Answer: e
Question: On the balance sheet, total assets must always equal the sum of total liabilities and equity.
Answer Options:
a. True
b. False
Answer: a
Question: You recently sold 200 shares of Disney stock, and the transfer was made through a broker. This is an example of: a. A money market transaction. b. A primary market transaction. c. A secondary market transaction. d. A futures market transaction. e. An over-the-counter market transaction.
Answer: c
Question: The alternative minimum tax (AMT) was created by Congress to make it more difficult for wealthy individuals to avoid paying taxes through the use of various deductions.
Answer Options:
a. True
b. False
Answer: a
Question: Which of the following would be most likely to occur in the year after Congress, in an effort to increase tax revenue, passed legislation that forced companies to depreciate equipment over longer lives? If the legislation becomes law, which of the following would occur in the year following the change? a. The firm’s operating income (EBIT) would increase. b. The firm’s taxable income would increase. c. The firm’s cash flow would increase. d. The firm’s tax payments would increase. e. The firm’s reported net income would increase.
Answer: c
Question: Which of the following statements is CORRECT? a. The income of certain small corporations that qualify under the Tax Code is completely exempt from corporate income taxes. Thus, the federal government receives no tax revenue from these businesses, even though they report high accounting profits. b. All businesses, regardless of their legal form of organization, are taxed under the Business Tax Provisions of the Internal Revenue Code. c. Small corporations that qualify under the Tax Code can elect not to pay corporate taxes, but then each stockholder must report his or her pro rata shares of the firm’s income as personal income and pay taxes on that income. d. Congress recently changed the tax laws to make dividend income received by individuals exempt from income taxes. Prior to the enactment of that law, corporate income was subject to double taxation, where the firm was first taxed on the corporation’s income and stockholders were taxed again on this income when it was paid to them as dividends. e. All corporations other than non-profits are subject to corporate income taxes, which are 15% for the lowest amounts of income and 38% for the highest income amounts.
Answer: c
Question: Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible. This treatment, other things held constant, tends to encourage the use of debt financing by corporations.
Answer Options:
a. True
b. False
Answer: a
Question: Its retained earnings is the actual cash that the firm has generated through operations less the cash that has been paid out to stockholders as dividends. If the firm has sufficient retained earnings, it can purchase assets and pay for them with cash from retained earnings.
Answer Options:
a. True
b. False
Answer: b
Question: Which of the following statements is CORRECT? a. If you purchase 100 shares of Disney stock from your brother-in-law, this is an example of a primary market transaction. b. If Disney issues additional shares of common stock through an investment banker, this would be a secondary market transaction. c. The NYSE is an example of an over-the-counter market. d. Only institutions, and not individuals, can engage in derivative market transactions. e. As they are generally defined, money market transactions involve debt securities with maturities of less than one year.
Answer: e
Question: Which of the following is a primary market transaction? a. You sell 200 shares of IBM stock on the NYSE through your broker. b. You buy 200 shares of IBM stock from your brother. The trade is not made through a broker; you just give him cash and he gives you the stock. c. IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker. d. One financial institution buys 200,000 shares of IBM stock from another institution. An investment banker arranges the transaction. e. IBM sells 2,000,000 shares of treasury stock to its employees when they exercise options that were granted in prior years.
Answer: c
Question: Which of the following statements is CORRECT? a. The income of certain small corporations that qualify under the Tax Code is completely exempt from corporate income taxes. Thus, the federal government receives no tax revenue from these businesses, even though they report high accounting profits. b. All businesses, regardless of their legal form of organization, are taxed under the Business Tax Provisions of the Internal Revenue Code. c. Small corporations that qualify under the Tax Code can elect not to pay corporate taxes, but then each stockholder must report his or her pro rata shares of the firm’s income as personal income and pay taxes on that income. d. Congress recently changed the tax laws to make dividend income received by individuals exempt from income taxes. Prior to the enactment of that law, corporate income was subject to double taxation, where the firm was first taxed on the corporation’s income and stockholders were taxed again on this income when it was paid to them as dividends. e. All corporations other than non-profits are subject to corporate income taxes, which are 15% for the lowest amounts of income and 38% for the highest income amounts.
Answer: c
Question: The value of any asset is the present value of the cash flows the asset is expected to provide. The cash flows a business is able to provide to its investors is its free cash flow. This is the reason that FCF is so important in finance.
Answer Options:
a. True
b. False
Answer: a
Question: An increase in accounts receivable represents an increase in net cash provided by operating activities because receivables will produce cash when they are collected.
Answer Options:
a. True
b. False
Answer: b
Question: The firm has never paid a dividend on its common stock, and it issued $2,400,000 of 10-year, non-callable, long-term debt in 2013. As of the end of 2014, none of the principal on this debt had been repaid. Assume that the company’s sales in 2013 and 2014 were the same. Which of the following statements must be CORRECT? a. The firm increased its short-term bank debt in 2014. b. The firm issued long-term debt in 2014. c. The firm issued new common stock in 2014. d. The firm repurchased some common stock in 2014. e. The firm had negative net income in 2014.
Answer: c
Question: If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense, this would probably encourage companies to use more debt financing than they presently do, other things held constant.
Answer Options:
a. True
b. False
Answer: a
Question: Assume that two firms are both following generally accepted accounting principles. Both firms commenced operations two years ago with $1 million of identical fixed assets, and neither firm sold any of those assets or purchased any new fixed assets. The two firms would be required to report the same amount of net fixed assets on their balance sheets as those statements are presented to investors.
Answer Options:
a. True
b. False
Answer: b
Question: Both interest and dividends paid by a corporation are deductible operating expenses, hence they decrease the firm’s taxes.
Answer Options:
a. True
b. False
Answer: b
Question: Which of the following statements is CORRECT? a. The NYSE does not exist as a physical location. Rather it represents a loose collection of dealers who trade stock electronically. b. An example of a primary market transaction would be your uncle transferring 100 shares of Walmart stock to you as a birthday gift. c. Capital market instruments include both long-term debt and common stocks. d. If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction. e. While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors.
Answer: c
Question: A loss incurred by a corporation a. Must be carried forward unless the company has had 2 loss years in a row. b. Can be carried back 2 years, then carried forward up to 20 years following the loss. c. Can be carried back 5 years and forward 3 years. d. Cannot be used to reduce taxes in other years except with special permission from the IRS. e. Can be carried back 3 years or forward 10 years, whichever is more advantageous to the firm.
Answer: b
Question: Which of the following statements is CORRECT?
Answer Options:
a. The most important difference between spot markets versus futures markets is the maturity of the instruments that are traded. Spot market transactions involve securities that have maturities of less than one year whereas futures markets transactions involve securities with maturities greater than one year.
b. Capital market transactions involve only preferred stock or common stock.
c. If General Electric were to issue new stock this year, this would be considered a secondary market transaction since the company already has stock outstanding.
d. Both NASDAQ dealers and “specialists” on the NYSE hold inventories of stocks.
e. Money market transactions do not involve securities denominated in currencies other than the U.S. dollar.
Answer: d
Question: Which of the following statements is CORRECT?
Answer Options:
a. The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and the statement of stockholders’ equity.
b. The balance sheet gives us a picture of the firm’s financial position at a point in time.
c. The income statement gives us a picture of the firm’s financial position at a point in time.
d. The statement of cash flows tells us how much cash the firm must pay out in interest during the year.
e. The statement of cash needs tells us how much cash the firm will require during some future period, generally a month or a year.
Answer: b
Question: The annual report contains four basic financial statements: the income statement, the balance sheet, the cash flow statement, and statement of stockholders’ equity.
Answer Options:
a. True
b. False
Answer: a
Question: The statement of cash flows has four main sections, one each for operating, investing, and financing activities, and one that shows a summary of the cash and cash equivalents at the end of the year.
Answer Options:
a. True
b. False
Answer: a
Question: Which of the following statements is CORRECT?
Answer Options:
a. Assets other than cash are expected to produce cash over time, and the amounts of cash they eventually produce should be exactly the same as the amounts at which the assets are carried on the books.
b. The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm’s future earnings and dividends, and the riskiness of those cash flows.
c. The annual report is an internal document prepared by a firm’s managers solely for the use of its creditors/lenders.
d. The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and statement of stockholders’ equity.
e. Prior to the Enron scandal in the early 2000s, companies would put verbal information in their annual reports, along with the financial statements. That verbal information was often misleading, so today annual reports can contain only quantitative information: audited financial statements.
Answer: b