Question 1

The extent to which retained earnings are used as a source of long-term capital for a firm, depends on the state of the economy.

Accepted Answer

The state of the economy affects a firm's decision on whether to use retained earnings as a source of long-term capital. In a healthy economy with growth opportunities, a firm may choose to reinvest its earnings to finance new projects and expansion. However, in a recession or economic downturn, a firm may retain more of its earnings to build up reserves and ensure financial stability, rather than using them for long-term capital.

Question 2

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

Accepted Answer

Cash budgets typically cover a one-year period and provide a month-by-month breakdown of expected cash inflows and outflows.

Question 3

A 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

False

Question 4

A factor is a restriction lenders impose on borrowers as a condition of providing long-term debt financing.

Accepted Answer

This statement correctly defines the term "factor" as described in finance and lending.

Question 5

A manufacturing firm does not necessarily need an inventory of parts and materials to assemble its products.

Accepted Answer

The answer of A manufacturing firm does not necessarily need...

Question 6

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 two important questions that need to be considered when establishing credit terms for customers. The length of the credit period and the cash discount offered can both impact a company's cash flow and profitability.

Question 7

Certificate of deposit is an interest-earning deposit that requires the funds to remain deposited for a fixed term.

Accepted Answer

Certificate of deposit (CD) is a type of time deposit that requires the funds to remain deposited for a fixed term in exchange for a higher interest rate than a standard savings account. The term can vary from a few months to several years, and penalties may be imposed for early withdrawal.

Question 8

Because it is normally unsecured, commercial paper is only offered by firms with no credit ratings.

Accepted Answer

The statement is false. Commercial paper can be offered by firms with credit ratings, but it is still unsecured.

Question 9

Term loans issued by commercial banks are popularly used by financial institutions and large corporations because they typically carry lower interest rates than commercial paper.

Accepted Answer

The answer of Term loans issued by commercial banks are...

Question 10

A commitment to meeting social responsibilities can contribute to a more profitable company and an increase in shareholder value.

Accepted Answer

When a company is committed to meeting social responsibilities, it can improve its reputation, attract more customers and employees, increase productivity and efficiency, and mitigate risks. All these factors can lead to higher profitability and a better performance in the long term, which in turn can benefit shareholders. Numerous studies have shown a positive correlation between corporate social responsibility and financial performance.

Question 11

In the context of accounting for the time value of money, discount rate remains constant in a specified number of time periods.

Accepted Answer

The answer of In the context of accounting for the...

Question 12

Commercial paper, which is sometimes issued for as little as two days, can be issued for up to 270 days.

Accepted Answer

Commercial paper can be issued for up to 270 days.

Question 13

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

Accepted Answer

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

Question 14

If an invoice lists the terms of trade credit as 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 answer of If an invoice lists the terms of...

Question 15

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

Accepted Answer

Creditors often impose covenants or conditions on borrowers when providing debt financing to ensure that the borrower meets certain financial and operating criteria. These covenants can restrict the borrower's ability to make certain business decisions or require them to maintain specific financial ratios, which can limit the borrower's flexibility and autonomy.

Question 16

Lean inventory policies can be ineffective in a firm, although they do not leave the firm vulnerable to supply disruptions.

Accepted Answer

The answer of Lean inventory policies can be ineffective in...

Question 17

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

Both options involve acquiring financial capital through borrowing or credit, either from a bank or a supplier.

Question 18

Return-on-equity indicates how much net income a firm earned per share of common stock outstanding.

Accepted Answer

Return-on-equity (ROE) measures the amount of net income generated by a company as a percentage of shareholder equity, not per share of common stock outstanding.

Question 19

When conflicts arise between the long-term interests of owners and those of other stakeholders, financial managers generally adopt the policies they believe are most consistent with the interests of ownership.

Accepted Answer

Financial managers have a fiduciary duty to act in the best interest of their shareholders, which means they prioritize the long-term interests of owners over those of other stakeholders (such as employees, customers, and suppliers).

Question 20

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

The decision to pay dividends is at the discretion of the company's management and board of directors. The shareholders have no legal right to dividends unless the company has a policy of regular dividend payments or the dividends are declared by the board of directors. A company may choose to reinvest its profits back into the business rather than pay dividends to shareholders. Therefore, the shareholders cannot sue the company for not providing a return on their equity investment if the company has not declared any dividends.

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