FM McQs Bank Foundations of Financial Management(A)

Foundations of Financial Management, 13/e

Stanley B. Block, Texas Christian University

Geoffrey A. Hirt, DePaul University
Bartley R. Danielsen, North Carolina State University

The Goals and Functions of Financial Management

1
Which of the following are microeconomic variables that help define and explain the
discipline of finance?

A) risk and return

B) capital structure
C) inflation
D) all of the above

Explanation: All of the above are relevant in explaining finance.

2
One primary macroeconomic variable that helps define and explain the discipline of
finance?
 A) capital structure
B) inflation
C) technology
D) risk

Explanation: Technology is very important in explaining the field of finance.

3
The money markets deal with _________.
A) securities with a life of more than one year
B) short-term securities
C) securities such as common stock
D) none of the above

Explanation: The money markets are concerned with short-term securities, those with a
life less than one year.

4
The ability of a firm to convert an asset to cash is called ____________.

A) liquidity
B) solvency
C) return
D) marketability

Explanation: Liquidity also means how close an asset is to cash.

5
Early in the history of finance, an important issue was:

A) liquidity
B) technology
C) capital structure
D) financing options
Explanation: Maintaining liquidity was a major concern historically.

6
The ___________________ is the most common form of business organization in the
U.S.

A) corporation
B) partnership
C) sole proprietorship
D) none of the above

Explanation: There are more sole proprietorships than any other form of business
organization.

7
The ____________________ has more sales in dollars than any other form of business
organization.

A) sole proprietorship
B) partnership
C) corporation
D) none of the above

Explanation: The corporation is the most important in terms of dollars.

8
One major disadvantage of the sole proprietorship is ________________.

A) simplicity of decision-making
B) unlimited liability
C) low operational costs
D) none of the above

Explanation: The owners of a sole proprietorship are personally liable.

9
The appropriate firm goal in a capitalist society is ________________.

A) profit maximization
B) shareholder wealth maximization
C) social responsibility
D) none of the above

Explanation: The goal is to maximize the wealth of shareholders.

10
The agency problem will occur in a business firm if the goals of ____________ and
shareholders do not agree.

A) investors
B) the public
C) management
D) none of the above

Explanation: The goals of management may be different from those of shareholders.

Review of Accounting

1
The accounting statements that a firm is required to file include all but one of these.

A) Balance Sheet
B) Statement of Accounts Receivable
C) Income Statement
D) Statement of Cash Flows

Explanation: The required statements include the income statement, balance sheet and
statement of changes in cash flows. The statement of changes in owners equity (or
retained earnings) is also required by Generally Accepted Accounting Principles but is not
covered in this text.

2
The _______________ shows the firm's operating results over a period of time.

A) Income Statement
B) Statement of Cash Flows
C) Balance Sheet
D) None of the above

Explanation: The Income Statement represents a moving picture of a firm's revenues and
expenses.

3
All of the following except one are tax-deductible expenses.

A) interest expense
B) depreciation
C) common stock dividends
D) income taxes

Explanation: Common stock dividends are not tax deductible to a firm.

4
All of the following are non-operating expenses except _____________.

A) interest expense
B) cost of goods sold
C) preferred stock dividends
D) taxes

Explanation: The cost of goods sold is an operating expense.

5
Bondholders receive _____________ from the business firm.

A) preferred dividend payments

B) common stock payments
 C) interest payments
D) royalties

Explanation: Bondholders are typically paid interest semi-annually.

6
The ratio of net income to common shares outstanding is called ______________.

A) price/earnings ratio
B) earnings per share
C) dividends per share
D) none of the above

Explanation: This is called the earnings per share (EPS).

7
Usually, firms with high price/earnings ratios are ____________ firms.

A) growth
B) declining
C) mature
D) none of the above

Explanation: A high p/e ratio indicates a firm with strong growth prospects

8
One of the limitations of the ____________ is that it is based on historical costs.

A) income statement
B) statement of cash flows
C) balance sheet
D) none of the above

Explanation: The balance sheet uses historical costs.

9
A source of funds is a:

A) decrease in a current asset

B) decrease in a current liability
C) increase in a current liability
D) a and c above

Explanation: A decrease in current assets is equivalent to an increase in current liabilities.

10
Short-term financing for a business firm includes:

A) bonds
B) accounts payable
C) stockholder's equity
D) mortgages

Explanation: The other three answers represent long-term financing

Financial Analysis

1
Trend analysis allows a firm to compare its performance to:

A) other firms in the industry

B) other time periods within the firm
C) other industries
D) all of the above

Explanation: Trend analysis gives an analyst a long-term perspective. As a security

analyst and a portfolio manager with Oppenheimer Capital, Dick Glasebrook spoke to a
Senior Finance Managers’ Meeting at the Boeing Company on May 4, 1999. He said it is
one thing to compare a firm’s performance against competitors within the same industry.
But investors are not limited to specific industries. In fact, investors seek to diversify their
investments across many different industries. So management should also compare
performance to any well run company--both in and outside of their industry.
2
Ratio analysis allows a firm to compare its performance to:

A) other firms in the industry

B) other time periods within the firm
C) other industries
D) all of the above

Explanation: Trend analysis gives an analyst a long-term perspective. As a security

analyst and a portfolio manager with Oppenheimer Capital, Dick Glasebrook spoke to a
Senior Finance Managers’ Meeting at the Boeing Company on May 4, 1999. He said it is
one thing to compare a firm’s performance against competitors within the same industry.
But investors are not limited to specific industries. In fact, investors seek to diversify their
investments across many different industries. So management should also compare
performance to any well run company--both in and outside of their industry.

3
Usually, a firm's suppliers are most interested in its ________ ratios.

A) profitability
B) debt
C) asset utilization
D) liquidity

Explanation: The suppliers are most interested in getting paid, as shown by the liquidity of
the firm.

4
_______________ would be most interested in a firm's debt utilization ratios.

A) bondholders
B) stockholders
C) short-term creditors
D) Both A and B
Explanation: Debt is indicated by a firm issuing bonds but is also a function of the debt to
equity relationship or the degree of financial leverage. Both bond holders and
stockholders are interested in this relationship although frof opposing viewpoints.

5
The _____________ ratio indicates the return firm shareholders are earning.

A) return on assets
B) return on investment
C) return on equity
D) net profit margin

Explanation: The shareholders represent equity, or ownership in the firm.

6
Which of the following is an example of a profitability ratio?

A) Quick ratio
B) Average collection period
C) Return on equity
D) Times interest earned

Explanation: This is the only profitability ratio that is listed. All profitability ratios have net
income in the denominator.

7
Total asset turnover will indicate if there is a problem with the _________ ratio.

A) debt to assets
B) times interest earned
C) fixed asset turnover
D) current

Explanation: Fixed asset turnover is part of total asset turnover.

8
All of the following are asset utilization ratios except:

A) average collection period

B) inventory turnover
C) receivables turnover
D) return on assets

Explanation: Return on assets is a profitability ratio. Any ratio with net income in the
denominator is a profitability ratio.

9
If a firm's debt ratio is 55%, this means ______ of the firm's assets are financed by equity
financing.

A) 55%
B) 50%
C) 45%
D) not enough information to answer question

Explanation: The equity portion plus the debt portion must add up to 100%.

10
All of the following can present problems for ratio analysis except:

A) inflation
B) inventory accounting methods
C) disinflation
D) all of the above

Explanation: These all may cause problems