Question 1

For financial managers to be socially responsible, it is necessary that they:

Accepted Answer

Financial managers need to be socially responsible in the long-term, not just concentrate on the short-term performance of the company. They should establish a long-term commitment to fulfilling the needs of stakeholders, such as employees, customers, investors, and the local community. This approach would create trust, loyalty, and goodwill to the business, which would help to ensure sustainability in the future. Maximizing utilization of human resources and allocating 10% of company profit to employee welfare are good approaches, but they are not enough to ensure social responsibility.

Question 2

Cash budgets normally cover a five-year period and show projected cash inflows and outflows for each week.

Accepted Answer

Cash budgets typically cover a shorter time period, such as one year, and show projected cash inflows and outflows on a monthly or quarterly basis. Weekly projections may be included in more detailed cash flow forecasts, but are not typically included in cash budgets.

Question 3

David needs to acquire financial capital to purchase a printing press for his business. David can either acquire the financial capital for the press by borrowing money from a bank or by purchasing the press on credit from his supplier.

Accepted Answer

David can acquire financial capital by borrowing money from a bank or by purchasing on credit from his supplier.

Question 4

Financial managers should focus solely on meeting the financial needs of their firms in the short run, leaving the long-term financial issues to the top management.

Accepted Answer

Financial managers should be involved in both short-term and long-term financial planning and decision-making in order to ensure the financial stability and growth of the company. They should work closely with top management to develop and implement financial strategies that align with the company's overall goals and objectives.

Question 5

_____ ratios measure the ability of an organization to convert assets into the cash it needs to pay off liabilities that come due in the next year.

Accepted Answer

Liquidity ratios measure an organization's ability to meet short-term obligations by converting assets into cash. These ratios include the current ratio and quick ratio (also known as acid-test ratio). Activity ratios measure an organization's efficiency in using its assets to generate revenue, while leverage ratios measure the amount of debt used by the organization to finance its operations. Profitability ratios measure an organization's ability to generate profits relative to its revenue, assets, or equity.

Question 6

The budgeted income statement is a projected financial statement that forecasts the types and amounts of assets a firm will need to implement its future plans and how the firm will finance those assets.

Accepted Answer

The budgeted income statement forecasts a firm's expected revenues and expenses, not assets and financing. The statement that forecasts assets and financing is the budgeted balance sheet.

Question 7

Benny-Duke Inc.reported a net income of $7 million but paid no dividends to its shareholders. The shareholders should sue the company for failure to provide a return on their equity investment.

Accepted Answer

It is not necessary for a company to pay dividends to provide a return on equity investment. The company may reinvest its profits to fund growth and increase the value of the stock, which would provide a return for shareholders. It is ultimately up to the company's management to decide whether or not to pay dividends.

Question 8

Kun works for PowTran Corp. Her primary responsibilities include managing the firm's working capital and analyzing long-term investment opportunities for PowTran. Kun is part of the firm's _____ management team.

Accepted Answer

Kun's responsibilities involve managing working capital and analyzing long-term investment opportunities, both of which are related to financial management. Therefore, she is part of the firm's financial management team.

Question 9

Financial capital refers to the:

Accepted Answer

Financial capital refers to the funds that a firm uses to acquire its assets and finance its operations. It can come from various sources such as equity or debt financing. Financial capital is essential to the growth and success of a business as it facilitates strategic investments and other activities necessary for the business to operate efficiently. Options A, B, and D are not correct as they do not fully capture the meaning and scope of financial capital.

Question 10

The current ratio is calculated by dividing the firm's current liabilities by its total assets.

Accepted Answer

The current ratio is calculated by dividing the firm's current assets by its current liabilities.

Question 11

Projects with the potential for high returns generally have a low degree of uncertainty and risk.

Accepted Answer

Projects with the potential for high returns often involve a higher degree of uncertainty and risk, as there is more uncertainty involved in the outcome and greater potential for loss if things do not go as planned.

Question 12

The following questions must be answered when setting credit terms: How long should the firm extend credit? What type of cash discount should the firm offer to encourage early payments?

Accepted Answer

These are valid questions that should be considered when setting credit terms.

Question 13

The debt-to-asset ratio compares a firm's total liabilities to its total assets and is a way of measuring the degree of financial leverage.

Accepted Answer

The statement correctly defines the debt-to-asset ratio as a measure of financial leverage.

Question 14

Which of the following best describes a highly leveraged firm?

Accepted Answer

A highly leveraged firm is one that relies heavily on debt financing instead of equity. Therefore, choice C is the correct answer. Option A is incorrect because a firm that relies heavily on equity is not highly leveraged. Option B is incorrect because having equity that is twice the debt indicates a lower level of leverage. Option D is also incorrect because having higher current assets than current liabilities does not necessarily indicate a high level of leverage.

Question 15

A disadvantage of debt financing is that creditors often impose covenants on the borrower.

Accepted Answer

Creditors often require covenants such as minimum financial ratios, restrictions on dividends, and limitations on additional borrowing in order to protect their interests as lenders.

Question 16

Cash equivalents are long-term, unsecured but highly liquid assets that firms list in the fixed assets section on their balance sheet.

Accepted Answer

Cash equivalents are short-term, highly liquid assets that can be easily converted into cash and are generally listed in the current assets section on the balance sheet. They are often considered part of a company's operating cash flow rather than fixed assets.

Question 17

Which of the following statements is true of a current ratio?

Accepted Answer

A current ratio below 1.0 means that a company does not have enough current assets to cover its current liabilities, indicating an inability to pay short-term debts. A current ratio above 1.0 implies that a company has enough current assets to cover its current liabilities, and a higher current ratio generally indicates better short-term liquidity. Option A is incorrect because a higher current ratio means that a firm has a stronger ability to pay its short-term debts. Option B is incorrect because the current ratio does not measure the extent to which a company relies on debt to finance its operations. Option D is incorrect because the current ratio is computed by dividing a firm's current assets by its current liabilities, not the other way around.

Question 18

Wild Trails Inc., an adventure resort in Texas, has 500 shares of outstanding common stock and has not issued any preferred stock. Net income is $27,500. Wild Trails Inc.'s earnings per share is _____.

Accepted Answer

Earnings per share (EPS) is calculated by dividing the net income by the number of outstanding shares. Here, EPS = $27,500 / 500 shares = $55.

Question 19

If an invoice lists the terms 2/10 net 30, it means that the supplier is offering a 10 percent cash discount off the invoice price if the buyer pays within 2 days.

Accepted Answer

The terms 2/10 net 30 mean a 2% discount is offered if payment is made within 10 days, not a 10% discount for payment within 2 days.

Question 20

In financial management, risk is referred to as the:

Accepted Answer

Risk in financial management refers to the degree of uncertainty that surrounds the actual outcome of a decision. It is the possibility that the actual outcome will differ from the expected outcome. Environmental factors and internal factors that may affect the smooth functioning of a company are examples of specific risks that need to be identified and managed. However, risk in finance refers specifically to the uncertainty about the outcome of a decision. Various strategies implemented by managers to increase returns are not risk in themselves but can be used to manage it.

Quiz 9: Finance: Acquiring and Using Funds to Maximize Value