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Questions and Answers

What is the amount a business earns after deducting what it spends for salaries and other expenses?

  • Dividends
  • Revenue
  • Interest
  • Profit (correct)

What does the electronic transfer of funds from the business's checking account to the employees' checking account represent?

  • Check kiting system
  • Direct deposit (correct)
  • Electronic check conversation
  • Debit card system

The emergence of an information-based economy is an important part of which environment in which businesses operate?

  • Global
  • Competitive
  • Technological (correct)
  • Economic and legal

If the Fed plans to raise the discount rate to 7%, what does this indicate?

<p>Bank borrowing funds from the Fed will now pay 7% on the amount they borrow (D)</p> Signup and view all the answers

In order to make an intelligent investment decision, entrepreneurs should what?

<p>Compare risks of potential investments to expected profits (C)</p> Signup and view all the answers

If the Fed increases interest rates in the U.S., what is likely to happen?

<p>Foreign investors are likely to transfer funds to U.S. investments (A)</p> Signup and view all the answers

To implement a policy of empowerment, an organization will restructure so that what happens?

<p>Employees assume more responsibility (D)</p> Signup and view all the answers

As a factor of production, the term capital includes what?

<p>Tools, machinery, and buildings (A)</p> Signup and view all the answers

Traditionally, banks provide loans to individuals and companies according to what?

<p>Creditworthiness (D)</p> Signup and view all the answers

Which of the following represents a nonbank?

<p>Life insurance company (A)</p> Signup and view all the answers

A significant decrease in the money supply tends to have what effect?

<p>Send the economy into a recession (D)</p> Signup and view all the answers

Which of the following provides the same result as a check?

<p>Debit card (A)</p> Signup and view all the answers

Based on the information that the dollar has fallen sharply against the euro, Arturo expects that:

<p>American goods will be more expensive in Spain (D)</p> Signup and view all the answers

World-class businesses attempt to meet the needs of:

<p>All stakeholders (D)</p> Signup and view all the answers

Due to population shifts, what is likely to happen?

<p>Businesses that cater to older consumers will see higher growth (B)</p> Signup and view all the answers

Acquiring funds through borrowing represents what?

<p>Debt financing (D)</p> Signup and view all the answers

Which of the following presents an effective technique to improve cash management?

<p>Speed up collections and slow down payments (D)</p> Signup and view all the answers

Investment bankers perform what function regarding new issues of bonds or stock?

<p>Underwrite (C)</p> Signup and view all the answers

Which of the following represents a disadvantage of issuing bonds?

<p>Bonds increase the firm's debt (C)</p> Signup and view all the answers

Which of the following represents a capital expenditure?

<p>Purchasing a building for office space (A)</p> Signup and view all the answers

Corporations receive the proceeds from the sale of their stock in which market?

<p>The primary market (A)</p> Signup and view all the answers

Dividends on preferred stock are:

<p>Normally fixed if and when paid (C)</p> Signup and view all the answers

One of the challenges of effective financial management is:

<p>To have sufficient cash without compromising investments (D)</p> Signup and view all the answers

When retained earnings are not enough for long-term needs, businesses may raise funds by:

<p>Selling common stock (B)</p> Signup and view all the answers

Mineral Mining Corporation is utilizing what to provide for an orderly retirement of their bonds?

<p>Sinking fund (D)</p> Signup and view all the answers

Which situation represents successful use of financial leverage?

<p>A firm borrows money at 8% and earns an 11% return (A)</p> Signup and view all the answers

Julia experienced what issue in her failed business?

<p>Undercapitalization (C)</p> Signup and view all the answers

The corporate certificate issued to an investor that has loaned money is called a:

<p>Bond (A)</p> Signup and view all the answers

Buying several different investment alternatives to spread the risk achieves what?

<p>Diversification (A)</p> Signup and view all the answers

The CFO solicited investments to prevent bankruptcy, representing what kind of financing?

<p>A short term debt financing (D)</p> Signup and view all the answers

When companies owe money to creditors and suppliers, these amounts are recorded as:

<p>Liabilities (C)</p> Signup and view all the answers

The balance sheet shows how the capital is structured in the business, including what?

<p>Balance sheet (C)</p> Signup and view all the answers

Net profit refers to:

<p>Net earnings after deduction of all expenses, including tax (D)</p> Signup and view all the answers

The acid test ratio helps determine what?

<p>Ability to repay short term debts despite inventory sales difficulties (D)</p> Signup and view all the answers

Although accounting has several uses, its overall purpose can be summarized as:

<p>To provide financial information useful to decision-makers (D)</p> Signup and view all the answers

An evaluation and unbiased opinion about the accuracy of a firm's financial statements is called a:

<p>Independent report (A)</p> Signup and view all the answers

Leverage ratios indicate the extent to which what has been used to fund a business's operations?

<p>Debt (B)</p> Signup and view all the answers

The three important financial statements prepared by accountants are:

<p>Balance sheet, income statement, and statement of cash flows (A)</p> Signup and view all the answers

What is the net worth (owners equity) for the business if assets total $3.5 million and liabilities total $1.3 million?

<p>$2.2 million</p> Signup and view all the answers

The balance sheet reflects which fundamental accounting equation?

<p>Assets = Liabilities + Owners equity</p> Signup and view all the answers

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Study Notes

Profit and Financial Concepts

  • Profit is the amount earned by a business after deducting expenses such as salaries.
  • Direct Deposit is an electronic transfer of funds from a business's account to employees, representing a cashless payday.
  • The technological environment influences businesses with the emergence of an information-based economy.
  • A planned increase in the discount rate indicates banks will pay 7% on borrowed funds from the Federal Reserve.

Investment Strategies and Market Conditions

  • Entrepreneurs should compare risks and potential profits to make informed investment choices.
  • An increase in U.S. interest rates can lead foreign investors to increase their investments in the U.S.
  • Empowerment within organizations involves employees assuming greater responsibility for decisions.
  • Capital as a production factor comprises tools, machinery, and buildings essential for business operations.

Banking and Financial Tools

  • Loans are traditionally granted by banks based on the recipient's creditworthiness.
  • Non-banking financial entities include life insurance companies, which provide investment alternatives.
  • A significant decrease in the money supply can lead to an economic recession.
  • A debit card functions like a check by withdrawing directly from a checking account.
  • A declining dollar against the euro implies Spanish wines may become cheaper in the U.S.
  • World-class businesses aim to satisfy all stakeholders, balancing the interests of customers, employees, and owners.
  • Shifts in population demographics increase demand for services that cater to older consumers.

Financing and Fundraising

  • Debt financing is the process of acquiring funds through borrowing, distinct from equity financing.
  • Effective cash management is achieved by speeding up collections while slowing down payments.
  • Investment bankers underwrite new bond or stock issues for firms.
  • Issuing bonds creates additional debt on a firm’s balance sheet.

Capital Expenditures and Market Structures

  • A capital expenditure example is purchasing office space or a building.
  • Corporations sell stock primarily in the primary market, where they receive proceeds.
  • Preferred stock dividends are typically fixed, ensuring reliability for investors.

Challenges in Financial Management

  • Effective financial management requires maintaining enough cash on hand without hindering investment potential.
  • When internal funds suffice, businesses can raise funds through selling common stock.
  • Regular deposits accrued to retire bonds are part of a sinking fund strategy.

Financial Leverage and Risk Management

  • Financial leverage is effectively used when a firm borrows at a lower interest rate than the return earned on investments.
  • An example of undercapitalization occurs when a lack of funds hampers business promotion efforts.
  • A bond signifies a loan from an investor to a corporation or government entity.
  • Diversification in investments spreads risk across several alternatives.

Accounting Principles

  • Liabilities are listed on the balance sheet as outstanding amounts owed to creditors.
  • The balance sheet illustrates the capital structure of a business, covering assets and debts at a given time.
  • Net profit refers to the earnings remaining after all expenses are deducted, including taxes.
  • The acid test ratio assesses a company's ability to cover short-term debts without relying on inventory sales.

Financial Statements and Reporting

  • The three essential financial statements used in accounting are the balance sheet, income statement, and statement of cash flows.
  • Calculating net worth, owners equity results from total assets minus liabilities.
  • The foundational accounting equation states that assets = liabilities + owners’ equity.

Audit and Financial Clarity

  • An independent report provides unbiased evaluations of a firm's financial statements.
  • Leverage ratios highlight the degree to which a company has used debt for operational funding.

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