Question 1

Financial managers usually focus almost exclusively on meeting the financial needs of their firms in the short run,leaving long-run financial issues to top management.

Accepted Answer

Financial managers play a crucial role in both short-term and long-term financial planning and decision making. They work closely with top management to develop and implement strategies that ensure financial stability and growth over the long term.

Question 2

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 3

Historically,the goal of financial management has been to achieve a dominant market share.

Accepted Answer

The historical goal of financial management has been to maximize profits and shareholder value, not necessarily achieve a dominant market share.

Question 4

Each specific ratio developed by financial managers has a theoretically "ideal" value that financial managers strive to attain.

Accepted Answer

Financial ratios do not have a universally "ideal" value as they vary by industry, company size, and economic conditions. Financial managers use them as benchmarks to assess performance relative to peers and historical data.

Question 5

Two firms that have very similar real-world financial performance might report very different profitability ratios if they use different but equally acceptable accounting procedures to develop their income statements and balance sheets.

Accepted Answer

Profitability ratios can vary depending on the accounting procedures used to develop financial statements. For example, one firm might choose to use different depreciation methods or inventory valuation methods than another firm, which can impact their reported profitability ratios. Additionally, different accounting treatments for certain transactions, such as leases or revenue recognition, can also impact reported profitability ratios. Therefore, two firms with similar real-world financial performance could report different profitability ratios if they use different accounting procedures.

Question 6

The debt-to-equity ratio measures the extent to which a firm relies on debt financing by dividing total debt by total owners' equity.The higher the value of this ratio,the more the firm is relying on debt.

Accepted Answer

The debt-to-equity ratio measures the proportion of a company's financing that comes from debt and owners' equity. A higher ratio indicates that the company relies more heavily on debt financing.

Question 7

Return on assets is a profitability ratio that is found by dividing net income by average total assets.

Accepted Answer

Return on assets (ROA) is calculated by dividing the net income of a company by its average total assets. This ratio measures the efficiency of a company in generating profits from its assets.

Question 8

Evaluating recent financial performance,planning for effective use of one's financial resources,and evaluating long-run investments are all functions that are carried out by financial managers.

Accepted Answer

Evaluating recent financial performance, planning for effective use of one's financial resources, and evaluating long-run investments are all important functions carried out by financial managers.

Question 9

Most common financial ratios are based on information taken from a firm's balance sheet and income statement.

Accepted Answer

Most common financial ratios are calculated using data from a firm's balance sheet and income statement. These ratios include liquidity ratios, profitability ratios, and activity ratios, among others.

Question 10

The closer the debt-to-asset ratio is to one,the greater the firm's reliance on debt.

Accepted Answer

A debt-to-asset ratio of one means that the firm has equal amounts of debt and assets, indicating a high reliance on debt financing. As the ratio decreases, the firm's reliance on debt decreases as well.

Question 11

Earnings per share (EPS)is a profitability ratio measuring how much a firm earns per share of common stock outstanding.

Accepted Answer

This statement is true. EPS is calculated by dividing the net income of a company by the number of shares of common stock outstanding. It is a commonly used metric to evaluate a company's profitability and financial performance.

Question 12

Today many financial managers accept the view that serving the needs of other stakeholders can be consistent with the goal of maximizing the value of the firm to its owners.

Accepted Answer

This is an accurate statement. Many financial managers believe that by serving the needs of other stakeholders (such as employees, customers, and the community), they can ultimately increase the value of the firm for its owners. This is known as the stakeholder theory, which suggests that a company should consider the interests of all stakeholders, not just shareholders.

Question 13

Return on equity is a profitability ratio calculated by dividing net income by average common stock equity.If the firm issues preferred stock,the dividends paid to preferred shareholders are subtracted from net income.

Accepted Answer

This is a correct statement regarding how return on equity is calculated in the presence of preferred stock. The formula is: (Net income - Preferred stock dividends) / Average common stock equity.

Question 14

The evaluation of long-run investment opportunities is one responsibility of financial managers.

Accepted Answer

Financial managers are responsible for evaluating investment opportunities in order to determine the potential long-term profitability and sustainability of those investments. This involves analyzing various factors such as market trends, industry conditions, cash flow projections, and risk management strategies. By carefully evaluating long-run investment opportunities, financial managers can make informed decisions about where to allocate resources in order to achieve the company's overall financial goals.

Question 15

One of the functions of financial management is to determine the best strategy for meeting a firm's long-term financing needs.

Accepted Answer

One of the key roles of financial management is to assess the company's long-term capital requirements and determine the most effective strategies for meeting them. This involves analyzing different financing options, evaluating risk and returns, and ultimately deciding on the best mix of debt and equity financing to ensure the company's long-term viability and success.

Question 16

When the goals of stakeholders conflict with each other,financial managers usually adopt the view that the preferences of internal stakeholders,such as managers and employees,should be given the most weight.

Accepted Answer

Financial managers are responsible for maximizing shareholder value, so when the goals of stakeholders conflict with each other, the preferences of shareholders should be given the most weight. Internal stakeholders such as managers and employees are important, but their preferences should not always take priority over shareholder interests.

Question 17

The inventory turnover ratio is an asset management ratio that compares average inventory to total assets.

Accepted Answer

The inventory turnover ratio compares the cost of goods sold to average inventory, not total assets.

Question 18

The debt-to-asset ratio measures the extent to which a firm relies on debt financing by dividing total debt by total assets.

Accepted Answer

The statement is true. The debt-to-asset ratio is a commonly used financial ratio that indicates the proportion of a company's assets that are financed through debt.

Question 19

Firms that sell goods that spoil easily or quickly become obsolete would want a very low inventory turnover ratio.

Accepted Answer

Firms that sell goods that spoil easily or quickly become obsolete would want a high inventory turnover ratio, as they need to sell the products quickly before they go bad or become outdated. A low inventory turnover ratio indicates that a company is not selling its inventory quickly enough, which could lead to spoilage, obsolescence, and higher storage costs.

Question 20

The current ratio helps financial managers evaluate the ability of a firm to pay short-term liabilities as they come due.

Accepted Answer

The current ratio measures a company's ability to pay its current liabilities with its current assets. Therefore, it is a good indicator of a company's short-term liquidity and ability to meet its upcoming obligations.

Quiz 8: Finance: Acquiring and Using Funds to Maximize Value