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TEST BANK for Foundations of Financial Management Canadian 10th Edition by Block Danielsen Hirt Short

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 01 1. What is the primary goal of financial management? A. Increased earnings B. Maximizing cash flow C. Maximizing shareholder wealth D. Minimizing risk of the firm

2. Proper risk-return management means that: A. the firm should take as few risks as possible. B. consistent with the objectives of the firm, an appropriate trade-off between risk and return should be determined. C. the firm should earn the highest return possible. D. the firm should value future profits more highly than current profits.

3. Which of the following is not a major area of concern and emphasis in modern financial management and in this text? A. Inflation and its effect on profits B. Stable short-term interest rates C. Changing international environment D. Increased reliance on debt

4. Which of the following is not a major area of concern and emphasis in modern financial management and in this text? A. Marginal analysis B. Risk-return trade-off C. Commodity trading D. Changing financial institutions

5. The effect of the high rates of inflation experienced during the 1970s and early 1980s was to make: A. the gold standard was eliminated. B. purchasing power increased. C. interest rates fell. D. capital budgeting decisions less reliable.

Foundations of Financial Management - 10th Canadian Edition by Block

6. In the past, the study of finance has included: A. operational efficiency. B. employee relationships. C. legal cases. D. mergers and acquisitions.

7. A financial manager's goal of maximizing current or short-term earnings may not be appropriate because: A. it considers the timing of the benefits. B. increased earnings may be accompanied by acceptably higher levels of risk. C. share ownership is widely dispersed. D. earnings are subjective; they can be defined in various ways such as accounting or economic earnings.

8. One of the major disadvantages of a sole proprietorship is: A. that there is unlimited liability to the owner. B. the simplicity of decision making. C. low organizational costs. D. low operating costs.

9. The partnership form of organization: A. avoids the double taxation of earnings and dividends found in the corporate form of organization. B. usually provides limited liability to the partners. C. has unlimited life. D. simplifies decision making.

10. A corporation is not: A. owned by shareholders who enjoy the privilege of limited liability. B. easily divisible between owners. C. a separate legal entity with perpetual life. D. a separate legal entity with limited life.

11. Inflation: A. increases corporations' reliance on debt for capital expansion needs. B. creates larger asset values on the firm's historical balance sheet. C. makes it cheaper (in terms of interest costs) for firms to borrow money. D. creates stability for investors.

Foundations of Financial Management - 10th Canadian Edition by Block

12. Which of the following securities is not included as part of the capital market? A. Common stock B. Commercial paper C. Government bonds D. Preferred stock

13. Maximization of shareholder wealth is a concept in which: A. increased earnings is of primary importance. B. profits are maximized on a quarterly basis. C. virtually all earnings are paid as dividends to common shareholders. D. optimally increasing the long-term value of the firm is emphasized.

14. The largest Canadian corporations are mainly: A. widely held. B. family controlled. C. U.S. controlled. D. Japanese controlled.

15. Which of the following is not a true statement about the goal of maximizing shareholder wealth? A. It takes into account the timing of cash-flows. B. It is a short-run point of view which takes risk into account. C. It considers risk as a factor. D. It is a long-run point of view which takes risk into account.

16. Increased international competition can be seen as a motivator to emphasize: A. asset diversification strategies. B. the risk side of the risk-return relationship. C. the return side of the risk-return relationship. D. invest in a new risky project.

17. Corporations can reduce portfolio risk by: A. narrowing their focus on one successful product. B. merging with companies in unrelated industries. C. repurchasing their own stock. D. selling their own stock.

Foundations of Financial Management - 10th Canadian Edition by Block

18. The shift to the return side of the risk-return relationship has occurred because: A. narrow focus on production. B. stock splits. C. there has been a decrease in the use of advanced technology in the production process. D. there has been an increase in international competition.

19. A corporate buy-back, or the repurchasing of shares, is: A. an example of balance sheet restructuring. B. an excellent source of profits when the firm's stock is over-priced. C. a method of reducing the debt-to-equity ratio. D. shown as revenue on the income statement.

20. Which of the following is (are) a result of high inflation? A. Loss from disposal of assets B. Over-valued liabilities C. Lower stock price D. Under-valued assets

21. A corporate restructuring can result in: A. increased revenue. B. buying of low-profit margin divisions. C. selling of high-profit margin divisions. D. reductions in the work force.

22. Which of the following is not an example of restructuring as discussed in the text? A. Repurchase of common stock B. Creating a new organizational chart C. Merging with companies in related industries D. Divesting of an unprofitable division

23. Agency theory deals with the issue of: A. when to hire an agent to represent the firm in negotiations. B. the legal liabilities of a firm if an employee, acting as the firm's agent, injures someone. C. the limitations placed on an employee acting as the firm's agent to obligate or bind the firm. D. the conflicts that can arise between the viewpoints and motivations of a firm's owners and managers.

Foundations of Financial Management - 10th Canadian Edition by Block

24. As mergers, acquisitions, and restructurings have increased in importance, agency theory has become more important in assessing whether: A. a stock repurchase should be undertaken. B. shareholder goals are truly being achieved by managers in the long run. C. managers are actually agents or only employees of the firm. D. managers and owners are actually the same people with the same interests.

25. Insider trading occurs when: A. someone has information not available to the public, which they use to profit from trading in stocks. B. corporate officers buy stock in their company. C. lawyers, investment dealers, and others buy common stock in companies represented by their firms D. stock transactions occur with reduced brokerage fees.

26. The major difficulty in most insider-trading cases has been: A. that lenient judges have simply released the guilty individuals. B. that insider trading, even though illegal, actually serves a beneficial economic and financial purpose. C. that inside trades have not been legally well defined. D. inside trades actually have a beneficial effect on the wealth of all shareholders.

27. The 1990 Nobel Prize in economics was given to three finance professors. They are: A. Harry Markowitz, Merton Miller, William Sharpe B. Harry Markowitz, Franco Modigilani, Paul Samuelson C. Merton Miller, Franco Modigliani, Robert Merton D. William Sharpe, Richard Roll, Steve Ross

28. Future financial managers will need to understand: A. employment standards. B. production engineering. C. actuarial calculations. D. international currency hedging strategies.

29. Professors Harry Markowitz and William Sharpe received their Nobel prize in economics for their contributions to the: A. options pricing model. B. theories of working capital management. C. theories of risk-return and portfolio theory. D. theories of international capital budgeting.

Foundations of Financial Management - 10th Canadian Edition by Block

30. In the 1930s, financial practices didn't focus on: A. maintenance of liquidity. B. reorganization of financially distressed companies. C. the bankruptcy process. D. international exchange costs.

31. The increasing percentage ownership of public corporations by institutional investors has: A. had no effect on corporate management. B. created higher returns for the stock market in general. C. created more pressure on public companies to manage their firms more efficiently. D. taken away the voice of the individual investor.

32. Money markets would include which of the following securities? A. Common stock and corporate bonds B. Treasury bills and commercial paper C. Certificates of deposit and preferred stock D. Government bonds.

33. When a corporation uses the financial markets to raise new funds, the sale of securities is made in the: A. primary market. B. secondary market. C. on-line market. D. third market.

34. Companies that have higher risk than a competitor in the same industry will generally have: A. to pay a lower interest rate than its competitors. B. a higher relative stock price than its competitors. C. a lower cost of funds than its competitors. D. to pay a higher interest rate than its competitors.

35. The financial markets allocate capital to corporations by: A. reflecting expectations of the market participants in the corporation's share price. B. requiring higher returns from companies with lower risk than their competitors. C. rewarding companies with expected high returns with lower relative stock prices. D. relying on the opinion of investment dealers.

Foundations of Financial Management - 10th Canadian Edition by Block

36. Corporate restructuring has been one result of more institutional ownership. Restructuring can cause: A. stability in the asset and liabilities of the firm. B. the purchase of low-profit margin divisions. C. the promotion of current management and/or large increases in the workforce. D. changes in the asset and liabilities of the firm.

37. Corporate restructuring in the late 1990s more often took the form of: A. leveraged buyouts. B. mergers to refocus on core businesses. C. a change in capital structure. D. addition of senior management.

38. The increase in the internationalization of financial markets has led: A. to companies searching the global financial markets for high cost funds. B. to a decrease in Canadian companies listing on the New York Stock Exchange. C. to a decrease in debt obligations denominated in foreign currency on Canadian corporate balance sheets. D. to the tasks of the financial manager being reshaped.

39. The internationalization of the financial markets has: A. allowed firms such as Bombardier to raise capital around the world. B. raised the cost of capital. C. forced companies to value everything in U.S. dollars. D. created ASPE.

40. Increased use of technology has increased corporate efficiency by: A. increasing the firm's reliance on debt. B. creating larger asset values on the firm's balance sheet. C. made it cheaper (in terms of interest costs) for firms to borrow money. D. creating electronic communication networks.

41. Maximization of shareholder wealth is a concept in which: A. increased earnings are of primary importance. B. increased cash flows are of primary importance. C. increased dividends are of primary importance. D. increased share price is of primary importance.

Foundations of Financial Management - 10th Canadian Edition by Block

42. Capital structure is: A. the relative mix of capital and intangible assets held by the firm. B. the relative importance of debt and equity in the firm's financing. C. the relative importance of long-term investment decisions. D. the terms required to borrow money.

43. Financial markets allocate capital based on: A. the pricing mechanism. B. the efforts of financial intermediaries. C. intervention by the Bank of Canada. D. the number of treasury bills outstanding.

44. Corporate governance is the: A. relationship and exercise of oversight by the board of directors of the company. B. relationship between the chief financial officer and institutional investors. C. operation of the firm by the chief executive officer (CEO) and other senior executives on the management team. D. strategically directing the company through the board of directors with a focus on social responsibility.

45. Agency theory examines the relationship between: A. shareholders of the firm and its investment dealers. B. shareholders of the firm and its managers. C. the board of directors and large institutional investors. D. shareholders of the firm and its transfer agent.

46. Agency theory would imply that conflicts are more likely to occur between management and shareholders when: A. the company is owned and operated by the same person. B. management acts in the best interests of maximizing shareholder wealth. C. the chairman of the board is also the chief executive officer (CEO). D. the board of directors exerts strong and involved oversight of managers.

47. The internationalization of the financial markets has: A. lowered the cost of capital. B. raised the cost of capital. C. forced companies to value everything in U.S. dollars. D. had no effect on the cost of capital.

Foundations of Financial Management - 10th Canadian Edition by Block

48. In analysis of a firm's market share value, an investor should not consider: A. the risk inherent in the firm. B. the time pattern of the firm's earnings and cash flow. C. the quality and reliability of reported earnings. D. book value of assets.

49. The increased percentage of ownership of public corporations by institutional investors has: A. had no effect on corporate management. B. created higher returns for the stock market in general. C. created less pressure on public companies to manage their firms more efficiently. D. increased the ethical standards of management.

50. As finance emerged as an analytical, decision oriented discipline, the initial emphasis was placed on capital acquisitions. True False

51. Inflation is assumed to be a temporary problem that does not affect financial decisions. True False

52. Timing is not a particularly important consideration in financial decisions. True False

53. Institutional investors have had increasing influence over corporations with their ability to vote large blocks of stock and replace poor performing boards of directors. True False

54. Insider trading involves the use of information not available to the general public to make profits from trading in a company's shares. True False

55. Agency theory assumes that corporate managers act to increase the wealth of corporate shareholders. True False

Foundations of Financial Management - 10th Canadian Edition by Block

56. Historically the field of finance as a discipline described capital preservation, liquidity, reorganization, and bankruptcy through the 1930s depression. True False

57. The higher the profit of a firm, the higher the value the firm is assured of receiving in the market. True False

58. Social responsibility and profit maximization are synonymous. True False

59. There is unlimited liability in a general partnership. True False

60. In the mid1950s, finance began to change to a more analytical, decision oriented approach. True False

61. There are some serious problems with the financial goal of maximizing the earnings of the firm. True False

62. Maximizing the earnings of the firm is the goal of financial management. True False

63. Because socially desirable goals can impede profitability in many instances, managers should not try to operate under the assumption of wealth maximization. True False

64. The sole proprietorship represents single-person ownership and offers the advantages of simplicity of decision making and low organizational and operating costs. True False

Foundations of Financial Management - 10th Canadian Edition by Block

65. Profits of sole proprietorships are taxed at corporate tax rates. True False

66. The primary market includes the sale of securities by way of initial public offerings. True False

67. The most common partnership arrangement carries limited liability to the partners. True False

68. A limited partnership limits the profits partners may receive. True False

69. In terms of size of revenues and profits, the corporation is by far the most important form of business organization in Canada. True False

70. Dividends paid to corporate shareholders have already been taxed once as corporate income. True False

71. One advantage of the corporate form of organization is that income received by shareholders is not taxable since the corporation already paid taxes on the income distributed. True False

72. A corporation must have at least 35 shareholders. True False

73. Profits of a manufacturing corporation are taxed at the same rate as dividends. True False

74. Recently, the emphasis of financial management has been on the relationships between risk and return. True False

Foundations of Financial Management - 10th Canadian Edition by Block

75. The formation of a corporation is a way to circumvent personal liability. True False

76. The secondary market characteristically has had stable prices over the past 20 years. True False

77. The first Nobel Prizes given to finance professors was for their contributions to capital structure theory and portfolio theories of risk and return. True False

78. Financial markets exist as a vast global network of individuals and financial institutions that may be lenders, borrowers, or owners of public companies worldwide. True False

79. Inflation has led to phantom profits and undervalued assets. True False

80. Money markets refer to those markets dealing with short-term securities having a life of one year or less. True False

81. Capital markets refer to those markets dealing with short-term securities having a life of one year or less. True False

82. New issues are sold in the secondary market. True False

83. Existing securities are traded in the secondary market. True False

84. The financial markets value assets based on the most productive current use. True False

Foundations of Financial Management - 10th Canadian Edition by Block

85. The 1990s demonstrated that the old valuation models were no longer effective. True False

86. The largest financial intermediaries after the banks are insurance companies. True False

87. The TSX Composite Index is representative of equity market value of the top listed Canadian companies. True False

88. The Internet is largely responsible for the internationalization of the financial markets. True False

89. Agency theory examines the relationship between companies and their customers. True False

90. Honesty in business requires timely and full disclosure of pertinent firm developments. True False

91. Businesses will increasingly rely on B2B Internet applications to speed up cash flows. True False

92. Issues over corporate governance are often agency problems. True False

93. Agency theory examines the relationship between the owners of the firm and the managers of the firm. True False

94. Secondary markets are the markets that trade previously issued securities. True False

Foundations of Financial Management - 10th Canadian Edition by Block

95. Financial management builds upon the disciplines of economics and accounting. Describe what a: economics provides the financial manager b: accounting provides the financial manager

96. Selecting profit maximization as the primary goal of the firm may not increase its value, because a profitonly focus has several drawbacks. List and describe these drawbacks.

97. What 4 factors will investors consider in the analysis of a firm market share value?

98. According to agency theory, other than maximizing shareholder wealth what other self-interests do financial managers have?

Foundations of Financial Management - 10th Canadian Edition by Block

99. Besides maximizing shareholder wealth, what should corporations consider to be goals? List and briefly explain.

100. What are the 4 components of good corporate governance?

101. List the 4 components of good corporate governance and identify additional measures that could be added to strengthen corporate governance.

102. List the occasional functions of the finance manager connected to the efficient raising and investing of funds.

103. What are the characteristics of a sole proprietorship? What are the drawbacks?

Foundations of Financial Management - 10th Canadian Edition by Block

104. What are the characteristics of a partnership? What are the advantages compared to a sole proprietorship?

105. What are the characteristics of a corporation?

106. What 2 choices does the board of directors have to distribute earnings of a corporation?

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 01 Key

1. What is the primary goal of financial management? A. Increased earnings B. Maximizing cash flow C. Maximizing shareholder wealth D. Minimizing risk of the firm

Accessibility: Keyboard Navigation Block - Chapter 01 #1 Difficulty: Easy Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 01 #2 Difficulty: Easy Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-05 Measuring the Goal Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 01 #3 Difficulty: Medium Learning Objective: 01-02 Identify the analysis and decision-making nature of finance while considering return and risk. Topic: 01-03 Goals of Financial Management Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 01 #4 Difficulty: Medium Learning Objective: 01-02 Identify the analysis and decision-making nature of finance while considering return and risk. Topic: 01-03 Goals of Financial Management Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 01 #5 Difficulty: Medium Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-15 Risk Type: Concept

6. In the past, the study of finance has included: A. operational efficiency. B. employee relationships. C. legal cases. D. mergers and acquisitions.

Accessibility: Keyboard Navigation Block - Chapter 01 #6 Difficulty: Easy Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics. Topic: 01-02 Evolution of Finance as a Discipline Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 01 #7 Difficulty: Medium Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 01 #8 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 01 #9 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 01 #10 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 01 #11 Difficulty: Medium Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-15 Risk Type: Concept

12. Which of the following securities is not included as part of the capital market? A. Common stock B. Commercial paper C. Government bonds D. Preferred stock

Accessibility: Keyboard Navigation Block - Chapter 01 #12 Difficulty: Medium Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-13 Structure and Functions of the Financial Markets Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 01 #13 Difficulty: Medium Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-07 Management and Shareholder Wealth Type: Concept

14. The largest Canadian corporations are mainly: A. widely held. B. family controlled. C. U.S. controlled. D. Japanese controlled.

Accessibility: Keyboard Navigation Block - Chapter 01 #14 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 01 #15 Difficulty: Medium Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-07 Management and Shareholder Wealth Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 01 #16 Difficulty: Medium Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-15 Risk Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 01 #17 Difficulty: Medium Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-14 Allocation of Capital Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 01 #18 Difficulty: Medium Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-15 Risk Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 01 #19 Difficulty: Medium Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-07 Management and Shareholder Wealth Type: Concept

20. Which of the following is (are) a result of high inflation? A. Loss from disposal of assets B. Over-valued liabilities C. Lower stock price D. Under-valued assets

Accessibility: Keyboard Navigation Block - Chapter 01 #20 Difficulty: Medium Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-15 Risk Type: Concept

21. A corporate restructuring can result in: A. increased revenue. B. buying of low-profit margin divisions. C. selling of high-profit margin divisions. D. reductions in the work force.

Accessibility: Keyboard Navigation Block - Chapter 01 #21 Difficulty: Medium Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 01 #22 Difficulty: Medium Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 01 #23 Difficulty: Hard Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 01 #24 Difficulty: Hard Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 01 #25 Difficulty: Medium Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-09 Ethical Behaviour Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 01 #26 Difficulty: Hard Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-09 Ethical Behaviour Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 01 #27 Difficulty: Medium Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-05 Measuring the Goal Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

28. Future financial managers will need to understand: A. employment standards. B. production engineering. C. actuarial calculations. D. international currency hedging strategies.

Accessibility: Keyboard Navigation Block - Chapter 01 #28 Difficulty: Easy Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-15 Risk Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 01 #29 Difficulty: Medium Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-05 Measuring the Goal Type: Memory

30. In the 1930s, financial practices didn't focus on: A. maintenance of liquidity. B. reorganization of financially distressed companies. C. the bankruptcy process. D. international exchange costs.

Accessibility: Keyboard Navigation Block - Chapter 01 #30 Difficulty: Easy Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics. Topic: 01-02 Evolution of Finance as a Discipline Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 01 #31 Difficulty: Medium Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 01 #32 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-12 The Role of the Financial Markets Type: Memory

33. When a corporation uses the financial markets to raise new funds, the sale of securities is made in the: A. primary market. B. secondary market. C. on-line market. D. third market.

Accessibility: Keyboard Navigation Block - Chapter 01 #33 Difficulty: Easy Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-14 Allocation of Capital Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 01 #34 Difficulty: Medium Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-15 Risk Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 01 #35 Difficulty: Medium Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-14 Allocation of Capital Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 01 #36 Difficulty: Easy Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-10 Functions of Financial Management Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 01 #37 Difficulty: Easy Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics. Topic: 01-02 Evolution of Finance as a Discipline Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 01 #38 Difficulty: Easy Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-10 Functions of Financial Management Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 01 #39 Difficulty: Medium Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-15 Risk Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 01 #40 Difficulty: Medium Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-15 Risk Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 01 #41 Difficulty: Medium Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 01 #42 Difficulty: Hard Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics. Topic: 01-02 Evolution of Finance as a Discipline Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 01 #43 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 01 #44 Difficulty: Easy Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-08 Social Responsibility Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 01 #45 Difficulty: Easy Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 01 #46 Difficulty: Medium Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-07 Management and Shareholder Wealth Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 01 #47 Difficulty: Medium Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-15 Risk Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 01 #48 Difficulty: Easy Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-06 Market Share Price Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 01 #49 Difficulty: Medium Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Concept

50. As finance emerged as an analytical, decision oriented discipline, the initial emphasis was placed on capital acquisitions. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #50 Difficulty: Easy Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics. Topic: 01-02 Evolution of Finance as a Discipline Type: Concept

51. Inflation is assumed to be a temporary problem that does not affect financial decisions. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #51 Difficulty: Easy Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics. Topic: 01-01 The Field of Finance Type: Memory

52. Timing is not a particularly important consideration in financial decisions. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #52 Difficulty: Easy Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics. Topic: 01-02 Evolution of Finance as a Discipline Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

53. Institutional investors have had increasing influence over corporations with their ability to vote large blocks of stock and replace poor performing boards of directors. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #53 Difficulty: Easy Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Memory

54. Insider trading involves the use of information not available to the general public to make profits from trading in a company's shares. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #54 Difficulty: Easy Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-09 Ethical Behaviour Type: Memory

55. Agency theory assumes that corporate managers act to increase the wealth of corporate shareholders. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #55 Difficulty: Easy Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Memory

56. Historically the field of finance as a discipline described capital preservation, liquidity, reorganization, and bankruptcy through the 1930s depression. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #56 Difficulty: Easy Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics. Topic: 01-02 Evolution of Finance as a Discipline Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

57. The higher the profit of a firm, the higher the value the firm is assured of receiving in the market. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #57 Difficulty: Medium Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-06 Market Share Price Type: Concept

58. Social responsibility and profit maximization are synonymous. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #58 Difficulty: Easy Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-08 Social Responsibility Type: Concept

59. There is unlimited liability in a general partnership. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #59 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Memory

60. In the mid1950s, finance began to change to a more analytical, decision oriented approach. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #60 Difficulty: Easy Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics. Topic: 01-02 Evolution of Finance as a Discipline Type: Memory

61. There are some serious problems with the financial goal of maximizing the earnings of the firm. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #61 Difficulty: Easy Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-05 Measuring the Goal Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

62. Maximizing the earnings of the firm is the goal of financial management. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #62 Difficulty: Easy Learning Objective: 01-02 Identify the analysis and decision-making nature of finance while considering return and risk. Topic: 01-03 Goals of Financial Management Type: Concept

63. Because socially desirable goals can impede profitability in many instances, managers should not try to operate under the assumption of wealth maximization. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #63 Difficulty: Medium Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-07 Management and Shareholder Wealth Type: Memory

64. The sole proprietorship represents single-person ownership and offers the advantages of simplicity of decision making and low organizational and operating costs. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #64 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Memory

65. Profits of sole proprietorships are taxed at corporate tax rates. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #65 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

66. The primary market includes the sale of securities by way of initial public offerings. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #66 Difficulty: Easy Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-14 Allocation of Capital Type: Memory

67. The most common partnership arrangement carries limited liability to the partners. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #67 Difficulty: Medium Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Memory

68. A limited partnership limits the profits partners may receive. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #68 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Memory

69. In terms of size of revenues and profits, the corporation is by far the most important form of business organization in Canada. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #69 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

70. Dividends paid to corporate shareholders have already been taxed once as corporate income. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #70 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Concept

71. One advantage of the corporate form of organization is that income received by shareholders is not taxable since the corporation already paid taxes on the income distributed. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #71 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Concept

72. A corporation must have at least 35 shareholders. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #72 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Memory

73. Profits of a manufacturing corporation are taxed at the same rate as dividends. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #73 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

74. Recently, the emphasis of financial management has been on the relationships between risk and return. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #74 Difficulty: Medium Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-10 Functions of Financial Management Type: Concept

75. The formation of a corporation is a way to circumvent personal liability. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #75 Difficulty: Medium Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Concept

76. The secondary market characteristically has had stable prices over the past 20 years. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #76 Difficulty: Easy Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-14 Allocation of Capital Type: Memory

77. The first Nobel Prizes given to finance professors was for their contributions to capital structure theory and portfolio theories of risk and return. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #77 Difficulty: Easy Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

78. Financial markets exist as a vast global network of individuals and financial institutions that may be lenders, borrowers, or owners of public companies worldwide. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #78 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-12 The Role of the Financial Markets Type: Memory

79. Inflation has led to phantom profits and undervalued assets. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #79 Difficulty: Easy Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-14 Allocation of Capital Type: Concept

80. Money markets refer to those markets dealing with short-term securities having a life of one year or less. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #80 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-12 The Role of the Financial Markets Type: Memory

81. Capital markets refer to those markets dealing with short-term securities having a life of one year or less. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #81 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-12 The Role of the Financial Markets Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

82. New issues are sold in the secondary market. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #82 Difficulty: Easy Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-14 Allocation of Capital Type: Memory

83. Existing securities are traded in the secondary market. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #83 Difficulty: Easy Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-14 Allocation of Capital Type: Memory

84. The financial markets value assets based on the most productive current use. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #84 Difficulty: Easy Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-15 Risk Type: Concept

85. The 1990s demonstrated that the old valuation models were no longer effective. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #85 Difficulty: Medium Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics. Topic: 01-02 Evolution of Finance as a Discipline Type: Concept

86. The largest financial intermediaries after the banks are insurance companies. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #86 Difficulty: Easy Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-07 Management and Shareholder Wealth Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

87. The TSX Composite Index is representative of equity market value of the top listed Canadian companies. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #87 Difficulty: Easy Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-15 Risk Type: Memory

88. The Internet is largely responsible for the internationalization of the financial markets. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #88 Difficulty: Medium Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-12 The Role of the Financial Markets Type: Concept

89. Agency theory examines the relationship between companies and their customers. FALSE

Accessibility: Keyboard Navigation Block - Chapter 01 #89 Difficulty: Easy Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Memory

90. Honesty in business requires timely and full disclosure of pertinent firm developments. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #90 Difficulty: Medium Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-09 Ethical Behaviour Type: Concept

91. Businesses will increasingly rely on B2B Internet applications to speed up cash flows. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #91 Difficulty: Easy Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics. Topic: 01-02 Evolution of Finance as a Discipline Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

92. Issues over corporate governance are often agency problems. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #92 Difficulty: Medium Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Concept

93. Agency theory examines the relationship between the owners of the firm and the managers of the firm. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #93 Difficulty: Medium Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-04 Maximizing Shareholder Wealth Type: Memory

94. Secondary markets are the markets that trade previously issued securities. TRUE

Accessibility: Keyboard Navigation Block - Chapter 01 #94 Difficulty: Medium Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields. Topic: 01-14 Allocation of Capital Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

95. Financial management builds upon the disciplines of economics and accounting. Describe what a: economics provides the financial manager b: accounting provides the financial manager Economics provides the financial manager with • A broad picture of the economy and the key measures that influence the corporation's decisions and performance (gross domestic product, industrial production, disposable income, unemployment, inflation, interest rates, taxes). • An understanding of the institutional structure of our mixed capitalist system (government regulation, Bank of Canada, chartered banks, investment dealers, trusts, insurance companies, financial markets). Capital is accumulated and valued in competitive financial markets, affecting its cost and availability to the firm. • A structure for decision making (risk analysis, pricing theory through supply and demand relationships, comparative return analysis). Accounting provides the financial manager with • Much of the language of finance (assets, liabilities, cash flow). • Financial data (income statements, balance sheets, statement of cash flows). The financial manager must know how to interpret and use this data in allocating the firm's financial resources to generate the best value on the basis of return and risk. Finance links economic theory with the numbers of accounting, and all corporate managers—whether in the area of production, sales, research, marketing, management, or long run strategic planning-must know what it means to assess the financial performance of the firm.

Block - Chapter 01 #95 Difficulty: Hard Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics. Topic: 01-01 The Field of Finance Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

96. Selecting profit maximization as the primary goal of the firm may not increase its value, because a profitonly focus has several drawbacks. List and describe these drawbacks. 1. Risk may increase as profit changes. More debts or investment in projects with cyclical earnings to increase profits also increase risk. Shareholders may consider the increase in risk insufficient for the increased earnings. 2. Profit fails to take into account the timing of benefits. We might be indifferent between the following alternatives if our emphasis were solely on maximizing earnings, as the total is the same. However, alternative B is clearly superior, because larger benefits occur earlier; we could reinvest the difference in earnings for alternative B for an extra period. Earnings per Share

3. Accurately measuring profit is almost impossible. Economics and accounting define profit (earnings) differently. Furthermore, earnings may not correspond to current values due to the methods used to capture accounting accruals and the amortization of capital expenditures. As well, financial statements are subject to manipulation by managers, so reported earnings may be misleading.

Block - Chapter 01 #96 Difficulty: Medium Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-05 Measuring the Goal Type: Memory

97. What 4 factors will investors consider in the analysis of a firm market share value? • The risk inherent in the firm (nature of its operations and how the firm is financed) • The time pattern of the firm's earnings and cash flows • The quality and reliability of reported earnings (as a guidepost to future earning power) • Economic and political factors

Block - Chapter 01 #97 Difficulty: Medium Learning Objective: 01-03 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price. Topic: 01-06 Market Share Price Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

98. According to agency theory, other than maximizing shareholder wealth what other self-interests do financial managers have? Financial managers are interested in: • Maintaining their jobs (may discourage value-enhancing takeovers) • Protecting "private spheres of influence" • Maximizing their own compensation package • Arbitrating among the firm's different stakeholders (shareholders, creditors, employees, unions, environmentalists, consumer groups, Canada Revenue Agency, government regulatory bodies, customers) Pursuit of these interests may emphasize short-term results over long-term wealth building. Management may also perceive the risk of investment decisions differently from shareholders, leading to different points of view as to the best decision regarding the investment of the firm's resources.

Block - Chapter 01 #98 Difficulty: Medium Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-07 Management and Shareholder Wealth Type: Memory

99. Besides maximizing shareholder wealth, what should corporations consider to be goals? List and briefly explain. Corporations, which receive their operational charters from society, should consider socially desirable actions that include: • Community works (charitable giving, employment opportunities for marginalized groups) • Customer respect (safe products, fair pricing, appropriate advertising and communication) • Strong employee relations (fair benefits and compensation, equitable hiring, education, health and safety) • Environmental health (pollution controls, appropriate use and renewal of resources) • Human rights promotion (respecting the dignity of individuals globally)

Block - Chapter 01 #99 Difficulty: Medium Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-09 Ethical Behaviour Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

100. What are the 4 components of good corporate governance? Good corporate governance results from: • Board composition (strong leadership, competent education, balanced competencies) • Director and officers ownership positions in the firm (other than by stock options) • A published code of ethics • Independent audits and a financially literate audit committee

Block - Chapter 01 #100 Difficulty: Medium Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-09 Ethical Behaviour Type: Memory

101. List the 4 components of good corporate governance and identify additional measures that could be added to strengthen corporate governance. Good corporate governance results from: • Board composition (strong leadership, competent education, balanced competencies) • Director and officers ownership positions in the firm (other than by stock options) • A published code of ethics • Independent audits and a financially literate audit committee There have been increased demands for additional corporate governance practices by firms, despite the increased costs of compliance and sometimes delays in timely reporting of financial results. These measures include: • Separating the roles of CEO and chair of the board • Independent board of directors members • Improved accounting standards (stock options, internal audit controls, "off-balance sheet items") • More stringent reporting and disclosure requirements • Closer monitoring by regulatory bodies (securities commissions) • Questioning the use of "dual class" shares

Block - Chapter 01 #101 Difficulty: Hard Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-09 Ethical Behaviour Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

102. List the occasional functions of the finance manager connected to the efficient raising and investing of funds. Intermediate financing, bond issues, leasing, stock issues, capital budgeting, dividend decisions, forecasting

Block - Chapter 01 #102 Difficulty: Easy Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests. Topic: 01-10 Functions of Financial Management Type: Memory

103. What are the characteristics of a sole proprietorship? What are the drawbacks? A sole proprietorship is characterized by: • Single-person ownership • Simplicity of decision making • Low organizational and operating costs • Unlimited liability to the owner (can lose personal assets in settlement of firm's debts) • Profits or losses taxed in hands of individual owner Most small businesses with one to ten employees are sole proprietorships. The unlimited liability is a serious drawback and few lenders are willing to advance funds to a small business without a personal liability commitment from the owner.

Block - Chapter 01 #103 Difficulty: Medium Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

104. What are the characteristics of a partnership? What are the advantages compared to a sole proprietorship? A partnership is characterized by • Multiple ownership • Ability to raise more capital and share ownership responsibilities • Unlimited liability for the owners (one wealthy partner may have to bear a disproportionate share of losses in a general partnership) • Taxation of profits or losses are allocated in percentages to partners To circumvent the unlimited liability feature, a special form of partnership, called a limited partnership, can be utilized. Under this arrangement one or more partners are designated general partners and have unlimited liability for the debts of the firm; other partners are designated limited partners and are liable only for their initial contribution. The limited partners are normally prohibited from being active in the management of the firm.

Block - Chapter 01 #104 Difficulty: Medium Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Concept

105. What are the characteristics of a corporation? A corporation is characterized by: • A legal entity unto itself (may sue or be sued, engage in contracts, acquire property) • Ownership by shareholders (each with limited liability, although bankers may require small business owners to give their personal guarantee) • Divisibility of the ownership (many shareholders) • Continuous life span (not dependent on life of one shareholder) • Taxation on its own income (individual shareholders pay tax on dividends or capital gain tax when shares are sold) In terms of revenue and profits produced, the corporation is by far the most important form of economic unit.

Block - Chapter 01 #105 Difficulty: Medium Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

106. What 2 choices does the board of directors have to distribute earnings of a corporation? Earnings generated by the corporation are owned equally by each shareholder, and the board of directors has two choices for these earnings. Earnings can be: • Paid out as dividends (shareholders pay tax on dividends: a dividend tax credit reduces the effect of double taxation) • Reinvested in the firm (recorded as retained earnings)

Block - Chapter 01 #106 Difficulty: Easy Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds. Topic: 01-11 Forms of Organization Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 01 Summary Category

# of Question s

Accessibility: Keyboard Navigation

Block - Chapter 01

106

Difficulty: Easy

Difficulty: Hard

Difficulty: Medium

Learning Objective: 01-01 Illustrate how finance builds on the disciplines of accounting and economics.

Learning Objective: 01-02 Identify the analysis and decision-making nature of finance while considering return and risk.

Learning Objective: 0103 Examine the primary goal of finance as the maximization of shareholder wealth as measured by share price.

Learning Objective: 01-04 Debate alternative goals of the firm on the basis of social or management interests.

Learning Objective: 01-05 Identify financial manager functions connected to the efficient raising and investing of funds.

Learning Objective: 01-06 Outline the role of financial markets in allocating capital; determining value; and establishing yields.

Topic: 01-01 The Field of Finance

Topic: 01-02 Evolution of Finance as a Discipline

Topic: 01-03 Goals of Financial Management

Topic: 01-04 Maximizing Shareholder Wealth

Topic: 01-05 Measuring the Goal

Topic: 01-06 Market Share Price

Topic: 01-07 Management and Shareholder Wealth

Topic: 01-08 Social Responsibility

Topic: 01-09 Ethical Behaviour

Topic: 01-10 Functions of Financial Management

Topic: 01-11 Forms of Organization

Topic: 01-12 The Role of the Financial Markets

Topic: 01-13 Structure and Functions of the Financial Markets

Topic: 01-14 Allocation of Capital

Topic: 01-15 Risk

Type: Concept

Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 02 1. Which of the following is not one of the three basic financial statements required by Accounting Standards for Private Enterprises (ASPE)? A. Income Statement B. Statement of Retained Earnings C. Statement of Cash Flows D. Balance Sheet

2. Which of the following would not be classified as a current asset? A. Marketable securities B. Long term Investments C. Prepaid expenses D. Inventory

3. An item that may be converted to cash within one year or one operating cycle of the firm is classified as a: A. current liability. B. long-term asset. C. current asset. D. long-term liability.

4. Which of the following is not a primary source of capital to the firm? A. Assets B. Common stock C. Preferred stock D. Bonds

5. The residual income of the firm belongs to: A. creditors. B. preferred shareholders. C. common shareholders. D. bondholders.

Foundations of Financial Management - 10th Canadian Edition by Block

6. The best indication of the operational efficiency of management is: A. net income. B. earnings per share. C. earnings before interest and taxes (EBIT). D. gross profit.

7. Which account represents the cumulative earnings of the firm since its formation, minus dividends paid? A. Share price B. Common stock C. Retained earnings D. Accumulated amortization

8. A firm has $3,500,000 in its common stock account and $2,500,000 in its retained earnings account. The firm issued 100,000 shares of common stock. What was the original issue price if only one stock issue has ever been sold? A. $35 per share B. $25 per share C. $60 per share D. Not enough information to tell

9. A firm has $2,000,000 in its common stock account and $20,000,000 in its retained earnings account. The firm issued 500,000 shares of common stock. What are accumulated earnings per share? A. $4 per share B. $44 per share C. $40 per share D. $5 per share

10. The major limitation of financial statements is: A. in their complexity. B. in their lack of comparability. C. in their use of historical cost accounting. D. in their lack of detail.

11. Inflation has its major impact on balance sheets in which of the following areas? A. Inventory and accounts payable B. Plant and equipment and long-term debt C. Plant and equipment and inventory D. Interest expense and earnings per share

Foundations of Financial Management - 10th Canadian Edition by Block

12. "Inventory profits" are most likely to occur in an inflationary economy under which of the following inventory cost assumptions? A. Weighted average B. Specific item C. FIFO D. Lower of cost or market

13. The orientation of book value per share is __________, while the orientation of market value per share is ___________. A. short term; long term B. future; historical C. historical; future D. long term; short term

14. A firm with earnings per share of $5 and a price-earnings ratio of 15 will have a share price of? A. $20.00 B. $75.00 C. $3.00 D. The market assigns a stock price independent of EPS and the P/E ratio

15. Earnings per share is: A. operating profit divided by number of shares outstanding. B. net income divided by number of shares outstanding. C. net income divided by shareholders' equity. D. net income minus preferred dividends divided by number of shares outstanding.

16. Which of the following is an outflow of cash? A. Profitable operations B. The sale of equipment C. The sale of the company's common stock D. The payment of cash dividends

17. Which of the following is an inflow of cash? A. Funds spent in normal business operations B. The purchase of a new factory C. The sale of the firm's bonds D. The retirement of the firm's bonds

Foundations of Financial Management - 10th Canadian Edition by Block

18. Amortization is a source of cash inflow because: A. it is a tax-deductible noncash expense. B. it supplies cash for future asset purchases. C. it is a tax-deductible cash expense. D. it is a taxable expense.

19. Assuming a tax rate of 35%, amortization expenses of $400,000 will: A. reduce income by $140,000. B. reduce taxes by $140,000. C. reduce taxes by $400,000. D. have no effect on income or taxes, since amortization is not a cash expense.

20. Assuming a tax rate of 30%, the after tax cost of interest expense of $200,000 is: A. $60,000. B. $140,000. C. $200,000. D. $120,000.

21. Gross profit is equal to: A. sales minus cost of goods sold. B. sales minus (selling and administrative expenses). C. sales minus (cost of goods sold and selling and administrative expenses). D. sales minus (cost of goods sold and amortization expense).

22. The firm's price-earnings (P/E) ratio is not influenced by its: A. capital structure. B. earnings volatility. C. sales, profit margins, and earnings. D. Purchase of machinery.

23. Total shareholders' equity consists of: A. preferred stock and common stock. B. common stock and retained earnings. C. common stock and contributed surplus. D. preferred stock, common stock, contributed surplus, and retained earnings.

Foundations of Financial Management - 10th Canadian Edition by Block

24. The Balance Sheet cannot show: A. the current ratio. B. the value of common stock outstanding. C. the change in retained earnings. D. the price earnings relationship.

25. Well prepared accounting statements: A. let management know if cash flow from internal operations is large enough to make necessary equipment replacements. B. provide no new information to financial managers. C. determine the market price of common stock. D. eliminate the effects of inflation from decision making.

26. The Glorius VanderBuilt Denim Slacks Company has taxable income of $100,000. Assuming a 34% tax rate, what is the tax payable? A. $34,000 B. $66,000 C. $100,000 D. $12,250

27. Book value of a firm: A. is usually the same as the firm's market value. B. is based on current asset costs. C. is the same as net worth. D. none of the choices are correct.

28. A statement of cash flows allows a financial analyst to determine: A. whether a cash dividend is affordable. B. how increase in asset accounts have been financed. C. whether long-term assets are being financed with long-term or short-term financing. D. all of the choices are correct.

29. A firm has $200,000 in current assets, $400,000 in long-term assets, $80,000 in current liabilities, and $200,000 in long-term liabilities. What is its net working capital? A. $120,000 B. $320,000 C. $520,000 D. None of the choices are correct

Foundations of Financial Management - 10th Canadian Edition by Block

30. A firm has current assets of $25,000, long term assets of $100,000, long term liabilities of $50,000, and $50,000 in shareholders' equity. What is its net working capital? A. $0 B. $50,000 C. $100,000 D. $25,000

31. Assuming a tax rate of 40%, the after tax cost of a $200,000 dividend payment is: A. $200,000. B. $70,000. C. $130,000. D. None of the choices are correct

32. Which of the following would not be included in the balance sheet investment account? A. Shares of other corporations B. Long term government bonds C. Marketable securities D. Investments in other corporations

33. Which of the following is not true of current cost accounting? A. The book value of equipment is near replacement value B. The book value of the common stock equals market value C. Dividends and income are adjusted for inflation D. All of the choices are correct

34. The primary disadvantage of accrual accounting is that: A. it does not match revenues and expenses in the period in which they are incurred. B. it does not appropriately measure accounting profit. C. it does not recognize the actual exchange of cash. D. it does not adequately show the actual cash flow position of the firm.

35. The statement of cash flows does not include which of the following sections? A. Cash flows from operating activities B. Cash flows from sales activities C. Cash flows from investing activities D. Cash flows from financing activities

Foundations of Financial Management - 10th Canadian Edition by Block

36. Which of the following would represent a use of funds and, indirectly, a reduction in cash balances? A. An increase in inventories. B. A decrease in marketable securities. C. An increase in accounts payable. D. The sale of new bonds by the firm.

37. Which of the following would represent a source of funds and, indirectly, an increase in cash balances? A. A reduction in accounts receivable. B. The repurchase of shares of the firm's stock. C. A decrease in net income. D. A reduction in notes payable.

38. A firm's purchase of plant and equipment would be considered as a: A. use of cash for financing activities. B. use of cash for operating activities. C. source of cash for investment activities. D. use of cash for investment activities.

39. Reinvested funds from retained earnings theoretically belong to: A. bondholders. B. common shareholders. C. employees. D. all of the choices are correct.

40. For private companies, asset accounts on the balance sheet are listed in the order of: A. liquidity. B. profitability. C. size. D. importance.

41. An increase in investments in long-term securities will: A. increase cash flow from investing activities. B. decrease cash flow from investing activities. C. increase cash flow from financing activities. D. decrease cash flow from financing activities.

Foundations of Financial Management - 10th Canadian Edition by Block

42. Free cash flow is equal to cash flow from operating activities: A. plus capital expenditures, minus dividends. B. plus capital expenditures, plus dividends. C. plus dividends, minus capital expenditures. D. minus capital expenditures, minus dividends.

43. In the last decade, free cash flow has been associated with special financial activities such as: A. leveraged buyouts. B. Registered Retirement Savings Plan (RRSPs). C. stock options. D. golden parachutes.

44. Common stock dividends are __________ by preferred stock dividends. A. increased B. decreased C. not effected D. Not enough information to tell

45. Increasing interest expense will have what effect on EBIT? A. Increase it B. Decrease it C. No effect D. Not enough information to tell

46. When a firm's earnings are falling more rapidly than its stock price, its P/E ratio will: A. remain the same. B. go up. C. go down. D. could go either up or down.

47. Net worth is equal to shareholders' equity: A. plus dividends. B. minus preferred stock. C. plus preferred stock. D. minus liabilities.

Foundations of Financial Management - 10th Canadian Edition by Block

48. Net worth for an individual is the same as _____ for a corporation. A. shareholders' equity B. capital assets minus long-term debt C. book value D. current assets minus current debt

49. Amortization tends to: A. increase cash flow and decrease income. B. decrease cash flow and increase income. C. affect only cash flow. D. affect only income.

50. Accrual based accounting results in income and cash flow being: A. the same. B. different. C. equal except for amortization. D. equal except for dividends.

51. The P/E ratio is determined by: A. net worth divided by earnings. B. market capitalization divided by dividend. C. net worth per share divided by earnings per share. D. market value per share divided by earnings per share.

52. A balance sheet valuation measure is: A. earnings per share. B. the P/E ratio. C. the dividend yield. D. market value to book value.

53. Preferred share dividends ________ earnings available to common shareholders. A. increase B. decrease C. due not effect D. not enough information to tell

Foundations of Financial Management - 10th Canadian Edition by Block

54. Which of the following is not subtracted to arrive at operating profit? A. Interest expense B. Cost of goods sold C. Amortization D. Selling and administration expense

55. Given the following what is free cash flow?

A. $115,000 B. $235,000 C. $150,000 D. $140,000

56. All of the following would be included in Cash Flows from Investing, except: A. investments in Plant. B. merchandise Purchases. C. purchases of Investments. D. sale of Long-Term Investments.

57. An item that must be paid within one year or one operating cycle of the firm is classified as a: A. current liability. B. long-term asset. C. current asset. D. None of the choices are correct.

58. Assuming no conversion rights of bond holders or preferred shareholders, the retained earnings of the firm belongs to: A. creditors. B. preferred shareholders. C. common shareholders. D. Canada Revenue Agency.

Foundations of Financial Management - 10th Canadian Edition by Block

59. A firm has $7,500,000 in its common stock account and $2,500,000 in its retained earnings account. The firm issued 100,000 shares of common stock. What was the original issue price if only one stock issue has ever been sold? A. $75 per share B. $25 per share C. $100 per share D. Not enough information to tell

60. Assuming a tax rate of 35%, amortization expenses of $800,000 will: A. reduce income by $280,000. B. reduce taxes by $280,000. C. reduce taxes by $800,000. D. have no effect on income or taxes, since amortization is not a cash expense.

61. Assuming a tax rate of 30%, the after tax cost of interest expense of $400,000 is: A. $120,000. B. $280,000. C. $400,000. D. $240,000.

62. The income statement is the primary financial statement for measuring the profitability of a firm over a period of time. True False

63. The income statement measures the increase in the assets of a firm over a period of time. True False

64. Accounting income is based on verifiably completed transactions. True False

65. For private companies, asset accounts are listed in order of their liquidity. True False

66. Book value per share and market value per share are usually the same dollar amount. True False

Foundations of Financial Management - 10th Canadian Edition by Block

67. Book value per share is of greater concern to the financial manager than market value per share. True False

68. Book value is equal to net worth. True False

69. Equity is a measure of the monetary contributions that have been made directly or indirectly on behalf of the shareholders of the company. True False

70. Shareholders' equity is equal to liabilities plus assets. True False

71. Shareholders' equity is equal to assets minus liabilities. True False

72. Shareholders' equity minus preferred stock is the same thing as what is sometimes called net worth or book value. True False

73. The statement of cash flows helps measure how the changes in a balance sheet are financed between two time periods. True False

74. An increase in an asset represents a source of funds. True False

75. Accumulated amortization shows up in the income statement. True False

Foundations of Financial Management - 10th Canadian Edition by Block

76. The change in accumulated amortization is usually equal to the amortization expense charged in the income statement. True False

77. Net working capital is the difference between current assets and current liabilities. True False

78. Amortization is an accounting entry and does not involve a cash expense. True False

79. An advantage of the net working capital approach over the cash approach is that it looks at the changes of every account of the statement of cash flows. True False

80. Cash flow is equal to earnings before taxes minus amortization. True False

81. The corporate tax rate is 25% on the first $200,000 of income and 50% on any amount over $200,000. True False

82. Interest expense is deductible before taxes and therefore has an after tax cost equal to the interest paid times (1-tax rate). True False

83. Preferred stock dividends are paid out before income taxes. True False

84. Total assets of a firm are financed with liabilities and shareholders' equity. True False

Foundations of Financial Management - 10th Canadian Edition by Block

85. Retained earnings shown on the balance sheet represents available cash on hand generated from prior year's earnings but not paid out in dividends. True False

86. Current cost accounting adjusts financial statements by using the consumer price index. True False

87. An increase in a liability account represents a source of funds. True False

88. The statement of cash flows includes the effects of dividends paid and amortization expense. True False

89. The net working capital approach to funds flow analysis looks at the difference between total assets and total liabilities. True False

90. The marginal corporate tax rate for incomes over $1,000,000 is 50%. True False

91. Preferred stock is always excluded from shareholders' equity because it is a hybrid security and does not have full voting rights. True False

92. Current cost accounting undervalues plant and equipment because it does not adjust for inflation. True False

93. The investments account includes marketable securities. True False

Foundations of Financial Management - 10th Canadian Edition by Block

94. The investments account represents a commitment of funds of at least one year. True False

95. A $125,000 credit sale could be a part of a firm's cash flow from operations if paid off within a firm's fiscal year. True False

96. An increase in accounts receivable represents a reduction in cash flows from operations. True False

97. An increase in accounts payable represents a reduction in cash flows from operations. True False

98. The purchase of a new factory would reduce the cash flows from investing activities. True False

99. The sale of corporate bonds held by the firm as a long-term investment would increase cash flows from investing activities. True False

100. Paying dividends to common shareholders will not affect cash flows from financing activities. True False

101. It is not possible for a company with a high profit margin to have a low operating profit. True False

102. Operating profit is essentially a measure of how efficient management is in generating revenues and controlling expenses. True False

Foundations of Financial Management - 10th Canadian Edition by Block

103. The P/E ratio provides no indication of investors' expectations about the future of a company. True False

104. The real value of a firm is the same in an economic and accounting sense. True False

105. A balance sheet represents the assets, liabilities, and shareholders' equity of a company at a given point in time. True False

106. Balance sheet items are usually adjusted for inflation. True False

107. Marketable securities are temporary investments of excess cash and are carried at the lower of cost or market. True False

108. Retained earnings represent the firm's cumulative earnings since inception, minus dividends and other adjustments. True False

109. Cash flow consists of illiquid cash equivalents which are difficult to convert to cash within 90 days. True False

110. The sale of a firm's securities is a source of funds, whereas the payment of dividends is a use of funds. True False

111. The use of amortization is an attempt to allocate the past and future cost of an asset over its useful life. True False

Foundations of Financial Management - 10th Canadian Edition by Block

112. Free cash flow is equal to cash flow from operating activities plus amortization. True False

113. Free cash flow is equal to cash flow from operating activities minus necessary capital expenditures and normal dividend payments. True False

114. Taxes on individuals have traditionally been progressive, meaning that the more taxable income you have, the higher your marginal tax rate. True False

115. The P/E ratio is strongly related to the past performance of the firm. True False

116. An increase in assets represents a source of funds. True False

117. Sales less cost of goods sold is equal to earnings before taxes. True False

118. Sales less cost of goods sold is equal to gross profit. True False

119. When a firm has a sharp drop off in earnings, its P/E ratio may be artificially high. True False

120. The investments account does not directly affect cash and cash equivalents. True False

121. Amortization expense is charged in the income statement. True False

Foundations of Financial Management - 10th Canadian Edition by Block

122. An increase in inventory represents a source of funds. True False

123. The income statement allows analysts and investors to measure a firm's profitability of over a period of a month, quarter or year. True False

124. Earnings available to common shareholders includes potential dividends to be paid to preferred shareholders. True False

125. The effective tax rate on dividend income is lower than interest income because of the dividend tax credit (DTC). Canadians are allowed to claim the DTC because the government wants to reduce the effects of double taxation. True False

126. Prior Adjustments may be added or subtracted from a firm's Retained Earnings. These "adjustments" are usually for accounting errors or substantive changes to historical cost of assets or liabilities. True False

127. Preferred and/or Common Share dividends are added to Cash Flow from Operations in determining Free Cash Flow. True False

128. The sale of a firm's preferred shares is a source of funds, whereas the payment of preferred dividends is a use of funds. True False

129. What is an income statement and what is its purpose as it relates to financial management?

Foundations of Financial Management - 10th Canadian Edition by Block

130. What is the P/E ratio? Why is it an important ratio? List 3 factors that influence the P/E ratio.

131. In the text, the author said that "Earnings are flexible." What was meant by this?

132. Several theories have been suggested about the factors contributing to the management or "manipulation" of reported earnings. List and explain them.

133. Explain these terms found on a typical balance sheet. Provide examples of each if applicable.

134. List and describe the limitations of the balance sheet.

Foundations of Financial Management - 10th Canadian Edition by Block

135. What is a cash flow statement? What information can it provide? Why is a cash flow statement important to small business?

136. List the 3 primary sections on the cash flow statement.

137. Describe and briefly explain the steps used in the indirect method to compute cash flows from typical operating activities of a company.

138. Define free cash flow. Explain what it is equal to and why it is important a finance manager needs to know the value of free cash flow.

139. What causes the after tax cash flow to the individuals to vary?

Foundations of Financial Management - 10th Canadian Edition by Block

140. What is a tax savings?

142. Two-by-Four Wood Products (TBF) report net income of $2 per share in its most recent financial statements. If TBF has no preferred shares outstanding and the market price of its stock is $4 what is TBF's P/E ratio?

143. Jane is considering an investment in Fauna Flowers (FF). FF is trading at $33 a share. It the company's current dividend is $1.50 a share, what is FF's dividend yield?

Foundations of Financial Management - 10th Canadian Edition by Block

144. Blink and Wink (BW) manufactures contact lens. In its most recent fiscal year BW reported after-tax interest expense on a new bond issue of $550,000. If BW's effective tax rate is 35%, what was the firm's before tax interest expense?

145. Cool Ties and Things (CTT) has Total Shareholder's Equity of $350,000. CTT issued $85,000 in preferred stock two years ago. If CTT has 37,000 shares issued and outstanding what is CTT's book value per share?

146. The following is the December 31, 2014 balance sheet for the Epics Corporation.

Sales for 2015 were $2,000,000, with the cost of goods sold being 55% of sales. Amortization expense was 10% of the gross plant and equipment at the beginning of the year. Interest expense was 9% on the notes payable and 11% on the bonds payable. Selling, general, and administrative expenses were $200,000 and the firm's tax rate is 40%. A) Prepare an income statement. B) If the dividend payout ratio for Epics is 35%, what is the value of the retained earnings account on December 31, 2015?

Foundations of Financial Management - 10th Canadian Edition by Block

147. Given the financial information for the A.E. Neuman Corporation, A) Prepare a Statement of Cash Flows for the year ended December 31, 2015. B) What is the dividend payout ratio? C) If we increased the dividend payout ratio to 100%, what would happen to retained earnings?

Foundations of Financial Management - 10th Canadian Edition by Block

148. Calculate the tax bill for a corporation that earned $250,000 in 2015 in Manitoba as a manufacturer.

149. Calculate the after tax cost of the interest. Assume the company has issued 10,000 bonds with a coupon rate of 8% and a face value of $1,000 per bond, and the company has a marginal tax rate of 42%.

150. ElectroWizard Company produces a popular video game called Destructo, which sells for $32. Last year ElectroWizard sold 50,000 Destructo games, each of which costs $6 to produce. ElectroWizard incurred selling and administrative expenses of $80,000 and amortization expense of $10,000. In addition, ElectroWizard has a $100,000 loan outstanding at 12%. Its tax rate is 40%. There are 100,000 common shares outstanding. Prepare an income statement for ElectroWizard in good form (include EPS).

Foundations of Financial Management - 10th Canadian Edition by Block

151. Identify each of the following as increasing (+) or decreasing (-) cash flows from operating activities (O), investment activities (I), or financing activities (F). (EXAMPLE: the sale of plant and equipment would increase cash flows from investing activities, and the correct answer would be + I).

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 02 Key

1. Which of the following is not one of the three basic financial statements required by Accounting Standards for Private Enterprises (ASPE)? A. Income Statement B. Statement of Retained Earnings C. Statement of Cash Flows D. Balance Sheet

Accessibility: Keyboard Navigation Block - Chapter 02 #1 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Memory

2. Which of the following would not be classified as a current asset? A. Marketable securities B. Long term Investments C. Prepaid expenses D. Inventory

Accessibility: Keyboard Navigation Block - Chapter 02 #2 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Memory

3. An item that may be converted to cash within one year or one operating cycle of the firm is classified as a: A. current liability. B. long-term asset. C. current asset. D. long-term liability.

Accessibility: Keyboard Navigation Block - Chapter 02 #3 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-07 Interpretation of Balance Sheet Items Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

4. Which of the following is not a primary source of capital to the firm? A. Assets B. Common stock C. Preferred stock D. Bonds

Accessibility: Keyboard Navigation Block - Chapter 02 #4 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-02 Return on Capital Type: Memory

5. The residual income of the firm belongs to: A. creditors. B. preferred shareholders. C. common shareholders. D. bondholders.

Accessibility: Keyboard Navigation Block - Chapter 02 #5 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Memory

6. The best indication of the operational efficiency of management is: A. net income. B. earnings per share. C. earnings before interest and taxes (EBIT). D. gross profit.

Accessibility: Keyboard Navigation Block - Chapter 02 #6 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

7. Which account represents the cumulative earnings of the firm since its formation, minus dividends paid? A. Share price B. Common stock C. Retained earnings D. Accumulated amortization

Accessibility: Keyboard Navigation Block - Chapter 02 #7 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 02 #8 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #9 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

10. The major limitation of financial statements is: A. in their complexity. B. in their lack of comparability. C. in their use of historical cost accounting. D. in their lack of detail.

Accessibility: Keyboard Navigation Block - Chapter 02 #10 Difficulty: Medium Learning Objective: 02-03 Examine the limitations of the balance sheet as a measure of a firms financial position. Topic: 02-09 Limitations of the Balance Sheet Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #11 Difficulty: Hard Learning Objective: 02-03 Examine the limitations of the balance sheet as a measure of a firms financial position. Topic: 02-09 Limitations of the Balance Sheet Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #12 Difficulty: Medium Learning Objective: 02-03 Examine the limitations of the balance sheet as a measure of a firms financial position. Topic: 02-09 Limitations of the Balance Sheet Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 02 #13 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-08 Valuation Basics from the Balance Sheet Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #14 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-03 Valuation Basics from the Income Statement Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #15 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-03 Valuation Basics from the Income Statement Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

16. Which of the following is an outflow of cash? A. Profitable operations B. The sale of equipment C. The sale of the company's common stock D. The payment of cash dividends

Accessibility: Keyboard Navigation Block - Chapter 02 #16 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-12 Determining Cash Flows from Operating Activities Type: Concept

17. Which of the following is an inflow of cash? A. Funds spent in normal business operations B. The purchase of a new factory C. The sale of the firm's bonds D. The retirement of the firm's bonds

Accessibility: Keyboard Navigation Block - Chapter 02 #17 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-12 Determining Cash Flows from Operating Activities Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #18 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-12 Determining Cash Flows from Operating Activities Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 02 #19 Difficulty: Easy Learning Objective: 02-08 Explain the concept of tax savings for companies. Topic: 02-23 Amortization (Capital Cost Allowance) as a Tax Shield Type: Concept

20. Assuming a tax rate of 30%, the after tax cost of interest expense of $200,000 is: A. $60,000. B. $140,000. C. $200,000. D. $120,000.

Accessibility: Keyboard Navigation Block - Chapter 02 #20 Difficulty: Easy Learning Objective: 02-08 Explain the concept of tax savings for companies. Topic: 02-22 Cost of a Tax-Deductible Expense Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #21 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

22. The firm's price-earnings (P/E) ratio is not influenced by its: A. capital structure. B. earnings volatility. C. sales, profit margins, and earnings. D. Purchase of machinery.

Accessibility: Keyboard Navigation Block - Chapter 02 #22 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-03 Valuation Basics from the Income Statement Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #23 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-02 Return on Capital Type: Concept

24. The Balance Sheet cannot show: A. the current ratio. B. the value of common stock outstanding. C. the change in retained earnings. D. the price earnings relationship.

Accessibility: Keyboard Navigation Block - Chapter 02 #24 Difficulty: Medium Learning Objective: 02-03 Examine the limitations of the balance sheet as a measure of a firms financial position. Topic: 02-09 Limitations of the Balance Sheet Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 02 #25 Difficulty: Medium Learning Objective: 02-03 Examine the limitations of the balance sheet as a measure of a firms financial position. Topic: 02-09 Limitations of the Balance Sheet Type: Concept

26. The Glorius VanderBuilt Denim Slacks Company has taxable income of $100,000. Assuming a 34% tax rate, what is the tax payable? A. $34,000 B. $66,000 C. $100,000 D. $12,250

Accessibility: Keyboard Navigation Block - Chapter 02 #26 Difficulty: Easy Learning Objective: 02-06 Outline the effect of corporate tax considerations on aftertax cash flow. Topic: 02-19 Corporate Tax Rates Type: Concept

27. Book value of a firm: A. is usually the same as the firm's market value. B. is based on current asset costs. C. is the same as net worth. D. none of the choices are correct.

Accessibility: Keyboard Navigation Block - Chapter 02 #27 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-08 Valuation Basics from the Balance Sheet Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 02 #28 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-10 Statement of Cash Flows Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #29 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-08 Valuation Basics from the Balance Sheet Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #30 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-08 Valuation Basics from the Balance Sheet Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

31. Assuming a tax rate of 40%, the after tax cost of a $200,000 dividend payment is: A. $200,000. B. $70,000. C. $130,000. D. None of the choices are correct

Accessibility: Keyboard Navigation Block - Chapter 02 #31 Difficulty: Medium Learning Objective: 02-07 Identify the different forms of investment income and the effects on investors taxes payable. Topic: 02-21 Personal Taxes Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #32 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #33 Difficulty: Medium Learning Objective: 02-03 Examine the limitations of the balance sheet as a measure of a firms financial position. Topic: 02-09 Limitations of the Balance Sheet Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 02 #34 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #35 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-11 Developing an Actual Statement Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 02 #36 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-12 Determining Cash Flows from Operating Activities Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 02 #37 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-12 Determining Cash Flows from Operating Activities Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #38 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-12 Determining Cash Flows from Operating Activities Type: Concept

39. Reinvested funds from retained earnings theoretically belong to: A. bondholders. B. common shareholders. C. employees. D. all of the choices are correct.

Accessibility: Keyboard Navigation Block - Chapter 02 #39 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-02 Return on Capital Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

40. For private companies, asset accounts on the balance sheet are listed in the order of: A. liquidity. B. profitability. C. size. D. importance.

Accessibility: Keyboard Navigation Block - Chapter 02 #40 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #41 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-12 Determining Cash Flows from Operating Activities Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #42 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-17 Free Cash Flow Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 02 #43 Difficulty: Hard Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-17 Free Cash Flow Type: Concept

44. Common stock dividends are __________ by preferred stock dividends. A. increased B. decreased C. not effected D. Not enough information to tell

Accessibility: Keyboard Navigation Block - Chapter 02 #44 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

45. Increasing interest expense will have what effect on EBIT? A. Increase it B. Decrease it C. No effect D. Not enough information to tell

Accessibility: Keyboard Navigation Block - Chapter 02 #45 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

46. When a firm's earnings are falling more rapidly than its stock price, its P/E ratio will: A. remain the same. B. go up. C. go down. D. could go either up or down.

Accessibility: Keyboard Navigation Block - Chapter 02 #46 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-03 Valuation Basics from the Income Statement Type: Concept

47. Net worth is equal to shareholders' equity: A. plus dividends. B. minus preferred stock. C. plus preferred stock. D. minus liabilities.

Accessibility: Keyboard Navigation Block - Chapter 02 #47 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-08 Valuation Basics from the Balance Sheet Type: Concept

48. Net worth for an individual is the same as _____ for a corporation. A. shareholders' equity B. capital assets minus long-term debt C. book value D. current assets minus current debt

Accessibility: Keyboard Navigation Block - Chapter 02 #48 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-08 Valuation Basics from the Balance Sheet Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

49. Amortization tends to: A. increase cash flow and decrease income. B. decrease cash flow and increase income. C. affect only cash flow. D. affect only income.

Accessibility: Keyboard Navigation Block - Chapter 02 #49 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-16 Amortization and Cash Flow Type: Concept

50. Accrual based accounting results in income and cash flow being: A. the same. B. different. C. equal except for amortization. D. equal except for dividends.

Accessibility: Keyboard Navigation Block - Chapter 02 #50 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-16 Amortization and Cash Flow Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #51 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-03 Valuation Basics from the Income Statement Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

52. A balance sheet valuation measure is: A. earnings per share. B. the P/E ratio. C. the dividend yield. D. market value to book value.

Accessibility: Keyboard Navigation Block - Chapter 02 #52 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-08 Valuation Basics from the Balance Sheet Type: Concept

53. Preferred share dividends ________ earnings available to common shareholders. A. increase B. decrease C. due not effect D. not enough information to tell

Accessibility: Keyboard Navigation Block - Chapter 02 #53 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

54. Which of the following is not subtracted to arrive at operating profit? A. Interest expense B. Cost of goods sold C. Amortization D. Selling and administration expense

Accessibility: Keyboard Navigation Block - Chapter 02 #54 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

55. Given the following what is free cash flow?

A. $115,000 B. $235,000 C. $150,000 D. $140,000

Block - Chapter 02 #55 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-17 Free Cash Flow Type: Concept

56. All of the following would be included in Cash Flows from Investing, except: A. investments in Plant. B. merchandise Purchases. C. purchases of Investments. D. sale of Long-Term Investments.

Accessibility: Keyboard Navigation Block - Chapter 02 #56 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-13 Determining Cash Flows from Investing Activities Type: Concept

57. An item that must be paid within one year or one operating cycle of the firm is classified as a: A. current liability. B. long-term asset. C. current asset. D. None of the choices are correct.

Accessibility: Keyboard Navigation Block - Chapter 02 #57 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 02 #58 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Memory

Accessibility: Keyboard Navigation Block - Chapter 02 #59 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #60 Difficulty: Easy Learning Objective: 02-08 Explain the concept of tax savings for companies. Topic: 02-23 Amortization (Capital Cost Allowance) as a Tax Shield Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

61. Assuming a tax rate of 30%, the after tax cost of interest expense of $400,000 is: A. $120,000. B. $280,000. C. $400,000. D. $240,000.

Accessibility: Keyboard Navigation Block - Chapter 02 #61 Difficulty: Easy Learning Objective: 02-08 Explain the concept of tax savings for companies. Topic: 02-22 Cost of a Tax-Deductible Expense Type: Concept

62. The income statement is the primary financial statement for measuring the profitability of a firm over a period of time. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #62 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

63. The income statement measures the increase in the assets of a firm over a period of time. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #63 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

64. Accounting income is based on verifiably completed transactions. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #64 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

65. For private companies, asset accounts are listed in order of their liquidity. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #65 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

66. Book value per share and market value per share are usually the same dollar amount. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #66 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

67. Book value per share is of greater concern to the financial manager than market value per share. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #67 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-08 Valuation Basics from the Balance Sheet Type: Concept

68. Book value is equal to net worth. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #68 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-08 Valuation Basics from the Balance Sheet Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

69. Equity is a measure of the monetary contributions that have been made directly or indirectly on behalf of the shareholders of the company. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #69 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

70. Shareholders' equity is equal to liabilities plus assets. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #70 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-08 Valuation Basics from the Balance Sheet Type: Memory

71. Shareholders' equity is equal to assets minus liabilities. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #71 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-08 Valuation Basics from the Balance Sheet Type: Memory

72. Shareholders' equity minus preferred stock is the same thing as what is sometimes called net worth or book value. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #72 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-08 Valuation Basics from the Balance Sheet Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

73. The statement of cash flows helps measure how the changes in a balance sheet are financed between two time periods. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #73 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-10 Statement of Cash Flows Type: Concept

74. An increase in an asset represents a source of funds. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #74 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-12 Determining Cash Flows from Operating Activities Type: Concept

75. Accumulated amortization shows up in the income statement. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #75 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-16 Amortization and Cash Flow Type: Concept

76. The change in accumulated amortization is usually equal to the amortization expense charged in the income statement. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #76 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-16 Amortization and Cash Flow Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

77. Net working capital is the difference between current assets and current liabilities. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #77 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-08 Valuation Basics from the Balance Sheet Type: Memory

78. Amortization is an accounting entry and does not involve a cash expense. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #78 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-16 Amortization and Cash Flow Type: Concept

79. An advantage of the net working capital approach over the cash approach is that it looks at the changes of every account of the statement of cash flows. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #79 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-10 Statement of Cash Flows Type: Concept

80. Cash flow is equal to earnings before taxes minus amortization. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #80 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-10 Statement of Cash Flows Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

81. The corporate tax rate is 25% on the first $200,000 of income and 50% on any amount over $200,000. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #81 Difficulty: Medium Learning Objective: 02-06 Outline the effect of corporate tax considerations on aftertax cash flow. Topic: 02-19 Corporate Tax Rates Type: Memory

82. Interest expense is deductible before taxes and therefore has an after tax cost equal to the interest paid times (1-tax rate). TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #82 Difficulty: Medium Learning Objective: 02-08 Explain the concept of tax savings for companies. Topic: 02-23 Amortization (Capital Cost Allowance) as a Tax Shield Type: Concept

83. Preferred stock dividends are paid out before income taxes. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #83 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

84. Total assets of a firm are financed with liabilities and shareholders' equity. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #84 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-08 Valuation Basics from the Balance Sheet Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

85. Retained earnings shown on the balance sheet represents available cash on hand generated from prior year's earnings but not paid out in dividends. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #85 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

86. Current cost accounting adjusts financial statements by using the consumer price index. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #86 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-06 Effects of IFRS on Financial Analysis Type: Concept

87. An increase in a liability account represents a source of funds. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #87 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-12 Determining Cash Flows from Operating Activities Type: Concept

88. The statement of cash flows includes the effects of dividends paid and amortization expense. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #88 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-10 Statement of Cash Flows Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

89. The net working capital approach to funds flow analysis looks at the difference between total assets and total liabilities. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #89 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-10 Statement of Cash Flows Type: Concept

90. The marginal corporate tax rate for incomes over $1,000,000 is 50%. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #90 Difficulty: Easy Learning Objective: 02-06 Outline the effect of corporate tax considerations on aftertax cash flow. Topic: 02-19 Corporate Tax Rates Type: Memory

91. Preferred stock is always excluded from shareholders' equity because it is a hybrid security and does not have full voting rights. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #91 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-02 Return on Capital Type: Concept

92. Current cost accounting undervalues plant and equipment because it does not adjust for inflation. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #92 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-10 Statement of Cash Flows Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

93. The investments account includes marketable securities. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #93 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

94. The investments account represents a commitment of funds of at least one year. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #94 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

95. A $125,000 credit sale could be a part of a firm's cash flow from operations if paid off within a firm's fiscal year. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #95 Difficulty: Hard Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-10 Statement of Cash Flows Type: Concept

96. An increase in accounts receivable represents a reduction in cash flows from operations. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #96 Difficulty: Hard Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-12 Determining Cash Flows from Operating Activities Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

97. An increase in accounts payable represents a reduction in cash flows from operations. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #97 Difficulty: Hard Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-12 Determining Cash Flows from Operating Activities Type: Concept

98. The purchase of a new factory would reduce the cash flows from investing activities. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #98 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-13 Determining Cash Flows from Investing Activities Type: Concept

99. The sale of corporate bonds held by the firm as a long-term investment would increase cash flows from investing activities. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #99 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-14 Determining Cash Flows from Financing Activities Type: Concept

100. Paying dividends to common shareholders will not affect cash flows from financing activities. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #100 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-13 Determining Cash Flows from Investing Activities Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

101. It is not possible for a company with a high profit margin to have a low operating profit. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #101 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

102. Operating profit is essentially a measure of how efficient management is in generating revenues and controlling expenses. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #102 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-02 Return on Capital Type: Concept

103. The P/E ratio provides no indication of investors' expectations about the future of a company. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #103 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-03 Valuation Basics from the Income Statement Type: Concept

104. The real value of a firm is the same in an economic and accounting sense. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #104 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

105. A balance sheet represents the assets, liabilities, and shareholders' equity of a company at a given point in time. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #105 Difficulty: Medium Learning Objective: 02-02 Examine the limitations of the income statement as a measure of a firms profitability. Topic: 02-05 Balance Sheet Type: Concept

106. Balance sheet items are usually adjusted for inflation. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #106 Difficulty: Medium Learning Objective: 02-02 Examine the limitations of the income statement as a measure of a firms profitability. Topic: 02-05 Balance Sheet Type: Concept

107. Marketable securities are temporary investments of excess cash and are carried at the lower of cost or market. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #107 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

108. Retained earnings represent the firm's cumulative earnings since inception, minus dividends and other adjustments. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #108 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

109. Cash flow consists of illiquid cash equivalents which are difficult to convert to cash within 90 days. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #109 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-13 Determining Cash Flows from Investing Activities Type: Concept

110. The sale of a firm's securities is a source of funds, whereas the payment of dividends is a use of funds. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #110 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-14 Determining Cash Flows from Financing Activities Type: Concept

111. The use of amortization is an attempt to allocate the past and future cost of an asset over its useful life. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #111 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-16 Amortization and Cash Flow Type: Concept

112. Free cash flow is equal to cash flow from operating activities plus amortization. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #112 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-17 Free Cash Flow Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

113. Free cash flow is equal to cash flow from operating activities minus necessary capital expenditures and normal dividend payments. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #113 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-17 Free Cash Flow Type: Memory

114. Taxes on individuals have traditionally been progressive, meaning that the more taxable income you have, the higher your marginal tax rate. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #114 Difficulty: Easy Learning Objective: 02-07 Identify the different forms of investment income and the effects on investors taxes payable. Topic: 02-21 Personal Taxes Type: Concept

115. The P/E ratio is strongly related to the past performance of the firm. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #115 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-03 Valuation Basics from the Income Statement Type: Concept

116. An increase in assets represents a source of funds. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #116 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-12 Determining Cash Flows from Operating Activities Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

117. Sales less cost of goods sold is equal to earnings before taxes. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #117 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

118. Sales less cost of goods sold is equal to gross profit. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #118 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

119. When a firm has a sharp drop off in earnings, its P/E ratio may be artificially high. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #119 Difficulty: Hard Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-03 Valuation Basics from the Income Statement Type: Concept

120. The investments account does not directly affect cash and cash equivalents. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #120 Difficulty: Hard Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

121. Amortization expense is charged in the income statement. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #121 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

122. An increase in inventory represents a source of funds. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #122 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-12 Determining Cash Flows from Operating Activities Type: Concept

123. The income statement allows analysts and investors to measure a firm's profitability of over a period of a month, quarter or year. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #123 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

124. Earnings available to common shareholders includes potential dividends to be paid to preferred shareholders. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #124 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-02 Return on Capital Type: Concept

Accessibility: Keyboard Navigation Block - Chapter 02 #125 Difficulty: Medium Learning Objective: 02-07 Identify the different forms of investment income and the effects on investors taxes payable. Topic: 02-21 Personal Taxes Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Accessibility: Keyboard Navigation Block - Chapter 02 #126 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-02 Return on Capital Type: Concept

127. Preferred and/or Common Share dividends are added to Cash Flow from Operations in determining Free Cash Flow. FALSE

Accessibility: Keyboard Navigation Block - Chapter 02 #127 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-17 Free Cash Flow Type: Memory

128. The sale of a firm's preferred shares is a source of funds, whereas the payment of preferred dividends is a use of funds. TRUE

Accessibility: Keyboard Navigation Block - Chapter 02 #128 Difficulty: Easy Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-14 Determining Cash Flows from Financing Activities Type: Memory

129. What is an income statement and what is its purpose as it relates to financial management? The income statement • Measures the profitability of a firm over a time period (month, year) • Assists financial decision making and analysis, utilizing past patterns for predicting the timing, uncertainty, and amount of future earnings and cash flows.

Block - Chapter 02 #129 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

130. What is the P/E ratio? Why is it an important ratio? List 3 factors that influence the P/E ratio. The P/E ratio is Market share price/Earnings per share. This ratio allows comparison of the relative market value of many companies on the basis of $1 of earnings per share. Firms expected to provide greater than average future returns often have P/E ratios higher than the market average P/E ratio. As investors' expectations for future returns change, a company's P/E ratio can shift substantially. The price/earnings ratio (P/E ratio) of a firm is influenced by • Earnings and sales growth • Risk (business performance and debt-equity structure) • Dividend payment policy • Quality of management • Many other factors

Block - Chapter 02 #130 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-03 Valuation Basics from the Income Statement Type: Concept

131. In the text, the author said that "Earnings are flexible." What was meant by this? In efforts to meet earnings targets, accountants and managers had resorted to stretching accounting standards beyond their reasonable limits. Earnings can be managed or "manipulated" because professional accounting bodies allow latitude. Accruals, such as allowance for doubtful accounts or warranty expenses, and write-downs of assets (inventories and capital) are by their nature discretionary. Margins can also be managed, by classification of "overhead" as a cost of goods rather than administrative expenses. Management has this discretion due to its experience and the need to make estimates of many of the revenues and expenses that will flow through the firm.

Block - Chapter 02 #131 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Topic: 02-02 Return on Capital Topic: 02-03 Valuation Basics from the Income Statement Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

132. Several theories have been suggested about the factors contributing to the management or "manipulation" of reported earnings. List and explain them. • Bonuses (Compensation is tied to reported earnings.) • Political considerations (High reported earnings attract societal attention.) • Smoothing (Less volatile earnings are viewed favourably by the market.) • Debt covenants (Debt contracts are often based on book value calculations.) • Big bath (New CEOs will look better in the future if assets are written down as they take over, avoiding future amortization charges.)

Block - Chapter 02 #132 Difficulty: Easy Learning Objective: 02-02 Examine the limitations of the income statement as a measure of a firms profitability. Topic: 02-04 Limitations of the Income Statement Type: Concept

133. Explain these terms found on a typical balance sheet. Provide examples of each if applicable. Marketable securities, Accounts receivable, Inventory, Prepaid expenses, Investments, Plant and equipment, Accumulated amortization, Accounts payable, Notes payable, Accrued expense, Shareholders' equity. Marketable securities are temporary investments of excess cash (lower of cost or current market value). Accounts receivable include an allowance for bad debts (based on historical evidence) to suggest their anticipated collection value. Inventory may be in the form of raw material, goods in process, or finished goods. Prepaid expenses represent future expenses that have already been paid (insurance premiums, rent). Investments, unlike marketable securities, are a longer-term commitment of funds, including stocks, bonds, or investments in other corporations (often for acquisition). Plant and equipment is identified as original cost minus accumulated amortization. Accumulated amortization is the sum of all past and present amortization charges on currently owned assets, whereas amortization expense is the current year's charge. Accounts payable represent amounts owed on open account to suppliers. Notes payable are generally short-term signed obligations to the banker or other creditors. Accrued expense is an obligation incurred but payment has not yet occurred (additional wages for services provided and owed workers). Shareholders' equity represents the total contribution and ownership interest of preferred and common shareholders.

Block - Chapter 02 #133 Difficulty: Medium Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-07 Interpretation of Balance Sheet Items Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

134. List and describe the limitations of the balance sheet. The values on the balance sheet are often subject to interpretation or revaluation. •Values are stated on a historical or original cost basis, not market values (some assets may be worth considerably more than their original cost or may require many times the original cost for replacement). • Accounting policy choice, which should be disclosed in the financial notes, will influence the recorded values. • Contingent liabilities omitted from the balance sheet, or items such as intangibles that are included, may have a hard-to-determine influence on economic value. Contingent liabilities should be disclosed in footnotes on the balance sheet, alerting us to their possible impact.

Block - Chapter 02 #134 Difficulty: Medium Learning Objective: 02-03 Examine the limitations of the balance sheet as a measure of a firms financial position. Topic: 02-09 Limitations of the Balance Sheet Type: Memory

135. What is a cash flow statement? What information can it provide? Why is a cash flow statement important to small business? The cash flow statement reports changes in cash and cash equivalents (rather than working capital) resulting from the activities of the firm during a given period. For many internal and external users of a firm's financial information, cash flow information is critical. The cash flow statement allows an analyst to identify • Cash flow generated from the firm's assets • Financial obligations (interest and dividends) • Commitment to new assets The statement of cash flows can highlight • The relative build up in short-term and long-term assets • The means of financing used to support any growth in the firm's asset base • The appropriateness and the future implications of the financing used The cash flow statements for the small business are particularly important, as cash flow is more relevant to the firm's short-term survival than its reported income. One is likely to be concerned about the quality, timing, and amount of earnings, and hence the firm's ability to acquire assets and meet its obligations. In the very competitive corporate environment of today exacting cash flow analysis is essential for a firm's survival.

Block - Chapter 02 #135 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-10 Statement of Cash Flows Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

136. List the 3 primary sections on the cash flow statement. These sections are: 1. Operating activities 2. Investing activities 3. Financing activities

Block - Chapter 02 #136 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-10 Statement of Cash Flows Type: Concept Type: Memory

137. Describe and briefly explain the steps used in the indirect method to compute cash flows from typical operating activities of a company. We follow these procedures to compute cash flows from operating activities using the indirect method. • Start with net income. • Recognize that noncash deductions in computing net income should be added back to net income to increase the cash balance. These include such items as amortization, deferred income taxes, restructuring charges, and foreign exchange losses. This produces cash flow from operations. • Next identify changes in noncash working capital. • Recognize that increases in current assets are a use of funds and reduce the cash balance (indirectly)—as an example, the firm spends more funds on inventory. • Recognize that decreases in current assets are a source of funds and increase the cash balance (indirectly)— that is, the firm reduces funds tied up in inventory. • Recognize that increases in current liabilities are a source of funds and increase the cash balance (indirectly)—that is, the firm gets more funds from creditors. • Recognize that decreases in current liabilities are a use of funds and decrease the cash balance (indirectly)— that is, the firm pays off creditors.

Block - Chapter 02 #137 Difficulty: Hard Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-12 Determining Cash Flows from Operating Activities Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

138. Define free cash flow. Explain what it is equal to and why it is important a finance manager needs to know the value of free cash flow. Free cash flow is equal to: Cash flow from operating activities Minus: Capital expenditures (required to maintain the productive capacity of the firm) Minus: Dividends (needed to maintain the necessary payout on common stock and to cover any preferred stock obligation) The concept of free cash flow forces the stock analyst or banker not only to consider how much cash is generated from operating activities, but also to subtract out the necessary capital expenditures on plant and equipment to maintain normal activities. Similarly, dividend payments to shareholders must be subtracted out, as these dividends must generally be paid to keep shareholders satisfied. The balance, free cash flow, is then available for special financial activities. In the last decade, special financing activities have often been synonymous with leveraged buyouts, in which a firm borrows money to buy its stock and take itself private with the hope of restructuring its balance sheet and perhaps going public again in a few years at a higher price than it paid. The analyst or banker normally looks at free cash flow to determine whether there are sufficient excess funds to pay back loans associated with special financial activities.

Block - Chapter 02 #138 Difficulty: Hard Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-17 Free Cash Flow Type: Concept

139. What causes the after tax cash flow to the individuals to vary? The after tax cash flow to the individual varies depending on whether investment income is in the form of interest, dividends, or capital gain. (Highest to lowest marginal tax rate.)

Block - Chapter 02 #139 Difficulty: Easy Learning Objective: 02-07 Identify the different forms of investment income and the effects on investors taxes payable. Topic: 02-21 Personal Taxes Type: Memory

140. What is a tax savings? A tax savings is the reduction of taxes otherwise payable as a result of an allowable deduction of an expense from taxable income.

Block - Chapter 02 #140 Difficulty: Easy Learning Objective: 02-07 Identify the different forms of investment income and the effects on investors taxes payable. Topic: 02-21 Personal Taxes Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

141. Valley Home Improvements (VHI) earned $350,000 after taxes in its most recent fiscal year. If VHI's Board of Directors declared a total of $45,000 in preferred dividends what would be the total amount available to pay common shareholders? Earnings Available to Common Shareholders (EAT) = Earnings After Taxes - Preferred Dividends EAT = $350,000 - $45,000 = $305,000

Block - Chapter 02 #141 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-01 Income Statement Type: Memory

P/E = 2 times For every $1 earned by TBF you would be paying $2 in price.

Block - Chapter 02 #142 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-03 Valuation Basics from the Income Statement Type: Memory

143. Jane is considering an investment in Fauna Flowers (FF). FF is trading at $33 a share. It the company's current dividend is $1.50 a share, what is FF's dividend yield?

Dividend Yield = ($1.50/$33) × 100 = 4.55%

Block - Chapter 02 #143 Difficulty: Easy Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Topic: 02-03 Valuation Basics from the Income Statement Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Before Tax Interest Expense = $846,154

Block - Chapter 02 #144 Difficulty: Medium Learning Objective: 02-08 Explain the concept of tax savings for companies. Topic: 02-22 Cost of a Tax-Deductible Expense Type: Concept

BV per Share = $265,000/37,000 = $7.16

Block - Chapter 02 #145 Difficulty: Easy Learning Objective: 02-05 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis. Topic: 02-08 Valuation Basics from the Balance Sheet Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

146. The following is the December 31, 2014 balance sheet for the Epics Corporation.

Block - Chapter 02 #146 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Learning Objective: 02-08 Explain the concept of tax savings for companies. Topic: 02-01 Income Statement Topic: 02-02 Return on Capital Topic: 02-03 Valuation Basics from the Income Statement Topic: 02-22 Cost of a Tax-Deductible Expense Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

C) The 2015 value for retained earnings would decrease by $100,000. In addition, assets would have to decrease by $100,000 or other liabilities would have to increase by the same amount.

Foundations of Financial Management - 10th Canadian Edition by Block Block - Chapter 02 #147 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-01 Income Statement Topic: 02-02 Return on Capital Topic: 02-03 Valuation Basics from the Income Statement Topic: 02-11 Developing an Actual Statement Topic: 02-12 Determining Cash Flows from Operating Activities Topic: 02-13 Determining Cash Flows from Investing Activities Topic: 02-14 Determining Cash Flows from Financing Activities Topic: 02-15 Combining the Three Sections of the Statement Type: Concept

148. Calculate the tax bill for a corporation that earned $250,000 in 2015 in Manitoba as a manufacturer.

Block - Chapter 02 #148 Difficulty: Medium Learning Objective: 02-06 Outline the effect of corporate tax considerations on aftertax cash flow. Topic: 02-19 Corporate Tax Rates Type: Concept

Block - Chapter 02 #149 Difficulty: Medium Learning Objective: 02-06 Outline the effect of corporate tax considerations on aftertax cash flow. Topic: 02-20 Effective Tax Rate Examples Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Block - Chapter 02 #150 Difficulty: Medium Learning Objective: 02-01 Prepare and analyze the four basic financial statements. Learning Objective: 02-06 Outline the effect of corporate tax considerations on aftertax cash flow. Topic: 02-01 Income Statement Topic: 02-02 Return on Capital Topic: 02-03 Valuation Basics from the Income Statement Topic: 02-20 Effective Tax Rate Examples Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Foundations of Financial Management - 10th Canadian Edition by Block Block - Chapter 02 #151 Difficulty: Medium Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows. Topic: 02-11 Developing an Actual Statement Topic: 02-12 Determining Cash Flows from Operating Activities Topic: 02-13 Determining Cash Flows from Investing Activities Topic: 02-14 Determining Cash Flows from Financing Activities Topic: 02-15 Combining the Three Sections of the Statement Type: Concept

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 02 Summary Category

# of Questions

Accessibility: Keyboard Navigation

127

Block - Chapter 02

151

Difficulty: Easy

Difficulty: Hard

Difficulty: Medium

Learning Objective: 02-01 Prepare and analyze the four basic financial statements.

Learning Objective: 02-02 Examine the limitations of the income statement as a measure of a firms profitability.

Learning Objective: 02-03 Examine the limitations of the balance sheet as a measure of a firms financial position.

Learning Objective: 02-04 Explain the importance of cash flows as identified in the statement of cash flows.

Learning Objective: 0205 Explain and include the effects of IFRS (International Financial Reporting Standards) on financial analysis.

Learning Objective: 02-06 Outline the effect of corporate tax considerations on aftertax cash flow.

Learning Objective: 02-07 Identify the different forms of investment income and the effects on investors taxes payable.

Learning Objective: 02-08 Explain the concept of tax savings for companies.

Topic: 02-01 Income Statement

Topic: 02-02 Return on Capital

Topic: 02-03 Valuation Basics from the Income Statement

Topic: 02-04 Limitations of the Income Statement

Topic: 02-05 Balance Sheet

Topic: 02-06 Effects of IFRS on Financial Analysis

Topic: 02-07 Interpretation of Balance Sheet Items

Topic: 02-08 Valuation Basics from the Balance Sheet

Topic: 02-09 Limitations of the Balance Sheet

Topic: 02-10 Statement of Cash Flows

Topic: 02-11 Developing an Actual Statement

Topic: 02-12 Determining Cash Flows from Operating Activities

Topic: 02-13 Determining Cash Flows from Investing Activities

Topic: 02-14 Determining Cash Flows from Financing Activities

Topic: 02-15 Combining the Three Sections of the Statement

Topic: 02-16 Amortization and Cash Flow

Topic: 02-17 Free Cash Flow

Topic: 02-19 Corporate Tax Rates

Topic: 02-20 Effective Tax Rate Examples

Topic: 02-21 Personal Taxes

Topic: 02-22 Cost of a Tax-Deductible Expense

Topic: 02-23 Amortization (Capital Cost Allowance) as a Tax Shield

Type: Concept

121

Type: Memory

Foundations of Financial Management - 10th Canadian Edition by Block

Chapter 03 1. Ratio analysis is not useful for: A. historical trend analysis within a firm. B. comparison of ratios within a single industry. C. measuring the effects of financing. D. measuring employee satisfaction.

2. Industries most sensitive to inflation-induced profits are those with: A. seasonal products. B. cyclical products. C. consumer products. D. high-profit products.

3. The ______________ method of inventory costing is most likely to lead to inflation-induced profits. A. FIFO B. Specific item C. Weighted average D. Lower of cost or market

4. In addition to comparison with industry ratios, it is also helpful to analyze ratios using: A. ethical behaviour. B. comparison of industry benchmarks. C. focus groups. D. trend analysis.

5. In examining the liquidity ratios, the primary emphasis is the firm's: A. ability to effectively employ its resources. B. overall debt position. C. ability to pay short-term obligations on time. D. ability to earn an adequate return.

Foundations of Financial Management - 10th Canadian Edition by Block

6. Which of the following is not an asset utilization ratio? A. Inventory turnover B. Return on assets C. Capital asset turnover D. Average collection period

7. Which two ratios are used in the DuPont system to create return on assets? A. Return on assets and asset turnover B. Profit margin and asset turnover C. Return on total capital and the profit margin D. Inventory turnover and return on capital assets

8. Total asset turnover indicates the firm's: A. liquidity. B. debt position. C. ability to use its assets to generate sales. D. profitability.

9. A short-term creditor would be most interested in: A. profitability ratios. B. asset utilization ratios. C. liquidity ratios. D. debt utilization ratios.

10. If a firm has both interest expense and lease payments: A. times interest earned will be smaller than fixed charge coverage. B. times interest earned will be greater than fixed charge coverage. C. times interest earned will be the same as fixed charge coverage. D. fixed charge coverage cannot be computed.

11. ABC Co. has an average collection period of 60 days. Total credit sales for the year were $3,285,000. What is the balance in accounts receivable at year-end? (Use 365 days in a year.) A. $54,750 B. $109,500 C. $540,000 D. $547,500

Foundations of Financial Management - 10th Canadian Edition by Block

12. A firm has operating profit of $120,000 after deducting lease payments of $20,000. Interest expense is $40,000. What is the firm's fixed charge coverage? A. 6.00x B. 4.00x C. 3.50x D. 2.33x

13. A firm has current assets of $75,000 and total assets of $375,000. The firm's sales are $900,000. The firm's capital asset turnover is: A. 3.0x. B. 12.0x. C. 2.4x. D. 5.0x.

14. Asset utilization ratios: A. relate the balance sheet assets to the income statement sales. B. measure how much cash is available for reinvestment into current assets. C. are most important to shareholders. D. measures the firm's ability to generate a profit on sales.

15. Which of the following is a potential problem of utilizing ratio analysis? A. Trends and industry averages are futuristic in nature B. Financial data is identical due to price-level changes C. Firms within an industry use similar accounting principles and application D. Firms within an industry may not use similar accounting methods

16. Replacement cost accounting (current cost method) will usually: A. increase assets, decrease net income before taxes, and lower the return on equity. B. increase assets, increase net income before taxes, and increase the return on equity. C. decrease assets, increase net income before taxes, and increase the return on equity. D. increase assets, increase net income before taxes, and lower the return on equity.

17. Income can be distorted by factors other than inflation. The most important causes of distortion for interindustry comparisons are: A. accounting trends. B. application of IFRS. C. timing of revenue receipts and nonrecurring gains or losses. D. cash reinvestment.

Foundations of Financial Management - 10th Canadian Edition by Block

18. Disinflation may cause: A. an increase in the value of gold, silver, and gems. B. a reduced required return demanded by investors on financial assets. C. increased return demanded by investors on non-financial assets. D. additional profits through rising inventory costs.

19. A quick ratio much smaller than the current ratio reflects: A. a small portion of current assets is in inventory. B. a large portion of current assets is in inventory. C. that the firm will have a high inventory turnover. D. that the firm will have a high return on assets.

20. During inflation, replacement cost accounting will: A. decrease the value of assets. B. raise the debt to asset ratio. C. increase incomes. D. reduce incomes.

21. A firm's long term assets = $75,000, total assets = $200,000, inventory = $25,000 and current liabilities = $50,000. Calculate the current ratio and quick ratio. A. Current ratio = 0.5; Quick ratio = 1.5 B. Current ratio = 1.0; Quick ratio = 2.0 C. Current ratio = 1.5; Quick ratio = 2.0 D. Current ratio = 2.5; Quick ratio = 2.0

22. The Bubba Corp. had net income before taxes of $200,000 and sales of $2,000,000. If it is in the 50% tax bracket its after tax profit margin is: A. 5% B. 12% C. 20% D. 25%

23. XYZ's receivables turnover is 10x. The accounts receivable at year-end are $600,000. What was the sales figure for the year? A. $60,000 B. $6,000,000 C. $7,200,000 D. $6,600,000

Foundations of Financial Management - 10th Canadian Edition by Block

24. A firm has total assets of $2,000,000. It has $900,000 in long-term debt. The shareholders' equity is $900,000. What is the total debt to asset ratio? A. 45% B. 40% C. 55% D. 100%

25. A firm has a debt to equity ratio of 50%, debt of $300,000, and net income of $90,000. The return on equity is: A. 60% B. 15% C. 30% D. not enough information.

26. A firm has a debt to asset ratio of 75%, $240,000 in debt, and net income of $48,000. Calculate return on equity. A. 60% B. 20% C. 26% D. Not enough information

27. If government bonds pay 8.5% interest and CDIC insured savings accounts pay 5.5% interest, shareholders in a moderately risky firm would expect return-on-equity values of: A. 5.5%. B. 8.5%. C. 12.0%. D. above 8.5%, but the exact amount is uncertain.

28. The most rigorous test of a firm's ability to pay its short-term obligations is its: A. current ratio. B. quick ratio. C. debt-to-assets ratio. D. times-interest-earned ratio.

Foundations of Financial Management - 10th Canadian Edition by Block

29. Investors and financial analysts wanting to evaluate the operating efficiency of a firm's, managers would probably look primarily at the firm's: A. debt utilization ratios. B. liquidity ratios. C. asset utilization ratios. D. profitability ratios.

30. The higher a firm's debt utilization ratios, excluding debt-to-total assets, the: A. less risky the firm's financial position. B. more risky the firm's financial position. C. more easily the firm will be able to pay dividends. D. less easily the firm will be able to pay dividends.

31. For a given level of profitability as measured by profit margin, the firm's return on equity will: A. increase as its debt-to-assets ratio decreases. B. decrease as its current ratio increases. C. increase as its debt-to assets ratio increases. D. decrease as its times-interest-earned ratio decreases.

32. Which of the following is not considered to be a profitability ratio? A. Profit margin B. Times interest earned C. Return on equity D. Return on assets (investment)

33. Which industry places the most value on intangible assets? A. Professional services B. Manufacturing industry C. Production facility D. Assembly facility