Exam Spring 2020, questions and answers PDF

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Chapter 15 Financial Decisions and Risk Management15 Muliple-Choice Quesions The business acivity that is concerned with determining a irm's long-term investments, obtaining the funds to pay for those investments, and conducing the irm's everyday inancial aciviies is A) bookkeeping. B) corporate ina...

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Chapter 15 Financial Decisions and Risk Management

15.1 Multiple-Choice Questions

1) The business activity that is concerned with determining a firm's long-term investments, obtaining the funds to pay for those investments, and conducting the firm's everyday financial activities is A) bookkeeping. B) corporate finance. C) investment brokers. D) chartered banks. E) money markets. Answer: B Diff: 2

Type: MC

Page Ref: 367

Skill: Knowledge Objective: 15.1

2) Which of the following represents the overall objective of financial managers? A) To ensure that the company has enough funds on hand to purchase materials needed to produce goods and services B) To ensure that the company has enough money to pay for its debts C) To increase the supply of money for the economy D) To increase the value of the firm and thus to increase shareholder wealth E) To manage the firm's cash flow Answer: D Diff: 2

Type: MC

Page Ref: 367

Skill: Knowledge Objective: 15.1

3) When a firm ensures that it always has enough funds on hand to purchase the materials and human resources that it needs to produce goods and services, it is exercising

A) cash flow management. B) government tax reporting. C) accounting. D) financial planning. E) financial control. Answer: A Diff: 2

Type: MC

Page Ref: 368

Skill: Knowledge Objective: 15.1

4) All of the following are responsibilities of the financial manager except A) determining a firm's long-term investments. B) obtaining funds to pay for those investments. C) developing the firm's financial statements. D) conducting the firm's everyday financial activities. E) managing the risks that the firm takes. Answer: C Diff: 1

Type: MC

Page Ref: 367-368

Skill: Comprehension Objective: 15.1 5) Which of the following is correct with respect to chief financial officers (CFOs)? A) About 50 percent of CEOs were formerly CFOs. B) CFOs do much more than simply focus on financial documents. C) In recent years, fewer CFOs have been appointed as chief executives officers (CEOs). D) The skill set of CFOs is narrowing because they have to sharpen their focus on financial issues. E) All of these are correct. Answer: B Diff: 1

Type: MC

Page Ref: 367

Skill: Comprehension Objective: 15.1

6) Tony is responsible for planning and controlling the acquisition and dispersal of the company's financial assets. What is Tony's job title? A) Management information systems manager B) Financial manager C) Purchasing manager D) Accounting manager E) Chief risk manager Answer: B Diff: 1

Type: MC

Page Ref: 367

Skill: Comprehension Objective: 15.1

7) In 2012, Canadian Pacific Railway Ltd. announced that it would make investments totaling $1.2 billion in order to improve its operating ratio, which in 2011 was the worst among North America's Big Six railways. This activity is CPR's A) cash flow management plan. B) financial plan. C) leveraging. D) budget. E) financial control. Answer: B Diff: 1

Type: MC

Page Ref: 368

Skill: Comprehension Objective: 15.1

8) The three basic areas of responsibility for financial managers are A) cash flow management, financial control, and financial planning.

B) risk management, portfolio diversification, and cash flow management. C) credit policy, cash flow management, and policy decisions on equity vs. debt financing. D) short-term, medium-term, and long-term financing. E) none of these. Answer: A Diff: 1

Type: MC

Page Ref: 368

Skill: Comprehension Objective: 15.1 9) The "measuring stick" against which performance is evaluated is provided by A) a budget. B) a cash flow statement. C) a financial plan. D) a balance sheet. E) debt levels. Answer: A Diff: 1

Type: MC

Page Ref: 368

Skill: Knowledge Objective: 15.1

10) Henry has received notice from a supplier that all invoices must be paid within 30 days rather than 60 days as previously given. Which of the following will be impacted by this change? A) Inventories B) Raw materials inventory C) Accounts receivable D) Capital expenditures E) Cash flow Answer: E Diff: 2

Type: MC

Page Ref: 368

Skill: Comprehension

Objective: 15.2

11) When managers at Kraft Foods anticipate how much cheddar cheese Safeway supermarkets will buy each month and when Safeway will pay for those purchases, Kraft is managing its A) accounts payable. B) accounts receivable. C) credit policies. D) capital expenditures. E) inventories. Answer: B Diff: 1

Type: MC

Page Ref: 369

Skill: Comprehension Objective: 15.2

12) David is looking at a bill for supplies his company bought. It is dated May 1st and the terms are 2/10; net 30. In order to pay the least amount, when should he pay the bill? A) Any day in May B) May 10 C) May 21 D) May 31 E) May 15 Answer: B Diff: 2

Type: MC

Page Ref: 369

Skill: Application Objective: 15.2 13) Which of the following terms would a firm use to speed up cash flow? A) 1/10; net 60

B) 1/10; net 30 C) 3/10; net 30 D) 2/10; net 60 E) 2/10; net 30 Answer: C Diff: 2

Type: MC

Page Ref: 369

Skill: Comprehension Objective: 15.2

14) A credit policy of "2/10, net 30" means A) That if a customer pays its bill within 10 days, it will receive a 30 percent discount. B) That if a customer pays its bill within 30 days, it will receive a 10 percent discount. C) That if a customer pays its bill within 2 days, it will receive a 10 percent discount. D) That if a customer pays its bill within 10 days, it will receive a 2 percent discount. E) None of these are correct. Answer: D Diff: 2

Type: MC

Page Ref: 369

Skill: Comprehension Objective: 15.2

15) What does a credit policy of "2/10, net 30" mean? A) That the selling company offers a 10 percent discount if the customer pays within 2 days. The customer has 30 days to pay the regular price. B) That if the buyer pays the net bill within 10 days, a 2 percent discount will be given. C) That the selling company offers a 2 percent discount if the customer pays within 10 days. The customer has 30 days to pay the regular price. D) That the buyer has two months to pay the bill. If the buyer pays before that time, a 10 percent discount will be given. E) None of these are correct. Answer: C

Diff: 2

Type: MC

Page Ref: 369

Skill: Comprehension Objective: 15.2

16) Sally is looking at an invoice dated July 1st for $1000 that has terms of 2/10; net 30. If she pays the bill on July 3rd how much should she write the cheque for? A) $900 B) $980 C) $998 D) $1000 E) $700 Answer: B Diff: 3

Type: MC

Page Ref: 369

Skill: Application Objective: 15.2 17) Why is it necessary for a business firm to establish a credit policy? A) A credit policy is necessary to determine how much money the business can borrow to purchase supplies. B) A credit policy is necessary to determine how dividends will be distributed to the shareholders. C) A credit policy is necessary to determine which suppliers the firm needs to pay. D) A credit policy is a means of accounting for the dollar value of inventory-in-process. E) A credit policy provides financial managers with expected dates of payment from buyers of the firm's products and services. Answer: E Diff: 3

Type: MC

Page Ref: 369

Skill: Comprehension Objective: 15.2

18) Jenex Corp. has a credit policy that reads "2/10, net 30." This means that A) the company is offering a 10 percent discount if the customer pays within 2 days.

B) the company will give a net reduction of 30 percent in the amount owed if the customer pays within 10 days. C) the customer will have to pay at least 10 percent of the bill by the end of 30 days. D) the customer will have to pay at least 30 percent of the bill by the end of 10 days. E) none of these. Answer: E Diff: 2

Type: MC

Page Ref: 369

Skill: Comprehension Objective: 15.2

19) Sellers adjust credit terms in order to influence A) when dividends are paid. B) when customers pay their bills. C) their net profit. D) their goods-in-process inventory. E) their accounts payable. Answer: B Diff: 2

Type: MC

Page Ref: 369

Skill: Knowledge Objective: 15.2

20) Scott is managing a company and he has been advised by his financial manager that his largest source of short-term debt is too high. What source of funding is Scott's financial manager probably talking about? A) Inventory loans B) Bank notes C) Credit cards D) Commercial paper E) Accounts payable

Answer: E Diff: 1

Type: MC

Page Ref: 369

Skill: Comprehension Objective: 15.2 21) Scott has been informed by his financial manager that his accounts receivable are being paid much too late. To fix this problem, Scott should A) develop a credit policy. B) call the companies and request the funds. C) charge higher interest rates. D) demand that the money be paid. E) sell the late accounts to collection agents. Answer: A Diff: 2

Type: MC

Page Ref: 369

Skill: Application Objective: 15.2

22) Long-term expenditures are usually more carefully planned than short-term outlays because A) they represent a binding commitment of company funds that continues long into the future. B) they are usually sold at high-profit margins. C) they can be used to pay off accounts payable. D) the expenditures must finance items that are easily liquidated. E) all of these. Answer: A Diff: 2

Type: MC

Page Ref: 369

Skill: Comprehension Objective: 15.2

23) For Levi Strauss' jean-making operation, rolls of denim are considered ________, while cut-but-notyet-sewn jeans are considered ________. A) work-in-process inventory; raw materials inventory B) short-term capital; long-term capital C) capital stock; supplies D) raw materials inventory; work-in-process inventory E) short-term credit; long-term credit Answer: D Diff: 2

Type: MC

Page Ref: 369

Skill: Comprehension Objective: 15.2

24) Cut out but not-yet-sewn jeans are part of the ________ inventory at a clothing manufacturer. A) raw materials B) work-in-process C) finished goods D) just-in-time E) last in, first out Answer: B Diff: 2

Type: MC

Page Ref: 369

Skill: Knowledge Objective: 15.2 25) With respect to inventory, which of the following is correct? A) Inventory is not an asset. B) All inventory is an asset except work-in-process inventory. C) Factoring inventory is generally a bad idea. D) Finished goods inventory is twice the value of work-in-process inventory. E) Rolls of denim at a Levi's factory are raw materials inventory. Answer: E

Diff: 2

Type: MC

Page Ref: 369

Skill: Comprehension Objective: 15.2

26) Capital expenditures differ from operating expenditures in that A) they are much smaller. B) they are shorter commitments. C) they are part of working capital. D) they are not budgeted. E) they are not normally sold or converted into cash. Answer: E Diff: 2

Type: MC

Page Ref: 369

Skill: Knowledge Objective: 15.2

27) Which term is used to identify the granting of credit by one firm to another? A) A line of credit B) A commitment fee C) Trade credit D) A secured loan E) An interfirm understanding of commercial intent Answer: C Diff: 1

Type: MC

Page Ref: 369-370

Skill: Knowledge Objective: 15.3

28) The most common form of trade credit is A) the trade acceptance.

B) the trade draft. C) the promissory note. D) open-book credit. E) none of these. Answer: D Diff: 1

Type: MC

Page Ref: 370

Skill: Knowledge Objective: 15.3 29) Mega has just shipped one of its products to Compucell on faith that they will pay the invoice. This is a(n) A) trade acceptance. B) revolving credit agreement. C) line of credit. D) open-book credit. E) promissory note. Answer: D Diff: 1

Type: MC

Page Ref: 370

Skill: Comprehension Objective: 15.3

30) What is a promissory note? A) A "gentleman's agreement" to pay for products which were shipped on faith that the payment would be forthcoming B) A short-term loan which uses accounts receivable as collateral for a loan C) An agreement signed by the buyer stating when and how much money will be paid to the seller in return for immediate credit D) The requirement for a firm to maintain a certain amount of funds on deposit with the lending bank E) The right given to a bank to seize certain assets if payment is not made when due Answer: C Diff: 2

Type: MC

Page Ref: 370

Skill: Comprehension Objective: 15.3

31) Jack is setting up a global operation. The form of trade credit that is particularly useful for Jack's international transactions would be A) revolving credit agreement. B) promissory notes. C) trade acceptance. D) line of credit. E) open-book credit. Answer: C Diff: 1

Type: MC

Page Ref: 370

Skill: Comprehension Objective: 15.3

32) Sallyanne is selling merchandise to a retailer using the terms of a trade draft. As a new employee of Sallyanne's, you find out that a trade draft is A) a means of pledging accounts receivable. B) an agreement to meet certain terms, which is attached to the shipment and which must be signed before the goods are delivered to the buyer. C) a legal agreement promising to pay for the goods, which is signed by the buyer before the seller will ship the goods. D) a type of secured loan with trade products serving as collateral. E) the seller ships products on faith that payment will be forthcoming. Answer: B Diff: 2

Type: MC

Page Ref: 370

Skill: Comprehension Objective: 15.3 33) Sallyanne is selling merchandise to Jack's Machine Shop. Sallyanne felt secure in receiving payment because she had Jack sign a promissory note. Sallyanne felt secure because a promissory note is

A) an agreement signed by the buyer stating when and how much money will be paid to the seller in return for immediate credit. B) the requirement for a firm to maintain a certain amount of funds on deposit with the lending bank. C) a "gentleman's agreement" to pay for products which were shipped on faith that the payment would be forthcoming. D) the right given to a bank to seize certain assets if payment is not made when due. E) basically the same thing as a trade acceptance. Answer: A Diff: 1

Type: MC

Page Ref: 370

Skill: Comprehension Objective: 15.3

34) Which term is used to identify a bank's requirement for the borrower to give the bank the right to seize certain assets if payments are not made as promised? A) Pledging accounts payable B) Open-book credit C) Pledging accounts receivable D) Collateral E) Trade acceptance Answer: D Diff: 1

Type: MC

Page Ref: 370

Skill: Knowledge Objective: 15.3

35) The main source of collateral for companies like accounting firms and law firms is A) cash flow. B) equipment and buildings. C) accounts receivable. D) accounts payable.

E) goodwill Answer: C Diff: 1

Type: MC

Page Ref: 370

Skill: Knowledge Objective: 15.3

36) Secured, short-term loans are usually secured by A) deposits with the bank. B) fixed assets. C) inventories. D) commercial paper. E) trade credit. Answer: C Diff: 1

Type: MC

Page Ref: 370

Skill: Knowledge Objective: 15.3 37) For a specific firm, which of the following is most likely to carry the lowest interest rate? A) Loan secured by fixed assets B) Commercial paper C) Loan secured by finished goods D) Unsecured loan E) Loan secured by raw materials Answer: C Diff: 3

Type: MC

Page Ref: 370

Skill: Comprehension Objective: 15.3

38) How may a firm obtain an unsecured short-term bank loan?

A) Obtain open-book credit B) Provide a fixed asset as a guarantee of payment C) Pledge accounts receivable D) Obtain a line of credit agreement E) Obtain an inventory loan Answer: D Diff: 2

Type: MC

Page Ref: 370

Skill: Comprehension Objective: 15.3

39) Which of the following requires a commitment fee? A) Line of credit B) Factoring C) Revolving credit agreement D) Trade acceptance E) Commercial paper Answer: C Diff: 1

Type: MC

Page Ref: 370

Skill: Knowledge Objective: 15.3

40) Which of the following guarantees that funds will be available? A) Trade credit B) Pledging assets C) Trade draft D) Line of credit E) Revolving credit agreement Answer: E Diff: 1

Type: MC

Page Ref: 370

Skill: Knowledge Objective: 15.3 41) What is the difference between factoring accounts receivable and using accounts receivable as collateral for a short-term loan? A) Factoring is the collateral used when issuing commercial paper. B) There is no difference. C) Factoring involves selling the accounts receivable instead of using them to obtain a loan. D) Factoring accounts receivable is accomplished through a finance company whereas using them as collateral is arranged with a bank. E) Factoring involves agreeing to repurchase accounts receivable at a future date instead of using them as collateral to obtain a loan. Answer: C Diff: 3

Type: MC

Page Ref: 370

Skill: Comprehension Objective: 15.3

42) Why is it necessary for a business firm to put up collateral when it takes out a loan? A) So that the bank can keep a portion as advance payment on the loan B) To show the bank that the business is big enough to require the loan C) To assure the bank that loan payments will be made as promised D) So the financial managers know dates of payment E) So that the accounting people can generate accurate financial statements Answer: C Diff: 3

Type: MC

Page Ref: 370

Skill: Comprehension Objective: 15.3

43) Which of the following is a financing method for short-term funds? A) Retained earnings

B) Trade credit C) Equity financing D) Common stock E) Bonds Answer: B Diff: 1

Type: MC

Page Ref: 370

Skill: Knowledge Objective: 15.3

44) A factor buys $50 000 worth of receivables. How much will the factor eventually sell the receivables for? A) $40 000 B) $45 000 C) $80 000 D) $85 000 E) It is impossible to know, given the information that is provided. Answer: E Diff: 2

Type: MC

Page Ref: 370

Skill: Application Objective: 15.3 45) John bought $40 000 worth of receivables for 60 percent of that sum ($24 000). He will profit if the money he eventually collects exceeds the amount he paid for the receivables. John is involved in A) pledging accounts receivable. B) leveraging goods-in-process inventory. C) collateralizing inventory. D) factoring accounts receivable. E) hedging. Answer: D Diff: 3

Type: MC

Page Ref: 370

Skill: Comprehension Objective: 15.3

46) John is a factor who has just bought $40 000 worth of finished goods for $24 000. The profit that he will make on this transaction depends on A) the quality of the receivables, the cost of collecting them, and interest rates. B) the c...