Problem Set #5

34 Questions | Total Attempts: 84

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Problem Quizzes & Trivia

Risk, Decisions and Judgements, Owner-Management Incentive, Qualitative Characteristcs of useful Info, Information Asymmetry, Assurance Services


Questions and Answers
  • 1. 
    Company management has to decide whether or not to market a new product. The company has projected sales of $3,000,000. Management believes there is a 20% chance that sales could be as low as $300,000. Conceptually, what is the 20% chance?
    • A. 

      Uncertainty

    • B. 

      Negative consequences

    • C. 

      Significance of negative consequences

    • D. 

      Risk

    • E. 

      None of the above

  • 2. 
    In the banking industry, default risk is the possibility that a borrower will be unable to repay the loan made to him by the bank. In her audit notes, a bank examiner, conducting a periodic audit of a bank, indicates a 30% chance exists that the bank will lose up to $10 million dollars due to defaulted loans. Which of the following is correct?
    • A. 

      " a 30% chance" is an informal expression of uncertainty

    • B. 

      " a 30% chance is a forml expression of loss

    • C. 

      "$10 million dollars" is an estimate of the significance of negative consequences

    • D. 

      A and c

    • E. 

      None of the above

  • 3. 
    Eric has an opportunity to invest in a business venture. If the business suceeds he will double his investment. If it fails he may lose everything he invested. He thinks the probability of success is 80%. Eric has $10,000 to invest. In making his decision, Eric's risk is
    • A. 

      His $10,000 investment

    • B. 

      A 20% chance

    • C. 

      An 80% chance

    • D. 

      20% chance of losing $10,000

    • E. 

      None of the above

  • 4. 
    Construction workers go to work every day knowing that they work at a hazardous job that could, if an accident occurred, cause serious injury or even death. The immediate initial loss that construction workers might experience could be described as
    • A. 

      Time

    • B. 

      Physical

    • C. 

      Financial

    • D. 

      Psychological

    • E. 

      All of the above

  • 5. 
    ___________ is the possibility that a decision will fail because a decision maker has insufficient or poor quality information with which to make a decision.
    • A. 

      Risk

    • B. 

      Uncertainty

    • C. 

      Significance of negative consequences

    • D. 

      Information risk

    • E. 

      None of the above

  • 6. 
    _____________ is the component of risk that means the importance of the outcome.
    • A. 

      Significance of negative consequences

    • B. 

      Loss

    • C. 

      Value of negative consequences

    • D. 

      Uncertainty

    • E. 

      None of the above

  • 7. 
    Information risk increases
    • A. 

      As the significance of consequences decreases

    • B. 

      When an important outcome has occured in the past

    • C. 

      As the number of agency relationships decreases

    • D. 

      As information asymmetry increases

    • E. 

      None of the above

  • 8. 
    Last Wednesday Isabel's mommy asked what Isabel would like for supper. Mommy and Isabel looked in the refrigerator, freezer and the pantry. They picked out hamburgers, macaroni and cheese, broccoli and mandarin oranges. When Isabel picked her menu she made a(n)
    • A. 

      Judgement

    • B. 

      Evaluation

    • C. 

      Contruction

    • D. 

      A and c only

    • E. 

      None of the above

  • 9. 
    A ________ is the task of selecting one (or more) alternative(s) from a well-definded set of alternatives
    • A. 

      Decision

    • B. 

      Choice

    • C. 

      Construction

    • D. 

      Evaluation

  • 10. 
    When individuals face a routine decision, one they have made many times before, the decision is most likely to appear to them as a(n)
    • A. 

      Choice

    • B. 

      Construction

    • C. 

      Evaluation

    • D. 

      Prediction

    • E. 

      None of the above

  • 11. 
    Tim works as a sales manager for Leptid, Inc. Sid owns a portion of Leptid, Inc. Leptid, Inc. has been given an opportunity to form a long-term supply contract with a large retailer. Who is MORE LIKELY to be in favor of Leptid, Inc. entering the contract and why?
    • A. 

      Tim, because he has more to lose

    • B. 

      Tim, because he anticipates a longer relationship with Leptid, Inc.

    • C. 

      Sid, because he has less to lose

    • D. 

      Sid, because he anticipates a shorter relationship with Leptid, Inc

    • E. 

      None of the above

  • 12. 
    Judy is a stockholder is CB Corporation. Michael is a marketing manager. Peter, a marketing rep, has suggested that the company drop a certain product line that is currently earning a 5% profit in favor of a new product line. Based on his marketing research, Peter believes the new product could earn as much as 6% profit. Based on research examining potential owner-management conflicts, who is less likely to favor switching product lines and why?
    • A. 

      Judy, because she has a longer time horizon

    • B. 

      Judy, because she has a shorter time horizon

    • C. 

      Michael, because he has more invested

    • D. 

      Either a or c, but not b

    • E. 

      None of the above

  • 13. 
    Maid in the USA charges a flat fee, based on the size and work required, to clean a house. A portion of the fee is split between the cleaners who clean the house. When cleaners finish their assigned houses they can go home early or earn extra money by helping to clean another house. However, sometimes, when cleaners work quickly they do not clean as thoroughly and the client is not happy. The owner of Maid in the USA has created an incentive conflict at her company. The conflict is known as a problem with
    • A. 

      Choice of effort

    • B. 

      Differential risk exposure

    • C. 

      Differential horizon

    • D. 

      Overinvestment

    • E. 

      None of the above

  • 14. 
    A potential owner-manager horizon conflict typically arises when
    • A. 

      The owner's investment of human capital and personal wealth is greater than the manager's

    • B. 

      The owner's investment in the company will be shorter than the manager's

    • C. 

      The manager's investment of human capital and personal wealth is greater than the owner's

    • D. 

      The manager's investment in the company will be shorter than the owner's

    • E. 

      None of the above

  • 15. 
    A company evaluates its production process with an OMEGA  measurement. The OMEGA is useful because regardless of who reads it, the measuring instrument always gives the same number. The qualitative characteristic most critical to the usefulness of this measurement is
    • A. 

      Feedback value

    • B. 

      Verifiability

    • C. 

      Neutrality

    • D. 

      Representational Faithfulness

    • E. 

      None of the above

  • 16. 
    When looking at applications for graduate school, admissions committees look at undergraduates' grade point averages. This information is used because it has high reliability due to its
    • A. 

      Feedback value

    • B. 

      Predictive value

    • C. 

      Timeliness

    • D. 

      Representational faithfulness

    • E. 

      None of the above

  • 17. 
    A key area of employee review at many companies is productivity. During employee reviews, managers often look at the individual's rate of absenteeism. The information is relevant due to its
    • A. 

      Feedback value

    • B. 

      Neutrality

    • C. 

      Verifiability

    • D. 

      Representational faithfulness

    • E. 

      None of the above

  • 18. 
    In making hiring decisions, many companies use a recent college graduate's major and the school they attended as key relevant information. This is most likely due to the extent of ________ this information possesses.
    • A. 

      Feedback value

    • B. 

      Verifiability

    • C. 

      Neutrality

    • D. 

      Representational faithfulness

    • E. 

      None of the above

  • 19. 
    When reviewing employees, managers at a certain company use peer evaluations. These evaluations are most likely considered reliable due to their
    • A. 

      Predictive value

    • B. 

      Representational faithfulness

    • C. 

      Feedback value

    • D. 

      Timeliness

    • E. 

      None of the above

  • 20. 
    A college admissions board considers a potential student's record of volunteer/public service a reliable indicator in the decision process. What qualititative characteristic makes the information useful?
    • A. 

      Its verifiability

    • B. 

      Its timeliness

    • C. 

      Its predictive value

    • D. 

      Its feedback value

    • E. 

      None of the above

  • 21. 
    ____________ is the extent to which information is capable of making a difference in the decisions of a reasonable person.
    • A. 

      Relevance

    • B. 

      Reliability

    • C. 

      Feedback Value

    • D. 

      Representational faithfulness

    • E. 

      None of the above

  • 22. 
    Champaign Park District includes three pools that are open to the public during the summer months. Families who live in the community can purchase admission  tickets each time they go or they can can pay a one-time summer-long fee. The Champaign Park District offer is an example of
    • A. 

      Screening to reduce adverse selection

    • B. 

      Self-selecting to reduce adverse selection

    • C. 

      Screening to reduce moral hazard

    • D. 

      Self-selecting to reduce moral hazard

    • E. 

      None of the above

  • 23. 
    A company advertises that its product comes with a 2-year extended parts and service warranty. Industry standard is a 1-year warranty. The company's marketing policy is an example of
    • A. 

      Signaling to reduce adverse selection

    • B. 

      Signaling to reduce monitoring

    • C. 

      Bonding to reduce adverse selection

    • D. 

      Bonding to reduce monitoring

    • E. 

      None of the above

  • 24. 
    Great Stuff Corp. advertises that its product comes with a 2-year extended parts and service warranty. Industry standard is a 1-year warranty. The company contracts with Warranties are Us. When repairs are required WaU completes them. In advertising Great Stuff uses the extended parts warranty as
    • A. 

      Bonding to reduce adverse selection

    • B. 

      Signaling to reduce adverse selection

    • C. 

      Bonding to reduce moral hazard

    • D. 

      Signaling to reduce moral hazard

    • E. 

      None of the above

  • 25. 
    Great Stuff Corp advertises that its product comes with a 2-year extended parts and service warranty. Industry standard is a 1-year warranty. The company contracts with Warranties are Us. When repairs are required WaU completes them. After Great Stuff makes a sale, the extended parts warranty is
    • A. 

      Bonding to reduce moral hazard

    • B. 

      Signaling to reduce moral hazard

    • C. 

      Bonding to reduce adverse selection

    • D. 

      Signaling to reduce adverse selection

    • E. 

      None of the above

  • 26. 
    Great Stuff Corp advertises that its product comes with a 2-year extended parts and service warranty. Industry standard is a 1-year warranty. The company contracts with Warranties are Us. When repairs are required WaU completes them. After Great Stuff makes a sale to a customer, WaU is
    • A. 

      A principle to Great Stuff

    • B. 

      An agent to Great Stuff

    • C. 

      An agent to the Customer

    • D. 

      Both b and c

    • E. 

      None of the above

  • 27. 
    Which of the following information asymmetry problems can be reduced/resolved using an assurance service?
    • A. 

      Moral hazard, using monitoring

    • B. 

      Moral hazard, using bonding

    • C. 

      Adverse selection, using monitoring

    • D. 

      Adverse selection using screening and self-selection

    • E. 

      None of the above

  • 28. 
    ________ occurs when an agent, with more information than the principal, makes a decision that does not maximize the principal's utility
    • A. 

      Asymmetric information

    • B. 

      Adverse selection

    • C. 

      Moral hazard

    • D. 

      Self-selection

    • E. 

      None of the above

  • 29. 
    A supplier knows what it costs to package and ship its goods to customers. The supplier offers increasing discounts to its customers as orders become larger. When the supplier offers the discount to its customers it is
    • A. 

      Screening

    • B. 

      Self-selecting

    • C. 

      Signaling

    • D. 

      Bonding

    • E. 

      None of the above

  • 30. 
    A builder knows how much material and how many man hours it will take to build an outbuilding on a farm property. A farmer signs a contract with the builder. A late-penalty will be deducted from the contract price if the building is not done in 90 days. The building is reducing information asymmetry by
    • A. 

      Screening and self-selecting

    • B. 

      Signaling

    • C. 

      Monitoring

    • D. 

      Bonding

    • E. 

      None of the above

  • 31. 
    A company hires an assurance service provider to help reduce an information asymmetry problem. Which of the following solutions is the company NOT using?
    • A. 

      Signaling

    • B. 

      Monitoring

    • C. 

      Bonding

    • D. 

      A and b

    • E. 

      B and c

  • 32. 
    A company loaned a key customer $100,000. As part of the loan agreement the customer has to provide the company with quarterly financial statements until the loan is repaid. The company has hired a CPA firm to perform assurance services regarding the financial statements. The CPAs provide the company with a written report stated in negative terms. The CPAs are performing
    • A. 

      A non-attestation service

    • B. 

      An examination

    • C. 

      A review

    • D. 

      Agreed upon procedures

    • E. 

      None of the above

  • 33. 
    A company is considering entering a contract with a supplier. The company had decided to hire an assurance provider. If the company is interested in improving the quality of information provided by the supplier, what service is the company most likely interested in using?
    • A. 

      Non-attestation services to improve relevance

    • B. 

      Non-attestation services to improve reliability

    • C. 

      Attestation services to improve relevance

    • D. 

      Attestation services to improve reliability

    • E. 

      None of the above

  • 34. 
    A company hires an assurance provider to improve the quality of information provided by a potential supplier. The company contract with the assurance provider requires a written report stated in positive terms. What type of service is the assurance provider performing?
    • A. 

      Non-attestation

    • B. 

      Examination

    • C. 

      Review

    • D. 

      Agreed-upon procedures

    • E. 

      None of the above