ACC 3008

Finance 1
Week 1 Quiz

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Multiple Choice Chapter’s 1 to 3

1. A stakeholder is: 

A. Any person or entity that owns shares of stock of a corporation.
B. Any person or entity that has voting rights based on stock ownership of a corporation.
C. A person who initially started a firm and currently has management control over the cash
flows of the firm due to his/her current ownership of company stock.
D.  Any person or entity who potentially has a claim on the cash flows of the firm.

 
 

2. An agency problem is said to exist when there is a conflict of interest between _____ and
_____. 
A. An agent; his or her representative.
B. A principal; his or her agent.
C. One shareholder; another shareholder.
D. A shareholder; a stakeholder.

 3. Which one of the following statements concerning a proprietorship is true? 

A. A proprietorship can be a business jointly owned by two family members.
B. A proprietor is personally responsible for 100% of the firm's liabilities.
C. A partial transfer of ownership is easier with a proprietorship than with a corporation.
D. Income from a proprietorship is taxed at a lower rate than other personal income.
 
 

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4. You are interested in purchasing 100 shares of stock in one of the largest corporations in
Canada. You would most likely purchase the shares in _______________. 
A. A primary market operated as an auction market.
B. A secondary market operated as a dealer market.
C. A primary market operated as a dealer market.
D. A secondary market operated as an auction market.

 
 

5. Which one of the following is a correct statement concerning a sole proprietorship? 

A. A sole proprietorship is relatively difficult to form.
B. The profits earned by a sole proprietorship are subject to double taxation.
C. A sole proprietorship is more highly regulated than a corporation.
D. It may be difficult to transfer the ownership of a sole proprietorship.

 
 

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6. What is the difference between third and fourth markets? 
A. A third market involves trading institution-to-institution trading without using the services of
brokers or dealers trading, while a fourth market involves trading exchange-listed securities in
OTC markets.
B. A third market involves trading in corporate equities, while a fourth market involves trading
in corporate debt.
C. A third market involves trading in corporate debt, while a fourth market involves trading in
corporate equities.
D. A third market involves trading exchange-listed securities in OTC markets, while a fourth
market trading involves institution-to-institution trading without using the services of brokers or
dealers.

7. The best definition of capital structure is: 

A. The possibility of conflicts between shareholders and management in a large corporation.
B. The process of planning and managing a firm's long-term investments.
C. How a firm is financed through different proportions of debt and equity.
D. A venue where buyers and sellers of capital equipment come together to trade such assets.

8. The best definition of capital markets is: 

A. The possibility of conflicts between shareholders and management in a large corporation.
B. A venue where long-term debt and equity securities are bought and sold.
C. The purchase or sale of securities whose value derives from the price of another, underlying,
asset.
D. A venue where buyers and sellers of capital equipment come together to trade such assets.
 

9. Which one of the following actions is the best example of an agency problem? 
A. Paying management bonuses based on the current market value of the firm's stock.
B. Accepting a project that enhances both management salaries and the market value of the firm's
stock.
C. Requiring stockholders approval of all management compensation decisions.
D.  Paying management bonuses based on the number of store locations opened during the year.

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10. Which of the following accounts does not relate to working capital management decisions? 
A. Long-term debt.
B. Accounts receivable.
C. Inventory.
D. Short-term debt. 

11. The process of planning and managing a firm's Long-term investments is called: 

A. Working capital management.
B. Financial depreciation.
C. Capital budgeting.
D. Capital structure. 

12. The mixture of debt and equity used by the firm to finance its operations is called: 
A. Working capital management.
B. Financial depreciation.
C. Agency cost analysis.
D. Capital structure.

13. The process of planning and managing a firm's long-term investments is called: 

A. Working capital management.
B. Financial depreciation.
C.  Capital budgeting.
D. Capital structure. 

14. The management of the firm's short-term assets and liabilities is called: 

A. Financial depreciation.
B. Agency cost analysis.
C. Capital budgeting.
D.   Working capital management.

15. In corporate agency theory, managers are __________, and owners are __________. 
A. Bondholders, shareholder.
B. Agents, principals.
C. Principals, agents.
D. Agents, contractors.

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16. Which one of the following actions by a financial manager creates an agency problem? 
A. Refusing to borrow money when doing so will create losses for the firm.
B. Agreeing to expand the company at the expense of stockholders' value.
C. Agreeing to pay bonuses based on the market value of the company stock.
D. Increasing current costs in order to increase the market value of the stockholders' equity.

 17. Which one of the following statements is correct concerning the listing of stock on an
exchange? 

A. Any firm can list their stock on any exchange they desire.
B. All exchanges have the same listing requirements.
C. Listing requirements are established by the Ontario Securities Commission.
D. The TSX has the most stringent listing requirements of any Canadian stock exchange.
 
 

18. Which of the following statements concerning auction markets is correct? 

A. NASDAQ is an auction market.
B. All trades involve a dealer in an auction market.
C. An auction market is called an over-the-counter market.
D. The TSX is an auction market.

 19. Capitalstructure decisions include which of the following? 

A. Determining whether the firm should purchase or lease some equipment.
B. Allocating funds to the various divisions within the firm.
C. Evaluating the size of inventory to be kept on hand.
D. Determining the number of shares of stock to issue.
 

20. The document that legally establishes domicile for a corporation is called the: 
A. Indenture contract.
B. Partnership agreement.
C. Amended homestead filing.
D. Articles of incorporation.

 
 

21. NASDAQ is: 
A. The largest financial market in the U.S. in terms of the total value of listed stocks.
B. Both an OTC and an auction market.
C.  An electronic market which has no physical location.
D. A market with far fewer listings than the NYSE.

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22. The repurchase of outstanding stock by a corporation causes ________ for the firm, all else
constant. 
A. An immediate cash inflow
B. A decrease in the cash flow to stockholders
C. A decrease in both earnings per share and dividends per share
D. Both a cash outflow and an increase in earnings per share

 23. A firm has a calendar tax year. On January 10, the firm purchased depreciable equipment for
cash. This purchase will create: 
A. A current cash outflow and a lesser decrease in current net income.
B. A decrease in net income by an amount equal to the decrease in net assets.
C. No change in net income for the current year.
D. An increase in the total taxes of the firm over a period of years.
 

24. Which one of the following will increase the operating cash flow of a firm, all else constant? 

A. An increase in the taxes paid

B. A decrease in sales
C. A decrease in the interest expense
D.  An increase in depreciation expense

25. Which one of the following will increase earnings per share, all else held constant? 

A. An increase in wages paid to employees.

B. A decrease in sales of the firm.
C. An increase in marginal tax rates.
D. A decrease in the number of shares outstanding.

 
 

26. A liquid asset is defined as an asset which: 

A. Can be quickly converted into cash without significant loss in value.
B. A firm expects to own for a period of ten years or more.
C. Has no physical presence, such as a patent.
D. A firm purchased with cash within the last year.

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27. Which of the following statements concerning a statement of financial position is (are)
correct? 
A. Assets equal liabilities minus shareholders' equity.
B. A patent is an example of an intangible asset.
C. Retained earnings is classified as long-term debt.
D. The statement is also known as a profit and loss statement. 

28. Which of the following assets is the most liquid? 

A. An office building
B. An electric saw for sale by a hardware store
C. A patent on a new kitchen appliance
D. An amount receivable from a customer for a service provided

29. Which of the following will cause net income to decrease for the following year? 

A. An increase in the amount of dividends paid per share.

B. A reduction in tax rates.
C. An increase in profit margins.
D.  The accumulation of more long-term debt by a firm.

30. Which one of the following will decrease net working capital? 

A. An increase in accounts payable.
B. A sale of a fixed asset for cash.
C. A sale of inventory at a profit.
D. A decrease in accounts payable.

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31. Which one of the following will increase shareholders' equity, all else held constant? 
A. A purchase of equipment on account.
B. A sale of inventory at a profit.
C. A payment on a loan.
D. The declaration of a stock dividend.

32. Jemison’s Hardware has accounts payable of $682, inventory of $3,608, cash of $340, fixed
assets of $4,211, accounts receivable of $418, and long-term debt of $3,750. What is the value of
the net working capital to total assets ratio? 

Net working capital to total assets ratio= net working capital / total assets.
Working capital = Current Assets – Current Liabilities
A. .29
B. .43
C. .47
D. .56

33. A Vancouver firm has a debt-equity ratio of .56. What is the total debt ratio? 
A. .36
B. .44
C. 1.44
D. 1.56

34. A Vancouver firm has sales of $1,640, net income of $135, net fixed assets of $1,200, and
current assets of $530. The firm has $280 in inventory. What is the common-size statement value
of inventory? 
A. 15.01 %
B. 16.18 %
C. 30.42 %
D. 52.83 %

35. Katrina's Fury has $697,400 in sales. The profit margin is 3.4 % and the firm has 12,500
shares of stock outstanding. The market price per share is $33. What is the price-earnings ratio? 
A. 15.8
B. 16.2
C. 16.6
D. 17.4

36. Patti's Pizza has net income of $218,490, a price-earnings ratio of 14.6, and earnings per
share of $1.32. How many shares of stock are outstanding? 
A. 14,965
B. 165,523
C. 171,000
D. 173,407

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37. Qwik Stop has accounts receivable of $4,830, inventory of $9,083, sales of $38,600, and cost
of goods sold of $21,400. How many days does it take the firm to both sell their inventory and
collect the payment on the sale? 
A. 186 days
B. 201 days
C. 214 days
D. 217 days

38. A Kingston firm has sales of $49,800, costs of $36,100, interest paid of $380, and
depreciation of $3,200. The tax rate is 35 %. What is the value of the cash coverage ratio? 
A. 25.73
B. 30.00
C. 36.05
D. 41.08

39. Which of the following regarding financial statement analysis is NOT correct? 

A. It is straightforward to calculate the market value based measures of firm performance using
financial statements prepared according to GAAP.
B. Asset management ratios measure the intensity and efficiency of asset use.
C. For common size statements, we divide asset and liability accounts by total assets and
statement of comprehensive income accounts by sales.
D. An increase in a firm's net fixed assets is considered to be a use of cash.

40. The interval measure is an example of a(n)____________ ratio. 

A. Financial leverage.
B. Asset management.
C. Profitability.
D. Short-term solvency.

41. On a common-size statement of financial position, all _____ accounts are shown as a
percentage of _____. 
A. Income; total assets.
B. Liability; net income.
C. Liability; total assets.
D. Equity; sales.

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42. Which of the following is NOT a correct statement about the price/earnings ratio? 
A. A high P/E ratio is often taken to mean the firm has significant prospects for future growth.
B. A P/E ratio of 15 means investors are willing to pay $15 for each $1 of current earnings.
C. Care must be taken in interpreting very high P/E ratios since they can result from a firm
having very low earnings.
D. A firm with high earnings per share will also have a very high P/E ratio.

43. Activities of the firm in which cash is spent are known as: 

A. Uses of cash.
B. Cash payments.
C. Cash receipts.
D. Cash on hand.

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