Examining the issue of accounting methods

Examining the issue of accounting methods/Finance Basics

1. Monitoring is done by:

a. shareholders.

b the Board of Directors.

c independent accountants.

d all of the above.

2. A post-audit will

a. identify the problem that needs to be fixed.

b. check the accuracy of the cash flow forecasts.

c. suggest questions that should have been asked before.

d. do all of the above.

3. Generally, all other things being the same, firms with high levels of intangible assets tend to report.

a. higher than actual ROI.

b lower than actual ROI.

c actual ROI.

d none of the above.

4. Goodwill from the purchase of another firm is

a. not an amortized expense.

b. not tax deductible.

c. not to be expensed for financial reporting purposes.

d any of the above.

none of the above.

5. Concerning accounting treatment of mergers, which of the following statements is correct?

a. With the pooling method, the amount paid in excess of book value is added to the capital surplus account.

b. Taxes will generally be higher if the purchase method is used.

c. Firms may prefer the purchase method in order to deduct goodwill for tax purposes.

d. Firms may prefer the pooling method in order to “write up” the acquired firm’s assets.

e. None of the above statements are correct.

6. In examining the issue of whether the choice of accounting methods affects stock prices, studies have found that

a. accounting depreciation methods can affect stock prices significantly.

b. switching depreciation methods can affect stock prices significantly.

c. accounting changes that increase accounting earnings also increase stock prices.

d. accounting changes can affect stock prices if the company either withholds information or provides incorrect information.

e. all of the above are true.

7. Financial economists prefer to use market values when measuring debt ratios because

a. Market values are more stable than book values.

b. Market values are a better reflection of current value than historical value.

c. Market values are readily available and do not have to be calculated like book values.

d. Market values are more difficult to calculate, making financial economists more valuable.

e. none of the above reasons.

8. For large firms, capital investment involves which of the following steps?

a. Process

b. Information

c. Incentives

d. Measuring performance

e. All of the above

9. In a graph depicting stock price changes over time in reaction to announcements providing new information, three possible patterns exist. In a “bubble” pattern there is a sharp increase at announcement followed by a gradual increase followed by a gradual decrease. In an “early response” pattern a gradual increase in price occurs before the announcement. In the “delayed response” pattern there is a slow or late increase in price after the announcement, then a strong movement to the equilibrium price followed by no additional change in price from that announcement. Which of these patterns would be indicative of inefficient markets?

a. Bubble

b. Delayed

c Early

d All of the above

e None of the above

10. The stock market crash of October 1987 and the Great Crash of 1929, although not fully explained, may be (partially) explained by

a. new information coming to the market; being efficient, the market was priced down.

b. technical difficulties in order processing.

c. the bubble theory, which states that prices move wildly above equilibrium values and eventually fall back to equilibrium, causing large losses.

d. the conspiracy theory that large institutions and rich investors control the market and caused the general population to suffer large wealth losses.

e. none of the above.

11. An annuity

a. is a series of equal payments through time.

b. is a debt instrument that pays no interest.

c. has no value.

d. is a stream of payments that varies with current market interest.

12. The time value of money concept can be defined as

a. the time in your life when you receive an inheritance.

b. the relationship between money spent versus money received.

c. the relationship between a dollar to be received in the future and a dollar today.

d. the relationship of interest rate stated and amount paid.

e. none of the above.

13. An important reason for acquisitions is that the combined firm may generate greater revenue than the two separate firms could. Examples of revenue enhancement would not include

a. an elimination of a previously ineffective media effort.

b. an elimination of a previously ineffective advertising effort.

c. an elimination of a weak existing distribution effort.

d. economies of scale.

e. All of the above would be examples of revenue enhancement.

14. The financial aspect of strategic planning involves

a. identifying businesses in which the firm has a competitive advantage for possible acquisition.

b. identifying businesses to sell or liquidate.

c. identifying declining businesses that should be allowed to run down

d. all of the above

15. Your company has decided to expand its business and open a regional branch office in the Midwest. You have been directed to research and recommend three possible cities in which to locate the new regional branch. Which of the following criteria will be important for you to include in your recommendation?

a. The socioeconomic makeup of the communities within 20 miles of the new location

b. The unemployment rate in the area within a 30-minute drive from the new location

c. The cost per square foot for newly developed industrial and office space within 3 miles of the new location

d. The number of colleges and universities within 10 miles of the new location

e. All of the above

16. What is the best primary source of financial data for conducting initial due diligence on a public company that you may have an interest in acquiring?

a. The Delaware Secretary of State

b. The United States Federal Trade Commission

c. The industry’s trade association

d. The United States Securities Exchange Commission

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