Question 1

Will and Bill both enjoy sunshine,water,and surfboards.Thus,the two friends decided to create a business together in Sydney renting surfboards,paddle boats,and inflatable devices.Will and Bill will equally share in the decision making and in the profits or losses.Which type of business did they create if they both have full personal liability for the firm's debts?

Accepted Answer

Will and Bill created a general partnership since they both have equal decision-making authority and share in the profits or losses. In a general partnership, each partner is personally liable for the partnership's debts, which is the case for Will and Bill as well.

Question 2

Todd and Cathy created a firm that is a separate legal entity and will share ownership of that firm on a 50/50 basis.Which type of entity did they create if they have no personal liability for the firm's debts?

Accepted Answer

Todd and Cathy created a corporation, which is a separate legal entity from its owners (shareholders). As such, the shareholders have limited liability, meaning they are not personally responsible for the debts and liabilities of the corporation. Additionally, the fact that Todd and Cathy share ownership on a 50/50 basis suggests that they have formed a C corporation, which allows for equal ownership and a more flexible management structure.

Question 3

Which one of the following is most likely to create a situation where an agency conflict could arise?

Accepted Answer

Separating management from ownership creates a situation where the managers may have different goals and objectives than the owners, leading to a potential agency conflict. The managers may prioritize their own interests over those of the owners, which could harm the value of the company. The other options do not necessarily create a conflict of interest between the managers and the owners.

Question 4

Financial institutions are:

Accepted Answer

The answer of Financial institutions are:
...

Question 5

A corporation:

Accepted Answer

A corporation is a separate legal entity from its owners, which means that it can enter into contracts, sue or be sued, and own property. It is not controlled by its owners, but by a board of directors who are elected by the shareholders. The corporation's existence is regulated by its charter or articles of incorporation, and its identity is defined by its bylaws.

Question 6

Which of the following are advantages of the corporate form of organisation?
I.ability to raise large sums of equity capital
II.ease of ownership transfer
III.both profits and dividends are taxed
IV.limited liability for all owners

Accepted Answer

I. The corporate form of organisation allows a company to raise large sums of equity capital by issuing shares to investors.
II. Ownership of a corporation is represented by shares of stock, which can be easily bought, sold or transferred between investors.
III. This statement is incorrect as both profits and dividends in a corporation are not taxed twice. Profits are taxed at the corporate level and dividends are taxed at the individual level.
IV. The owners (shareholders) of a corporation enjoy limited liability, meaning that they are not personally responsible for the company's debts or obligations.

Question 7

Which of the following are effective means of aligning management goals with shareholder interests?
I.employee share options
II.threat of a takeover
III.management bonuses tied to performance goals
IV.threat of a proxy fight

Accepted Answer

Employee share options, management bonuses tied to performance goals, the threat of a takeover, and the threat of a proxy fight are all mechanisms that can align management goals with shareholder interests by incentivizing management to act in ways that increase shareholder value.

Question 8

What is the goal of financial management for a sole proprietorship?

Accepted Answer

The primary goal of financial management for a sole proprietorship is to maximize the market value of the owner's equity, as this reflects the overall financial health and success of the business.

Question 9

Which one of the following applies to a general partnership?

Accepted Answer

In a general partnership, each partner is jointly and severally liable for all of the partnership's debts, which means that any one of the partners can be held solely liable for all of the partnership's debt. Options A, C, D, and E are incorrect as they do not apply to a general partnership.

Question 10

Which one of the following is most likely to align management's priorities with shareholders' interests?

Accepted Answer

Compensating managers with shares that must be held for 3 years before they can be sold aligns management's priorities with shareholder interests because it ensures that the managers have a vested interest in the long-term success of the company. As the value of the shares increases over time, the managers will reap greater rewards, giving them an incentive to make decisions that benefit the company's shareholders. This can improve the overall performance of the company and lead to increased shareholder value.

Question 11

Which one of the following is a capital structure decision?

Accepted Answer

Establishing the preferred debt-equity level is a capital structure decision as it involves determining the proportion of debt and equity financing in a company's funding mix. The other options are related to working capital management or investment decisions and do not involve the company's capital structure.

Question 12

Which one of the following functions should be assigned to the treasurer rather than the controller?

Accepted Answer

Cash management is typically the responsibility of the treasurer, as it involves managing the company's cash flow, cash balances, and short-term investments. The controller, on the other hand, is responsible for financial accounting, cost accounting, data processing, and tax management.

Question 13

Working capital management includes which one of the following?

Accepted Answer

Working capital management involves managing short-term assets and liabilities to ensure that a business can meet its operational requirements. Determining which customers will be granted credit is a crucial aspect of working capital management as it directly impacts a company's cash flow and liquidity. Deciding which new projects to accept, whether to purchase a new machine or fix a current machine, determining how many new shares of stock should be issued, and establishing the target debt-equity ratio are all strategic decisions that are not directly related to working capital management.

Question 14

Which one of the following statements correctly applies to a sole proprietorship?

Accepted Answer

In a sole proprietorship, the owner is the only source of equity financing, so obtaining additional equity is dependent on the owner's personal finances. The business entity also does not have limited liability, making the owner personally responsible for the firm's debts. It also does not have an unlimited life, as it ceases to exist upon the death or retirement of the owner. Ownership cannot be easily transferred to another individual, and debt financing may be difficult to arrange in the firm's name due to the lack of legal separation between the owner and the business entity.

Question 15

Which one of the following is a working capital decision?

Accepted Answer

Working capital decisions are related to the day-to-day operations of a firm, such as managing cash, inventory, accounts receivable and payable. The other options are related to long-term financial decisions, such as capital structure, financing sources and cost of capital. Therefore, option E, which is about determining the optimal level of cash reserves, is a working capital decision.

Question 16

In a general partnership,each partner is personally liable for:

Accepted Answer

The answer of In a general partnership,each partner is personally...

Question 17

Which one of the following best matches the primary goal of financial management?

Accepted Answer

The primary goal of financial management is to maximize the market value of the firm, which is reflected in the stock price. This involves making decisions that will increase the firm's profitability, as well as managing the efficient use of resources to minimize costs and optimize asset utilization. Increasing the firm's liquidity (D) is also important, but it is not the primary goal. Choices A, B, and C are focused on operational goals rather than financial management goals.

Question 18

The daily financial operations of a firm are primarily controlled by managing the:

Accepted Answer

Working capital refers to the management of a firm's short-term assets and liabilities, such as cash, accounts receivable, inventory, and accounts payable, which are essential for the day-to-day operations of the firm. Therefore, managing working capital is crucial to ensuring that the company has enough liquidity to meet its short-term obligations and maintain its operations.

Question 19

Capital budgeting includes the evaluation of which of the following?

Accepted Answer

Capital budgeting is a process used by companies to evaluate potential long-term investments, such as the purchase of new equipment or facilities, or the development of new products or services. The evaluation involves analyzing the potential future cash flows that the investment will generate, which includes size, timing, and risk. Therefore, the best choice(s) is E, which includes all three factors.

Question 20

Which of the following individuals commonly use finance in the course of their job?
I.chief financial officers
II.accountants
III.security analysts
IV.strategic managers

Accepted Answer

All listed individuals use finance in their jobs: CFOs manage financial operations, accountants handle financial records, security analysts evaluate financial securities, and strategic managers use financial data for planning.

Quiz 1: Introduction to Financial Management