San Jose City College Business 82 REVIEW Chapters 6-10 (101-193Q)
The following questions were pulled from the test bank to provide a basis for preparation for a midterm exam. DO NOT MEMORIZE these questions as the exam will ask different questions about the same material. After you have researched each of the questions, bring any issues to class for discussion.
____ 101. Bennys Bumpers is incorporated in Ohio but also conducts business in Florida. Bennys Bumpers is a _______ in Ohio but is a _________ in Florida.
C corporation, S corporation
primary corporation, secondary corporation
domestic corporation, foreign corporation
____ 102. Suzanne Limley was just elected to the board of directors at United Bank Corporation. As a board member, she is expected to represent the interests of
senior bank management.
____ 103. Mikes Motorcycles, Inc., has just incorporated the business in Delaware. John Littleton, a partner, now becomes a
____ 104. You are in a group of investors that is considering taking over Sips and Chips, the cybercafe in town. Several
investors favor reorganizing the cafe by forming a C corporation. You want to make sure these investors are
aware of the possible drawbacks of this form of ownership, so you point out that
a) this type of business lacks permanence.
b) earnings that the investors receive would be taxed both as corporate income and as income
to the investors.
c) all of the investors would be subject to unlimited liability for any debts the firm incurs.
d) all of the items in this list would be legitimate drawbacks of forming a C corporation.
____ 105. Recently, several well-known large companies such as Home Depot, Inc., and Time Warner, Inc., have been
criticized for paying CEOs exorbitant salaries and bonuses even when the corporations they lead have lost
value. This is considered a failure on the part of the __________ of these firms to protect the rights of the
___________ who elected them.
boards of directors, creditors
boards of directors, stockholders
top management, employees
audit committee, partners
____ 106. ___________ are clauses in senior management contracts that can compensate executives with millions of dollars in severance pay.
____ 107. Like a statutory close corporation, a limited liability company (LLC)
files articles of incorporation outlining operational and organizational levels.
is not required to elect a board of directors or hold annual stockholders meetings.
follows the same state laws that C corporations follow.
has no more than 50 shareholders.
____ 108. Elaine and several friends want to start a business. They like the idea of limited liability. However, they want to keep their organization simple and avoid the need to have formal meetings. Each member of the group wants to actively participate in managing the business and share in any profits. Which of the following forms
of business ownership would best satisfy the goals of Elaine and her friends?
statutory close corporation.
____ 109. To increase production capacity and provide consumers with market stability, Exxon and Mobil created
ExxonMobil. This would be an example of a _______ merger.
____ 110. In 1988, Philip Morris, the leading cigarette manufacturer in the United States, merged with Kraft, Inc., the
maker of several leading food brands, such as Miracle Whip, Velveeta, and Maxwell House. This
combination would be classified as a _________ merger.
____ 111. Tim, Bill, and Mel want to start a rehabbing business. All of them want to take an active role in managing
their company while also protecting their personal assets from unlimited liability. They are likely to find that
forming a ______________ will meet their needs.
limited liability company
____ 112. Compared to C corporations, an advantage of an LLC is that
a) C corporations must file paperwork with the state when they are formed, while no
paperwork needs to be filed to form an LLC.
b) C corporations are limited to no more than 100 owners, while LLCs can have an unlimited
number of owners.
c) earnings of C corporations that are distributed to owners are subject to double taxation, but
the earnings of LLCs pass through the company and are taxed only as personal income.
d) LLCs are classified as domestic firms in all of the states where they operate, while
corporations are classified as foreign business entities in states other than the one in
which they are incorporated.
____ 113. In a typical business format franchise, the franchisor
pays royalties and fees to the franchisees.
provides the franchisees with management training and support.
allows franchisees to operate loosely, as long as they are profitable.
owns all of the franchise outlets but leases them to the franchisees.
____ 114. Successful franchisors are particularly vigilant in avoiding the ______________, a situation where the
behavior of an incompetent or irresponsible franchisee harms the reputation of the franchisor and other
negative halo effect
____ 115. Jacob currently works as a manager at a major corporation but has been thinking about quitting to start his
own business. Which of the following reasons would most likely explain Jacobs interest in making this major
He wants a job with fewer responsibilities.
He wants more benefits and a steadier income.
He doesnt like the risk associated with working in the corporate environment.
He wants to have more independence and flexibility than his corporate position allows.
____ 116. Michael Peters is a middle-aged professional who lost his job five months ago when his former employer
downsized. Hes been actively looking for work at all of the nearby companies, but he hasnt been able to find
a job that truly uses his talents or abilitiesor that offers an income anywhere close to what he earned in his
previous position. He is beginning to feel that the only way to survive in his current situation is to start his
own business. Michael might well become a(n)
____ 117. Greg has developed an automobile engine that runs efficiently for up to three hours on a single russet potato.
His friends have pointed out how difficult it will be to get car manufacturers to adopt his new technology and
that it could take years to get enough service stations to stock potatoes to make it practical for people to rely
on the new energy source for long trips. But Greg is convinced he can make the U.S. economy energy
independent, thus changing the world. He plans to create a new business called Spuds-to-Go to promote his
new engine. Greg has
an external locus of control.
strong strategic planning skills.
____ 118. Which of the following questions would an entrepreneur be most likely to ask in the aftermath of a business
Why did I ever think Id be good at running a business on my own?
When will other people start recognizing my talents and abilities?
What can I learn from this experience that will help me be more successful in the future?
When will this string of bad luck end?
____ 119. Cal is thinking about starting a small business and is trying to access the potential opportunities and threats
associated with a new start-up. Hes talked with friends and associates about his plans, and several have
offered him opinions and advice. The comments of four friends are summarized below. Which of these
statements would probably be the most helpful to Cal?
a) You are likely to face some lean months at first, so manage your money carefully. Avoid
the temptation to make splashy purchases.
b) One advantage of operating a small business is the fact that you dont have to worry very
much about government regulation.
c) Focus on the domestic market. There is no practical way for you to compete effectively
against big businesses in foreign markets.
d) Aim your efforts at the broadest possible market segments. Those are the ones that offer
you the greatest potential to make profits quickly.
____ 120. Sal is thinking about starting a small business and is trying to access the potential opportunities and threats
associated with a new start-up. Shes talked with friends and associates about her plans, and several have
offered her opinions and advice. The comments of four friends are summarized below. Which of these
statements would probably be the most helpful to Sal?
a) Since your company will be small and new, its important to impress your customers.
Spend a lot of money on upscale offices and state-of-the-art equipment to create a
b) Dont worry about your lack of business experience and limited business skills.
Entrepreneurs can make up for a lack of skills with enthusiasm and hard work.
c) Hang in there. If a business is going to fail, it almost always happens in the first year. If
you can stick it out for more than a year, youll be on your way to success.
d) Find a market segment that you can profitably serve but which is too small to attract larger
____ 121. Dana is thinking about starting her own graphics design business but is keenly aware of the fact that she lacks
much business experience. A friend has suggested that she consider going to work for someone else in the
same type of business before going out on her own. This advice is
a) usually a bad idea. Working for someone else tends to stifle creativity.
b) often a good idea because it allows you to learn the ins and outs of running that type of
business with little personal risk. But keep in mind that if you work for someone else too
long you might get too comfortable in your position to follow through with your plans.
c) almost always an excellent idea. Most studies suggest that the vast majority of successful
small business owners worked for at least 10 years for someone else before they launched
their own company.
d) sometimes a good idea, but more often its a waste of time. Most small businesses are so
simple to manage that prior experience isnt really necessary.
____ 122. Barnie has been a very successful sales rep for a big corporation and has managed to save up a large sum of
money. Hes tired of working for the big company and is wondering if he should sink his savings into a new
business. He is willing to work hard and has very good people skills. But he hasnt been able to develop a
good business concept from scratch. He also realizes that he doesnt have strong financial skills and might
need some training and assistance in this area. Someone like Barnie
is unlikely to find a small business opportunity that suits his needs.
is likely to find franchising an attractive option.
would find that starting a business from scratch is the best way to go.
obviously needs to develop a stronger external locus of control before leaving his
____ 123. Sheila loves taking care of animals and has thought about starting her own pet grooming business. However,
she doesnt know much about the growth potential for this type of business or the amount of competition she
would face. She also wants to find out if there are any government regulations she would need to deal with.
She should be able to find answers to many of her questions by contacting the
American Association of Entrepreneurs.
Federal Trade Commission.
Small Business Administration.
local chapter of the federal governments Entrepreneurial Advisory Board.
____ 124. Barry and Inga recently founded a hot new company that is growing rapidly. They need more money to
finance their companys growth and have been approached by a venture capital firm. Barry and Inga should
realize that the venture capital firm will only provide financing
if they agree to avoid any risky investments.
after they have paid off all of the personal debt they incurred to start their company.
in exchange for a significant stake in their firms ownership.
if they agree to pledge specific company assets as collateral to back the loan.
____ 125. Cynthia is a successful business woman who has amassed a large amount of money by investing in companies
with the potential for rapid growth. These companies are either later sold to other investors or the companies
offer stock to the public. While she is excited about the possibility of helping these businesses grow, her
primary motivation is to make money for herself. Cynthia seems to match the profile of a(n):
____ 126. Senator Taxmoore wants to help revitalize inner cities and stimulate more innovation. He could achieve both
of these goals by supporting legislation that would
encourage the formation of small businesses.
make it illegal for firms to outsource jobs.
increase government benefits for those that are unemployed.
call for greater government ownership of factories located in inner cities.
____ 127. Senator Foghorne is running for re-election. One of his political proposals is the enactment of new legislation
that will provide American workers who are laid off with much higher unemployment compensation and will
guarantee those benefits for a full year. If enacted, Senator Foghornes proposal is likely to
lower tax rates on small businesses.
have a negative impact on entrepreneurship rates.
encourage more people to start new businesses.
reduce the federal deficit.
____ 128. Tiny Timber Tree Farms applied to United Bank for a business loan. Which financial statements would the
loan officer of the bank be most likely to request?
a) Balance sheets, income statements, and cash flow statements.
b) Journals, ledgers, and trial balances.
c) Total debits and total credits.
d) The prospectus, statement of retained earnings, and total liability statement.
____ 129. Samantha is an accounting major who has been disturbed by all of the recent accounting scandals. She has
decided to dedicate her career to catching those involved in embezzlement, securities fraud, money
laundering, and other white collar crimes. One way Samantha could achieve this would be to seek training as
____ 130. Recent calls to reform GAAP have focused on the need for the FASB to
a) eliminate the necessity for standardization so that small businesses and big businesses will
account for earnings in significantly different ways.
b) give firms more flexibility in their accounting procedures so that they can present their
earnings in the most meaningful way.
c) allow CPA firms a greater role in advising the firms that they audit.
d) make it more difficult for firms to manipulate results, thus making it easier for investors to
compare financial results of different firms.
____ 131. The accounting equation shows us that the value of the firms assets must equal the value of the firms
earnings at a point in time.
revenues minus expenses.
financing provided by owners and creditors.
____ 132. Lottadoes liabilities are $130,000, and its owners equity is $170,000. This means that Lottadoes
total assets are $300,000.
net income is $40,000.
net income for the current year was $300,000.
net cash flow for the current year was $40,000.
____ 133. Which of the following statements is the rationale for the accounting equation?
What the firm owns minus what it owes creditors equals what it is worth to its owners.
A firm is worth its equity minus its assets.
The firms profit is equal to its revenue minus its expenses.
Assets must equal earnings minus expenses.
____ 134. As represented on the balance sheet, a firm has two sources of funds: the firms
assets and liabilities.
liabilities and the owners equity.
assets and owners equity.
assets and earnings.
____ 135. Sabiha is the small business loan officer at Regional National Bank. It is her job to approve loans for small
businesses so that the local economy will grow. One factor she looks at carefully when making loan decisions
is the amount of debt the firm already has outstanding. She can find this information by looking at the firms
statement of cash flows.
____ 136. A business has two sources of funds: the owners and the non-owners. The financing provided by owners is
represented on the balance sheet as ____________, and the financing provided by non-owners is represented
on the balance sheet as ___________.
liabilities; retained earnings
owners equity; liabilities
____ 137. A firms current liabilities
a) are what it owes to its shareholders.
b) are due in less than a year.
c) do not have to be repaid on any specific date. Instead, repayment can be deferred as long
as the firm is willing and able to make the required interest payments.
d) must equal its current assets.
____ 138. A firms cost of goods sold is subtracted from the ________________ on the ___________________ in order
to compute the firms ____________________.
total assets; balance sheet; net worth
revenue; statement of cash flows; cash balance
revenue; income statement; gross profit
liabilities; balance sheet; total profit
____ 139. Mason owns stock in Munnymacher Inc. and wants to see if he can identify any trends in its financial
performance over the past few years. This suggests he would want to perform a(n)
a) incremental analysis.
b) horizontal analysis.
c) vertical analysis.
d) elasticity analysis.
____ 140. Radcliffe McCoy is the financial manager for his company. He is comparing income statements from the past
three years to see the trend (if any) in cost of goods sold and other expenses. He is using
____ 141. Small business owner Barry Shain has always paid all of his current bills on time. However, this year he has
more bills coming due than normal. Which type of ratio would help him evaluate whether he is likely to have
enough cash to continue meeting his obligations over the next year?
____ 142. By calculating a ____________, Paul Pezzelle determined that his firm was financed by debt and equity at a
ratio of 1:1 (50 percent with debt and 50 percent with equity).
____ 143. Tiny Timber Tree Farms has decided to adopt activity-based costing. One likely reason the firms accountants
decided on this approach was to
provide a more meaningful way to assign overhead costs to specific products.
simplify the process of assigning costs to specific products.
base costing on the amount of direct labor used to produce each product.
move from a system that focuses on assigning costs to goods and services to a system that
assigns costs to activities.
____ 144. Arvids Moving and Storage has a fleet of 37 trucks. Arvid currently has two of his own mechanics who
perform all of the routine maintenance as well as other minor repairs on all of the trucks. However, he
wonders whether outsourcing this work would be more cost-effective and asks his accountant to work with
two managers to analyze such a change. Which of the following types of analysis would the accountant be
most likely to use?
____ 145. Pierres Gourmet Foods produces high-quality desserts and appetizers that are distributed by upscale grocery
stores. When assigning production costs to its various food products, the costs of ingredients used to make a
product are ____________, the cost of the workers who prepare the product are _______________, and the
cost of the rent and insurance on the building are ________________.
direct costs, derived costs, fixed costs
tax-exempt costs, taxable costs, depreciable expenses
fixed costs, proportional costs, capital costs
direct materials costs, direct labor costs, overhead costs
____ 146. Desmond owns a restaurant and is considering buying his desserts from a local bakery rather than continuing
to hire a pastry chef for this purpose. When he performs an incremental analysis, which of the following
would be considered an incremental cost?
a) The utilities, including the oven costs that are shared with the other chefs, during regular
hours of operation.
b) The pastry chefs wages.
c) The head chef and salad chefs wages.
d) The insurance on the restaurants building and equipment.
____ 147. Preparing a good budget is beneficial because
a) it fosters better communication and coordination among members of various departments
with direct responsibility for producing products and services.
b) it provides direction through the identification of goals and plans of action.
c) it provides an effective way to monitor progress.
d) All of these statements are benefits of budgeting.
____ 148. As a financial manager for his firm, Martin Meyer is worried about possible cash shortages his firm might
face over the next few months. The ____________ budget would help him identify periods when cash might
be very tight.
____ 149. Sally Meadows works for Swictek Industries. Her primary responsibilities involve management of the firms
working capital and the analysis of long-term investment opportunities for Swictek. Sallys job is in the area
____ 150. At Chips and Dips, a local convenience market, an increase in the inventory turnover ratio would indicate that
at risk of holding too much inventory.
selling its stock of merchandise more quickly.
relying heavily on credit sales.
more likely to face a cash flow problem.
____ 151. At Sips and Chips, a local cybercafe, a financial manager has calculated the debt to equity ratio and
discovered it is equal to one. This means that Sips and Chips
relies exclusively on debt financing to meet its long-term financing needs.
is at risk of being unable to pay its short-term debts when they come due.
is relying on equal amounts of debt and equity financing.
has an equal amount of current assets and current liabilities.
____ 152. At Sips and Chips, the local cybercafe, management is measuring the profit earned on each dollar invested by
the stockholders. Managers are measuring the firms
degree of financial leverage.
earnings per share.
return on assets.
return on equity.
____ 153. Snow International, a ski company in the Midwest of the United States, has 500 shares of outstanding
common stock and has not issued any preferred stock. Net income is $27,500. What would be the earnings per
$27,500/500 = $55
500/$27,500 = $.018
$27,500 ? 500 = $13,750,000
$27,500 – 500 = $27,000
____ 154. Two firms in the same industry are the same size and have very similar real-world financial results. The
profitability ratios of these firms
a) should be very similar because both firms must use exactly the same mathematical
formulas to calculate their ratios.
b) could be quite different if they use different GAAP-approved methods to construct their
c) could be very different because ratios are based on projections of future performance
rather than on actual real-world performance.
d) should be identical because GAAP requires all firms in the same industry to use the same
accounting methods to construct their financial statements and compute their key financial
____ 155. Kendra Wright was recently hired by High Adventure Inc. to be a financial manager. She is surprised to learn
that the company currently operates by the seat of its pants. As she seeks to develop a more rigorous
financial plan, she will have to
a) work independently of others in the organization.
b) avoid too much reliance on pro forma statements.
c) seek input from the managers of the various functional units of the firm as well as the
d) make heavy use of a technique known as value mapping.
____ 156. The manager of Timmys Timbers, the local landscape company, realizes that he runs a seasonal business. For
example, although his sales do not start coming in until April and May, he needs to be well-stocked in March
in anticipation of the spring sales. He should create a _________ to help plan for when the firm will need to
arrange for additional funds in order to avoid a cash crunch.
pro forma income statement
pro forma balance sheet
set of leverage ratios
____ 157. Georges Car Repair Shop buys parts from a local parts distributor. The distributor delivers the parts promptly
under terms stated on the invoice that say: 3/15 net 30. George has always paid the bill in just 30 days and has
never really worried about these invoice terms. Your advice to George is:
a) He is smart to wait until the 30th day before making payment because this gives him the
use of cash for the maximum possible amount of time.
b) These terms mean that the payment is due in 30 days, but that as long as he is not more
than 15 days late, he can avoid the 3 percent late penalty. Thus, George could actually
delay payment until the 45th day without incurring a penalty.
c) If possible, it is smart to pay the bill within 15 days after receipt because then he will
receive a 3 percent discount. If he does a lot of business with this firm, this will result in a
sizeable savings for George by years end.
d) George should not react to these payment terms because they are a tactic used by many
distributors to get customers to pay early, with little or no benefit to George.
____ 158. United Financial Corporation is a large, well-known company with an excellent credit rating. Its financial
managers project that United Financial will need to obtain some short-term financing in the near future. These
same managers believe that interest rates on short-term loans from banks are currently undesirably high. One
financing option these financial managers might find attractive would be to
sell some additional bonds.
issue commercial paper.
establish a revolving credit arrangement with its banker.
____ 159. Sally McGregor sells lawn and garden products in bulk to companies that do lawn and garden work. She
extends credit to her customers for 60 days, but she is worried about cash flow problems. But this is a highly
competitive business and most of her competitors also offer creditsome of them for up to 90 days. Sally is
also concerned with the cost of billing and collecting money from her customers, some of whom make it a
habit of paying late. Which of the following statements represents the most useful advice to Sally?
a) Sally can reduce her cash flow issues by extending credit for 90 days.
b) Sally should consider a cash only policy and eliminate credit sales. This would eliminate
her cash flow problems and free up money and other resources that she now devotes to
collecting past due accounts.
c) Sally would be able to generate more sales and reduce her collection costs by cutting the
credit period to 30 days.
d) Sally should consider selling her receivables to a factor, thus allowing her to receive cash
more quickly and eliminate the hassles associated with collections.
____ 160. Jasmine started a small business two years ago. The business is just now seeing some success, and Jasmine
notes that she has a few thousand dollars more in her bank account than she currently needs to pay her bills.
However, because of the uncertainty of cash flows in her new business, she is concerned that she may need
access to these funds on fairly short notice in the future. Given this situation, Jasmine should
invest the funds in common stocks.
keep all of these funds in her checking account.
put some of her excess cash into money market mutual funds.
use her excess cash to buy intangible assets.
____ 161. William is the credit manager for Timmys Timbers, a local landscaping company. Just recently, his mulch
supplier noted on the invoice the terms of 3/15 net 30. What does this mean?
a) Timmys Timbers will get a 3 percent cash discount if the balance owed to the supplier is
paid within 15 days; otherwise the entire balance is due in 30 days.
b) The entire amount is due in 30 days, but the 3 percent late penalty will only be imposed if
payment is more than 15 days late.
c) Timmys Timbers Tree Farm must pay 15 percent of the amount due in 3 days; then the
remaining 85 percent is due in 30 days.
d) Timmys Timbers has to pay the invoice within 30 days. Late payment penalties are 3
percent if the bill is paid in less than 60 days, but they rise to 15 percent if payment is not
made within 60 days.
____ 162. Timmys Timbers has just arranged a $300,000 line of credit with its banker for the next year. This means
a) Timmys Timbers now has $300,000 more in cash in its bank account but must begin
paying financing charges on these funds immediately.
b) Timmys Timbers now has guaranteed access to up to $300,000, but it must pay a
commitment fee on any unused portion of these available funds.
c) as long as its credit rating doesnt deteriorate, Timmys Timbers can take out loans of up
to $300,000 from the bank over the next year without having to negotiate new loan
agreements each time it needs to borrow funds.
d) the bank now holds commercial paper issued by Timmys Timbers that will be worth
$300,000 plus interest when it matures. In exchange, the bank provides Timmys Timbers
with $300,000 of cash that it can use immediately or at any time over the next year.
____ 163. Firms that _______________ may find that they can achieve their objective by developing a relationship with
a firm that offers factoring services.
a) need to establish a source of long-term financing that avoids fees and commissions
b) have larger than necessary cash balances and want to find a safe way to invest the excess
c) rely heavily on credit sales and want to speed up their receipt of cash
d) plan to issue large sums of commercial paper in the near future
____ 164. Denise is 25 years old and has decided to begin saving for retirement by setting aside $2,500 each year. She
expects to earn 6 percent on the funds in her retirement account. Under this scenario, she will have $413,000
in her retirement account, even though she only made $100,000 in contributions. The additional $313,000 is
the result of
____ 165. Dan inherited $1,000 from his grandmothers estate. He has found an investment opportunity that will earn 7
percent interest compounded annually each year for the next two years. If he puts his money into this
investment, in the first year he will earn _____ in interest, while in the second year he will earn _______ in
____ 166. Alison has $5,000 to invest and is trying to decide between two investment opportunities. One investment
offers her future cash flo
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