Which of the following statements is CORRECT? a. Corporations face fewer regulations than sole proprietorships. b. If a partnership goes bankrupt, each partner is exposed to liabilities only up the amount of his or her investment in the business. c. One advantage of forming a corporation is that equity investors are usually exposed to less liability than in a partnership. d. One disadvantage of operating a business as a sole proprietor is that the firm is subject to double taxation, at both the firm level and the owner level. e. It is generally less expensive to form a proprietorship than a corporation because, with a proprietorship, extensive legal documents are required. Which of the following statements is CORRECT? a. Corporations of all types are subject to the corporate income tax. b. One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., "one person, one vote." c. It is easier to transfer one's ownership interest in a partnership than in a corporation. d. One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability. e. One of the advantages of the corporate form of organization is that it avoids double taxation. Which of the following statements is CORRECT? a. Corporations generally face fewer regulations than sole proprietorships. b. Corporate shareholders are exposed to unlimited liability. c. Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation. d. There is a tax disadvantage to incorporation, and there is no way any corporation can escape this disadvantage, even if it is very small. e. It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a sole proprietorship. Which of the following actions would be likely to encourage a firm's managers to make decisions that are in the best interest of shareholders? a. The percentage of the firm's stock that is held by institutional investors such as mutual funds, pension funds, and hedge funds rather than by small individual investors rises from 10% to 60%. b. The percentage of executive compensation that comes in the form of cash is increased and the percentage coming from long-term stock options is reduced. c. The state legislature passes a law that makes it more difficult to successfully complete a hostile takeover. d. The firm's founder, who is also president and chairman of the board, sells 90% of her shares. e. The firm's board of directors gives the firm's managers greater freedom to take whatever actions they decide to take. Which of the following statements is CORRECT? a. One advantage of forming a corporation is that it subjects the firm's investors to fewer taxes. b. One disadvantage of forming a corporation is that this makes it more difficult for the firm's investors to transfer their ownership interests. c. One drawback of forming a corporation is that it makes it more difficult for the firm to raise capital. d. One drawback of forming a corporation is that it subjects the firm to additional regulations. e. One drawback of forming a corporation is that it subjects the firm's investors to increased personal liabilities. Which of the following statements is CORRECT? a. The efficiency of the U.S. economy would probably be increased if hostile takeovers were absolutely forbidden. b. Hostile takeovers are most likely to occur when a firm's stock is selling below its intrinsic value because of its poor management. c. Stockholders in general would be better off if managers concealed good events and therefore caused the price of the firm's stock to sell at a price below its intrinsic value. d. Hostile takeovers are most likely to occur when a firm's stock sells at a price above its intrinsic value because its management has been issuing overly optimistic statements about its likely future performance. Which of the following statements is CORRECT? a. Firms in highly competitive industries are more likely to consciously exercise "social responsibility" than are firms in oligopolistic industries. b. Most business in the U.S. is conducted by corporations, and corporations' popularity results primarily from their favorable tax treatment. c. Corporations and partnerships have an advantage over proprietorships because a sole proprietor is exposed to unlimited liability, but the liability of all investors in the other types of businesses is more limited. d. A good goal for a firm's management is maximization of expected EPS. e. One example of an agency relationship is the one between stockholders and managers. Which of the following statements is CORRECT? a. Managers generally welcome hostile takeovers since the company seeking to do the taking over generally offers a price for the stock that is higher than the price before the takeover action started. b. The entrenched managers of established, stable companies sometimes attempt to get their state legislatures to remove rules that make it more difficult for raiders to succeed with hostile takeovers. c. The entrenched managers of established, stable companies sometimes attempt to get their state legislatures to impose rules that make it more difficult for raiders to succeed with hostile takeovers. d. One disadvantage of organizing a business as a corporation rather than a partnership is that the equity investors in a corporation are exposed to unlimited liability. Which of the following actions would be likely to reduce conflicts of interest between stockholders and managers? a. The board of directors becomes more vigilant in its oversight of the company's management. b. Managerial compensation is changed so that managers receive larger cash salaries but fewer long-term options to buy shares of stock. c. The company's outside auditing firm is offered a lucrative consulting contract with the company. d. The company changes the way executive stock options are handled, with all options now being vested after only 2 years rather than having 20% of the options awarded be vested every 2 years over a 10-year period. e. Congress passes a law that severely restricts hostile takeovers. Which of the following statements is CORRECT? a. The proper goal of the financial manager should be to maximize the firm's expected cash flows, because this will add the most wealth to each of the individual shareholders (owners) of the firm. b. Large, publicly-owned firms like AT&T and GM, are controlled by their management teams. Ownership is generally widely dispersed, hence managers have great freedom in how they manage the firm. Managers may operate in stockholders' best interests, but they may also operate in their own personal best interests. As long as managers stay within the law, there are no effective tools that can be used to motivate them to take actions that are in the stockholders' best interests. c. The financial manager should seek that combination of assets, liabilities, and capital that will generate the largest expected projected after-tax income over the relevant time horizon. d. Potential conflicts of interest can exist between stockholders and managers. e. The riskiness inherent in a firm's earnings per share (EPS) depends on the characteristics of the projects the firm selects, which means it depends upon the firm's assets, but EPS does not depend on the manner in which those assets are financed. The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to a. Maximize its expected EPS. b. Maximize its expected total corporate income. c. Maximize the stock price per share over the long run, which is the stock's intrinsic value. d. Maximize the stock price on a specific target date. e. Minimize the chances of losses. Which of the following statements would most people in business agree with? a. Although people's moral characters are probably developed before they get into a business school, it is still useful for business schools to cover ethics, if only to give students an idea about the adverse consequences of unethical behavior to themselves, their firms, and the nation. b. It is not useful for large corporations to develop a formal set of rules defining ethical and unethical behavior. c. Firms and government agencies almost always agree with one another regarding the restrictions that should placed on hiring and firing employees. d. A corporation's short-run profits will almost always increase if the firm takes actions that the government has determined are in the best interests of the nation. e. "Whistle blowers," because of the courage it takes to blow the whistle, are generally promoted more rapidly than other employees. Which of the following statements is CORRECT? a. Any action that would maximize a firm's stock price must be consistent with the maximization of social welfare. b. Decisions regarding social and ethical behavior have no effect, either positive or negative, on firms' stock prices. c. If the government did not mandate some actions deemed to be socially responsible, such as those relating to fair hiring practices, most firms in competitive markets would still pursue these policies. d. In a competitive industry, if one group of firms is "socially conscious" and takes costly actions designed to improve social welfare, but other firms do not, then most investors will flock to the socially conscious firms, thus enhancing their ability to attract capital. Eventually, these firms must dominate the industry. e. The ability of firms in competitive industries to engage voluntarily in socially beneficial but costly projects is constrained by competition and the need to attract capital. Which of the following statements is CORRECT? a. Corporate stockholders are exposed to unlimited liability. b. Due to legal considerations related to ownership transfers and limited liability, most business (measured by dollar sales) is conducted by corporations in spite of large corporations' less favorable tax treatment. c. Most businesses (by number and total dollar sales) are organized as proprietorships or partnerships because it is easier to set up and operate as one of these forms rather than as a corporation. However, if the business gets very large, it becomes advantageous to convert to a corporation, primarily because corporations have important tax advantages over proprietorships and partnerships. d. Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of U.S. businesses (in terms of number of businesses) are organized as corporations. e. Large corporations are taxed more favorably than sole proprietorships. Cheers Inc. operates as a partnership. Now the partners have decided to convert the business into a corporation. Which of the following statements is CORRECT? a. Cheers' shareholders (the ex-partners) will now be exposed to less liability. b. Cheers will now be subject to fewer regulations. c. Cheers' investors will be exposed to less liability, but they will find it more difficult to transfer their ownership. d. Cheers will find it more difficult to raise additional capital. e. Assuming Cheers is profitable, none of its income will be subject to federal income taxes. 1. A manufacturing concern would report the cost of units only partially processed as inventory in the balance sheet. 2. Both merchandising and manufacturing companies normally have multiple inventory accounts. 3. When using a perpetual inventory system, freight charges on goods purchased are debited to Freight-In. 4. If a supplier ships goods f.o.b. destination, title passes to the buyer when the supplier delivers the goods to the common carrier. 5. If ending inventory is understated, then net income is understated. 6. If both purchases and ending inventory are overstated by the same amount, net income is not affected. 7. Freight charges on goods purchased are considered a period cost and therefore are not part of the cost of the inventory. 8. Purchase Discounts Lost is a financial expense and is reported in the “other expenses and losses” section of the income statement. 9. The cost flow assumption adopted must be consistent with the physical movement of the goods. 10. In all cases when FIFO is used, the cost of goods sold would be the same whether a perpetual or periodic system is used. 11. The change in the LIFO Reserve from one period to the next is recorded as an adjustment to Cost of Goods Sold. 12. Many companies use LIFO for both tax and internal reporting purposes. 13. LIFO liquidation often distorts net income, but usually leads to substantial tax savings. 14. LIFO liquidations can occur frequently when using a specific-goods approach. 15. Dollar-value LIFO techniques help protect LIFO layers from erosion. 16. The dollar-value LIFO method measures any increases and decreases in a pool in terms of total dollar value and physical quantity of the goods. 17. A disadvantage of LIFO is that it does not match more recent costs against current revenues as well as FIFO. 18. The LIFO conformity rule requires that if a company uses LIFO for tax purposes, it must also use LIFO for financial accounting purposes. 19. Use of LIFO provides a tax benefit in an industry where unit costs tend to decrease as production increases. 20. LIFO is inappropriate where unit costs tend to decrease as production increases. The Primary goal of a Publicly-owned firm interested in serving its stockholders should be to? Maximize the stock price per share Which of the following statements is most correct? A. Compensating managers with stock can reduce the agency problem between stockholders and managers. B. Restrictions are included in credit agreements to protect bondholders from the agency problem that exists between bondholders and stockholders. C. The threat of a takeover can reduce the agency problem between bondholders and stockholders D. Statements a and b are correct E. All of the statements above are correct. D. Statements A and B are correct. Which of the following actions are likely to reduce the agency problem between stockholders and managers? A. Congress passes a law that severely restricts hostile takeovers. B. A manager receives a lower salary but receives additional shares of the company's stock C. The board of directors has become more vigilant in its oversight of the company's management. D. Statement b and c are correct E. All of the statements above are correct. D. Statements b and c are correct. Which of the following actions are likely to reduce agency conflicts between stockholders and managers? A. Paying managers a large fixed salary. B. Increasing the threat of corporate takeover. C. Placing restrictive covenants in debt agreements. D. All of the statements above are correct E. Statement b and c are correct. B. Increasing the threat of corporate takeover Which of the following is most correct? A. A firm's fundamental value is it s market value. B. A firm's fundamental value is the present value of its future free cash flows. C. A firm's market price is usually greater than its fundamental value. D. A firm's fundamental value is usually greater than its market price. E. A firm's fundamental value is its book value. B. A firm's fundamental value is the present value of its future free cash flows. Which of the following statement is most correct? A. A market is transparent when trading is inexpensive. B. A market is transparent when accurate information is available to all market participants. C. A transparent market has few regulations. D. A transparent market has many opportunities for trading on insider information. E. A market is transparent when everyone knows who the person is that they are trading with. B. A market is transparent when accurate information is available to all market participants. Which of the following statement is most correct? A. Sarbanes-Oxley requires the Securities Exchange Commission to audit public companies' financial statements B. Sarbanes-Oxley made it illegal for company executives to trade on insider info. C. Sarbanes-Oxley requires the Chairman of the Board of Directors to sign and certify the company's financial statements. D. Sarbanes-Oxley requires the CEO sign and certify the company's financial statements. E. Sarbanes-Oxley requires company executives to disclose their fraudulent activities "in a timely and accurate manner." D. Sarbanes-Oxley requires the CEO sign and certify the company's financial statements. Which of the following statements is most correct? a. One of the advantages of the corporate form of organization is that there is no double taxation. b. The partnership form of organization has easy transferability of owner ship. c. One of the disadvantages of the sole proprietorship form of organization is that there is unlimited liability. d. Statements b and c are correct. e. None of the statements above is correct The primary goal of a publicly owned firm interested in serving its stockholders should be to a. Maximize expected total corporate profit. b. Maximize expected EPS. c. Minimize the chances of losses. d. Maximize the stock price per share. e. Maximize expected net income Which of the following statements is most correct? a. A hostile takeover is the main method of transferring ownership interest in a corporation. b. The corporation is a legal entity created by the state and is a direct extension of the legal status of its owners and managers, that is, the owners and managers are the corporation. c. Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization. d. In part due to limited liability and ease of ownership transfer, corporations have less trouble raising money in financial markets than other organizational forms. e. Although stockholders of the corporation are insulated by limited legal liability, the legal status of the corporation does not protect the firm's managers in the same way. Which of the following statements is most correct? a. Corporations are taxed more favorably than sole proprietorships. b. Corporations have unlimited liability. c. Because of their size, large corporations face fewer regulations than smaller corporations and sole proprietorships. d. Reducing the threat of corporate takeover increases the likelihood that managers will act in shareholders' interest. e. Bond covenants are designed to reduce potential conflicts between stockholders and bondholders. Which of the following statements is most correct? a. The proper goal of the financial manager should be to maximize the firm's expected cash flow, because this will add the most wealth to each of the individual shareholders (owners) of the firm. b. One way to state the decision framework most useful for carrying out the firm's objective is as follows: "The financial manager should seek that combination of assets, liabilities, and capital that will generate the largest expected projected after tax income over the relevant time horizon." c.The riskiness inherent in a firm's earnings per share (EPS) depends on the characteristics of the projects the firm selects, which means it depends upon the firm's assets, but EPS does not depend on the manner in which those assets are financed. d. Since large, publicly owned firms are controlled by their management teams, and typically, ownership is widely dispersed, managers have great freedom in managing the firm. Managers may operate in stockholders' best interests, but they may also operate in their own personal best interests. As long as managers stay within the law, there simply aren't any effective controls over managerial decisions in such situations. e. Agency problems exist between stockholders and managers, and between stockholders and creditors Managers do not always attempt to maximize the long run value of their firms' stocks, or the stocks' intrinsic values. Thus, conflicts between stockholders and managers can exist. Additionally, there can be conflicts between stockholders and bondholders. a. True b. False Which of the following statements is CORRECT? a. One disadvantage of forming a corporation is that equity investors are usually exposed to more liability than they would be in a partnership. b. Corporations face fewer regulations than sole proprietorships. c. One disadvantage of operating a business as a corporation is that the firm is subject to double taxation, because taxes are levied at both the firm level and the individual shareholder level. d. It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required. e. If a partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business. Which of the following could explain why a business might choose to operate as a corporation rather than as a sole proprietorship or a partnership? a. Corporations generally face fewer regulations. b. Less of a corporation's income is generally subject to federal taxes. c. Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation. d. Corporate investors are exposed to unlimited liability. e. Corporations generally find it easier to raise large amounts of capital. The primary operating goal of a publicly owned firm trying to best serve its stockholders should be to a. Maximize managers' own interests, which are by definition consistent with maximizing shareholders' wealth. b. Maximize shareholder wealth, which is equivalent to maximizing the firm's stock price per share. c. Minimize the firm's risks because most stockholders dislike risk. In turn, this will maximize the firm's stock price. d. Use a well structured managerial compensation package to maximize conflicts that may exist between stockholders and managers. e. Since it is impossible to measure a stock's intrinsic value, the text states that it is better for managers to attempt to maximize the cur rent stock price than its intrinsic value. Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders? a. Decrease the use of restrictive covenants in bond agreements. b. Take actions that reduce the possibility of a hostile takeover. c. Elect a board of directors that allows managers greater freedom of action. d. Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries. e. Eliminate a requirement that members of the board of directors have a substantial investment in the firm's stock. Which of the following statements is CORRECT? a. One disadvantage of operating as a corporation rather than as a partnership is that corporate shareholders are exposed to more personal liability than are partners. b. Relative to sole proprietorships, corporations generally face fewer regulations, and they also find it easier to raise capital. c. There is no good reason to expect a firm's stockholders and bondholders to react differently to the types of assets in which it invests. d. Stockholders should generally be happier than bondholders to have managers invest in risky projects with high potential returns as opposed to safe projects with lower expected returns. e. Bondholders should generally be happier than stockholders to have managers invest in risky projects with high potential returns as opposed to safe projects with lower expected returns. Which of the following statements would most people in business agree with? a. A corporation's short run profits will almost always increase if the firm takes actions that the government has determined are in the best interests of the nation. b. Firms and government agencies almost always agree with one another regarding the restrictions that should be placed on hiring and firing employees. c. "Whistle blowers," because of the courage it takes to blow the whistle, are generally promoted more rapidly than other employees. d. It is not useful for large corporations to develop a formal set of rules defining ethical and unethical behavior. e. Although people's moral characters are probably developed before they are admitted to a business school, it is still useful for business schools to cover ethics, if only to give students an idea about the adverse consequences of unethical behavior to themselves, their firms, and the nation. What is double taxation? Corporations have limited liability; however, they face more regulations than the other forms of organization. Sole proprietorships do not pay corporate taxes. The biggest disadvantage of the corporation is that both corporate earnings and dividends are taxed, which is double taxation What advantages do corporations provide to investors? Outsiders thinking about investing in a business are generally not willing to be subjected to unlimited liability, and they also want to be able to sell their shares should they choose to do so. Corporations provide these advantages, hence firms that need large amounts of capital that must be raised in capital markets generally choose to incorporate Which of the following statements is CORRECT? a. Most businesses (by number and total dollar sales) are organized as proprietorships or partnerships because it is easier to set up and operate in one of these forms rather than as a corporation. However, if the business gets very large, it becomes advantageous to convert to a corporation, primarily because corporations have important tax advantages over proprietorships and partnerships. b. Corporate stockholders are exposed to unlimited liability. c. Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of U.S. businesses (in terms of number of businesses) are organized as corporations. d. Due to legal considerations related to ownership transfers and limited liability, most business (measured by dollar sales) is conducted by corporations in spite of large corporations' often less favorable tax treatment. e. Large corporations are taxed more favorably than sole proprietorships. Which of the following statements is CORRECT? a. Bond covenants are an effective way to resolve conflicts between shareholders and managers. b. One advantage of the corporate form of organization is that liability of the owners of the firm is limited to their investment in the firm. c. Managers who face the threat of hostile takeovers are less likely to pursue policies that maximize shareholder value than are managers who do not face the threat of hostile takeovers. d. Because of their simplified organization, it is easier for sole proprietorships and partnerships to raise large amounts of outside capital than it is for corporations. e. Corporations generally are subject to fewer regulations and more favorable tax treatment than sole proprietorships and partnerships. This is why corporations do most of the business in the United States. Which of the following statements is CORRECT? a. Most business in the U.S. is conducted by corporations, and corporations' popularity results primarily from their favorable tax treatment. b. A good goal for a firm's management is maximization of expected EPS. c. The potential exists for agency conflicts between stockholders and managers. d. Because most stock ownership is concentrated in the hands of a relatively small segment of society, firms' actions to maximize their stock prices have little benefit to society. e. Corporations and partnerships have an advantage over proprietorships because a sole proprietor is exposed to unlimited liability, but the liability of all investors in the other types of businesses is more limited. Which of the following statements is CORRECT? a. Corporations face fewer regulations than sole proprietorships. b. One disadvantage of operating a business as a sole proprietorship is that the firm is subject to double taxation, at both the firm level and the owner level. c. It is generally more expensive to form a proprietorship than a corporation because, with a proprietorship, extensive legal documents are required. d. If a regular partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business. e. One advantage of forming a corporation is that equity investors are usually exposed to less liability than in a regular partnership. Which of the following factors would be most likely to lead to an increase in interest rates in the economy? a. Households reduce their consumption and increase their savings. b. The economy falls into a recession. c. There is a decrease in expected inflation. d. Most businesses decide to modernize and expand their manufacturing capacity, and to install new equipment to reduce labor costs. e. The Federal Reserve decides to try to stimulate the economy. Which of the following statements is CORRECT? a. Partnerships have difficulty attracting capital in part because of their unlimited liability, the lack of impermanence of the organization, and difficulty in transferring ownership. b. A fast-growth company would be more likely to set up as a partnership for its business organization than would a slow-growth company. c. In a regular partnership, liability for the firm's debts is limited to the amount a particular partner has invested in the business. d. Corporations are at a disadvantage relative to partnerships because they have to file more reports to state and federal agencies, including the Securities and Exchange Administration, even if they are not publicly owned. e. A major disadvantage of a partnership relative to a corporation as a form of business organization is the high cost and practical difficulty of its formation. Which of the following statements is CORRECT? a. One of the advantages of the corporate form of organization is that it avoids double taxation. b. One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., "one person, one vote." c. It is generally easier to transfer one's ownership interest in a partnership than in a corporation. d. Corporations of all types are subject to the corporate income tax. e. One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability. Which of the following would be most likely to lead to higher interest rates on all debt securities in the economy? a. Households start saving a larger percentage of their income. b. The level of inflation begins to decline. c. The Federal Reserve uses monetary policy in an attempt to stimulate the economy. d. The economy moves from a boom to a recession. e. Corporations step up their expansion plans and thus increase their demand for capital. Cheers Inc. operates as a partnership. Now the partners have decided to convert the business into a regular corporation. Which of the following statements is CORRECT? a. Cheers will find it more difficult to raise additional capital. b. Assuming Cheers is profitable, less of its income will be subject to federal income taxes. c. Cheers' shareholders (the ex-partners) will now be exposed to less liability. d. Cheers' investors will be exposed to less liability, but they will find it more difficult to transfer their ownership. e. Cheers will now be subject to fewer regulations. Which of the following statements is CORRECT? a. Sole proprietorships and partnerships generally have a tax advantage over many corporations, especially large ones. b. Corporations of all types are subject to the corporate income tax. c. In any type of partnership, every partner has the same rights, privileges, and liability exposure as every other partner. d. Sole proprietorships are subject to more regulations than corporations. e. One of the disadvantages of incorporating a business is that the owners then become subject to liabilities in the event the firm goes bankrupt. Which of the following statements is CORRECT? a. Relative to sole proprietorships, corporations generally face fewer regulations, and this makes it easier for corporations to raise capital. b. Bondholders are generally more willing than stockholders to have managers invest in risky projects with high potential returns as opposed to safer projects with lower expected returns. c. Stockholders are generally more willing than bondholders to have managers invest in risky projects with high potential returns as opposed to safer projects with lower expected returns. d. One disadvantage of operating as a corporation rather than as a partnership is that corporate shareholders are exposed to more personal liability than partners. e. There is no good reason to expect a firm's stockholders and bondholders to react differently to the types of new asset investments a firm makes.
