5/20/24, 2:49 PM ASystems 2 | Quizlet

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20 Multiple choice questions

Term 1 of 20
Which of the following statements is correct?

Cash flow at risk is a risk assessment tool where management uses intuition to estimate the
maximum loss for a given period in terms of cash flow.

An increase in the estimated time to design a product increases the risk of a project and an
increase in the range of possible input prices increases the risk of a project

A company purchases hazard insurance to protect against losses from flood damage and
purchases liability insurance to protect against customer lawsuits for malfunctioning
products.

A bank's ability to pay the mortgage on its building over the life of the mortgage is a
solvency issue and its ability to pay employee wages and salaries is a liquidity issue.

Term 2 of 20
When a firm does a risk assessment, it should use which of the following methods?

Quantitative and qualitative methods

Financial methods

Empirically based methods

Group and single subject designs

Term 3 of 20
Two primary factors that contribute to business risk are:

interest rates and inflation

market demand and customer satisfaction

employee turnover and advertising expenses

sales volatility and the degree of operating leverage

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Term 4 of 20
If a company determines that a particular risk could result in a loss of up to $50,000 and the
company is willing to spend up to $50,000 to mitigate the risk, this loss is commonly called all of
the following except:

Risk map.

Value at risk

The strategic loss.

$2,583,000

Term 5 of 20
Which of the following is an example of the facilitated workshops and interviews technique of
identifying events within an Enterprise Risk Management (ERM) approach to risk management?

The head of financial reporting holds a meeting with all employees in the area to get their
ideas on possible risk areas within financial statements for the upcoming year.

A company considering expanding its business into a new country consults a list of events
related to doing business in that country developed by a consulting firm.

The international business is faced with legal and financial risks not faced by domestic
companies.

Purchasing forward contracts to lock in a certain amount of dollars in exchange for foreign
currency to be received from sales in a foreign country

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Term 6 of 20
Which of the following actions would a more risk averse management team likely take?

Purchasing forward contracts to lock in a certain amount of dollars in exchange for foreign
currency to be received from sales in a foreign country

The company will increase resources dedicated to ensuring all company activities are
conducted safely and in accordance with laws, regulations, and safety standards.

Enterprise Risk Management (ERM) is a more effective approach to risk management

because it manages risk in many individual silos instead of trying to manage them at the
organization level.

Accepting payments in foreign currency and making purchases in foreign currency

increases financial risk.

Term 7 of 20
The HEJ Company sells products and services in foreign currencies. Which of the following
actions taken by HEJ is an example of risk sharing?

Entering into forward contracts to exchange a fixed amount of foreign currency for dollars
at a future date based on expected exchange rates

The greatest probability

Use of preferred stock instead of common stock to finance acquisitions

Purchasing options to receive a set amount of dollars for a given amount of a foreign
currency regardless of spot (current) exchange rates

Term 8 of 20
Which of the following actions is an example of risk mitigation?

Requiring employees to change computer passwords every 25 days

Requiring employees to change computer passwords every 30 days

Storing another company's data on the same server as it stores its own data

Purchasing insurance to cover losses resulting from unauthorized access of the company's
computer system

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Term 9 of 20
Which of the following statements is not correct?

Earnings per share distributions is a risk assessment tool that measures the maximum loss
for a given period in terms of accrual earnings.

A pharmaceutical company invests in a state-of-the-art research facility and increases r&d

staff by 30%.

Risk identification involves brainstorming to list the risks facing an organization

Setting cash aside on a regular basis to provide funds in case the company is sued for a
hostile work environment

Term 10 of 20
Which of the following is an action that will increase financial risk?

Not establishing a sinking fund for bond repayments

Allowing sales managers to write off uncollectible accounts

Using variable-rate debt rather than fixed-rate debt

Selling a warehouse that is located near a river

Term 11 of 20
Which of the following actions would a less risk averse management team likely take?

Producing the product in two facilities rather than in just one facility

expenses being higher than budgeted due to unexpected shortages

Decreasing credit standards and offering larger credit limits

Allowing sales managers to write off uncollectible accounts

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Term 12 of 20
Which of the following is an example of strategic risk?

An employee accidentally emailing salary data throughout the company

Fire destroying a warehouse

Investing cash every quarter in a money market mutual fund to pay for possible flood
damages to an office building

A product becoming obsolete when a competitor introduced a new product

Term 13 of 20
The LOH Company manufactures a product comprising 15% of its total sales in a country with a
government having a history of seizing assets from foreign companies. Which of the following
actions taken by LOH is an example of risk avoidance?

Issuing debt to raise funds needed for a new product launch

Moving the manufacturing of the product out of the country

II and III.

It is easy and not very costly to implement.

Term 14 of 20
Which of the following is true regarding insurance?

A company with no existing debt borrowing money will lower financial risk at first, but after
a certain point issuing debt will increase financial risk

A company purchases hazard insurance to protect against losses from flood damage and
purchases liability insurance to protect against customer lawsuits for malfunctioning
products.

A company with no debt issuing debt in order to retire higher-cost equity

Offloading some portion of risk to another party

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Term 15 of 20
The CSB Company is assessing the potential loss from a production shutdown due to a strike at a
supplier. The following table lists three possible scenarios, the expected loss under each
scenario, and the likelihood of each scenario.

ScenarioExpected LossLikelihoodShort Strike$75,00060%Medium Strike$240,00030%Lengthy

Strike$3,000,00010%

Based on this information, what is the expected loss from this production shutdown?

$500,000

$525,000

$417,000

$278,000

Term 16 of 20
When evaluating financial risk, which ratios will be most beneficial to the analyst?

A customer not paying for a purchase made on credit

Establishes Operating Structures.

Total debt and interest coverage ratios

Using variable-rate debt rather than fixed-rate debt

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Term 17 of 20
Which of the following statement is correct?

An increase in the time to receive environmental clearance for building a pipeline increases
the risk of building the pipeline and having a guaranteed price for raw material purchases is
less risky than paying prevailing market prices for raw materials

A less risk averse management team is more likely to take on risk and a more risk averse
management team is less likely to take on risk.

An automobile company changing its sales mix to include a greater percentage of electric
vehicles and a lower percentage of gasoline-powered vehicles.

Investing cash every quarter in a money market mutual fund to pay for possible flood
damages to an office building

Term 18 of 20
Which of the following statements best describes inherent risk?

A company selling food is riskier than a company selling cars.

Earnings per share distributions is a risk assessment tool that measures the maximum loss
for a given period in terms of accrual earnings.

A company working to find a cure for cancer is riskier than a company selling clothing.

A company selling clothing is riskier than a company selling electronics.

Term 19 of 20
What is an example of implementing a risk management strategy?

Moving sensitive records to upper floors of buildings.

Designed to identify potential events that may affect the entity.

expenses being higher than budgeted due to unexpected shortages

Not establishing a sinking fund for bond repayments

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Term 20 of 20
Which of the following is an example of a financial risk?

A company violating a debt covenant and being in technical default

Fire destroying a warehouse

Fire damage to a store

Purchasing an insurance policy to cover a warehouse and its contents in case of theft or
damage

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