Do You Have Basic Idea Of Business Finance?

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Do You Have Basic Idea Of Business Finance? - Quiz

Business finance refers to money and credit utilized in the business. It's the crucial part of a business where a firm has to purchase assets, goods, raw materials. It's a multiple choice business Finance test with 25 questions. Let's try out the quiz. All the best!


Questions and Answers
  • 1. 

    Anything generally accepted as a means for paying for goods and services is known as _____________.

    • A.

      A federal reserve note

    • B.

      Barter

    • C.

      Legal tender

    • D.

      Money

    Correct Answer
    D. Money
    Explanation
    Money is generally accepted as a means for paying for goods and services. It is a medium of exchange that is widely recognized and used in economic transactions. Money can take various forms, such as coins, banknotes, or digital currency, and it serves as a unit of account and a store of value. Legal tender refers to the currency that a government has declared as acceptable for settling debts, and it is one of the characteristics of money. Therefore, money is the correct answer in this context.

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  • 2. 

    Chi-Chung recently took a trip to Uruguay. He was struck by the fact that Uruguayan coins were so large and heavy that his pockets simply couldn't accommodate an ordinary day's supply. In Chi-Chung's opinion, Uruguayan coins could be more ________.

    • A.

      Divisible

    • B.

      Stable

    • C.

      Portable

    • D.

      Durable

    Correct Answer
    C. Portable
    Explanation
    Chi-Chung's opinion is that Uruguayan coins could be more portable. This is because he found them to be large and heavy, making it difficult for him to carry a normal day's supply of coins in his pockets. Therefore, he believes that if the coins were more portable, it would be easier for him to carry them around.

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  • 3. 

    Pham traded 15 acres of undeveloped property for a new home on a one-acre lot. This exchange can be considered a(n) _________.

    • A.

      Highly liquid store of value

    • B.

      Example of barter

    • C.

      Easily divisible form of money

    • D.

      A good form of money

    Correct Answer
    B. Example of barter
    Explanation
    This exchange can be considered an example of barter because it involves the direct exchange of goods (15 acres of undeveloped property) for another good (a new home on a one-acre lot) without the use of money as a medium of exchange.

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  • 4. 

    Which of the following financial assets is most liquid?

    • A.

      Mutual fund shares

    • B.

      Shares of common stock

    • C.

      Corporate bonds

    • D.

      Checking account

    Correct Answer
    D. Checking account
    Explanation
    A checking account is the most liquid financial asset because it allows for easy and immediate access to funds. Unlike other options such as mutual fund shares, shares of common stock, or corporate bonds, a checking account allows individuals to withdraw money or make transactions at any time without any restrictions or penalties. This high level of liquidity makes checking accounts a convenient and flexible choice for managing everyday expenses and financial transactions.

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  • 5. 

    All of the following are included in M1 with the exception of ___.

    • A.

      Money market mutual funds

    • B.

      NOW accounts

    • C.

      Checking accounts

    • D.

      Traveler's checks

    Correct Answer
    A. Money market mutual funds
    Explanation
    M1 is a measure of the money supply that includes highly liquid assets such as currency in circulation, demand deposits (checking accounts), and traveler's checks. NOW accounts are also included in M1 as they are interest-bearing checking accounts. However, money market mutual funds are not included in M1 as they are considered to be less liquid and are typically not used for day-to-day transactions.

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  • 6. 

    In order to be included in M1, a financial asset _____.

    • A.

      Must be a bank account

    • B.

      Cannot pay any interest

    • C.

      Must serve as a medium of exchange

    • D.

      Must be government insured

    Correct Answer
    C. Must serve as a medium of exchange
    Explanation
    In order to be included in M1, a financial asset must serve as a medium of exchange. This means that the asset must be readily accepted as a form of payment for goods and services. Bank accounts, interest payments, and government insurance are not requirements for an asset to be included in M1.

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  • 7. 

    All of the following financial assets are included in M2 EXCEPT ___.

    • A.

      Bank savings accounts

    • B.

      Share draft accounts

    • C.

      Money market mutual funds

    • D.

      Common stock mutual funds

    Correct Answer
    D. Common stock mutual funds
    Explanation
    M2 is a measure of the money supply that includes highly liquid financial assets. Bank savings accounts, share draft accounts, and money market mutual funds are all examples of highly liquid financial assets that can be easily converted into cash. However, common stock mutual funds are not considered as highly liquid as the other options. Common stock mutual funds are investment vehicles that pool money from multiple investors to invest in a diversified portfolio of stocks. While they can be sold and converted into cash, the process may take time and may involve fees or penalties. Therefore, common stock mutual funds are not included in M2.

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  • 8. 

    All of the following are reasons why organizations need funds EXCEPT __.

    • A.

      To finance inventories

    • B.

      To make interest payments on loans

    • C.

      To add to owner's equity

    • D.

      To meet day-to-day cash needs

    Correct Answer
    C. To add to owner's equity
    Explanation
    Organizations need funds for various reasons, such as financing inventories, making interest payments on loans, and meeting day-to-day cash needs. However, adding to owner's equity is not a reason why organizations need funds. Owner's equity represents the owner's investment in the business and is typically used to measure the company's net worth. It is not a source of funds for the organization but rather a reflection of the owner's stake in the business.

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  • 9. 

    Which of the following investments would be considered closest to cash?

    • A.

      A Treasury bill

    • B.

      Shares of common stock

    • C.

      Bond issued by a small city

    • D.

      Farmland

    Correct Answer
    A. A Treasury bill
    Explanation
    A Treasury bill would be considered closest to cash because it is a short-term debt obligation issued by the government, typically with a maturity of one year or less. Treasury bills are highly liquid and can be easily bought or sold in the secondary market. They are also considered to have very low risk of default, making them a safe and reliable investment option. In contrast, shares of common stock, bonds issued by a small city, and farmland are all less liquid and may have higher risks associated with them.

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  • 10. 

    Abdul is the financial manager for Watertown Software. He needs to raise funds for his company and should probably consider ________.

    • A.

      Debt capital only

    • B.

      Equity capital only

    • C.

      The most beneficial combination of debt and equity capital

    • D.

      A government loan

    Correct Answer
    C. The most beneficial combination of debt and equity capital
    Explanation
    Abdul, as the financial manager, needs to raise funds for his company. In order to do this effectively, he should consider the most beneficial combination of debt and equity capital. This means that he should assess the advantages and disadvantages of both debt and equity financing options, and determine the optimal mix of these two sources of capital that will maximize the benefits for the company. By considering both debt and equity capital, Abdul can strike a balance between the advantages of borrowing money (debt capital) and issuing shares (equity capital) to meet the financial needs of Watertown Software.

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  • 11. 

    All of the following would add equity capital to a business EXCEPT ___.

    • A.

      Payment of dividends to shareholders

    • B.

      Venture capital investments

    • C.

      Company profits

    • D.

      Exercise of employee stock options

    Correct Answer
    A. Payment of dividends to shareholders
    Explanation
    Payment of dividends to shareholders would not add equity capital to a business. Dividends are payments made to shareholders from the company's profits as a distribution of earnings. This reduces the retained earnings of the company and does not contribute to the equity capital. On the other hand, venture capital investments, company profits, and the exercise of employee stock options all contribute to the equity capital of a business.

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  • 12. 

    All of the following statements concerning debt capital are correct EXCEPT ________.

    • A.

      All forms of debt eventually mature

    • B.

      Lenders have a prior claim to assets

    • C.

      Lenders have a prior claim to interest payments

    • D.

      Lenders have voting rights in the election of a firm's board of directors

    Correct Answer
    D. Lenders have voting rights in the election of a firm's board of directors
    Explanation
    All of the statements concerning debt capital are correct except for the statement that lenders have voting rights in the election of a firm's board of directors. While lenders do have a prior claim to assets and interest payments, they typically do not have voting rights in the election of a firm's board of directors. Voting rights are usually reserved for shareholders, who are the owners of the company. Lenders, on the other hand, are creditors who provide debt capital to the company.

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  • 13. 

    All of the following are sources of short-term funds EXCEPT ______.

    • A.

      Trade credit

    • B.

      Bank loans

    • C.

      Commercial paper

    • D.

      Privately placed bonds

    Correct Answer
    D. Privately placed bonds
    Explanation
    Privately placed bonds are not a source of short-term funds because they are typically issued for longer-term financing needs. Trade credit refers to the credit extended by suppliers to customers, bank loans are a common source of short-term funds, and commercial paper is a short-term debt instrument typically issued by large corporations. However, privately placed bonds are typically issued to a select group of investors for longer-term financing needs, making them an exception among the given options.

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  • 14. 

    A firm would most likely finance _______ using short-term sources.

    • A.

      Inventory

    • B.

      Buildings

    • C.

      Another company

    • D.

      Machinery

    Correct Answer
    A. Inventory
    Explanation
    A firm would most likely finance inventory using short-term sources because inventory is a current asset that is expected to be sold or used up within one year. Short-term financing options such as trade credit, bank loans, or lines of credit are commonly used to finance inventory as it allows the firm to meet its immediate working capital needs and maintain sufficient stock levels to meet customer demand. Financing inventory with short-term sources also helps to minimize the cost of carrying inventory over a longer period of time.

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  • 15. 

    Mitch raises money from wealthy individuals and institutional investors for a variety of promising new companies. In exchange, he will become part owner of those businesses. Mitch is a(n) _____________.

    • A.

      Underwriter

    • B.

      Venture capitalist

    • C.

      Entrepreneur

    • D.

      Angel investor

    Correct Answer
    B. Venture capitalist
    Explanation
    Mitch is a venture capitalist because he raises funds from wealthy individuals and institutional investors to invest in promising new companies. As part of the investment, he becomes a part owner of those businesses. Venture capitalists typically provide capital and expertise to help these companies grow and succeed in exchange for a share of ownership and potential profits.

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  • 16. 

    Which of the following is a depository financial institution?

    • A.

      A credit union

    • B.

      A life insurance company

    • C.

      A pension fund

    • D.

      A mutual fund

    Correct Answer
    A. A credit union
    Explanation
    A credit union is a depository financial institution because it accepts deposits from its members and provides them with various financial services such as loans, savings accounts, and checking accounts. Unlike traditional banks, credit unions are typically non-profit organizations that are owned and operated by their members. They are regulated and insured, offering a safe and secure place for individuals to deposit their money and access financial products and services.

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  • 17. 

    All of the following statements are correct EXCEPT _______.

    • A.

      The number of commercial banks is declining each year

    • B.

      Commercial banks are prohibited from selling securities or insurance

    • C.

      Commercial banks are the most important financial institution

    • D.

      Banks offer the widest range of services of any financial institution

    Correct Answer
    B. Commercial banks are prohibited from selling securities or insurance
    Explanation
    The given correct answer is "commercial banks are prohibited from selling securities or insurance." This statement is incorrect because commercial banks are not prohibited from selling securities or insurance. In fact, many commercial banks offer these services to their customers. Commercial banks are financial institutions that provide a wide range of services, including accepting deposits, granting loans, and offering various financial products and services. While they are important financial institutions, it is not accurate to say that they are the most important financial institution, as there are other types of financial institutions that play significant roles in the economy as well.

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  • 18. 

    Commercial banks obtain most of their funds from_________.

    • A.

      The government

    • B.

      The sale of securities

    • C.

      Stockholders

    • D.

      Depositors

    Correct Answer
    D. Depositors
    Explanation
    Commercial banks obtain most of their funds from depositors. Depositors are individuals and businesses who deposit money into their bank accounts. This money becomes a liability for the bank, as they are obligated to repay it when the depositor requests it. Banks use these funds to provide loans and make investments, earning interest and generating profits. The sale of securities and stockholders may also provide funds for banks, but depositors are the primary source of funds for commercial banks.

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  • 19. 

    Banks use most of their funds to _________.

    • A.

      Buy securities

    • B.

      Buy physical assets

    • C.

      Make loans

    • D.

      Buy other banks

    Correct Answer
    C. Make loans
    Explanation
    Banks use most of their funds to make loans. This is because lending money is one of the primary functions of banks. By making loans, banks provide financial assistance to individuals, businesses, and other entities. This allows them to earn interest on the loans, which is a major source of revenue for banks. Additionally, making loans helps stimulate economic growth by providing funds for investment and consumption. Therefore, it is crucial for banks to allocate a significant portion of their funds towards making loans.

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  • 20. 

    Omar made a purchase at his local Walmart. Instead of writing a check, Omar used a special card issued by his bank. The card has a Vista logo on the front. He entered his PIN and the purchase was automatically deducted from his checking account. Omar used his _____.

    • A.

      Debit card

    • B.

      Credit card

    • C.

      ATM card

    • D.

      Point-of-sale card

    Correct Answer
    A. Debit card
    Explanation
    Omar used a debit card to make the purchase at his local Walmart. A debit card is a special card issued by a bank that allows the cardholder to make purchases by deducting the amount directly from their checking account. This is different from a credit card, which allows the cardholder to borrow money from the bank to make purchases. An ATM card is used specifically for withdrawing cash from an ATM machine, while a point-of-sale card is a general term that can refer to any card used to make purchases at a point of sale.

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  • 21. 

    Deposit insurance shifts most of the financial risk of bank failures from depositors to ________.

    • A.

      The federal government

    • B.

      The bank's stockholders

    • C.

      Borrowers

    • D.

      The bank's creditors

    Correct Answer
    A. The federal government
    Explanation
    Deposit insurance is a system in which the federal government guarantees the safety of deposits in banks. In the event of a bank failure, depositors are protected and their funds are reimbursed by the government. This shifts the financial risk from the depositors to the federal government, as they are responsible for compensating the depositors. The other options, such as the bank's stockholders, borrowers, and the bank's creditors, do not have the same level of responsibility or obligation in ensuring the safety of deposits.

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  • 22. 

    If the Fed reduced reserve requirements, ___________.

    • A.

      Banks would have less money to lend businesses and consumers

    • B.

      Interest rates would fall

    • C.

      Inflation would decline

    • D.

      Economic growth would decline

    Correct Answer
    B. Interest rates would fall
    Explanation
    If the Fed reduced reserve requirements, it would mean that banks would be required to hold less money in reserves and would therefore have more money available to lend. This increase in lending capacity would lead to increased competition among banks to lend money, resulting in a decrease in interest rates. As a result, borrowers, both businesses and consumers, would be able to access credit at lower rates, stimulating borrowing and spending in the economy. This would ultimately lead to a decrease in interest rates.

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  • 23. 

    Which of the following actions would have the effect of increasing the supply of money and credit and lowering interest rates?

    • A.

      The Fed buying government securities

    • B.

      The Fed raising the margin requirement

    • C.

      The Fed raising the reserve requirement

    • D.

      The Fed raising the discount rate

    Correct Answer
    A. The Fed buying government securities
    Explanation
    When the Fed buys government securities, it injects money into the economy. This increases the supply of money and credit, as well as lowers interest rates. By purchasing government securities, the Fed increases the amount of money available in the banking system, which in turn reduces the cost of borrowing. This stimulates economic activity by making it cheaper for individuals and businesses to access credit, leading to increased spending and investment. Lower interest rates also encourage borrowing and investment, further boosting the supply of money and credit in the economy.

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  • 24. 

    Alexis purchased numerous shares of Google when the company first went public, and now she is looking to sell them at a considerable profit. What would be the main concern for Alexis at the moment she sells?

    • A.

      Tax on income

    • B.

      Stability of principal

    • C.

      Liquidity

    • D.

      Tax on capital gains

    Correct Answer
    D. Tax on capital gains
    Explanation
    The main concern for Alexis at the moment she sells her shares of Google would be the tax on capital gains. When she sells the shares at a considerable profit, she will be subject to a tax on the difference between the selling price and the original purchase price. This tax is known as the capital gains tax and can significantly impact the overall profit Alexis will make from the sale. Therefore, understanding and considering the tax implications is crucial for her financial planning.

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Our quizzes are rigorously reviewed, monitored and continuously updated by our expert board to maintain accuracy, relevance, and timeliness.

  • Current Version
  • Mar 22, 2022
    Quiz Edited by
    ProProfs Editorial Team
  • Dec 13, 2007
    Quiz Created by
    MSalmons
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