Chapter 13
Business Organization and Financial Data

TRUE-FALSE QUESTIONS

1. A business should begin with a vision or mission statement that is consistent with the planned overall strategy.

Difficulty Level: Easy

Subject Heading: Strategic Plan with a Vision or Mission

L.O. 13.1

2. The success of a business in raising funds for operations depends upon the extent that profits can be produced from operations.

Difficulty Level: Medium

Subject Heading: Starting a Business

L.O. 13.1

3. A mission statement is a subset of a vision statement.

Difficulty Level: Easy

Subject Heading: Strategic Plan with a Vision or Mission

L.O. 13.1

4. The mission statement should guide every decision management makes.

Difficulty Level: Easy

Subject Heading: Business and Financial Goals

L.O. 13.1

5. Past professional experience in their fields is a common characteristic of successful entrepreneurs.

Difficulty Level: Easy

Subject Heading: Habits of Successful Small Companies

L.O. 13.1

6. Highly successful, rapidly growing firms are disproportionately manufacturers.

Difficulty Level: Easy

Subject Heading: Habits of Successful Small Companies

L.O. 13.1

7. Many of the CEOs of Inc. 500 companies own more than 50 percent of the equity in their businesses.

Difficulty Level: Easy

Subject Heading: Habits of Successful Small Companies

L.O. 13.1

8. Managerial lines of authority, legal responsibility and the allocation of income and risk are directly related to the form the organization takes.

Difficulty Level: Medium

Subject Heading: Forms of Business Organization in the United States

L.O. 13.2

9. proprietorships are the most widely used form although they are generally the smallest organizations in terms of assets.

Difficulty Level: Medium

Subject Heading: Proprietorship

L.O. 13.2

10. A weakness for a proprietorship is that owner’s liability for debts of the firm is unlimited.

Difficulty Level: Medium

Subject Heading: Proprietorship

L.O. 13.2

11. Profits from a proprietorship are taxed at the corporate income tax rates.

Difficulty Level: Medium

Subject Heading: Proprietorship

L.O. 13.2

12. A partnership is a form of business organization when two or more people own a business operated for profit.

Difficulty Level: Medium

Subject Heading: Partnership

L.O. 13.2

13. Partnership income is taxed at the partnership income tax rate.

Difficulty Level: Medium

Subject Heading: Partnership

L.O. 13.2

14. Under partnership law, each partner has unlimited liability for all the debts of the firm.

Difficulty Level: Medium

Subject Heading: Partnership

L.O. 13.2

15. Limited partners face liability limited to their investment in the firm, but they can participate in the operations of the firm.

Difficulty Level: Medium

Subject Heading: Partnership

L.O. 13.2

16. Limited partners cannot participate in the operations of the firm.

Difficulty Level: Medium

Subject Heading: Partnership

L.O. 13.2

17. Limited partners must take an active role in the operations of the firm.

Difficulty Level: Medium

Subject Heading: Partnership

L.O. 13.2

18. The bylaws are the rules established to govern the corporation and include how the firm will be managed.

Difficulty Level: Medium

Subject Heading: Corporation

L.O. 13.2

19. A limited liability company can have an unlimited number of shareholders, including other corporations.

Difficulty Level: Medium

Subject Heading: Corporation

L.O. 13.2

20. All limited liability company shareholders must take active roles in managing the company.

Difficulty Level: Medium

Subject Heading: Corporation

L.O. 13.2

21. A corporation is a legal entity with an unending life and limited financial liability to its owners.

Difficulty Level: Medium

Subject Heading: Corporation

L.O. 13.2

22. Privately held corporations must register shares with the Securities and Exchange Commission before selling them to shareholders.

Difficulty Level: Medium

Subject Heading: Corporation

L.O. 13.2

23. If a corporation files for bankruptcy, creditors may try to get control of the personal assets of the owners of the company to collect on their debts.

Difficulty Level: Medium

Subject Heading: Corporation

L.O. 13.2

24. One advantage of the corporate form of organization is the ease with which ownership may be transferred.

Difficulty Level: Medium

Subject Heading: Corporation

L.O. 13.2

25. The liability of all owners in both a limited liability company and a limited partnership is limited to the owners’ investment in the company.

Difficulty Level: Medium

Subject Heading: Corporation

L.O. 13.2

26. The most desirable form of business organization from a liquidity standpoint is a corporation.

Difficulty Level: Medium

Subject Heading: Corporation

L.O. 13.2

27. The most desirable form of business organization from a liquidity standpoint is a limited liability company.

Difficulty Level: Medium

Subject Heading: Corporation

L.O. 13.2

28. The most desirable form of business organization in terms of ease of start-up is a proprietorship.

Difficulty Level: Medium

Subject Heading: Corporation

L.O. 13.2

29. The most desirable form of business organization in terms of ease of start-up is a corporation.

Difficulty Level: Medium

Subject Heading: Corporation

L.O. 13.2

30. Accounting is primarily concerned with matching revenues and expenses while finance focuses on identifying cash inflows and outflows.

Difficulty Level: Medium

Subject Heading: Table 13.2

L.O. 13.3

31. One of the important reasons corporations can accumulate large sums of capital is that they are allowed to sell capital stock.

Difficulty Level: Medium

Subject Heading: Corporations

L.O. 13.2

32. Partnerships are limited to 35 or fewer owners.

Difficulty Level: Easy

Subject Heading: Table 13.1

L.O. 13.2

33. Subchapter S corporations are limited to 35 or fewer owners.

Difficulty Level: Easy

Subject Heading: Table 13.1

L.O. 13.2

34. Limited liability companies (LLC) are limited to 35 or fewer owners.

Difficulty Level: Easy

Subject Heading: Table 13.1

L.O. 13.2

35. Limited partnerships issue stock.

Difficulty Level: Easy

Subject Heading: Table 13.1

L.O. 13.2

36. Corporations issue stock.

Difficulty Level: Easy

Subject Heading: Table 13.1

L.O. 13.2

37. Subchapter S corporations issue stock.

Difficulty Level: Easy

Subject Heading: Table 13.1

L.O. 13.2

38. Limited liability companies (LLC) issue stock.

Difficulty Level: Easy

Subject Heading: Table 13.1

L.O. 13.2

39. Limited liability companies (LLC) have an unlimited life span.

Difficulty Level: Hard

Subject Heading: Table 13.1

L.O. 13.2

40. In a limited partnership, the number of partners with limited liability is limited.

Difficulty Level: Medium

Subject Heading: Partnership

L.O. 13.2

41. One of the advantages for corporate stockholders is the limitation on liability.

Difficulty Level: Easy

Subject Heading: Corporation

L.O. 13.2

42. Corporate earnings distributed as shareholder dividends are subject to double taxation.

Difficulty Level: Easy

Subject Heading: Corporation

L.O. 13.2

43. Worldwide, all corporations use a suffix of either “Inc.” or “Corp.”

Difficulty Level: Medium

Subject Heading: Corporation

L.O. 13.2

44. With generally accepted accounting practices, there is one “right way” of accounting for business transactions.

Difficulty Level: Easy

Subject Heading: Accounting Principles

L.O. 13.3

45. Most of accounting practice is based upon the cash concept.

Difficulty Level: Easy

Subject Heading: Accounting Principles

L.O. 13.3

46. Among the inputs used to construct the financial statements are generally accepted financial principles (GAAP), which are formulated by the Financial Accounting Standards Board (FASB).

Difficulty Level: Easy

Subject Heading: Accounting Principles

L.O. 13.3

47. Under accrual accounting, revenues and their associated expenses are recognized when a sale occurs, regardless of when cash revenues or expenses occur.

Difficulty Level: Easy

Subject Heading: Accounting Principles

L.O. 13.3

48. From the financial manager’s perspective, profits are what matters most.

Difficulty Level: Easy

Subject Heading: Accounting Principles

L.O. 13.3

49. Accounting focuses on profitability while finance focuses on cash.

Difficulty Level: Easy

Subject Heading: Table 13.2

L.O. 13.3

50. The U.S. federal government, through the Financial Accounting Standards Board (FASB), oversees the accuracy and truthfulness in public company financial statements.

Difficulty Level: Easy

Subject Heading: Accounting Principles

L.O. 13.3

51. Three important financial statements are provided in the annual report: the statement of income, the balance, and the 401Q.

Difficulty Level: Easy

Subject Heading: The Annual Report

L.O. 13.3

52. A firm’s net income over some period is the same as its cash flow.

Difficulty Level: Easy

Subject Heading: Income Statement

L.O. 13.4

53. The income statement reports the revenues generated and expenses incurred by a firm at a given point in time.

Difficulty Level: Medium

Subject Heading: Income Statement

L.O. 13.4

54. Often, gross revenues are larger than net revenues.

Difficulty Level: Medium

Subject Heading: Income Statement

L.O. 13.4

55. The costs of producing or manufacturing the products sold to earn revenues are grouped under cost of sales (COS).

Difficulty Level: Easy

Subject Heading: Income Statement

L.O. 13.4

56. Each financial period’s income statement shows the amount of depreciation expense for all assets since they were purchased.

Difficulty Level: Medium

Subject Heading: Income Statement

L.O. 13.4

57. The amount of cash flowing into the firm can be higher or lower than the net income figure.

Difficulty Level: Medium

Subject Heading: Income Statement

L.O. 13.4

58. For a corporation, a firm commonly shows its net income on a per-shareholder basis. This is referred to as the earnings per shareholder (EPS).

Difficulty Level: Medium

Subject Heading: Income Statement

L.O. 13.4

59. Corporations are required to pay cash dividends to their common stockholders.

Difficulty Level: Medium

Subject Heading: Income Statement

L.O. 13.4

60. The balance sheet is a statement of a company’s financial position over an accounting period.

Difficulty Level: Easy

Subject Heading: The Balance Sheet

L.O. 13.5

61. The balance sheet equation or accounting identity can be written as: assets equal liabilities plus owners’ equity.

Difficulty Level: Easy

Subject Heading: The Balance Sheet

L.O. 13.5

62. The balance sheet equation or accounting identity can be written as: assets equal liabilities minus owners’ equity.

Difficulty Level: Medium

Subject Heading: The Balance Sheet

L.O. 13.5

63. Every dollar of a firm’s assets must be financed by a dollar of liabilities.

Difficulty Level: Medium

Subject Heading: The Balance Sheet

L.O. 13.5

64. Two broad groups of assets are identified on the balance sheet: liquid and non-liquid.

Difficulty Level: Easy

Subject Heading: Assets

L.O. 13.5

65. The current assets of a business include cash and other assets that are expected to be converted into cash within one quarter.

Difficulty Level: Easy

Subject Heading: Assets

L.O. 13.5

66. Inventories are treated as a liability on the balance sheet.

Difficulty Level: Easy

Subject Heading: Assets

L.O. 13.5

67. Liabilities are classified as secured and non-secured.

Difficulty Level: Easy

Subject Heading: Liabilities

L.O. 13.5

68. Only corporations have owners’ equity.

Difficulty Level: Easy

Subject Heading: Owners’ Equity

L.O. 13.5

69. Amount of net income plus amount of depreciation is a source of cash flows.

Difficulty Level: Easy

Subject Heading: Statement of Cash Flows

L.O. 13.6

70. A decrease in an asset account is a use of cash flows.

Difficulty Level: Easy

Subject Heading: Statement of Cash Flows

L.O. 13.6

71. An increase in a liability account is a source of cash flows.

Difficulty Level: Easy

Subject Heading: Statement of Cash Flows

L.O. 13.6

72. An increase in an equity account is a use of cash flows.

Difficulty Level: Easy

Subject Heading: Statement of Cash Flows

L.O. 13.6

73. A cash dividend is a use of cash flows.

Difficulty Level: Easy

Subject Heading: Statement of Cash Flows

L.O. 13.6

74. Positive cash flows must equal negative cash flows.

Difficulty Level: Hard

Subject Heading: Statement of Cash Flows

L.O. 13.6

75. Common-size financial statements express balance sheet and income statement numbers as a percent of sales.

Difficulty Level: Medium

Subject Heading: Common-Size Financial Statements

L.O. 13.7

76. Shareholder wealth is the market value of a firm’s common stock.

Difficulty Level: Easy

Subject Heading: Measuring Shareholder Wealth

L.O. 13.8

77. Market value added can be written as: the market value of stock minus the market value of debt plus the book value of stock minus the book value of debt.

Difficulty Level: Medium

Subject Heading: Measuring Shareholder Wealth

L.O. 13.8

78. Market value added can be written as: the market value of stock plus the market value of debt minus the book value of stock minus the book value of debt.

Difficulty Level: Medium

Subject Heading: Measuring Shareholder Wealth

L.O. 13.8

79. The market value added measures the value created by the firm’s managers.

Difficulty Level: Medium

Subject Heading: Measuring Shareholder Wealth

L.O. 13.8

80. Typically, a close estimate of market value added (MVA) is the market value of equity less the book value of equity.

Difficulty Level: Medium

Subject Heading: Measuring Shareholder Wealth

L.O. 13.8

81. Shareholder wealth may be defined as the price of a company’s stock times the number of shares outstanding.

Difficulty Level: Medium

Subject Heading: Measuring Shareholder Wealth

L.O. 13.8

82. The goal of any firm should be the maximization of sales.

Difficulty Level: Easy

Subject Heading: Goal of a Firm

L.O. 13.8

83. The goal of the firm is the maximization of profits and market share.

Difficulty Level: Easy

Subject Heading: Goal of a Firm

L.O. 13.8

84. Creditors have a fixed claim that usually doesn’t change with variations in the value of the firm’s assets over time.

Difficulty Level: Easy

Subject Heading: Goal of a Firm

L.O. 13.8

85. As long as the number of common stock shares outstanding does not change appreciably, the market’s perception of the firm and of its management’s actions appears in the firm’s stock price.

Difficulty Level: Easy

Subject Heading: Goal of a Firm

L.O. 13.8

86. Poison pills are provisions in a corporate charter that make a corporate take-over more unattractive.

Difficulty Level: Medium

Subject Heading: Principal-Agent Problem

L.O. 13.9

87. Implicit agency costs do not have a direct expense associated with them, but they harm shareholders anyway.

Difficulty Level: Medium

Subject Heading: Principal-Agent Problem

L.O. 13.9

88. Two basic tools that can be used to reduce the consequences of managers making self-serving decisions include offering managers stock options and offering managers restricted stock.

Difficulty Level: Medium

Subject Heading: Reducing Agency Problems

L.O. 13.9

89. Agency costs are the tangible and intangible expenses borne by shareholders because of the actual or potential self-serving actions of managers; and agency costs can include explicit, out-of-pocket expenses.

Difficulty Level: Hard

Subject Heading: Principal-Agent Problem

L.O. 13.9

90. Agency costs are the intangible expenses borne by shareholders because of the actual or potential self-serving actions of managers; they include only implicit (no cash is spent explicitly) expenses.

Difficulty Level: Hard

Subject Heading: Principal-Agent Problem

L.O. 13.9

91. The Sarbanes-Oxley Act of 2002 was passed by the U.S. Congress in response several accounting scandals.

Difficulty Level: Easy

Subject Heading: Reducing Agency Problems

L.O. 13.9

92. The Sarbanes-Oxley Act of 2002 was passed by the U.S. Congress in response several ethical scandals.

Difficulty Level: Easy

Subject Heading: Reducing Agency Problems

L.O. 13.9

93. Principals are managers hired by the principals to run the firm.

Difficulty Level: Easy

Subject Heading: Principal-Agent Problem

L.O. 13.9

94. Restricted stock is shares of stock awarded to managers that cannot be redeemed unless the manager is currently working for the firm.

Difficulty Level: Easy

Subject Heading: Reducing Agency Problems

L.O. 13.9

95. It is common for firms to use the same accounting firms to audit their books as they use for bookkeeping, financial system consulting, and so on since these firms are familiar with the details of their systems.

Difficulty Level: Easy

Subject Heading: Reducing Agency Problems

L.O. 13.9

96. Under Sarbanes-Oxley, to maintain independence, the lead auditor must be changed at least every three years.

Difficulty Level: Easy

Subject Heading: Reducing Agency Problems

L.O. 13.9

97. The chief financial officer (CFO) manages accounting, cost analysis, and tax planning.

Difficulty Level: Easy

Subject Heading: Finance in the Organization Chart

L.O. 13.10

98. The treasurer oversees the traditional functions of financial analysis, including capital budgeting, short-term and long-term financing decisions, and current asset management.

Difficulty Level: Easy

Subject Heading: Finance in the Organization Chart

L.O. 13.10

99. The marginal tax rate is the rate paid on the last dollar of income.

Difficulty Level: Easy

Subject Heading: Income Tax

L.O. 13.11A

100. Income tax liabilities may differ for each form of business organization selected.

Difficulty Level: Easy

Subject Heading: Income Tax

L.O. 13.11A

101. Income from partnerships and proprietorships is combined with other personal income for tax purposes.

Difficulty Level: Easy

Subject Heading: Income Tax

L.O. 13.11A

102. The tax liability on unrealized capital gains can be deferred for up to ten years.

Difficulty Level: Easy

Subject Heading: Income Tax

L.O. 13.11A

103. For individuals, capital gains are taxed as ordinary income.

Difficulty Level: Easy

Subject Heading: Income Tax

L.O. 13.11A

104. For companies, depreciation is deductible from income before taxes.

Difficulty Level: Easy

Subject Heading: Depreciation Basics

L.O. 13.11B

105. The depreciation deduction shields income from taxes.

Difficulty Level: Easy

Subject Heading: Depreciation Basics

L.O. 13.11B

MULTIPLE-CHOICE QUESTIONS

106. Statement of a firm’s main reason for being.

a. Owner’s goal statement

b. Bylaws

c. Principles statement

d. Mission statement

Difficulty Level:

Subject Heading:

L.O.

107. A guiding force behind top management’s decisions should be what?

a. Owner’s goal statement

b. Bylaws

c. Principles statement

d. Mission statement

Difficulty Level:

Subject Heading:

L.O.

108. Of the following forms of organization, which businesses are the greatest in numbers?

a. proprietorships

b. partnerships

c. corporations

d. limited partnerships

Difficulty Level: Easy

Subject Heading: Forms of Business Organization in the United States

L.O. 13.2

109. Of the following forms of organization, which businesses are the smallest in numbers?

a. proprietorships

b. partnerships

c. corporations

d. limited partnerships

Difficulty Level: Easy

Subject Heading: Forms of Business Organization in the United States

L.O. 13.2

110. Of the following forms of organization, which businesses generate the largest sales?

a. proprietorships

b. partnerships

c. corporations

d. limited partnerships

Difficulty Level: Easy

Subject Heading: Forms of Business Organization in the United States

L.O. 13.2

111. Of the following forms of organization, which businesses generate the smallest sales?

a. proprietorships

b. partnerships

c. corporations

d. limited partnerships

Difficulty Level: Easy

Subject Heading: Forms of Business Organization in the United States

L.O. 13.2

112. Of the following forms of business organization, which have stockholders with limited liability?

a. proprietorships

b. partnerships

c. corporations

d. limited partnerships

Difficulty Level: Easy

Subject Heading: Corporations

L.O. 13.2

113. Of the following forms of business organization, which have the advantage of limited liability but no stockholders?

a. proprietorships

b. partnerships

c. corporations

d. limited partnerships

Difficulty Level: Easy

Subject Heading: Organizational Structure

L.O. 13.2

114. A limited liability company (LLC):

a. must register with the SEC to sell securities to the public

b. is an ongoing entity, even if one of the owners leaves

c. has a limited number of shareholders

d. limits financial exposure of its owners

Difficulty Level: Medium

Subject Heading: Partnership

L.O. 13.2

115. Which form of business organization does not have a basic weakness of raising capital?

a. proprietorship

b. corporation

c. limited partnership

d. partnership

Difficulty Level: Medium

Subject Heading: Corporation

L.O. 13.2

116. Corporate stockholders:

a. cannot have limited liability

b. cannot easily transfer ownership

c. cannot be subject to taxes on dividends

d. can limit their liability to the amount of their investment

Difficulty Level: Medium

Subject Heading: Corporation

L.O. 13.2

117. A limited partnership is comprised of:

a. only limited partners

b. only general partners

c. both general and limited partners

d. both partners and proprietors

Difficulty Level: Medium

Subject Heading: Partnership

L.O. 13.2

118. Which of the following business organizations limit the liability of some or all of their owners to the extent of their investment in the company?

a. proprietorships and partnerships

b. corporations and proprietorships

c. limited partnerships and proprietorships

d. corporations and limited partnerships

Difficulty Level: Medium

Subject Heading: Mixed

L.O. 13.2

119. Which of the following business organizations do not limit the liability of some or all of their owners to the extent of their investment in the company?

a. proprietorships and partnerships

b. corporations and proprietorships

c. limited partnerships and proprietorships

d. corporations and limited partnerships

Difficulty Level: Medium

Subject Heading: Mixed

L.O. 13.2

120. A business organization that receives the limited liability of a corporation but is taxed as a proprietorship or partnership is called a:

a. limited proprietorship

b. limited partnership

c. limited corporation

d. S corporation

Difficulty Level: Medium

Subject Heading: Corporation

L.O. 13.2

121. Which of the following is not considered to be one of the three major forms of business ownership in the United States?

a. proprietorship

b. partnership

c. public limited company

d. corporation

Difficulty Level: Medium

Subject Heading: Mixed

L.O. 13.2

122. Under which one of the following business organizations do the owners have unlimited liability for all debts of the firm?

a. partnership

b. limited partnership

c. corporation

d. subchapter S corporation

Difficulty Level: Medium

Subject Heading: Partnership

L.O. 13.2

123. The corporate form of organization is recognized in many countries. Which one of the following does not designate a corporation?

a. Inc.

b. PLC

c. AG

d. SEC

Difficulty Level: Medium

Subject Heading: Corporation

L.O. 13.2

124. Which of the following forms of organization is not taxed at the owners’ personal tax rate?

a. proprietorship

b. LLC

c. subchapter S corporation

d. subchapter C corporation

Difficulty Level: Medium

Subject Heading: Corporation

L.O. 13.2

125. Which of the following forms of organization has an unlimited life?

a. proprietorship

b. LLC

c. subchapter S corporation

d. corporation and subchapter S corporation

Difficulty Level: Medium

Subject Heading: Corporation

L.O. 13.2

126. Provides the corporate name, indicates the intended business activities, provides names and addresses of directors, and indicates how a firm will be capitalized with stock.

a. Corporate statement

b. Bylaws

c. Mission statement

d. Charter

Difficulty Level: Easy

Subject Heading: Corporation

L.O. 13.2

127. The rules established to govern the corporation and include how the firm will be managed, how the directors will be elected, and the rights of the stockholders.

a. Corporate statement

b. Bylaws

c. Mission statement

d. Charter

Difficulty Level: Easy

Subject Heading: Corporation

L.O. 13.2

128. Which of the following are required to file annual reports with the Securities and Exchange Commission?

a. proprietorships

b. partnerships

c. public corporations

d. closely held corporations

Difficulty Level: Easy

Subject Heading: The Annual Report

L.O. 13.3

129. The rule-setting body, which authorizes generally accepted accounting principles is:

a. GAAP

b. FASB

c. SEC

d. Federal Reserve System

Difficulty Level: Easy

Subject Heading: Accounting Principles

L.O. 13.3

130. Accounting practices and procedures used to prepare financial statements are called:

a. GAAP

b. FASB

c. SEC

d. Federal Reserve System

Difficulty Level: Easy

Subject Heading: Accounting Principles

L.O. 13.3

131. The U.S. federal government body that receives corporations’ annual reports is the:

a. IRS

b. FRS

c. SEC

d. FBI

Difficulty Level: Easy

Subject Heading: Accounting Principles

L.O. 13.3

132. The U.S. federal government body that oversees the accuracy and truthfulness in public company financial statements.

a. IRS

b. FRS

c. SEC

d. FBI

Difficulty Level: Easy

Subject Heading: Accounting Principles

L.O. 13.3

133. Information about which accounting principles were used by the firm are included in the:

a. balance sheet

b. footnotes to the financial statements

c. management discussion on annual report

d. income statement

Difficulty Level: Medium

Subject Heading: Accounting Principles

L.O. 13.3

134. Which of the following are not included in an annual report?

a. balance sheet

b. income statement

c. statement of cash flows

d. projections of the future stock price

Difficulty Level: Medium

Subject Heading: The Annual Report

L.O. 13.3

135. Market value added would equal:

a. assets plus liabilities

b. assets minus liabilities

c. common stock price times number of shares outstanding

d. difference between the capital contributed and the share price times the number of shares outstanding

Difficulty Level: Medium

Subject Heading: Measuring Shareholder Wealth

L.O. 13.8

136. Generally accepted accounting principles are formulated by the:

a. Securities and Exchange Commission

b. Financial Accounting Standards Board

c. Federal Trade Commission

d. General Accounting Office

Difficulty Level: Medium

Subject Heading: Accounting Principles

L.O. 13.3

137. Financial statements that must be included in the annual report include the:

a. statement of sales

b. right sized income statement

c. statement of cash flows

d. statement of changes in shareholder market value

Difficulty Level: Easy

Subject Heading: The Annual Report

L.O. 13.3

138. Financial statements that must be included in the annual report include all of the following except:

a. the income statement

b. the balance sheet

c. the statement of cash flows

d. the cash budget

Difficulty Level: Medium

Subject Heading: The Annual Report

L.O. 13.3

139. Which of the following is not part of the accounting focus?

a. Matching revenue and expenses

b. Seek to measure firm profitability

c. Identifying cash inflows and outflows

d. Attempts to track assets and depreciate them

Difficulty Level: Easy

Subject Heading: Accounting Principles

L.O. 13.3

140. Which of the following is not part of the finance focus?

a. Seek to measure firm profitability

b. Market value of assets

c. Identifying cash inflows and outflows

d. Track the cash flows to assess the “quality” of reported assets and earnings

Difficulty Level: Easy

Subject Heading: Accounting Principles

L.O. 13.3

141. Net income is:

a. equal to cash flow

b. profits remaining after income taxes are paid

c. unavailable to the owners of the business

d. net profit before taxes plus depreciation

Difficulty Level: Medium

Subject Heading: Income Statement

L.O. 13.4

142. Suppose Ningbo Steel had sales revenue of $10,000 sales revenue, cost of goods sold of $5,000, operating expenses of $3000, interest expense of $1,000, a tax rate of 20%, and 1,000 shares of common stock outstanding. Based on this information, net profit after tax was:

a. $1,200

b. $1,000

c. $800

d. $400

Difficulty Level: Medium

Subject Heading: Income Statement

L.O. 13.4

143. Suppose Ningbo Steel had sales revenue of $11,000 sales revenue, cost of goods sold of $5,000, operating expenses of $3000, interest expense of $1,000, a tax rate of 20%, and 1,000 shares of common stock outstanding. Based on this information, net profit after tax was:

a. $1,600

b. $1,000

c. $500

d. $0

Difficulty Level: Medium

Subject Heading: Income Statement

L.O. 13.4

144. Suppose Ningbo Steel had sales revenue of $10,000 sales revenue, cost of goods sold of $5,000, operating expenses of $3000, interest expense of $1,000, a tax rate of 20%, and 2,000 shares of common stock outstanding. Based on this information, earnings per share was:

a. $1.20

b. $1.00

c. $0.80

d. $0.40

Difficulty Level: Medium

Subject Heading: Income Statement

L.O. 13.4

145. Suppose Ningbo Steel had sales revenue of $11,000 sales revenue, cost of goods sold of $5,000, operating expenses of $3000, interest expense of $1,000, a tax rate of 20%, and 2,000 shares of common stock outstanding. Based on this information, earnings per share was:

a. $1.20

b. $1.00

c. $0.80

d. $0.08

e. none of the above

Difficulty Level: Medium

Subject Heading: Income Statement

L.O. 13.4

146. Ningbo Steel had year end 2011 and 2012 retained earnings balances of $5,000,000 and $6,000,000 respectively. The firm paid $100,000 of dividends in 2012. Based on this information, Ningbo Steel’s net profit after taxes in 2012 was:

a. $100,000

b. $900,000

c. $1,000,000

d. $1,100,000

Difficulty Level: Medium

Subject Heading: Income Statement

L.O. 13.4

147. Ningbo Steel had year end 2011 and 2012 retained earnings balances of $6,000,000 and $6,600,000 respectively. The firm paid $200,000 of dividends in 2011. Based on this information, Ningbo Steel’s net profit after taxes in 2011 was:

a. $200,000

b. $600,000

c. $620,000

d. $6,200,000

Difficulty Level: Medium

Subject Heading: Income Statement

L.O. 13.4

148. Reports the revenues generated and expenses incurred by the firm over an accounting period, such as a quarter or a year.

a. Balance sheet

b. Income statement

c. Statement of cash flow

d. Sources and uses of funds

Difficulty Level: Easy

Subject Heading: Income Statement

L.O. 13.4

149. Which of the following statements is false?

a. working capital represents assets needed to carry out the normal
operations of the business.

b. Wages payable are part of a firm’s accounts payable,

c. because of accrual accounting, a firm’s net income over some period
is not necessarily the same as its cash flows.

d. Capital is recorded on the liability side of the balance sheet.

Difficulty Level: Medium

Subject Heading: The Balance Sheet

L.O. 13.5

150. The current liabilities of a business may include:

a. notes payable

b. accounts receivable

c. prepaid expenses

d. depreciation reserves

Difficulty Level: Easy

Subject Heading: Liabilities

L.O. 13.5

151. Which of the following accounts is not usually part of the owners’ equity for a corporation?

a. common stock

b. paid-in-capital

c. retained earnings

d. shares outstanding

Difficulty Level: Easy

Subject Heading: Owners’ Equity

L.O. 13.5

152. All of the following accounts are considered to be current assets on the balance sheet except:

a. cash

b. accruals

c. accounts receivable

d. inventory

Difficulty Level: Easy

Subject Heading: Assets

L.O. 13.5

153. All of the following accounts are considered to be current assets on the balance sheet except:

a. cash

b. short-term investments or marketable securities

c. land

d. inventory

Difficulty Level: Easy

Subject Heading: Assets

L.O. 13.5

154. All of the following accounts are considered to be fixed assets on the balance sheet except:

a. buildings

b. equipment

c. depreciation

d. machinery

Difficulty Level: Easy

Subject Heading: Assets

L.O. 13.5

155. All of the following accounts are considered to be current liabilities on the balance sheet except:

a. accounts receivable

b. accounts payable

c. accruals

d. notes payable

Difficulty Level: Easy

Subject Heading: Liabilities

L.O. 13.5

156. All of the following accounts are considered to be current liabilities on the balance sheet except:

a. depreciation

b. accounts payable

c. accruals

d. notes payable

Difficulty Level: Easy

Subject Heading: Liabilities

L.O. 13.5

157. The term ___________ conveys a relationship of equality between the assets of the business and the sources of funds for their acquisition.

a. statement of cash flows

b. cash transactions statement

c. income statement

d. balance sheet

Difficulty Level: Medium

Subject Heading: The Balance Sheet

L.O. 13.5

158. The notes payable of a firm may be:

a. loans to other businesses

b. loans from a bank

c. money owed by a customer

d. loans to owners or shareholders

Difficulty Level: Medium

Subject Heading: Liabilities

L.O. 13.5

159. The accrued liabilities of a firm are:

a. retained earnings from past years

b. reflect the prepayment of certain expenses

c. owners’ equity in the firm

d. amounts owed but not yet due

Difficulty Level: Medium

Subject Heading: Liabilities

L.O. 13.5

160. If a firm issues 10,000 shares of common stock with a par value of $5 and for a sales price of $15, what amount would be recorded in the capital paid-in excess of par account?

a. $10,000

b. $15,000

c. $50,000

d. $100,000

Difficulty Level: Medium

Subject Heading: Balance Sheet

L.O. 13.5

161. What would be recorded in the common stock par value account on the balance sheet if 20,000 shares are issued at a par value of $2 and the market value is $5?

a. $20,000

b. $40,000

c. $30,000

d. $60,000

Difficulty Level: Medium

Subject Heading: Balance Sheet

L.O. 13.5

162. Which one of the following balance sheet accounts would not be considered to be a current liability?

a. account payable

b. bank notes payable

c. accrued liabilities

d. mortgage debt

Difficulty Level: Medium

Subject Heading: Balance Sheet

L.O. 13.5

163. Current liabilities would not include:

a. accounts payable

b. notes payable

c. bonds

d. accruals

Difficulty Level: Medium

Subject Heading: Liabilities

L.O. 13.5

164. Owners’ equity does not include:

a. par value of the common stock

b. retained earnings

c. capital paid in excess of par account

d. notes receivable

Difficulty Level: Medium

Subject Heading: Owners’ Equity

L.O. 13.5

165. Which of the following would not be included on the balance sheet?

a. dividends paid

b. retained earnings

c. capital paid in excess of par

d. common stock

Difficulty Level: Medium

Subject Heading: Mixed

L.O. 13.5

166. Which of the following would not be considered an asset?

a. cash

b. accounts receivable

c. equipment

d. accounts payable

Difficulty Level: Medium

Subject Heading: Assets

L.O. 13.5

167. Which one of the following financial statements shows a relationship between assets and liabilities plus owners’ equity?

a. income statement

b. statement of cash flows

c. balance sheet

d. statement of retained earnings

Difficulty Level: Medium

Subject Heading: The Balance Sheet

L.O. 13.5

168. The financial statement that provides a snapshot view of the financial condition of a business at a point in time is the:

a. balance sheet

b. income statement

c. statement of cash flows

d. statement of retained earnings

Difficulty Level: Medium

Subject Heading: The Balance Sheet

L.O. 13.5

169. On the balance sheet, total assets minus net fixed assets equals:

a. current assets

b. current liabilities

c. gross fixed assets

d. total assets

Difficulty Level: Medium

Subject Heading: Assets

L.O. 13.5

170. On the balance sheet, retained earnings represents

a. net profits for the current year

b. net profits for the current year minus preferred stock dividends

c. cash reinvested in fixed assets to support growth

d. the cumulative total of earnings reinvested in the firm.

Difficulty Level: Medium

Subject Heading: Owners’ Equity

L.O. 13.5

171. Financial and physical items owned by a business.

a. Income

b. Assets

c. Equity

d. Liabilities

Difficulty Level: Easy

Subject Heading: The Balance Sheet

L.O. 13.5

172. Creditors’ claims on a firm, which are the financial obligations of the business.

a. Income

b. Assets

c. Equity

d. Liabilities

Difficulty Level: Easy

Subject Heading: The Balance Sheet

L.O. 13.5

173. Funds supplied by the owners and represents their residual claim on the firm.

a. Income

b. Assets

c. Equity

d. Liabilities

Difficulty Level: Easy

Subject Heading: The Balance Sheet

L.O. 13.5

174. Liabilities + Owners’ equity

a. Income

b. Assets

c. Equity

d. Liabilities

Difficulty Level: Easy

Subject Heading: The Balance Sheet

L.O. 13.5

175. Cash and all other assets that are expected to be converted into cash within one year.

a. Current assets

b. Short-term assets

c. Goodwill

d. Depreciation

Difficulty Level: Easy

Subject Heading: Assets

L.O. 13.5

176. Assets needed to carry out the normal operations of the business.

a. Cash

b. Working capital

c. Goodwill

d. Depreciation

Difficulty Level: Easy

Subject Heading: Assets

L.O. 13.5

177. An intangible asset that represents the excess funds paid, when one firm merges with or purchases another, over and above the accounting value of the firm’s net assets.

a. Current assets

b. Owners’ equity

c. Goodwill

d. Appreciation

Difficulty Level: Easy

Subject Heading: Assets

L.O. 13.5

178. Devaluing a physical asset over the period of its expected life.

a. Operations

b. Working capital

c. Goodwill

d. Depreciation

Difficulty Level: Easy

Subject Heading: Assets

L.O. 13.5

179. The actual disbursement of cash is recorded in which of the following financial statements?

a. income statement

b. balance sheet

c. statement of cash flows

d. treasurer’s report

Difficulty Level: Medium

Subject Heading: Statement of Cash Flows

L.O. 13.6

180. The three main sections of the statement of cash flows include all of the following except:

a. cash from saving

b. cash from investments

c. cash from operations

d. cash from financing

Difficulty Level: Medium

Subject Heading: Statement of Cash Flows

L.O. 13.6

181. Which of the following would not be a source of funds?

a. decrease in an equity account

b. increase in a liability account

c. decrease in an asset account

d. cash sales

Difficulty Level: Medium

Subject Heading: Statement of Cash Flows

L.O. 13.6

182. Which of the following would not be a use of funds?

a. increase in an asset account

b. decrease in a liability account

c. decrease in an equity account

d. increase in a liability account

Difficulty Level: Medium

Subject Heading: Statement of Cash Flows

L.O. 13.6

183. Cash flows from financing activities might include:

a. increase in bonds payable

b. increase in accounts payable

c. depreciation

d. reduction in notes receivable

Difficulty Level: Medium

Subject Heading: Statement of Cash Flows

L.O. 13.6

184. Cash flows from operating activities might include:

a. net income

b. increase in equity sold to investors

c. dividend payment

d. decrease in notes payable

Difficulty Level: Medium

Subject Heading: Statement of Cash Flows

L.O. 13.6

185. Which of the following is a source of cash?

a. a decrease in an asset account

b. a decrease in a liability account

c. a decrease in an equity account

d. a decrease in an expense account

Difficulty Level: Medium

Subject Heading: Statement of Cash Flows

L.O. 13.6

186. Which of the following is a use of cash?

a. an increase in an asset account

b. an increase in a liability account

c. an increase in an equity account

d. an increase in notes payable

Difficulty Level: Medium

Subject Heading: Statement of Cash Flows

L.O. 13.6

187. A statement that expresses the income statement items as a percent of total sales is called:

a. a percentage of sales income statement

b. a cross-sectional income statement

c. a common size income statement

d. a ratio based income statement

Difficulty Level: Medium

Subject Heading: Common-Size Financial Statements

L.O. 13.7

188. What is the main purpose of common-size financial statements?

a. To remove the bias introduced by increasing revenue

b. To facilitate comparisons over time

c. To facilitate comparison between firms of different structure

d. To facilitate comparison between different-sized firms

Difficulty Level: Medium

Subject Heading: Common-Size Financial Statements

L.O. 13.7

189. Shareholder wealth is measured as:

a. assets plus liabilities

b. assets minus liabilities

c. common stock price times number of shares outstanding

d. par value of stock time number of shares outstanding

Difficulty Level: Medium

Subject Heading: Measuring Shareholder Wealth

L.O. 13.7

190. The _______________ established the Public Company Accounting Oversight Board (PCAOB).

a. Smoot-Hawley Act

b. Sarbanes-Oxley Act

c. Gram-Harkins Act

d. McKean-Obama Act

Difficulty Level: Medium

Subject Heading: Reducing Agency Problems

L.O. 13.8

191. Computation of a firm’s market value added (MVA) includes which of the following components?

a. discounted market value of equity

b. market value of debt

c. future value of equity

d. future value of debt

Difficulty Level: Medium

Subject Heading: Measuring Shareholder Wealth

L.O. 13.8

192. The goal of a business should be:

a. maximization of the owners’ wealth

b. maximization of accounting profit

c. maximization of sales

d. maximization of assets

Difficulty Level: Easy

Subject Heading: Goal of a Firm

L.O. 13.8

193. Computation of a firm’s market value added (MVA) includes all of the following except:

a. market value of stock

b. market value of debt

c. book value of debt

d. interest paid on debt

Difficulty Level: Medium

Subject Heading: Measuring Shareholder Wealth

L.O. 13.8

194. The Sarbanes-Oxley Act established this entity. .

a. Auditing Commission

b. Public Company Accounting Oversight Board

c. FASB

d. SEC

Difficulty Level: Medium

Subject Heading: Reducing Agency Problems

L.O. 13.9

195. The 2002 Sarbanes-Oxley Act was designed to:

a. limit the compensation that could be paid to CEOs.

b. eliminate the many disclosure and conflict of interest problems of corporations

c. provide uniform international accounting standards

d. limit CEO compensation

Difficulty Level: Hard

Subject Heading: Reducing Agency Problems

L.O. 13.9

196. The 2002 Sarbanes-Oxley Act and actions by the stock exchanges:

a. limit the compensation that could be paid to CEOs.

b. increase the number of independent directors on corporate Boards.

c. provide uniform international accounting standards

d. none of the above

Difficulty Level: Hard

Subject Heading: Reducing Agency Problems

L.O. 13.9

197. Agency costs are:

a. the costs of hiring managers

b. assets minus liabilities

c. common stock price times number of shares outstanding

d. internal costs associated with managers and directors

Difficulty Level: Medium

Subject Heading: Principal-Agent Problem

L.O. 13.9

198. Agency costs do not include:

a. costs of auditing financial statements

b. liability insurance for board of directors

c. management perks

d. fees paid to advertising agencies

Difficulty Level: Medium

Subject Heading: Principal-Agent Problem

L.O. 13.9

199. Implicit agency costs:

a. will not harm shareholders

b. have a direct expense associated with them

c. may include restrictive covenants

d. include cost of goods sold

Difficulty Level: Medium

Subject Heading: Principal-Agent Problem

L.O. 13.9

200. For corporations, the principal-agent relationship usually refers to the relationship between:

a. buyers-sellers

b. owners-managers

c. manager-customer

d. owner-bankers

Difficulty Level: Medium

Subject Heading: Principal-Agent Problem

L.O. 13.9

201. Which one of the following alternatives is commonly used to reduce agency problems as they relate to corporate control?

a. stock options

b. higher salaries

c. larger perquisites (“perks”)

d. less restrictive accountability requirements

Difficulty Level: Medium

Subject Heading: Reducing Agency Problems

L.O. 13.9

202. Agency problems may result from a manager's concerns about any of the following except

a. job security

b. personal wealth

c. corporate goals

d. company provided perquisites

Difficulty Level: Medium

Subject Heading: Principal-Agency Issue

L.O. 13.9

203. Agency problems may result from a manager's concerns about any of the following except

a. maximizing long-term shareholder wealth

b. personal wealth

c. embezzlement

d. company provided perquisites

Difficulty Level: Medium

Subject Heading: Principal-Agency Issue

L.O. 13.9

204. Owners of the firm.

a. Investors

b. Principals

c. Agents

d. Operators

Difficulty Level: Easy

Subject Heading: Principal-Agent Problem

L.O. 13.9

205. Managers hired by the owners to run the firm.

a. Investors

b. Principals

c. Agents

d. Operators

Difficulty Level: Easy

Subject Heading: Principal-Agent Problem

L.O. 13.9

206. Top finance officers in a corporation include:

a. treasurer

b. chief operating officer

c. accounting clerks

d. chief lending officer

Difficulty Level: Easy

Subject Heading: Finance in the Organization Chart

L.O. 13.10

207. Responsible for the controller and the treasury functions of a firm.

a. Chief financial officer

b. Treasurer

c. Principle

d. Controller

Difficulty Level: Easy

Subject Heading: Finance in the Organization Chart

L.O. 13.10

208. Oversees the traditional functions of financial analysis, including capital budgeting,

short-term and long-term financing decisions, and current asset management.

a. Chief financial officer

b. Treasurer

c. Principle

d. Controller

Difficulty Level: Easy

Subject Heading: Finance in the Organization Chart

L.O. 13.10

209. Manages accounting, cost analysis, and tax planning.

a. Chief financial officer

b. Treasurer

c. Principle

d. Controller

Difficulty Level: Easy

Subject Heading: Finance in the Organization Chart

L.O. 13.10

210. Which of the following activities is not under the treasurer?

a. Cash management

b. Credit management

c. Capital budget

d. Tax planning

Difficulty Level: Medium

Subject Heading: Finance in the Organization Chart

L.O. 13.10

211. Which of the following activities is not under the controller?

a. Capital budget

b. Tax planning

c. Cost accounting

d. Financial accounting

Difficulty Level: Medium

Subject Heading: Finance in the Organization Chart

L.O. 13.10