Question 1

Equity refers to
A) Economic fairness
B) Funds from investors
C) Funds from lenders
D) The cost of borrowings

Accepted Answer

Equity refers to the funds that are raised from investors, representing ownership in a company.

Question 2

The cost of debt is
A) Interest
B) Dividend
C) Capital growth
D) Dividend and capital growth

Accepted Answer

The cost of debt refers to the interest expense that a company pays on its borrowings, such as loans or bonds, and not to dividends or capital growth, which are associated with equity financing.

Question 3

According to Rappaport (1998), the focus of increasing shareholder wealth is to:
A) Obtain funds at competitive rates from capital markets
B) Invest funds to exploit imperfections in product markets
C) Both of the above
D) None of the above

Accepted Answer

Rappaport (1998) emphasizes that increasing shareholder wealth involves both obtaining funds at competitive rates from capital markets and investing those funds to exploit imperfections in product markets.

Question 4

Value-based management emphasizes shareholder value, because this is the:
A) Primary goal of every business
B) Required under Corporations legislation
C) Necessary for economic growth
D) Function of accounting processes

Accepted Answer

Value-based management emphasizes shareholder value as the primary goal of every business, focusing on creating value for its shareholders as its main objective.

Question 5

The difference between total market capitalization and the total capital invested in the business is termed:
A) total shareholder return
B) market value added
C) shareholder value added
D) economic value added

Accepted Answer

Market Value Added (MVA) is the difference between the total market capitalization of a company and the capital contributed by investors. It essentially measures the value a company has added or lost over a certain period in terms of market capitalization.

Question 6

Total shareholder return is calculated by:
A) comparing the dividends received by shareholders and the increase in the share price with the original shareholder investment
B) discounting estimated future cash flows to their present values using the cost of capital
C) deducting the total capital invested in the business from the total market capitalization
D) deducting from net operating profit a charge to cover the opportunity cost of the capital invested in the business

Accepted Answer

Total shareholder return is calculated by comparing the dividends received by shareholders and the increase in the share price with the original shareholder investment. This measure reflects the total return to shareholders in terms of both dividend income and capital gain.

Question 7

For shareholder value to be created, a business must:
A) Sell its products in product markets for more than they cost to produce
B) Borrow from lenders at a cost that is lower than the cost of capital
C) Generate profits in product markets that exceed the cost of capital in capital markets
D) Generate profits in capital markets that exceed the cost of capital in product markets

Accepted Answer

Shareholder value is created when a business generates profits that exceed the cost of capital, meaning the returns from product markets are greater than the costs incurred in capital markets.

Question 8

According to Rappaport (1998), the main drivers of shareholder value are:
A) Sales growth, net operating profit, and capital investment
B) The mix of debt and equity, and the weighted average cost of capital
C) Operating, investment and financing decisions
D) Cash flow from operations, the level of debt, and the cost of capital

Accepted Answer

The answer of According to Rappaport (1998), the main drivers...

Question 9

A detrimental consequence of the emphasis on shareholder value may be that it has led to a focus on:
A) Sales growth and the return on investment
B) Dividends and share price
C) Short-term financial performance
D) Long-term performance

Accepted Answer

Focusing on shareholder value often leads to prioritizing short-term financial performance over long-term sustainability and growth, as companies may engage in practices that boost short-term profits at the expense of long-term health.

Question 10

Which of the following statements is true?:
A) Managers have much the same information requirements as do investors
B) Strategy involves taking a longer term view about the sustainable performance of the business
C) Financial accounting is about creating shareholder value
D) Management accounting is concerned with reporting shareholder value to investors

Accepted Answer

Strategy involves taking a longer-term view about how to sustain and improve the business's performance, rather than focusing solely on short-term financial metrics.

Question 11

Decisions made using management accounting information are made in the context of:
A) Whether those decisions are likely to lead to shareholder value in the longer term
B) How those decisions will appear when they are reported in the annual financial statements
C) Both a and b above
D) None of the above. Management accounting information has no relevance to shareholder value or financial statements

Accepted Answer

Management accounting information is used to make decisions that are expected to lead to long-term shareholder value (A) and also considers how those decisions will be reflected in the annual financial statements (B).

Question 12

Shareholders in a company have the right to:
A) Participate in the management of the company
B) Visit the company top observe its practices
C) Obtain additional information to that shown in the annual financial statements
D) Receive an Annual Report and attend an Annual General Meeting

Accepted Answer

Shareholders have the right to receive an Annual Report and attend an Annual General Meeting, where they can vote on important matters.

Question 13

The role of a company's board of directors is generally accepted as being to:
A) Create value for its shareholders
B) Provide entrepreneurial leadership of the company within a framework of prudent and effective controls which enables risk to be assessed and managed
C) Set the strategy for the business and then manage the implementation of that strategy
D) Make important decisions in relation to capital and product markets

Accepted Answer

The board of directors is primarily responsible for providing leadership and ensuring that the company is managed within a framework of effective controls, allowing for risk assessment and management.

Question 14

The financial statements of a company are the responsibility of the:
A) Shareholders
B) Directors
C) Senior managers
D) Accountants and auditors

Accepted Answer

Directors of a company are ultimately responsible for the preparation and integrity of the financial statements, as they oversee the company's operations and ensure that the financial reports accurately reflect the company's financial position.

Question 15

An audit is best defined as:
A) A thorough checking of financial transactions to ensure they are recorded correctly
B) A certification by an independent accountant that the financial statements are true and correct
C) The production of financial statements that comply with legislation, accounting standards and present a true and fair view (or present fairly)
D) An examination of accounting records of a company carried out by an independent accountant to ensure that the financial statements present a true and fair view (or present fairly)

Accepted Answer

An audit involves an independent examination of financial information of any entity, whether profit oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon. It ensures that the financial statements prepared by the organization present a true and fair view of its financial performance and position.

Question 16

An organization's system of financial and other controls, established in order to provide reasonable assurance of effective and efficient operation, internal financial control and compliance with laws and regulations is referred to as a system of:
A) Governance
B) Audit
C) Risk management
D) Internal control

Accepted Answer

The correct answer is D) Internal control. An organization's system of internal control is designed to provide reasonable assurance regarding the achievement of objectives in the effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations.

Question 17

Stakeholder theory is concerned primarily with:
A) Those groups who influence, or are influenced by, the organization
B) Employees, customers and suppliers
C) Investors and lenders
D) Society as a whole

Accepted Answer

Stakeholder theory focuses on the relationships between an organization and all parties who have a stake in or are affected by the organization, not just a specific group. This includes employees, customers, suppliers, investors, lenders, and society at large, making it a broader concept than options B, C, and D, which each mention specific groups.

Question 18

In company law, the group to whom boards of directors owe the most responsibility are:
A) Stakeholders
B) Shareholders
C) Lenders
D) Government

Accepted Answer

Boards of directors primarily owe their responsibility to the shareholders of a company. Shareholders are the owners of the company, and the board acts on their behalf, making decisions that ideally should increase shareholder value.

Quiz 2: Accounting and Its Relationship to Shareholder Value and Corporate Governance

Equity refers to

The cost of debt is

According to Rappaport (1998) , the focus of increasing shareholder wealth is to:

Value-based management emphasizes shareholder value, because this is the:

The difference between total market capitalization and the total capital invested in the business is termed:

Total shareholder return is calculated by:

For shareholder value to be created, a business must:

According to Rappaport (1998) , the main drivers of shareholder value are:

A detrimental consequence of the emphasis on shareholder value may be that it has led to a focus on:

Which of the following statements is true?:

Decisions made using management accounting information are made in the context of:

Shareholders in a company have the right to:

The role of a company's board of directors is generally accepted as being to:

The financial statements of a company are the responsibility of the:

An audit is best defined as:

An organization's system of financial and other controls, established in order to provide reasonable assurance of effective and efficient operation, internal financial control and compliance with laws and regulations is referred to as a system of:

Stakeholder theory is concerned primarily with:

In company law, the group to whom boards of directors owe the most responsibility are: