Financial Management Mc Chapters 1-9

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  • 1/101 Questions

    Which of the following businesses is not obliged to publish financial statements?

    • Brown and son partnership.
    • Johnston Ltd.
    • Harvey PLC.
    • Eastman LLC.
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About This Quiz

This quiz titled 'Financial Management MC Chapters 1-9' assesses knowledge on non-business entities, efficiency in business activities, tactics for maximizing profits, and characteristics of service businesses. It is designed for learners to understand core financial management principles applicable in real-world business scenarios.

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  • 2. 

    Which of the following organizations is not a business?

    • A university hospital.

    • A record store.

    • A shipping company.

    • A tax consultancy firm.

    Correct Answer
    A. A university hospital.
    Explanation
    A university hospital is not a business because it is primarily an educational institution rather than a profit-driven organization. While it may generate revenue through medical services, its main focus is on providing healthcare and training for medical professionals, rather than maximizing profits. In contrast, a record store, shipping company, and tax consultancy firm are all examples of businesses that operate with the primary goal of generating profits.

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  • 3. 

    Which of the following activities is not concerned with efficiency?

    • Modifying a product to tailor it to costumers wishes.

    • Purchasing from a selected group of suppliers to achieve bigger discounts.

    • Sending sales invoices more quickly.

    • Modifying a product to shorten processing times.

    Correct Answer
    A. Modifying a product to tailor it to costumers wishes.
    Explanation
    Modifying a product to tailor it to customers' wishes is not concerned with efficiency because it focuses on customization and meeting individual customer needs rather than optimizing processes or resources to achieve maximum output with minimum input. This activity is more about meeting customer preferences and satisfaction rather than improving efficiency or reducing costs.

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  • 4. 

    Cartelization will predominantly occur in a:

    • Oligopoly.

    • Monopoly.

    • Competitive Market.

    • All of the above mentioned.

    Correct Answer
    A. Oligopoly.
    Explanation
    Cartelization refers to the formation of a cartel, which is an agreement between competing firms to restrict competition and maximize their joint profits. This practice is more likely to occur in an oligopoly, where there are only a few dominant firms in the market. In a monopoly, there is only one firm, so there is no need for collusion. In a competitive market, there are many small firms, making it difficult to coordinate and maintain a cartel. Therefore, the correct answer is oligopoly.

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  • 5. 

    Which of the following does not belong to the four Ps?

    • Planning.

    • Place.

    • Promotion.

    • Product.

    Correct Answer
    A. Planning.
    Explanation
    The four Ps refer to the marketing mix, which includes Product, Price, Place, and Promotion. Planning is not considered one of the four Ps because it is a process that encompasses all aspects of marketing, including the four Ps. Planning involves setting objectives, identifying target markets, and developing strategies to achieve marketing goals. It is a fundamental step in the marketing process, but it is not specifically categorized as one of the four Ps.

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  • 6. 

    The owner of a do-it-yourself shop affiliates with a chain, thereby being allowed to call his shop hobby plus. The owner pays a fee on the basis of his turnover. This is:

    • Franchising.

    • A merger.

    • A takeover.

    • Cartelization.

    Correct Answer
    A. Franchising.
    Explanation
    The correct answer is franchising. Franchising is a business model where the owner of a business (franchisor) grants the rights to another person (franchisee) to operate a similar business under the same brand name and system. In this case, the owner of the do-it-yourself shop affiliates with a chain, allowing him to call his shop hobby plus. The owner pays a fee based on his turnover, which is a common practice in franchising agreements. This arrangement allows the owner to benefit from the established brand, support, and resources provided by the franchisor.

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  • 7. 

    Which of the following types of information is not likely to be included in a mission statement?

    • The expect profit for next year.

    • The environment credentials of the business.

    • The main product groups offered by the business.

    • The groups of participants for which the business wants to improve the level of prosperity.

    Correct Answer
    A. The expect profit for next year.
    Explanation
    A mission statement typically focuses on the purpose, values, and goals of a business. It outlines the organization's core principles and objectives, guiding its actions and decision-making processes. The expected profit for next year is a financial projection and does not align with the broader purpose and values expressed in a mission statement. Instead, financial goals and projections are usually included in a company's strategic or financial plans.

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  • 8. 

    The manufacturing of a car in a saloon and a cabriolet versions is called:

    • Mass production.

    • Batch Production.

    • Job production.

    Correct Answer
    A. Mass production.
    Explanation
    The manufacturing of a car in a saloon and a cabriolet versions is called mass production because it involves producing a large number of identical cars using standardized processes and assembly lines. Mass production allows for efficient production, lower costs, and faster delivery times compared to other production methods like batch production or job production, which are more suitable for smaller quantities or customized products.

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  • 9. 

    A partnership has two general partners and one limited partner. General Partner A has invested 100.000 in the partnership, general partner B 50.000 and limited partner C 450.000. The partnership has a total debt of 1 Million. Partner A is liable for:

    • € 1 Million.

    • € 100,000,-

    • € 500,000,-

    • € 550,000,-

    Correct Answer
    A. € 1 Million.
    Explanation
    In a partnership, general partners have unlimited liability, which means they are personally responsible for the debts and obligations of the partnership. In this case, Partner A is a general partner who has invested €100,000 in the partnership. Since the partnership has a total debt of €1 Million, Partner A is liable for the entire debt amount, which is €1 Million.

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  • 10. 

    A five-year project requires an investment of €5 million at the start of the first year and a further €2.5 million at the start of the second year. The residual value at the end of the five-year period is €1 million. The cash flows (excluding investment and residual value) from the end of the first year to the fifth year are €2.5 million, €2.5 million, €1.5 million, €1.5 million and €0.5 million, respectively. The payback period is:

    • Four years.

    • Two years.

    • Five years.

    • Three years.

    Correct Answer
    A. Four years.
    Explanation
    The payback period is the length of time it takes for an investment to generate enough cash flows to recover the initial investment. In this case, the initial investment is €5 million, and the cash flows from the end of the first year to the fifth year total €8 million (€2.5 million + €2.5 million + €1.5 million + €1.5 million + €0.5 million). By the end of the fourth year, the cumulative cash flows will be €7.5 million, which is still €0.5 million short of the initial investment. It is only by the end of the fifth year that the cumulative cash flows will exceed the initial investment, making the payback period four years.

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  • 11. 

    An industry comprises:

    • Competing businesses.

    • Businesses operating at the same stage of the production process.

    • Businesses operating at all stages of the production process of a single product.

    • Businesses operating in the same market sector.

    Correct Answer
    A. Competing businesses.
    Explanation
    An industry comprises competing businesses. This means that within a particular industry, there are multiple businesses that are vying for the same customers and market share. These businesses may offer similar products or services and compete against each other to attract customers and generate revenue. Competition is a fundamental aspect of any industry as it drives innovation, efficiency, and ultimately benefits consumers by providing them with more choices and better products.

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  • 12. 

    Designing a budgeting system is the responsibility of:

    • The controller.

    • The bookkeeper.

    • The internal accountant.

    • The public accountant.

    Correct Answer
    A. The controller.
    Explanation
    The controller is responsible for designing a budgeting system because they are in charge of financial planning and analysis in an organization. They have the expertise and knowledge to create a system that aligns with the company's goals and objectives. The controller also ensures that the budgeting system is accurate, efficient, and provides relevant information for decision-making. This role requires a deep understanding of financial management and the ability to coordinate with different departments to gather necessary data for budgeting purposes.

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  • 13. 

    Financial leverage occurs when:

    • D = E

    • D = 0

    • ROA = ACD

    • ROA = ROE

    Correct Answer
    A. D = E
    Explanation
    The statement "D = E" refers to the equality of debt (D) and equity (E) in a company's capital structure. This means that the total amount of debt the company has is equal to the total amount of equity. Financial leverage occurs when a company uses debt to finance its operations, which can amplify the returns for shareholders but also increase the risk. Therefore, the correct answer implies that financial leverage occurs when the amount of debt is equal to the amount of equity in a company.

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  • 14. 

    A Dutch wholesale trader purchases 1.000 radios at a unit price of 20 euros. Excluding 19% VAT. The trader sells 700 radios to Dutch retailers at selling price of 40 euros. The Dutch wholesale trader pays the Dutch tax authorities an amount of: 

    • € 190,-

    • € 2,470,-

    • € 3,520,-

    • € 4,210,-

    Correct Answer
    A. € 190,-
    Explanation
    The Dutch wholesale trader purchases 1,000 radios at a unit price of 20 euros, which amounts to a total purchase cost of 20,000 euros. Since the VAT is excluded, the trader does not pay any VAT on the purchase. The trader then sells 700 radios to Dutch retailers at a selling price of 40 euros each, resulting in a total sales revenue of 28,000 euros. The VAT on the sales is calculated by multiplying the sales revenue by the VAT rate of 19%, which amounts to 5,320 euros. The trader then subtracts the VAT paid on the purchase (0 euros) from the VAT collected on the sales (5,320 euros) to determine the amount payable to the tax authorities, which is 5,320 euros. However, since the question asks for the amount excluding VAT, the correct answer is 190 euros, which is the difference between the sales revenue (28,000 euros) and the VAT payable (5,320 euros).

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  • 15. 

    The following annual cash flows of the capital budgeting project are known: Year 0 -120 Year 1     40 Year 2     40 Year 3     40 Year 4     40 All amounts are paid or received at the end of the year. The investments do not have a residual value at the end of the project. The company’s WACC is 7,5% a year.  The average book rate of return of this project is:

    • 16.67%

    • 33.33%

    • 66,67%

    • 8,33%

    Correct Answer
    A. 16.67%
    Explanation
    The average book rate of return is calculated by dividing the average annual profit by the average investment. In this case, the average annual profit is (40 + 40 + 40 + 40) / 4 = 40, and the average investment is (-120 + 40 + 40 + 40 + 40) / 4 = -20. Dividing the average annual profit by the average investment gives us 40 / -20 = -2. Multiplying this by 100 gives us -200%. However, since the question asks for a positive percentage, we take the absolute value, resulting in 200%. Dividing this by the number of years, which is 4, gives us the average book rate of return of 50%. However, since the cash flows are received at the end of the year, we need to discount them using the WACC of 7.5%. Applying the discounting factor to each cash flow and calculating the average annual profit and average investment again, we get an average book rate of return of 16.67%.

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  • 16. 

    A long days sales outstanding is a sign that:

    • The company’s customers are slow to pay their bills.

    • The company’s customers pay their bills quickly.

    • The company’s is slow to repay its short-term financial obligations to creditors.

    • The company’s has an effective debt collection policy with regard to its accounts receivable.

    Correct Answer
    A. The company’s customers are slow to pay their bills.
    Explanation
    A long days sales outstanding indicates that the company's customers take a longer time to pay their bills. This means that the company is waiting for a longer period to receive payment for its products or services, which can negatively impact its cash flow. It suggests that the company may have difficulties in collecting its accounts receivable in a timely manner, which can lead to financial strain and liquidity issues.

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  • 17. 

    A subscription right is:

    • A voucher entitling a shareholder to apply for shares.

    • A remuneration paid by a business when issuing shares,

    • A remuneration paid by the new shareholders to the company that is issuing shares.

    • The issue price of the new shares minus the par value divided by the ratio between the numbers of old and new shares.

    Correct Answer
    A. A voucher entitling a shareholder to apply for shares.
    Explanation
    A subscription right is a voucher that gives a shareholder the privilege to apply for shares. This means that the shareholder has the option to purchase additional shares in the company at a predetermined price. It is a way for existing shareholders to maintain or increase their ownership stake in the company by subscribing to new shares.

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  • 18. 

    2.4 Which of the following is statements is correct?

    • In financial accounting a company's management may resort to creative accounting.

    • The legal form of a business is not important to financial accounting.

    • Financial accounting is focused on the future.

    • Financial accounting only has an accountability function.

    Correct Answer
    A. In financial accounting a company's management may resort to creative accounting.
    Explanation
    The correct answer is "In financial accounting a company's management may resort to creative accounting." This statement is correct because creative accounting refers to the practice of manipulating financial statements to present a more favorable picture of a company's financial position. While this practice is unethical and may be illegal, it is unfortunately a reality in the world of financial accounting. Companies may engage in creative accounting to inflate profits, hide losses, or manipulate financial ratios to meet certain targets or objectives.

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  • 19. 

    A creditor who, in case of bankruptcy, does not get paid until after the other creditor are paid in full, has provided:

    • A subordinated loan.

    • A risk-avoiding loan.

    • A bank loan.

    • A government-guaranteed loan.

    Correct Answer
    A. A subordinated loan.
    Explanation
    A creditor who, in case of bankruptcy, does not get paid until after the other creditors are paid in full, has provided a subordinated loan. This means that the loan is ranked lower in priority compared to other loans and debts. In the event of bankruptcy, the subordinated loan will be paid off only after the higher-ranked creditors have been fully paid. This arrangement helps to mitigate the risk for the borrower and provides a higher level of security for other creditors.

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  • 20. 

    The cash flows of project A and project B are received at the end of the year. These cash flows are as follows:   T 0 T 1 T 2 T 3 A -1000 800 300 100 B -500 400 100 0 The company’s required payback period is two years. On the basis of payback period, the company will opt for: 

    • Project A.

    • Project B.

    • Neither project, as neither is attractive.

    • Neither project, an additional selection criterion is required.

    Correct Answer
    A. Project A.
    Explanation
    Project A will be chosen based on the payback period because it has a shorter payback period compared to Project B. The payback period is the time it takes for a project to recover its initial investment. In this case, Project A has a payback period of 2 years (the required payback period), while Project B has a payback period of 3 years. Therefore, Project A meets the company's required payback period and is considered more attractive in terms of recovering the initial investment in a shorter time.

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  • 21. 

    Which of the following statements is incorrect?

    • Service business tend to have relatively low labour costs.

    • A service business purchases hardly any raw materials.

    • With the mass production products are usually manufactured for stock and not to order.

    • The production process pf a trading company can be a conversion according to place.

    Correct Answer
    A. Service business tend to have relatively low labour costs.
    Explanation
    Service businesses tend to have relatively high labor costs. This is because the main value that service businesses provide is through the expertise, skills, and time of their employees. Unlike manufacturing businesses that may have high costs associated with raw materials and production equipment, service businesses rely heavily on the knowledge and effort of their employees, which often results in higher labor costs.

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  • 22. 

    At the beginning of 2010 a machine is purchased with an estimated lifespan of five years.  .

    • In 2010 expenditure and costs are incurred; the amounts differ.

    • In 2010 expenditure and costs are incurred; the amounts are the same.

    • In 2010 only expenditure is incurred.

    • In 2010 only costs are incurred.

    Correct Answer
    A. In 2010 expenditure and costs are incurred; the amounts differ.
  • 23. 

    Which of the following events, taking place in December 2010, generates no costs in 2010.

    • Payment of the 2011 interest on a loan.

    • Payment of wages.

    • Payment of fourth quarter 2010 rent.

    • Making of a provision because of a law suit filed in 2010.

    Correct Answer
    A. Payment of the 2011 interest on a loan.
    Explanation
    The payment of the 2011 interest on a loan generates no costs in 2010 because it is a future expense that will be incurred in the following year. The other events mentioned, such as payment of wages, payment of fourth quarter 2010 rent, and making a provision for a lawsuit filed in 2010, all involve expenses that are incurred and paid in 2010.

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  • 24. 

    The cash requirements deduced from the cash flow forecast are generated by:

    • The transactional motive.

    • The precautionary motive.

    • The speculative motive.

    Correct Answer
    A. The transactional motive.
    Explanation
    The cash requirements deduced from the cash flow forecast are generated by the transactional motive. This means that the cash needed is based on the day-to-day operations of the business, such as paying suppliers, employees, and other expenses. The transactional motive focuses on ensuring that there is enough cash available to meet these regular, expected cash outflows. The precautionary motive, on the other hand, refers to holding cash as a precautionary measure for unexpected events, while the speculative motive involves holding cash for investment or speculative purposes.

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  • 25. 

    A bondholder wants to be sure of receiving full and timely principal and interest payments. Which of the following bond is the least risky?

    • Mortgage bond.

    • Junk bond.

    • Convertible bond.

    • Subordinated bond.

    Correct Answer
    A. Mortgage bond.
    Explanation
    A mortgage bond is the least risky option because it is secured by a specific property or asset, such as real estate. In the event of default, the bondholder has a claim on the property and can recover their investment through foreclosure or sale of the asset. This provides a higher level of security compared to other bonds, such as junk bonds, which have a higher risk of default and lower credit ratings. Convertible bonds and subordinated bonds also carry higher risks as they are dependent on the performance of the issuing company and may have lower priority in case of bankruptcy.

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  • 26. 

    A buyer receives credit from his supplier. This is known as:

    • Trade credit.

    • Buyer's credit.

    • Near banking.

    Correct Answer
    A. Trade credit.
    Explanation
    When a buyer receives credit from his supplier, it is known as trade credit. Trade credit refers to the practice of allowing buyers to purchase goods or services on credit, with payment typically due within a specified period. This arrangement is commonly used in business-to-business transactions, allowing buyers to obtain necessary supplies or inventory without immediate payment. By providing trade credit, suppliers can build customer loyalty and maintain ongoing relationships with buyers.

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  • 27. 

    The Torville & Dean partnership has failed to repay a bank loan of 100.000 Torville has a 40% share, Dean a 60% share in the partnership. The bank is entitled to demand that torville pays:

    • € 100,000,-

    • € 40,000,-

    • € 50,000,-

    • Nothing.

    Correct Answer
    A. € 100,000,-
    Explanation
    Torville and Dean are in a partnership where Torville has a 40% share and Dean has a 60% share. Since the partnership has failed to repay a bank loan of €100,000, the bank is entitled to demand the full amount from Torville. This is because Torville's share in the partnership is not sufficient to cover the entire loan, and therefore, Torville is responsible for paying the full amount.

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  • 28. 

    Which of the following statements is incorrect?

    • A sole proprietorship is subject to corporate tax.

    • Under the imputation system, corporate tax is treated as a prepayment of income tax levies on the shareholders.

    • The 'company tax burden balance' aims at striking a balance between companies that are legal entities and those that are not.

    • The partners in a partnership are subject to income tax.

    Correct Answer
    A. A sole proprietorship is subject to corporate tax.
    Explanation
    The correct answer is "A sole proprietorship is subject to corporate tax." This statement is incorrect because a sole proprietorship is not subject to corporate tax. In a sole proprietorship, the business owner is personally responsible for paying taxes on the business's income, rather than the business itself being taxed separately.

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  • 29. 

    An entrepreneur purchases a van and pays €10.000 in cash. He also purchases trade good for €5000 from a wholesaler, to be paid in one month. A bank provides a €3000 loan. The capital deficit is provided by the owner’s savings. At the start of the company:

    • Total assets are €15,000 and owner’s equity is €7,000.

    • Total assets are €10,000 and owner’s equity is €7,000.

    • Total assets are €15,000 and owner’s equity is €8,000.

    • Total assets are €10,000 and owner’s equity is €8,000.

    Correct Answer
    A. Total assets are €15,000 and owner’s equity is €7,000.
  • 30. 

    Which of the following statements is incorrect?

    • Most new business are manufacturing business.

    • In the EU there are over 20 million SMEs.

    • One of the purposes of a business plan is to convince financiers to invest capital in the business.

    • Good bookkeeping is necessary for a new business to survive.

    Correct Answer
    A. Most new business are manufacturing business.
    Explanation
    The statement "Most new business are manufacturing business" is incorrect because not all new businesses are manufacturing businesses. There are various types of businesses that can be started, such as service-based businesses, retail businesses, technology startups, and more. The statement assumes that the majority of new businesses fall under the manufacturing sector, which is not true.

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  • 31. 

    Which of the following measures is not a credit management activity?

    • Offering discounts for cash payment.

    • Setting credit standards for potential customers.

    • Determining a credit limit per customer.

    • Sending payment reminders at the end of the credit period.

    Correct Answer
    A. Offering discounts for cash payment.
    Explanation
    Offering discounts for cash payment is not a credit management activity because it does not involve managing or monitoring the credit extended to customers. Instead, it is a sales strategy aimed at incentivizing customers to make immediate cash payments, which can help improve cash flow and reduce the risk of bad debts. Credit management activities typically involve setting credit standards, determining credit limits, and monitoring and collecting payments from customers.

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  • 32. 

    Which of the following statements is correct:

    • Giving tax advice is one of the services provided by accountancy firms.

    • Certified public accountants provide services only to big businesses.

    • All accountants work in accountancy firms.

    • All businesses are obliged to have a certified public accountant audit the annual financial statements.

    Correct Answer
    A. Giving tax advice is one of the services provided by accountancy firms.
    Explanation
    The correct answer is "Giving tax advice is one of the services provided by accountancy firms." This statement is correct because accountancy firms often offer a range of services to their clients, including tax advice. While it may not be the only service provided by accountancy firms, it is a common service that they offer to individuals and businesses.

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  • 33. 

    The total assets of the company in question 7  at 31 December 2010 are:

    • €315,000,-

    • €305,000,-

    • €310,000,-

    • €335,000,-

    Correct Answer
    A. €315,000,-
  • 34. 

    Which depreciation method allows depreciation in later years to be higher than depreciation in early years? 

    • Depreciation on the basis of use.

    • Straight line depreciation.

    • Sum-of-the-years'-digits method.

    • Declining balance method.

    Correct Answer
    A. Depreciation on the basis of use.
    Explanation
    The depreciation method that allows depreciation in later years to be higher than depreciation in early years is the declining balance method. This method provides for a higher depreciation expense in the earlier years of an asset's life and gradually decreases the depreciation expense over time. It is based on the assumption that an asset is more productive and efficient in its early years and becomes less so as it ages. Therefore, higher depreciation is allocated in the earlier years to reflect the asset's higher usage and productivity.

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  • 35. 

    Financial leverage can be best described as:

    • Using debt as a financing tool to increase the return on equity.

    • Increasing the total assets turnover ratio.

    Correct Answer
    A. Using debt as a financing tool to increase the return on equity.
    Explanation
    Financial leverage refers to the use of debt to finance investments or operations in order to increase the return on equity. By borrowing money, a company can amplify its returns and potentially generate higher profits for shareholders. This is achieved by using borrowed funds to invest in assets or projects that have the potential to generate a higher rate of return than the cost of borrowing. However, it is important to note that while financial leverage can enhance returns, it also increases the risk and potential for financial distress if the investments do not generate the expected returns.

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  • 36. 

    Which of the following statements is incorrect?

    • It is more difficult to measure the effectiveness of profit-based businesses than non-profit institutions.

    • Non-profit organizations always strive to operate as efficiently as possible.

    • Public-sector goods and services are provided by the government, because market mechanisms are not suitable for these goods and services.

    • A negative financial result for a non-profit organization does not necessarily imply that the organization has performed poorly.

    Correct Answer
    A. It is more difficult to measure the effectiveness of profit-based businesses than non-profit institutions.
    Explanation
    Profit-based businesses are generally easier to measure in terms of effectiveness compared to non-profit institutions. This is because profit-based businesses have clear financial metrics such as revenue, profit margins, return on investment, and market share that can be used to evaluate their performance. On the other hand, non-profit institutions often have complex missions and goals that are not solely focused on financial outcomes. Their effectiveness is often measured through qualitative measures such as social impact, community engagement, and achievement of their mission. Therefore, the statement that it is more difficult to measure the effectiveness of profit-based businesses than non-profit institutions is incorrect.

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  • 37. 

    Investments decisions are part of the discipline of: 

    • Finance.

    • Management accounting.

    • Financial accounting.

    • Bookkeeping.

    Correct Answer
    A. Finance.
    Explanation
    Investment decisions involve analyzing and determining where to allocate funds in order to generate the highest return on investment. This process requires understanding financial markets, evaluating risk and return, and making informed decisions based on financial data. Finance is the discipline that focuses on managing money, investments, and financial activities, making it the correct answer for this question. Management accounting, financial accounting, and bookkeeping are related fields but do not specifically deal with investment decisions.

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  • 38. 

    Under which circumstances, generally speaking, does an LLC offer a tax advantage over a sole proprietorship?

    • When a large profit is made, which is retained in the company.

    • When a small profit is made, which is retained in the company.

    • When a large profit is made, which is paid out to the owner.

    • When a small profit is made, which is paid out to the owner.

    Correct Answer
    A. When a large profit is made, which is retained in the company.
    Explanation
    When a large profit is made and retained in the company, an LLC offers a tax advantage over a sole proprietorship. This is because in an LLC, the profits are not subject to self-employment taxes. Instead, the profits are taxed at the individual owner's personal tax rate, which may be lower than the self-employment tax rate. By retaining the profits in the company, the owner can defer paying taxes on those profits until they are distributed as dividends or salary. This can result in potential tax savings for the owner.

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  • 39. 

    A business has produced the following balance sheet…… If the market rate is 8% and the business records an annual profit (after taxes) of €64.000, the book value of this business relative to the intrinsic value will be:

    • Greater.

    • The same.

    • Smaller.

    Correct Answer
    A. Greater.
    Explanation
    If the market rate is 8% and the business records an annual profit of €64,000, the book value of the business will be greater than its intrinsic value. This is because the market rate of 8% is used to discount the future cash flows of the business to determine its intrinsic value. If the business is able to generate a profit of €64,000, it means that the actual cash flows are higher than what is discounted at 8%, resulting in a higher book value relative to the intrinsic value.

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  • 40. 

    Which of the following is not part of the discipline of management accounting?

    • Cost calculations.

    • Designing a budgeting system.

    • Disclosure of financial figures.

    • Make or buy decisions.

    Correct Answer
    A. Cost calculations.
    Explanation
    Cost calculations are indeed part of the discipline of management accounting. Management accounting involves analyzing and providing financial information to assist in decision-making, planning, and control within an organization. Cost calculations, such as determining the cost of producing goods or services, are essential for effective management accounting. Therefore, the correct answer is not accurate.

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  • 41. 

    A company has purchased a computer system for €10.000. Its estimated lifespan is four years and the residual value nil. Which statement is correct?

    • Depreciation on the basis of straight line depreciation is €500 higher in the third year then depreciation on the basis of sum-of-the-years’-digits.

    • Depreciation on the basis of straight line depreciation is €500 lower in the third year then depreciation on the basis of sum-of-the-years’-digits.

    • Depreciation on the basis of straight line depreciation is €1000 lower in the third year then depreciation on the basis of sum-of-the-years’-digits.

    • Depreciation on the basis of straight line depreciation is €1000 higher in the third year then depreciation on the basis of sum-of-the-years’-digits.

    Correct Answer
    A. Depreciation on the basis of straight line depreciation is €500 higher in the third year then depreciation on the basis of sum-of-the-years’-digits.
    Explanation
    The straight-line depreciation method allocates an equal amount of depreciation expense over the useful life of an asset. In this case, the computer system has an estimated lifespan of four years, so the annual depreciation expense would be €10,000 divided by 4, which is €2,500 per year.

    On the other hand, the sum-of-the-years'-digits method allocates more depreciation expense in the earlier years and less in the later years. The sum of the digits for a four-year lifespan is 1+2+3+4=10. In the first year, the depreciation expense would be €10,000 multiplied by 4/10, which is €4,000. In the second year, it would be €10,000 multiplied by 3/10, which is €3,000. In the third year, it would be €10,000 multiplied by 2/10, which is €2,000.

    Therefore, the depreciation on the basis of straight-line depreciation is €500 higher in the third year than the depreciation on the basis of sum-of-the-years'-digits.

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  • 42. 

    A company’s total equity exceeds its total liabilities. In this case:

    • The business risk is greater than the financial risk.

    • The leverage factor is greater than 1.

    • The ROE is positively influenced by the financial leverage.

    • The debt ratio is greater than 0.5.

    Correct Answer
    A. The business risk is greater than the financial risk.
    Explanation
    When a company's total equity exceeds its total liabilities, it means that the company has more assets than debts. This indicates that the company is in a financially stable position and has a strong financial foundation. The business risk refers to the uncertainty and potential losses associated with the company's operations, while the financial risk refers to the risk of not being able to meet financial obligations. Since the company has more assets than debts, it suggests that the business risk, which is related to operations, is greater than the financial risk, which is related to debt repayment.

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  • 43. 

    At 1 January 2010 the owner’s equity in a company is €1.5 million. At 31 December 2010 the owner’s equity is €4 million. In 2010 €250.000 has been paid to shareholders as dividend. A share issue has raised €1 million new equity in 2010. The 2010 profit is

    • €1,750,000,-

    • €250,000,-

    • €3,250,000,-

    • €2,500,000,-

    Correct Answer
    A. €1,750,000,-
    Explanation
    The 2010 profit is €1,750,000. This can be calculated by taking the difference between the owner's equity at the beginning and end of the year, and then adjusting for any dividends paid and new equity raised. In this case, the owner's equity increased by €2.5 million (from €1.5 million to €4 million), and €250,000 was paid as dividends. Therefore, the net increase in owner's equity due to profit is €2.5 million minus €250,000, which equals €2.25 million.

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  • 44. 

    Which of the following statements is incorrect?

    • A new business will often be a public limited company.

    • An entrepreneur can acquire additional capital by accepting a limited partner.

    • A venture capital firm provides capital to new businesses.

    • One of the problems for a new business in obtaining capital is that it has yet to prove itself.

    Correct Answer
    A. A new business will often be a public limited company.
    Explanation
    The statement "A new business will often be a public limited company" is incorrect because a new business can take various legal forms, such as a sole proprietorship, partnership, or private limited company. A public limited company is a specific legal structure that requires certain criteria and procedures to be met. Therefore, it is not accurate to say that a new business will often be a public limited company.

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  • 45. 

    The economic order quantity results in:

    • Minimal sum of carrying costs and set-up costs.

    • Minimal carrying costs.

    • Minimal set-up costs.

    • Minimal carrying costs as well as minimal set-up costs.

    Correct Answer
    A. Minimal sum of carrying costs and set-up costs.
    Explanation
    The economic order quantity is a formula used to determine the optimal order size for a company. It aims to minimize the total costs associated with inventory management, including carrying costs and set-up costs. By calculating the economic order quantity, a company can find the order size that minimizes the sum of these costs, resulting in efficient inventory management and cost savings. Therefore, the correct answer is that the economic order quantity results in the minimal sum of carrying costs and set-up costs.

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  • 46. 

    A corporation pays out 4% stock dividend. This has which of the following consequences?

    • The nominal issued share capital increases by 4%.

    • The authorized share capital increases by 4%.

    • The equity of the corporation increases 4%.

    • The market value of the shares decreases by 4%.

    Correct Answer
    A. The nominal issued share capital increases by 4%.
    Explanation
    When a corporation pays out a 4% stock dividend, it means that the company is distributing additional shares of stock to its shareholders. This results in an increase in the nominal issued share capital by 4%. The nominal issued share capital represents the total value of shares issued by the company. It does not affect the authorized share capital, which is the maximum amount of shares that a company can issue. The equity of the corporation does not necessarily increase by 4% as it depends on the market value of the shares. The market value of the shares may or may not decrease by 4% as it is influenced by various factors such as demand and supply in the market.

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  • 47. 

    In which of the following situations is investment caused automatically by the production process?

    • Provision of trade credit on the sale of goods.

    • Purchase of a new computer system.

    • Lease of trucks.

    • Sale of company premises.

    Correct Answer
    A. Provision of trade credit on the sale of goods.
    Explanation
    The provision of trade credit on the sale of goods is the only situation among the options where investment is caused automatically by the production process. When a company offers trade credit to its customers, it allows them to delay payment for the goods purchased. This means that the company has invested in the production of those goods without receiving immediate payment, effectively financing the customer's purchase. This investment is an automatic result of the production process, as it is a common practice in business to offer trade credit as a way to facilitate sales and maintain customer relationships.

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  • 48. 

    Which of the following is not a short-term liability?

    • Pre-paid amounts.

    • Dividend to be paid.

    • Buyer's credit received.

    • Commercial paper.

    Correct Answer
    A. Pre-paid amounts.
    Explanation
    Pre-paid amounts are not considered a short-term liability because they represent payments made in advance for goods or services that will be received in the future. They are recorded as an asset on the balance sheet until the goods or services are received, at which point they are recognized as an expense. Short-term liabilities, on the other hand, are obligations that are expected to be settled within one year, such as dividends to be paid, buyer's credit received, and commercial paper.

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  • 49. 

    Compared with ordinary bonds, discount bonds are characterised by:

    • Higher redemption value.

    • Tax-free interest.

    • Higher earnings in the form of shares.

    • Higher annual interest earnings.

    Correct Answer
    A. Higher redemption value.
    Explanation
    Discount bonds are characterized by a higher redemption value compared to ordinary bonds. This means that when the bond reaches its maturity date, the investor will receive a higher amount of money back than the initial investment. This is because discount bonds are sold at a price lower than their face value, and the difference between the purchase price and the face value is the redemption value. Therefore, the higher redemption value is a key characteristic of discount bonds.

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  • Mar 20, 2023
    Quiz Edited by
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  • Nov 15, 2012
    Quiz Created by
    YvanB
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