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Jose San City College Business 82 Midterm REVIEW Chapters 1-10
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.
___a_ 1. A negative aspect of the entrepreneurship era was that
a) powerful businesses gained the ability to manipulate prices and exploit workers.
b) productivity declined in many key industries as work shifted away from mass production
to more labor intensive methods.
c) governments began running huge deficits.
d) inflation spiraled out of control, resulting in a decline in standards of living.
___c_ 2. Which of the following statements is most consistent with the marketing concept?
The primary purpose of a business is to dominate its market.
Consumers always care more about price than about quality.
All aspects of a business organization should focus on the needs of the customer.
Controlling the market for natural resources can give a firm a huge competitive advantage.
___d_ 3. The marketing era introduced
the marketing strategy.
the 4 Ps of marketing.
the marketing approach.
the marketing concept.
___c_ 4. Businesses in the relationship era focus efforts on building long-term customer relationships. One key tool for
business development during this era was utilizing
____c 5. During the marketing era businesses concentrated on:
recovering and rebuilding in the aftermath of World War II.
building long-term customer relationships.
developing brands to differentiate their products from those of competitors.
none of the above.
___b_ 6. A small consulting company in Waikiki, Hawaii struggles financially because of limited access to economic
resources. This company has to get creative to build long-term bonds with its current customers and use
technology to reach new customers using concepts from the
___a_ 7. Which of the following is a key feature of an organization that adopts the marketing concept?
a) Departments throughout the organization adopt a customer orientation.
b) Executive management and the board of directors focus mainly of the financial aspects of
the companys operations.
c) The marketing department is seen as the only department capable of creating lasting value.
d) The goal of the organization is to maximize market share by keeping prices as low as
___d_ 8. During the production era, companies continued to implement new technologies to streamline production
processes. Although there were many changes, the primary focus resulted in _______________.
refinement, efficiencies, and entrepreneurship.
marketing, consumer orientation, and specializations.
competition, marketing, and refinement.
specializations, efficiencies, and refinement.
__d__ 9. As products flooded the market after World War II, firms responded by:
a) cultivating their customers.
b) focusing on a low cost strategy.
c) adopting a bleeding edge approach to the introduction of products in an attempt to be first
d) branding their products to create distinctive identities.
___a_ 10. Nonprofit organizations exist for financial gain to support a dedicated mission. They also provide support to
their regions economic well-being.
all of the above.
_a___ 11. A growing number of firms have developed nonprofit partnerships with a profit-minded approach (i.e., Kraft,
Polo Ralph Lauren, Los Angeles Times). By using the same investment dollars to improve society and
support their strategic missions, these businesses are
raising their public profile.
creating unneeded products and services.
experiencing backlash in the market.
___d_ 12. Nonprofit organizations are measured by different standards than for-profit businesses and are typically
__b__ 13. The four major categories of factors of production are:
technology, law, capital, and ingenuity.
natural resources, capital, human resources, and entrepreneurship.
economic power, money, technology, and agriculture.
knowledge, human resources, capital, and technology.
__a__ 14. Janet owns a modern 600 acre farm that grows corn and soybeans. Which factors of production will Janet
need to employ to produce her crops?
natural resources, human resources, capital, and entrepreneurship.
only natural and human resources.
only capital and human resources.
only entrepreneurship and capital.
__a__ 15. The five key dimensions of the broader business environment include
economic, competitive, technological, social, and global.
technological, economic, demographic, global, and social.
global, social, technological, market forces, and value.
customers, vendors, suppliers, wholesalers, and retailers.
__d__ 16. Entrepreneurs participate in which business environments?
competitive, economic, and social
capital, economic, and competitive
human resources, competitive, and social
economic, competitive, technological, social, and global
___a_ 17. Tiny Timbers Tree Farm sells a variety of trees for different customers. Recently, the company received
notice from the U.S. Department of Fish and Wildlife that a shortage of fir trees is affecting a rare moth
population. The federal agency has ruled that tree farms must refrain from cultivating fir trees for business use
until further notice. Which element of Tiny Timbers environment is most directly affected by this ruling?
__d__ 18. Super King Groceries competes with some of the larger chain stores in the area and offers services not
provided by their competitors (i.e. car service, curb service, delivery service). Because Super King is not as
large as some retailers, prices are moderately higher. This does not seem to hurt the stores business due to the
customers just dont like the competitors products.
Super King has better food.
Super Kings employees are friendlier.
Super King customers receive value not provided by the other stores.
___b_ 19. John Blue has started his own Internet business, Blueways.com, offering online ordering of refurbished
computer parts. His business has experienced a slower than usual start due to higher than expected costs for
capital resources. Those expenses could have included
buildings, money, and skilled labor.
computers, cables, Internet service, copiers, and software.
raw materials, money, and employee training.
advertising and financial costs.
__d__ 20. In choosing your career, you must consider the key dimensions of the business environment and your place
within it. That would mean that you should
only pay attention to your parents and what they want for you.
wait for the jobs to find you at school.
look for a mentor to help you make the transition to the work world.
consider your interests and abilities as well as those skills you learned in college.
___d_ 21. In 2005, General Motors introduced a blockbuster promotion by offering customers the employee discount
prices for any vehicle. Chrysler and Ford followed the trend and offered the same program. This intense price
competition among three major automobile producers resulted in lower profits for all three companies. This
outcome illustrates a problem for firms in:
__c__ 22. The government often allows only one company to provide electricity in a given geographic area because
allowing several companies to do so would result in an inefficient duplication of infrastructure. This suggests
that electric utilities are
a) trust busters.
c) natural monopolies.
d) pure players.
__a__ 23. A market structure with pure competition has all of the following characteristics except:
a) the firms use product differentiation allowing consumers to easily identify their favorite
b) there are many firms competing in the market.
c) firms can easily enter and leave the market.
d) no individual firm has any control over the price of the product.
__b__ 24. ____________________ is the market structure that is most likely to result in higher prices, lower quality and
fewer choices for consumers.
___d_ 25. Abraham Lincoln once stated, You cannot help the poor by destroying the rich. You cannot lift the wage
earner by pulling down the wage payer. This quote is most consistent with the philosophy of a:
__d__ 26. The Shero nation was founded on a capitalistic market system. The newly elected Prime Minister won by
campaigning on the platform based on socialist principles. If the Prime Minister of Shero implements her
campaign promises, which of the following trends will the citizens of the country be most likely to
A dramatic decrease in government corruption.
More rapid economic growth for businesses.
Lower tax rates for all people and an emphasis on free markets.
Higher taxes for wealthier citizens and more services for the poor and elderly.
__a__ 27. Natasha is very unhappy with conditions in her country. She has very little economic or political freedom.
Virtually all productive enterprises are owned by the government, and they seem to be run very inefficiently.
The result is frequent shortages and surpluses of goods and services. These conditions suggest that Natashas
country relies on a _________________ economic system.
__a__ 28. With the tragedy of the 9/11 attacks and the devastation of Hurricane Katrina, workers in both New York City
and New Orleans experienced
__a__ 29. The items included in the CPIs market basket are chosen to represent:
goods and services bought by the average consumer.
goods and services bought by the business sector.
the cost of government supplied goods and services.
all goods and services produced by domestic businesses.
_a___ 30. Pampered Pooch is a dog groomer in the area looking to increase productivity for the business. Currently, in
an eight hour day, Pampered Pooch can wash and groom 12 large dogs. To calculate productivity the
management of Pampered Pooch would
a) divide the number of dogs groomed per day (12) by the amount of labor per day (8 hours).
b) divide the total weight of the dogs by 12, then multiply the results by the number of hours
of labor per day (8 hours).
c) divide 8 hours by 12 dogs per day.
d) divide 12 dogs by a 7 day work week and multiply the result by 8.
_c___ 31. Martha has noticed that the CPI has increased by 7% over the past year. The best conclusion for Martha to
make based on this information is that
a) her cost of living has increased by 7%.
b) her income has increased by 7%.
c) the weighted average of prices of goods and services in a market basket bought by a
typical consumer have increased by 7%.
d) the price of necessities such as food, rent, and medicine have increased by an average of
_c___ 32. Michael has inherited $500,000 from the sale of a family business. His banker is advising he find multiple
banks to deposit his money. Why?
a) The Open Market Operations of the Federal Reserve would invest his money in other
securities and might lose it without needing to justify the expenditure.
b) The Federal Reserve does not keep that much money in any one bank due to federal
regulations prohibiting the buying and selling of securities.
c) The Federal Deposit Insurance Corporation will only insure up to $100,000 in each
account per customer, per bank. He would need more than one bank to ensure his money
is federally protected in the event of an economic collapse of the banking system.
d) He needs to diversify his holdings in more than one bank to protect himself against
fraudulent lending practices of banks.
__d__ 33. Early in his first term, President George W. Bush faced an economy in the beginnings of a recession. Which
of the following would represent an example of a fiscal policy President Bush might suggest to deal with this
a) Ask Congress to cut total spending on social programs to avoid running a budget deficit.
b) Ask Congress to cut taxes in order to give consumers and businesses more income to
spend and invest.
c) Order the Fed to raise the required reserve ratio.
d) Urge Congress to give the U.S. Treasury the authority to print more money.
__b__ 34. In China and India conventional landline telephone networks:
a) make up the vast majority of all phone connections.
b) are no longer considered a necessity as these nations move directly to cell phone networks.
c) have provided the infrastructure for their Internet backbone and so remain a top
d) represent the best hope to have a truly connected economy given the lack of sophisticated
cell phone technology in these nations.
__b__ 35. Which of the following is a major trend in the global economy?
A movement to impose more barriers to international trade.
Slow economic growth in less developed nations.
Increasing interdependence among the worlds economies.
Slow growth in the volume of trade among nations due to a lack of cooperation among
___b_ 36. A major reason multinational firms headquartered in the United States might locate production facilities in
foreign countries is to:
a) gain access to capital, which tends to be scarce in the United States.
b) take advantage of the fact that many other nations have much higher per capita GDPs than
the United States.
c) gain access to a pool of highly educated workers who are paid much less than American
d) avoid the need to deal with ethical issues.
_b___ 37. One of the key reasons Japanese companies like Sony and Toyota thrived during the 1990s was because:
a) the Japanese economy was growing very rapidly during that decade.
b) they reduced their risk by doing business globally instead of focusing on the Japanese
c) the Japanese government implemented higher tariffs to protect these companies from
d) the Yen was the worlds strongest currency during this period.
_a___ 38. Rose works as an insurance claims adjuster. She is responsible for data management, which includes record
keeping and client management. However, her supervisor has assigned Rose some new responsibilities. As a
result of these new duties, Rose is finding that she isnt able to process as many claims as she could in the
past. This illustrates the concept of:
__b__ 39. Ross has two different projects he would like to work on this weekend: paint the spare bedroom or perform
some minor repairs on his old 83 Chevy. Unfortunately, he doesnt have time to do both this weekend. The
fact that Ross must give up one thing in order to do something else illustrates the concept of:
the hierarchy of needs.
__a__ 40. A country has a comparative advantage in the production of a good if it can produce that good
__________________ than other nations
at a lower dollar cost.
at a lower opportunity cost
using more labor and less capital
using fewer natural resources
_d___ 41. With a given amount of labor and other resources producers in the nation of Alphania can produce either 100
widgets or 50 wackets. Thus, in Alphania two widgets must be given up to produce each wacket. Using the
same amount of labor and resources, producers in Betania can produce 40 widgets or 40 wackets--so one
widget must be given up for each wacket produced. Based on this information:
a) Alphania has a comparative advantage in producing both goods.
b) Betania has an absolute advantage in producing both goods.
c) Alphania has a comparative advantage in producing wackets but Betania has an absolute
advantage in producing wackets.
d) Betania has a comparative advantage in producing wackets.
_a___ 42. Changes in the amount of foreign aid the U.S. provides to developing nations would directly affect
a) the U.S. balance of payments, but would not directly influence its balance of trade.
b) the U.S. balance of trade, but would not directly affect its balance of payments.
c) both the U.S. balance of payments and its balance of trade by roughly equal amounts.
d) neither the U.S. balance of payments nor its balance of trade.
__b__ 43. Which of the following groups does NOT benefit when a nation has a weak currency?
domestic firms that want to export goods to foreign markets.
foreign firms that operate facilities within the nation.
domestic firms with operations in foreign countries.
foreign tourists who are visiting the country.
__c__ 44. In late 2002 a euro cost $1.00 of U.S. currency. In late 2007, a euro cost $1.49. This indicates that the
a) U.S. dollar has weakened relative to the euro.
b) U.S. dollar has strengthened relative to the euro.
c) exchange rate between the dollar and the euro has deviated significantly from its market
d) euro has weakened relative to the U.S. dollar.
_a___ 45. An example of foreign direct investment would involve Honda Corporation, with headquarters in Tokyo,
building a manufacturing plant in the U.S.
building a manufacturing plant in Japan.
licensing the Honda trademark in promotional advertising in Germany.
investing in the Japanese automotive market.
_c___ 46. Uberholtz, a German company, has granted Sistec, an American company, the right to manufacture
Uberholtzs product and use the Uberholtz trademark in return for a fee. Sistec is the ________ and Uberholtz
is the ___________.
_a___ 47. Pandys, an American restaurant chain, promotes its business in Latin America with the hopes of offering
prospective buyers the opportunity to open and operate Pandys restaurants in their countries. Pandys
corporate management offers financial and marketing assistance to ensure success within established
guidelines. The prospective buyer is the ________ and Pandys Corporation is the ___________.
__b__ 48. Due to the rising prices of gasoline, Harleen is looking for a car with better gas mileage. She hopes to
purchase the newest Preo, an imported car using hybrid technology. But Preos are hard to find because the
government in Harleens country has limited the number of them that can be imported each year. Harleen is
witnessing the impact of a(n) ____________.
voluntary export restriction
__d__ 49. Nashika spent a two-week vacation in Africa and purchased more than $4,000 worth of African tribal art.
Upon returning to the U.S., she was required to pay a(n) ________ on the art work.
_b___ 50. With the fear of Mad Cow disease, some countries imposed a total ban on imported beef creating a(n)
____ 51. A major concern voiced by members of Congress and some U.S. citizens was that NAFTA would result in
unfair job gains for Canadas technology market.
significant job loss for the U.S. economy.
significant risk to the Mexican peso.
Canadian currency fluctuations.
____ 52. Harriette owned a diner in the 1950s. At that time, the state in which Harriettes diner was located had a law
declaring that it was illegal for restaurants to serve whites and African Americans in the same dining room.
But Harriette never made customers of different races eat in separate rooms. This illustrates a situation in
which Harriettes practice was
a) clearly unethical because obeying the law is the most fundamental ethical requirement of
b) an example of an ethical lapse.
c) ethical even though it was illegal according to state law.
d) neither ethical nor unethical; it represents a pure business decision that has no ethical
____ 53. Janet reasons, Its wrong to lie, BUT its okay to overstate my expense account on my last trip because I
really need the money and the company hasnt given me a raise in the past year. This is an example of an
employee who applies_________ to fit the situation at hand.
a universal code of ethics
relative ethical standards
a value-weighted ethical approach
pragmatically justified code of ethics
____ 54. A couple of weeks ago, your boss had a private conversation with you. She explained that the companys
financial performance is poor and that the firm is looking at the possibility of layoffs. She then asked for you
to help her determine whether positions in your division should be cutand if so, which ones. After
analyzing the situation, you believe that cutting jobs would almost certainly improve the companys
profitability. However, several of the workers who are most likely to be cut are good friends, and you know
they would suffer significant financial hardship if they lost their jobs. Your report to your boss is due
tomorrow. It appears that you are facing a(n):
situation that requires the use of relative ethical standards.
ethical moot point.
____ 55. It often takes a pharmaceutical firm 15 or more years to develop a new drug. The sales from these new drugs
must recover the expenses of research and development. Many of these pharmaceutical firms want to support
socially responsible causes, but when they are asked to lower the price of drugs distributed to third world
nations, it becomes a(n) __________. Do they forego profits for investors (and to fund additional research) in
order to help those in need?
____ 56. You are a manager for a large financial services firm whose brokers trade stocks and bonds for individual
customers. Your boss has provided you with your teams sales goals for the following six months. You know
that the fastest way to achieve the lofty numbers is to recruit experienced brokers from competitor firms to
join your firm. These professionals are likely to bring loyal clients who initiate a lot of trades, making you a
clear winner in the eyes of top management. The current brokers in your department are good. Theyve
worked hard and done everything youve asked of them. But they are young and inexperienced. There is a
good chance they can achieve the sales goals, but its not a sure thing. If you seek to recruit new brokers, your
current brokers will move down in the ranks and will earn smaller commissions.
a) This action is certain to have legal consequences, so you should clear it with your human
b) This is an example where your values and top managements values are clearly in sync.
You should follow the easier route to achieving your sales goals because profit is the
highest ethical goal in any organization.
c) A manager should always consider his team of employees first and go down with the ship,
if need be.
d) This describes an ethical dilemma between your personal goals and your responsibility as
a manager of others.
____ 57. Companies that want to develop socially responsible objectives
a) should seek out other firms in their area and imitate their approach.
b) should focus their attentions on meeting the needs of investors, because the only legitimate
social responsibility of a firm is to protect the interests of those who have invested money
in the company.
c) should scan the competitive environment.
d) should identify key stakeholders and consider their priorities.
____ 58. A canoe and recreation club recently filed suit against a number of manufacturing plants located along the
Missouri River. In the suit, the club claimed that the plants failed to adequately treat the waste that is being
dumped into the streams and waterways, thus adversely affecting the recreational opportunities available to
club members. The canoe and recreation club is an example of a(n) __________ of the manufacturing
companies that operate these plants.
____ 59. Harbor Paint Products, Inc. proactively implemented an incentive program that rewarded employees for
soliciting customer feedback on its new deck stain product. Outside sales professionals, inside customer
service representatives, and partner retail associates were asked to contribute a minimum of seven customer
impressions (positive or negative) each week into a company marketing data base. The program promoted
the use of new technology for efficiency.
the creation of worthy jobs.
consumerism and safe work environments.
consumerism and the right to be heard.
____ 60. Recently, Estee Lauder announced that it will donate a portion of each sale of its Gwyneth Paltrow-endorsed
perfume to breast cancer research. This is an example of
new product extensions.
____ 61. In an effort to embrace _________________, a large community college system recently built a new green
campus where facilities were designed and constructed to use energy and water more efficiently in order to
conserve the environment and its resources for future generations.
new product development
____ 62. Which of the following actions best demonstrates the practice of corporate responsibility?
a) A company donates $10,000 to a local charity.
b) The CEO of a corporation announces that his company has increased its profit margin to
investors for the sixth straight year.
c) A company changes its business practices to better serve its low-income customers.
d) A company gives its employees paid leave to if they donate that time to serve in charitable
____ 63. Ben & Jerrys is recognized for being a socially conscious trendsetter. As a socially responsible company, this
maker of high-quality ice cream is likely to focus on
a) putting the needs of other stakeholders above the needs of the owners and employees of
b) finding the proper balance between earning profits and meeting responsibilities to other
c) providing its ice cream at the lowest possible price.
d) partnering with non-dairy manufacturers.
____ 64. Which of the following serves as a good example of a proactive socially responsible approach toward global
a) offering bribes to those international clients who accept large gifts as common business
b) asking business vendors to comply with human rights policies, safety rules, and
sustainable environmental goals.
c) partnering with the low-cost providers of goods and services, because this strategy serves
the interests of stakeholders and stockholders.
d) providing ones customers with the best value at the lowest cost and doing what it takes to
make that happen.
____ 65. In 2002, the United States granted China PNTR (Permanent Normal Trade Relations). Several Congressional
representatives argued that by granting China this status, the United States was turning a blind eye toward the
social responsibility to workers abroad. The types of worker issues these leaders were referring to might
the migration of workers from agrarian jobs to urban jobs.
the formation of labor unions.
____ 66. Vice President Harry Farrell is one of the few top managers at his company who has a strong engineering
background. Harry loves to sprinkle technical jargon and slang into his speeches when he makes presentations
to less technically inclined colleagues. This communication style
is likely to create a language barrier that undermines the effectiveness of his message.
is likely to be very effective since it allows Harry to emphasize his unique qualifications.
may create perceptual barriers to good communication.
is likely to contribute to cultural barriers that reduce the effectiveness of his message.
____ 67. Almost everyone has experienced a conversation where someone has pleaded, Thats not what I meant!
a) This experience is the result of good communication between parties.
b) This experience indicates the comfort level between conversationalists.
c) This is an indication that a communication barrier prevented the recipient from
understanding the messenger.
d) When this occurs, it is usually the result of a recipient causing trouble for the messenger.
____ 68. Cheryl is presenting the new payroll system to the managers. She was unable to reserve the large conference
room, so she scheduled the presentation for the cafeteria, which is not designed for giving presentations and
has poor acoustics. What is her challenge?
The inability to use active voice.
Physical barriers that are likely to create noise.
____ 69. Marguerite attended a seminar on how to improve work productivity. When Marguerite returned to work, her
manager requested a summary of the seminar. Marguerites summary explained that the speakers thick
accent and excessive use of jargon made it hard for her to follow his presentation. Its clear that Marguerite
experienced _________ during the seminar.
____ 70. Dave Malloy is a marketing director for the Redding Company. His recent trip to a developing Asian country
got off to an awkward start when his attempt to greet his host with a hearty handshake was not well-received.
Daves experience is an example of a _______________ that can undermine effective communications.
____ 71. Ginny is almost 30 years old but looks quite a bit younger. When she participates in discussions with business
people who dont know her well, she often finds they dont pay much attention to her ideas because they
assume she is immature and inexperienced. This suggests that Ginny faces a(n) _______________ barrier that
undermines her message when she speaks.
____ 72. Sue has a habit of slouching against a wall and staring at the floor while talking with colleagues at work about
important issues. Sues body language
a) is unlikely to have a significant impact on how her message is received since the content
of a message matters much more than the way it is delivered.
b) is an example of cultural noise.
c) can be interpreted as a physical barrier to communication.
d) may distract her colleagues and undermine her message.
____ 73. The workers at the Axme Corporation have divided into several cliques. Employees in each clique tend to
stick together, sharing lunch and coffee breaks. The employees in one clique very seldom interact with
workers in another clique. This type of situation may well create ___________ barriers that prevent effective
____ 74. Key executive board members attend annual meetings at the World Bank. Most of the members travel from
their respective countries and come prepared to discuss local business needs. The interactions in the meeting
are an example of
____ 75. Tanyas arms are crossed as she listens to the managers presentation. When the manager ends, she joins the
audience in a standing ovation but does not clap her hands with her colleagues. Her posture and gestures are
a communication channel.
____ 76. Barney Hendricks is interviewing web developers for his company. Over lunch, he tells you that his top
candidate showed lots of enthusiasm when he first entered the office. His tone and attitude really showed an
interest in the job, Barney said. And he just looked confident and composed. Unlike some other candidates,
he looked me right in the eye when he answered some tough questions. Barney appears to be very impressed
by this candidates
nonverbal communication skills.
____ 77. Ted jokes with his employees at the end of every weekly staff meeting. He notices that Jeanne appears sullen
and uninterested in his jokes today and wonders if something he said offended her. This is an example of
a) Ted trying to discern the body language of the employee. There may or may not be a
message here. Perhaps Jeanne is simply tired.
b) why managers should only communicate business needs with employees, omitting casual,
more informal conversation.
c) Jeannes exercising her active listening skills. Ted has probably misinterpreted her
concentration for disinterest.
d) a situation in which verbal communication is more meaningful than nonverbal
____ 78. People tend to __________________ people who have good listening skills.
be resentful of
be careful of what they say around
tell more to
make unrealistic demands on
____ 79. An instructor tested her students __________ skills by telling one student a story about the Ford Motor
Company and asking him to repeat it to another student. The second student then repeated it to a third student,
and on and on. The last student repeated it in front of the entire class.
____ 80. An instructor watched the reactions of various students while she lectured on a topic. One student was
doodling, another was text messaging on his cell phone, and another looked as if she was making out her
grocery list. Although frustrated by her observations, the instructor realized that these students have a hard
time paying attention because
a) todays students actually multitask in a way that makes listening less important.
b) there is a significant gap between the rate at which people listen and the rate at which they
c) todays student communicates digitally rather than verbally.
d) students do not have to achieve active listening skills in order to make good grades.
____ 81. Julie has spent the last few minutes rewriting a memo that she intends to send to all of the employees in her
department. She wants to clarify the message by making it short and to the point. Julies goal is to
enrich the communication channel by making each word count.
make the message more passive in tone.
____ 82. Consider the following sentences:
1.The baseball player caught the ball in midair.
2. The ball was caught in midair.
Both sentences use the active voice.
The first sentence is in the passive voice; the second sentence is in the active voice.
Both sentences use the passive voice.
The first sentence is in the active voice; the second sentence is in the passive voice.
____ 83. Katy wants to improve her business writing skills and is looking for a way to determine the appropriate tone
for her messages. Which of the following suggestions represents the best advice?
a) Keep the tone highly formal and structured to convey that the message is important. After
all, business issues must be taken seriously.
b) Incorporate a lot of slang and colorful language into your message. This enlivens and
enriches the message and makes it stand out from more stilted writing styles.
c) Imagine you are speaking to the recipient of the message, and let your writing style flow
like a natural conversation.
d) Keep your tone neutral, and use the passive voice. This keeps the message from offending
or antagonizing the recipient, thus ensuring the it will receive serious consideration.
____ 84. A department head plans to send a memo to the employees in her department outlining some changes in the
companys personnel policies. She believes that most employees will view the changes in a very favorable
light. Given this perception, she should
a) describe the policy changes at the beginning of the memo.
b) devote the first few paragraphs to a detailed discussion of the rationale for the new policies
before actually describing them.
c) include other more controversial topics in the same memo because the good news about
personnel policies will put the employees in a better mood to deal with such issues.
d) take full credit for the changes, even though they were actually developed by human
____ 85. In late 2007, Boeing announced that its 787 Dreamliner, scheduled to be delivered to several airlines by early
2008, would be delayed due to problems at various critical points in the project. The project director wants to
distribute a detailed memo to all members of the project team outlining how to correct each of these problems.
One way the director can convey the memos key points more effectively is to
use the passive voice.
keep the memo concise. Ideally the length should be no more than one page.
avoid the use of bulleted lists.
include headings to identify each major section of the memo.
____ 86. Millie Martin is giving a presentation at a customer service seminar and wants to grab her audiences
attention. One effective way for her to open the presentation is to
a) make a joke about someone in the audience.
b) walk out wearing a funny outfit.
c) ask a relevant question such as, How many of you have spent far too long waiting in line
to return a defective product?
d) maintain continuous eye contact with members of the audience during the first five
minutes of her talk.
____ 87. Jonna is planning a presentation and has decided to organize it around six key ideas. This approach
a) is likely to work very well since dividing the main presentation into several distinct key
ideas helps maintain the audiences interest.
b) is a good approach, but she should try to come up with more than six ideas.
c) includes too many ideas, since most people cant absorb more than two to four main points
in a single presentation.
d) is likely to be very effective as long as she includes at least four slides for each key idea.
____ 88. Swim Club advocate Laticia Featherly has been asked to testify at the local school board meeting next week
in support of continuing her clubs partnership with the district to provide extracurricular recreational
activities for students. The board has indicated that she can have up to 10 minutes to make her case. In
preparing her speech, she should remember that it is a good idea to
a) provide as many key points as possible in 10 minutes, because one of those points may
resonate with one or more board members.
b) maintain steady eye contact with the chairperson of the school board.
c) plan for her presentation to last about 15 minutes, because it is better to have too much
material than to have too little.
d) limit her presentation to three or four key points, so they will be memorable to the
____ 89. During a presentation, it is usually a good idea to summarize the key points
a) just before launching into the body of the presentation and then once again during the
closing segment of the presentation.
b) only at the opening of the presentation.
c) at least three times during the body of the presentation in order to make sure the audience
stays focused on the key ideas.
d) only at the close of the presentation.
____ 90. At the beginning of her presentation, Delaney told the audience she would answer questions at the end of her
delivery. Jim arrived late and began asking questions during Delaneys presentation. What should Delaney
a) Answer his questions immediately in order to minimize the distraction.
b) Ignore Jim and refuse to acknowledge his questions.
c) Announce to the audience that she has changed her mind and will now deal with questions
during the presentation.
d) Advise Jim and remind the audience that all questions will be addressed at the end.
____ 91. Andrew Beck has a great idea for new accounting software that will enhance efficiency in his companys
operation. His manager has asked him to present his ideas to the entire department. Andrew is excited about
the opportunity, but he is also a little nervous because he has never given a presentation. Which of the
following comments would help Andrew the most?
a) Relax and just wing it. The worst mistake you can make is to practice too much.
b) A little nervousness before a presentation can actually be a good thing because the
adrenaline it generates can help you think faster and focus more completely.
c) Avoid making eye contact with individuals in the audience during the presentation since
that can make you more self-conscious. Instead, focus on an inanimate object near the rear
of the audience.
d) Make sure you have thoroughly memorized your speech and stick to it. If you are
thoroughly prepared, you can easily overcome your nerves.
____ 92. What should you do when a hostile questioner appears determined to undermine your presentation?
a) Refuse to answer the questions until the hostile questioner asks them in a more reasonable
b) Stay calm and professional, take time to collect your thoughts, and then answer the
question without getting defensive.
c) Ignore the individual. In most cases, the audience will be sympathetic to your position and
will come to your defense.
d) Answer the question in a clear and confident tone and then make strong eye contact with
the questioner for several seconds to indicate that you arent intimidated.
____ 93. Dana wants to open her own business after completing college. As a fine arts student, she is planning to
provide services as a graphic artist. She wants the freedom to be her own boss and doesnt want to deal with a
lot of rules and regulations. But she is nervous about risking her personal wealth. She is thinking about
forming a sole proprietorship and asks you for your opinion about this form of business. Which of the
following statements is most accurate?
a) Forming a sole proprietorship will enable you to be your own boss. But if you are really
nervous about risking your personal assets, you might want to consider some other form of
ownership because it will also expose you to unlimited liability.
b) Forming a sole proprietorship is a bad choice. Not only is a sole proprietorship subject to
extensive government regulation that will limit your ability to run your business, it also
exposes you to unlimited liability.
c) Forming a sole proprietorship is a great idea. It gives you the ability to be your own boss
while also protecting your personal assets from loss.
d) Forming a sole proprietorship can help you protect your personal assets, but it is a poor
choice for individuals who want to be their own boss because this form of business is
____ 94. Justin Rolando decided to operate his own Web design firm and is leaning toward organizing it as a sole
proprietorship. One factor Justin should realize is that by choosing this form of business he would be
creating a business that was legally separate and distinct from himself.
incurring the problem of double taxation.
exposing himself to unlimited personal liability for the companys debts.
required to fill out special forms and pay proprietorship fees to get the company legally
____ 95. Allison Peterson has elected to operate her new downtown boutique as a _____________. She is aware of the
unlimited liability associated with this form of ownership, but she wants to remain in complete control of her
company and be her own boss.
____ 96. Marco Valez is comparing forms of business structure in order to make the best decision for the business he
plans to form next month. He plans to be the only investor/owner, and he will also actively manage the
business. He is convinced that the company will be profitable, so he wants to keep all of the after-tax earnings
for himself. Which of the following forms of business ownership is Marco likely to choose?
limited liability company
____ 97. Samantha has a talent for making attractive but inexpensive jewelry and wants to set up a small business to
sell some of her creations. She asks for your advice about setting up her firm, telling you that she wants to
start her business as quickly and inexpensively as possible. In addition, she doesnt want to share control (or
profits) with anyone else. Which form of business ownership would you suggest for Samantha?
limited liability company (LLC).
____ 98. Basil Pappas spent his youth working in the restaurants of several of his close relatives. Now, he wants to
venture into his own business and has decided that he will open his own restaurant. Basil needs more money
than he can come up with on his own, so he plans to ask his two brothers to put up some money in exchange
for a share of ownership. Such an arrangement means that the company cant be formed as a
statutory close corporation.
____ 99. Sue has a great idea for a business but has limited financial assets. She wants to retain control over the
management of the company, but she needs someone to provide additional financing. Her friend Tom has
some money to invest and likes Sues idea. He would like to share in any profits, but he doesnt have the time
or interest in managing the company and is nervous about the liability involved in running a business. A
_______________ would probably match the needs of both Sue and Tom.
____ 100. Cathy and Denise open a business as a limited liability partnership in a state that offers partial shield
protection. From Cathys perspective, this means that she
a) has unlimited liability for most types of debts the firm incurs, but she is protected from
any debts that result from Denises negligence or malpractice.
b) is protected from any debts that arise from her own negligence or business errors but has
unlimited liability for any other business debts.
c) may lose any money she initially invests in the company has but no further liability.
d) will split responsibility for any company debts evenly with Denise, so she can never be
held responsible for more than 50 percent of any claims against their business.
____ 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
a) senior bank management.
____ 103. Mikes Motorcycles, Inc., has just incorporated the business in Delaware. John Littleton, a partner, now
____ 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.
a) boards of directors, creditors
b) boards of directors, stockholders
c) top management, employees
d) 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):
a) angel investor.
b) venture capitalist.
c) institutional investor.
d) limited partner.
____ 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?
Balance sheets, income statements, and cash flow statements.
Journals, ledgers, and trial balances.
Total debits and total credits.
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 ___________.
a) liabilities; retained earnings
b) dividends; interest
c) owners equity; liabilities
d) revenues; expenses
____ 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)
____ 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
a) invest the funds in common stocks.
b) keep all of these funds in her checking account.
c) put some of her excess cash into money market mutual funds.
d) 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 flows of $2,000 for each of the next five years. Another investment offers her future
cash flows of $5,000 in year five and $7,500 in year six. You tell her that in order for her to compare these
two investments, she will need to calculate the _________ of the future cash flows.
common payout value
average annual payout
____ 167. Flying High Inc. is trying to decide whether to invest in a new robot for its packaging line. The new robot will
cost $370,000 and is expected to significantly increase efficiency and thus save the company $67,000 per year
for the next eight years. At that time, the robot will be completely depreciated and may not have any salvage
value. As part of the financial management team for Flying High, you are assigned to evaluate this proposal.
A key part of your analysis will probably consist of a computation of the proposals
net present value.
total net cash flow.
____ 168. A wealthy relative promises to give you $5,000 when you complete all of the college courses needed to earn a
degree in business. The present value of this future sum must be
a) more than $5,000, but the exact value depends on how long it takes you to earn your
degree and the rate of interest you can earn on investments.
b) less than $5,000, but the exact value depends on how long it takes you to earn your degree
and the rate of interest you can earn on investments.
c) more than $5,000, but the exact value depends on the exchange rate for the dollar and the
rate of interest you could earn on investments.
d) less than $5,000, but the exact value depends on how long it takes you to earn your degree
and the exchange rate for the dollar.
____ 169. Danielle, the regional manager of CDz music store, is trying to determine if the store should invest in a new
computerized inventory tracking system. Using financial analysis, she would decide that the investment was
total positive cash flows were greater than total negative cash flows.
its NPV is equal to or greater than zero.
its NPV is less than zero.
the firm has enough cash to make the purchase without having to arrange additional
____ 170. Jason, the regional manager for a large electronics firm, is trying to determine whether a new warehouse is a
good investment. After working with his firms financial managers, he concludes that the project carries a
negative net present value. What should Jason doand why?
a) Invest in the warehousea negative NPV indicates that failing to do so will reduce the
value of the firm to its stockholders.
b) Do not invest in the warehousea negative NPV means that the present value of the
positive cash flows are not high enough to justify the costs of the warehouse.
c) Invest in the warehousea negative NPV means that the cost of financing the warehouse
is less than the cost of any other investment.
d) Do not invest in the warehousea negative NPV means the firm doesnt have enough
money to afford the investment.
____ 171. Sally Snooks has recently completed this class. While attending her companys holiday party, she hears one
of the executives mention that the company is heavily leveraged. Sally, who recently bought 300 shares in the
companys stock, is very interested in this bit of information because she knows that such leverage
a) will protect her return on investment if the company experiences a downturn in sales.
b) will increase the amount of taxes she will have to pay on her dividends.
c) means that the firm is financed with a sizeable amount of debt, which can increase the
return on her investment in good times but can lead to a lower return when times are bad.
d) is a time-proven way to both improve the expected return on equity and reduce the
financial risk to stockholders. This is because reliance on debt means creditors are
assuming most of the risk while stockholders are entitled to most of the profits.
____ 172. Lottadoe and Bigbux are two companies that are identical in every respect except that Lottadoe uses only
equity financing while Bigbux relies heavily on debt financing. Over the past year, the firms had identical net
incomes before interest and taxes were taken into account. If this net income was very high,
Lottadoe would pay less in taxes than Bigbux.
Bigbux would report a higher return on equity than Lottadoe.
Bigbux would report a lower return on equity than Lottadoe.
Lottadoe would report a lower net income after taxes than Bigbux.
____ 173. Lottadoe and Bigbux are two companies that are identical in every respect except that Lottadoe uses only
equity financing while Bigbux relies heavily on debt financing. Over the past year, the firms had identical net
incomes before interest and taxes were taken into account. If the firms faced a rough year with a very low
a) Bigbux would report a higher net taxable income than Lottadoe.
b) Lottadoe would report a higher return on equity than Bigbux.
c) Lottadoe would be required to pay a higher dividend than Bigbux, thus reducing retained
d) Bigbux would be able to skip its interest payments if paying them would cause its net
income to be negative.
____ 174. Tucker Enterprises has $100,000 worth of debt financing and $200,000 in equity financing. This year it paid
$8,000 in interest on its debt and paid $8,000 in dividends to stockholders. Its tax rate is 25 percent. This
suggests that its
interest payments will result in a $2,000 reduction in its taxes.
the dividend payments will result in an $8,000 reduction in its taxes.
the dividend payment will increase both taxes and retained earnings.
neither interest nor dividends will affect the companys taxes because they are both aftertax expenses.
____ 175. Deborah owns 100 shares of common stock in the Macrofirm Corporation. She bought the stock at a price of
$33 per share, and it is now selling at $46 per share. If she sold it now, she would realize a
____ 176. The Zeerocks Corporation is a rapidly growing company that just experienced a very profitable quarter. The
companys board of directors announced that they have decided not to pay a dividend to common
stockholders. This suggests that
a) the board has violated its obligation to the companys owners, making it likely that the
company will be sued.
b) the board has decided to reinvest the profits.
c) preferred stockholders also will not receive a dividend.
d) the company had some large interest payments it had to make.
____ 177. You own 10 percent of the shares of common stock currently held in Zeerocks Corporation. At the most
recent meeting, the board of directors authorized 100,000 new shares of stock be sold to raise funds. As an
existing stockholder, you may have a(n) ___________ right to buy up to __________ shares of the new stock
before it is offered to the public.
a) preliminary; 1,000
b) cumulative; 10,000
c) protective; 5,000
d) preemptive right; 10,000
____ 178. Reba owns a convertible bond issued by Macrofirm, Inc. The bond has a par value of $1,000, a conversion
ratio of 40, a coupon rate of 6 percent, and will mature in 2019. The market price of Macrofirms common
stock has risen steadily over the past three years and is currently $35 per share. Reba
a) is likely to find it attractive to convert the bond to common stock.
b) should hold the bond until it matures.
c) may be forced to sell her bond back to the company, but if she does so, she will receive a
premium above the par value.
d) will be able to redeem the bond as soon as the price of the stock rises above $40 so that it
covers the conversion ratio.
____ 179. Julie owns a bond with a $1,000 par value. If she decides to sell her bond on the secondary market before the
maturity date, she
a) will receive less than $1,000, because the only time the bond is worth the full par value is
b) will receive exactly $1,000, because that is the guaranteed value of the bond.
c) will receive more than $1,000, because the bond will pay interest to the buyer, making it
an attractive investment.
d) could receive more or less than $1,000, because the market price of bonds is free to
____ 180. Abby owns a $1,000 callable bond that was issued in 2002 and matures in 2032. The bond was issued with a
coupon rate of 8.5 percent. Interest rates have been falling since the bonds were issued, and coupon rates on
similar newly issued bonds are now 5.5 percent. Under these circumstances,
the firm that issued the bond is very likely to redeem it in the near future.
Abby will receive $55 in interest this year.
Abby will exchange the bonds for a stated number of shares of stock in the same company.
Abby is likely to be very unhappy with the return the bond is paying each year.
____ 181. Ozemoore Enterprises is preparing to issue some new bonds. Financial manager Rex Hilliard wants to make
sure that the firm has a plan to retire the bonds in an orderly manner. He would be most likely to recommend
that the company include a ____________ arrangement in the bond agreement.
____ 182. Corporation GHI has issued bonds in $100,000 increments to raise capital for product development efforts.
The bonds contain a provision that allows the bondholders to exchange each bond for 25 shares of common
stock. Bonds with this type of arrangement are called
____ 183. Dominic Pizetta works for an investment bank that helps young firms go public. The client firm he is
currently helping shows great promise due to the fact that it owns several patents on marketable innovations.
Dominics investment bank has agreed to underwrite the stock issue, meaning that it will
a) set the stock price relatively high at the beginning of the IPO and gradually lower it until
all shares are sold.
b) guarantee the sale of all shares to investors in a stated time period (usually 72 hours), but
in order to do so, will set the price relatively low at the beginning of the IPO.
c) purchase all the shares of stock itself at an agreed upon price, so that the client will receive
a known amount of funds.
d) arrange for a single major venture capital firm to buy all of the stock at an agreed upon
____ 184. STR is a well-known, mid-sized company that first went public in 1977. The firms CFO, Samantha Tate, is
working with the firms investment banker to raise capital. Samantha wants to simplify the process and not
get bogged down in the paperwork required by the SEC. She could accomplish this objective by
a) taking advantage of the 10-year exemption offered by the SEC, which allows companies
whose stock has been publicly traded for at least 10 years an exemption from filing
paperwork when issuing new securities.
b) working with the investment banker to sell the securities through a private placement.
c) telling the investment banker to issue the stock in the secondary market.
d) having the investment banker sell the stock in the over-the-counter market.
____ 185. CEO Carol Moss and CFO Jay Hall of Mainer Industries are on a whirlwind tour with their investment
banker. They are visiting several major cities to meet with potential investors about their companys initial
public offering. Carol and Jay are participating in an IPO
dog and pony show.
____ 186. The CEO of your firm has just remarked to you, Quit worrying about the price of the company stock on the
secondary market. After all, we received our funds for long-term expansion when we issued the stock in the
primary market. As the finance director of the firm, your response is,
a) Youre right! The price on the secondary market really has no relationship to our firms
b) Youre right! Investors who buy stock in the secondary market dont provide us with any
funds, so their views arent relevant to how we manage the company.
c) Not so fast! The price of our stock on the secondary market indicates how well we are
managing our firm and benefiting our stockholders.
d) Not so fast! Dont you know that we get a percentage of any revenue earned on the sale
of stock on the secondary market?
____ 187. TRV is a small corporation with only 430 stockholders and total assets of $8.7 million. Investors who want to
buy stock in this company would probably purchase the stock in the
____ 188. In 2006, the _________ and the _________ were the two most important self-regulatory organizations
(SROs). However, in late 2006 these two organizations announced plans to merge their regulatory efforts.
NYSE; World Bank
____ 189. Stuart wants to buy some additional stock in Admiral Engines, but the price of the stock has been fluctuating
wildly in recent days. He wants to make sure he doesnt pay too much. His analysis suggests that $26 per
share is the highest price he should pay. Stuart is likely to place a ______________ with his broker.
fail safe order
____ 190. Suri owns 100 shares in OPQ, an oil company. After looking at the firms latest annual report, she feels good
about the performance of the company, so she tells her broker to buy 100 more shares but to pay no more than
$33 a share. Suri just issued her broker a
stop loss order
____ 191. Harry Oakley knows that the stock market sometimes goes through rough times and that the stocks of poorly
managed companies can lose value. But he has noticed that over the long run, the general direction of stock
prices has been upward. He is a patient investor who favors holding several different stocks and letting the
market take its course. Harrys approach most closely fits the
a) value investing strategy.
b) investing for income strategy.
c) buy and hold strategy.
d) working capital strategy.
____ 192. The Wall Street Journals dartboard stock challenge showed that
a) stocks picked by experts performed much better than stocks picked randomly by throwing
darts at financial pages.
b) once all factors were taken into account, stocks picked by randomly throwing darts
performed almost as well as stocks picked by experts.
c) once all factors were taken into account, stocks picked by throwing darts clearly
outperformed the stocks picked by experts by a wide margin.
d) stocks chosen by throwing darts had a slightly higher average return than stocks chosen by
experts. However, the returns were also much less stable, so the risk of loss on stocks
picked by darts was also much higher.
____ 193. You have just graduated from college and landed your first job. However, you realize that it is never too early
to begin investing for your future needs. Which of the following investment strategies would be most likely to
help you accumulate significant wealth over the long haul?
invest mainly in a broad group of corporate bonds.
invest mainly in a diversified set of common stocks.
invest in the preferred stocks of a few well-established corporations.
put all of your money into a government insured savings account with a bank.