BUS 100 Final exam Final exam-CHAPTERS (14-17)

BUS 100 Final exam Final exam-CHAPTERS (14-17) Chapter 13 Information Technology for Business 23) Who has access to intranets generally? A) employees B) suppliers C) customers D) shareholders E) dealers Answer: ...

BUS 100 Final exam Final exam-CHAPTERS (14-17) Chapter 13 Information Technology for Business 23) Who has access to intranets generally? A) employees B) suppliers C) customers D) shareholders E) dealers Answer: A Explanation: A) Employees are able to access confidential information on matters related to the conditions of their employment or materials related to the company business. Page Ref: 335 Difficulty: Easy AACSB: Use of information technology Objective: 13.2 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 24) What system allows outsiders limited access to a firm's internal information systems? A) intranets B) firewalls C) extranets D) directories E) satellites Answer: C Explanation: C) An example of limited access is the ability of buyers to enter a system to see what goods are available. Page Ref: 335 Difficulty: Easy AACSB: Use of information technology Objective: 13.2 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 25) What is a computer-based system that allows people to communicate simultaneously from different locations via telephone, e-mail, or video? A) groupware B) a data communication network C) the Internet D) electronic conferencing E) hypertextAnswer: D Explanation: D) An advantage of electronic conferencing is that it can eliminate travel time and save money for the company. Page Ref: 336 Difficulty: Easy AACSB: Use of information technology Objective: 13.2 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 26) What feature allows people in remote locations to work simultaneously on one document? A) video conferencing B) voice mail C) data conferencing D) digital information service E) text messaging Answer: C Explanation: C) Data conferencing can be used to work on documents that specify design components and production schedules. Page Ref: 336 Difficulty: Easy AACSB: Use of information technology Objective: 13.2 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 27) What type of network links computers and workstations, usually within one building? A) satellite communication B) global positioning C) personal digital D) wide area E) local area Answer: E Explanation: E) A LAN requires only one computer system with one database and software system. Page Ref: 337 Difficulty: Easy AACSB: Use of information technology Objective: 13.2 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 28) In client-server networks, who is the usual client?A) the computer through which users make requests for information B) the application through which users answer information requests C) the customer who does business online D) the supplier who checks the availability of components E) the network which supports the database and software systems Answer: A Explanation: A) The clients are usually the laptop or desktop computers. Page Ref: 337 Difficulty: Moderate AACSB: Use of information technology Objective: 13.2 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 29) What feature does a firewall provide? A) Internet access B) protection from electrical surges C) connectivity between stations in a LAN D) privacy protection E) links to computers in a WAN Answer: D Explanation: D) A firewall is set up to filter incoming information. Page Ref: 346 Difficulty: Easy AACSB: Use of information technology Objective: 13.2 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 30) Which component directs the computer to the correct resources to use and how to use them? A) an application program B) system software C) an electronic spreadsheet D) a database E) management information systems Answer: B Explanation: B) System software are the programs that tell the computer how to function. Page Ref: 338 Difficulty: Easy AACSB: Use of information technology Objective: 13.2 Learning Outcome: Identify the different types of technologies used in business anddescribe their uses Skill: Concept 31) Which type of communication technology is attractive to businesses because it eliminates travel expenses? A) VSAT Satellite Communications B) extranets C) intranets D) electronic conferencing E) social networks Answer: D Explanation: D) Business colleagues can interact as if they were in the same room, even when oceans apart, thanks to electronic conferencing technology. Page Ref: 339 Difficulty: Easy AACSB: Use of information technology Objective: 13.2 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 32) Who is the person who is in charge of operating systems for gathering, organizing, and distributing information? A) production manager B) operations manager C) information systems manager D) research and development manager E) communications manager Answer: C Explanation: C) Companies view their information as a private resource and therefore need the services of an information systems manager. Page Ref: 340 Difficulty: Easy AACSB: Use of information technology Objective: 13.3 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 33) What is the name of the application used for searching, sifting, and reorganizing pools of data to uncover useful information? A) data warehousing B) data access C) data tapping D) data cleaning E) data miningAnswer: E Explanation: E) Data mining is a powerful tool that aids managers in a range of tasks including costing, planning, and setting production targets. Page Ref: 341 Difficulty: Easy AACSB: Use of information technology Objective: 13.3 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 34) Which cybercriminal activity refers to the act of luring Internet users to bogus Web sites? A) computer virus distribution B) spamming C) phishing D) Trojan horse distribution E) piracy Answer: C Explanation: C) schemes bait Internet users into visiting false Web sites that are able to steal their information. Page Ref: 344 Difficulty: Easy AACSB: Use of information technology Objective: 13.4 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 35) Which term refers to the unauthorized stealing of personal information from a computer system? A) espionage B) leverage C) denial of service D) identity theft E) network flooding Answer: D Explanation: D) Identity theft is the fastest growing crime in the United States. Page Ref: 345 Difficulty: Easy AACSB: Use of information technology Objective: 13.4 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept36) What is "spam"? A) a form of firewall B) intellectual property C) junk e-mail D) a form of hacking E) wireless mooching Answer: C Explanation: C) Spam is a greater problem than postal junk mail because of the low costs of the Internet and its large reach. Page Ref: 346 Difficulty: Easy AACSB: Use of information technology Objective: 13.4 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 37) What is the name of software and hardware that prevent hackers from accessing a company's internal network? A) partition B) firewall C) extranet D) index E) security Answer: B Explanation: B) Firewalls are essential systems that secure a computer network. Page Ref: 346 Difficulty: Easy AACSB: Use of information technology Objective: 13.5 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 38) A local preschool is considering the use of webcams inside of their classrooms. Which statement, if true, would BEST support the claim that this technology would NOT be a good idea? A) Parents prefer to communicate with their children's teachers face-to-face and via phone. B) Some parents want more information on how their children work in class. C) Teachers want feedback and recognition from parents. D) Administration encourages parents to communicate daily with the teachers. E) Teachers send weekly videos and photos of the children working in class. Answer: A Explanation: A) Clients have expressed preferred communication methods (face-to-face and via phone) that are in opposition to webcams (communicating with teachers through video-conferencing).Page Ref: 331 Difficulty: Moderate AACSB: Reflective thinking skills Objective: 13.1 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Application 39) Which of the following BEST describes enterprise resource planning? A) an information processing application for routine business activities of a company's business units B) an information system for organizing and managing a firm's activities across product lines, departments, and geographic locations C) a system used for transforming data into information for use in decision making D) a computer-based electronic technology that assists in designing products by simulating a real product and displaying it in three-dimensional graphics E) an internal inventory of a company's product lines Answer: B Explanation: B) Enterprise resource planning (ERP) is an information system for organizing and managing a firm's activities across products, departments, and geographic locations. Page Ref: 332 Difficulty: Moderate AACSB: Use of information technology Objective: 13.1 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 40) How can customers order a personal computer from the online Dell site with exactly the features they desire? A) through mass production B) through unit production C) through process management D) through mass-customization E) through anti-virus software Answer: D Explanation: D) Although companies can produce in large volumes, each unit features the unique options the customer prefers with mass-customization. Page Ref: 332 Difficulty: Moderate Objective: 13.1 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Application 41) Which of the following best describes an extranet?A) a software and hardware system that prevents outsiders from accessing a company's network B) a tool that searches Web pages containing the user's search terms and then displays pages that match C) a private network of internal Web sites and other sources of information available to a company's employees D) an Internet connection allowing outsiders limited access to a firm's internal information system E) a delivery system linked to production schedules Answer: D Explanation: D) The most common application, for example, allows buyers to enter a system to see which products are available for sale and delivery, thus providing convenient product-availability information. Page Ref: 335 Difficulty: Moderate AACSB: Use of information technology Objective: 13.2 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 42) At Chaparral Steel, delivery times, sales, profits, and customer service and loyalty have been boosted by a system that gives customers electronic access to the mill's inventories. What is the name of this system? A) distribution channel B) intranet C) handbook D) extranet E) product availability Answer: D Explanation: D) Extranets allow outsiders limited access to a firm's internal information network. Page Ref: 335 Difficulty: Moderate AACSB: Use of information technology Objective: 13.2 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Application 43) What system includes data conferencing and videoconferencing? A) electronic communication systems B) electronic conferencing C) group systems D) data communication networks E) data mining Answer: BExplanation: B) Electronic conferencing allows groups of people to communicate simultaneously from various locations via e-mail, phone, or video; two forms of electronic conferencing are videoconferencing and data conferencing. Page Ref: 336 Difficulty: Moderate AACSB: Use of information technology Objective: 13.2 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 44) What advantage does a communication system using VSAT satellite have? A) speed B) low cost C) privacy D) groupware E) spyware Answer: C Explanation: C) A company that operates its own VSAT system has total control over its communications without dependence on other companies. Page Ref: 336 Difficulty: Moderate AACSB: Use of information technology Objective: 13.2 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 45) What does a company need to operate so that it has total control over its communications without dependence on other companies? A) Web site B) VSAT system C) extranet D) groupware site E) enterprise planning Answer: B Explanation: B) One advantage, therefore, is privacy. Page Ref: 336 Difficulty: Moderate AACSB: Use of information technology Objective: 13.2 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 46) What is the most common type of network used in businesses? A) intranetB) client-server C) extranet D) hotspot E) anti-virus Answer: B Explanation: B) Most businesses have laptop or desktop computers through which users make requests for information or resources; servers are the computers that provide the services shared by users. Page Ref: 337 Difficulty: Moderate AACSB: Use of information technology Objective: 13.2 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 47) What is the major limitation of Wi-Fi? A) high cost B) privacy concerns C) productivity D) short range of distance E) installation challenges Answer: D Explanation: D) Each "hotspot," or access point, is actually its own small network; some of these services are free. Page Ref: 338 Difficulty: Moderate AACSB: Use of information technology Objective: 13.2 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 48) What are keyboards, monitors, and printers examples of? A) control B) hardware C) software D) databases E) servers Answer: B Explanation: B) Hardware includes any of the physical components of a computer network. Page Ref: 338 Difficulty: Moderate AACSB: Use of information technology Objective: 13.2Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept49) Which of the following best describes information? A) the useful interpretation of facts and figures B) a list of company names provided by the local Chamber of Commerce C) the collection of raw facts and figures D) controlled flow of words for a useful purpose E) databases and flowcharts Answer: A Explanation: A) Data are raw facts and figures that are transformed into information. Page Ref: 339 Difficulty: Moderate AACSB: Use of information technology Objective: 13.3 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 50) A cell phone store manager needs to forecast sales for the upcoming Black Friday sales weekend. Which information would be MOST helpful? A) the store with the least sales of all store locations for the past five years B) the store with the highest sales of all store locations for the past five years C) the cell phone model which earned the most revenue in all store locations for the past five years D) the total amount spent per customer in each cell phone store for all locations for the past five years E) the number of customers who entered the cell phone store for all locations Answer: D Explanation: D) Customer sales per store over time could be used to forecast how stores would do during the coming year. Page Ref: 339 Difficulty: Moderate AACSB: Analytic skills Objective: 13.2 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Application 51) Who most often needs information in order to conduct technical projects? A) middle managers B) members of the board of directors C) top-level managers D) knowledge workers E) network administrators Answer: D Explanation: D) Knowledge workers are employees for whom information and knowledge are the raw materials of their work—engineers, scientists, and IT specialists. Page Ref: 343Difficulty: Moderate Objective: 13.3 Learning Outcome: Identify the tools and resources used for managing personal finances Skill: Concept 52) Which software can create products ranging from cell phones to auto parts at lower costs compared to manual modeling methods? A) application software B) operations software C) computer-aided manufacturing software D) computer-aided design software E) data warehousing software Answer: D Explanation: D) Computer-aided design helps knowledge workers design products by simulating them and displaying them in three-dimensional graphics. Page Ref: 343 Difficulty: Moderate AACSB: Use of information technology Objective: 13.3 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 53) Which system supports an organization's managers by providing daily reports, schedules, plans, and budgets? A) management application B) management operations C) management information D) management expert E) management enterprise Answer: C Explanation: C) Many management information systems—cash flow, sales, production scheduling, shipping—help managers find answers to such questions. Page Ref: 343 Difficulty: Moderate Objective: 13.3 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 54) What is a management information system? A) a system that supports managers by providing daily reports, schedules, plans, and budgets that can be used for making decisions B) an easy-access application of an information system designed for instant access by upper-level managers C) an information processing application for use in business activities involving welldefined processing stepsD) an interactive system that locates and presents information needed to support the decision-making process E) a repository of information resources related to the collection of data Answer: A Explanation: A) Many management information systems—cash flow, sales, production scheduling, and shipping—help managers find answers to such questions. Page Ref: 343 Difficulty: Moderate AACSB: Use of information technology Objective: 13.3 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 55) A small parochial school uses handwritten timecards and attendance sheets to calculate biweekly payroll and vacation time. Which statement, if true, would BEST support the idea by managers to convert to computer software to maintain employee records? A) The school has multiple types of employees, with different work schedules and different contracts, whose hours are calculated by hand. B) Part-time staffing has been allocated for payroll and human resource function. C) Employees often submit their timecards incorrectly. D) Employees often forget to submit their vacation request forms. E) The existing management is eager to switch to the new system for human resources. Answer: A Explanation: A) This statement indicates the complexity and amount of work involved with using the current system. Page Ref: 343 Difficulty: Moderate Objective: 13.3 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Critical Thinking 56) A small preschool decided to give its teachers access to a portable laptop during daily naptime. Administrators found over time that teacher productivity actually decreased. Which statement would BEST explain why teacher productivity has decreased in spite of the increased computer time? A) Too many children were disruptive during naptime hours. B) Teachers added more tasks to get done and could not complete them all during naptime. C) Teachers could not watch the children and work on the computer at the same time. D) The classroom lacked the necessary office equipment needed to be productive. E) Teachers spent most of the naptime surfing Internet Web sites unrelated to their work assignments. Answer: E Explanation: E) The teachers' actions directly relate to the decrease in productivity.Page Ref: 343 Difficulty: Moderate AACSB: Reflective thinking skills Objective: 13.3 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Critical Thinking 57) Which of the following best describes a decision support system? A) a system that supports an organization's managers by providing daily reports, schedules, plans, and budgets that can be used for making decisions B) a quick-reference, easy-access application of information systems specifically designed for instant access by upper-level managers C) a system of hardware and software that imitates human behavior D) an interactive system that creates virtual business models for a particular kind of decision and tests them with different data to see how they respond E) a processor that plans production and delivery schedules Answer: D Explanation: D) Decision support systems are interactive systems that create virtual business models and test them with different data to see how they respond. Page Ref: 344 Difficulty: Moderate AACSB: Use of information technology Objective: 13.3 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 58) The increase of technology in the workplace has resulted in more employees working at home and telecommuting. Telecommuting employees rely heavily on e-mail communication to complete work tasks. Which statement, if true, BEST supports those who claim that e-mail communication fosters increased misunderstandings? A) The high volume of e-mail discourages employees from interacting with coworkers face to face, thus leading to more misunderstandings. B) Most e-mail communication among workers is polite and to the point. C) People who e-mail frequently don't know how to communicate verbally with others. D) E-mail fosters more nonverbal communications between workers in a company. E) Workers communicate more frequently about work when e-mailing. Answer: A Explanation: A) The effects of the e-mail overload that are commonly experienced by employees can be discouraging and increase misunderstandings. Page Ref: 344 Difficulty: Moderate AACSB: Reflective thinking skills Objective: 13.3 Learning Outcome: Identify the different types of technologies used in business and describe their usesSkill: Critical Thinking 59) What does phishing or pharming involve the use of? A) intellectual property theft B) firewalls that prevent hacking C) viruses sent from one station to another in a LAN D) deceptive e-mails that imitate popular Web sites E) trading of company secrets Answer: D Explanation: D) Phishing and pharming trick computer users into giving out personal information. Page Ref: 345 Difficulty: Moderate AACSB: Use of information technology Objective: 13.4 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 60) In order for a virus to spread from computer to computer, what must it always attach itself to first? A) all available computer memory B) a worm C) a piece of spyware D) a piece of hardware E) a program Answer: E Explanation: E) A virus resides in a file that attaches itself to a program in order to migrate from computer to computer. Page Ref: 346 Difficulty: Moderate AACSB: Use of information technology Objective: 13.4 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 61) Which type of IT threat can spread without a computer user needing to open any software? A) worms B) Trojan horses C) spam D) spyware E) computer viruses Answer: A Explanation: A) Worms are a kind of virus that travel from computer to computer within networked computer systems without your needing to open any software to spread thecontaminated file. Page Ref: 346 Difficulty: Moderate AACSB: Use of information technology Objective: 13.4 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 62) What type of users would download spyware? A) users seeking to prevent viruses from attacking B) users who are unaware that their computer activities will be monitored C) users who wish to prevent spam from entering their computer D) users who want easy access to their coworkers' files E) users who are keen to share documents Answer: B Explanation: B) Spyware is downloaded by users who are lured by "free software" offers; once installed, it crawls around to monitor the host's computer activities, gathering e-mail addresses and other important information. Page Ref: 346 Difficulty: Moderate AACSB: Use of information technology Objective: 13.4 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 63) What is a particularly sinister quality of spyware? A) It replicates itself, using up valuable computer memory. B) It often disguises itself as helpful software. C) It consumes bandwidth by flooding user inboxes with junk e-mail. D) It often leads to wireless mooching. E) It is completely legal. Answer: B Explanation: B) Spyware can masquerade as a friendly file available as freeware or shareware. Page Ref: 346 Difficulty: Moderate AACSB: Use of information technology Objective: 13.4 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 64) Which of the following best describes a firewall? A) a software and hardware system that prevents outsiders from accessing a company's internal networkB) a tool that searches Web pages containing the user's search terms and then displays pages that match C) a private network of internal Web sites and other sources of information available to a company's employees D) an Internet connection allowing outsiders limited access to a firm's internal information system E) an extranet site that gives customers access to different product lines Answer: A Explanation: A) Firewalls are security systems with special software or hardware devices designed to keep computers safe from hackers. Page Ref: 346-347 Difficulty: Moderate AACSB: Use of information technology Objective: 13.5 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Concept 65) Tamasaki Sushi Bar is located in the Cotswold Shopping Center in a busy uptown business district. It caters to a few art galleries, a theater, and a nearby technical college. Recently, Tamasaki has noticed a decrease in customers around the lunchtime hour, which is one of its primary sales times during the day. Many customers use cell phones and frequent the Internet cafe in the area during the lunch hour. Which statement, if true, could BEST explain the sagging sales experienced by Tamasaki? A) Most of the workers use the lunchtime hour for taking food out instead of eating in. B) The nearby establishments have their own cafeteria for employees and students to use. C) Technically savvy customers take advantage of deals offered via the Web sites and Facebook sites of the deli and bar-grill down the street. D) Limited parking spaces discourage customers from stopping by for lunch. E) College students prefer pizza and burgers for lunch and restaurant food for dinner. Answer: C Explanation: C) This statement indicates the willingness of technically savvy customers to patronize stores with online sales and service. Page Ref: 330 Difficulty: Difficult Objective: 13.1 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Critical Thinking 66) Many hotels have been exploring ways to allow customers to check out without waiting at the front desk upon leaving. This would greatly decrease checkout time and allow the front desk to be used for incoming and existing customers. One idea is to permit customers to pay for their hotel stay online the night before checkout and then to leave their keys in the room.Which statement, if true, would BEST support this new idea for checking out? A) Hotel customers have continually been requesting Internet access in their rooms. B) Hotel rooms now come equipped with free Internet access directly to the hotel's Web site through the television. C) More hotel customers now travel with laptops that have wireless Internet access. D) Most hotel checkout counters have additional services for customers' needs during their stay. E) Customers are willing to pay for Internet access through wireless and DSL connections. Answer: B Explanation: B) Existing technology and customers' use of television can facilitate online checkout by the greatest number of customers. Page Ref: 330 Difficulty: Difficult AACSB: Reflective thinking skills Objective: 13.1 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Critical Thinking 67) A small preschool collects its tuition payments from parents by automated bank drafts each month. Administrators at the school are considering online tuition collections through the use of a secure logon on their school Web site. Which statement, if true, would BEST support the idea of online tuition collections? A) The Web site already has a wealth of information on it that parents use each day. B) Parents are highly technically savvy and prefer the convenience of using the school's Web site for other functions like enrollment and admissions. C) School newsletters and flyers went paperless a few years ago. D) A small group of parents has expressed interest in paying their bills online. E) The teachers have also expressed a need to go digital with paperwork. Answer: B Explanation: B) The parents are willing to switch and have been receptive to using technology in related functions such as enrollment and admissions. Page Ref: 331 Difficulty: Difficult AACSB: Reflective thinking skills Objective: 13.1 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Critical Thinking 68) Why might businesses want to analyze data that reveal what consumers do in the marketplace? A) to be able to send them tailor-made advertisements B) to be able to close the customer service departmentC) to be able to reduce production costs D) to be able to stabilize employee turnover E) to be able to manage long-term costs Answer: A Explanation: A) Understanding how consumers act in the marketplace can provide enough information that the marketer can determine which specific media options and types of advertisements will be most appealing to specific consumer groups. Page Ref: 339 Difficulty: Moderate AACSB: Use of information technology Objective: 13.3 Learning Outcome: Describe the major components of effective promotion Skill: Concept 69) Kinsey Lighting, Inc. is a small retailer of decorative lamps and accessories for commercial businesses and residential homes. The company has been family-owned for two decades and has always advertised its business through local media outlets such as newspapers, yellow pages, and occasional radio spots. Recently, Kinsey has been talking with a Web designer about developing a company Web site. Which statement, if true, would BEST support Kinsey's decision to create a Web site for the business? A) There have been more younger families moving into homes in the area. B) The local business association has an online directory for its business partners. C) A new Web site business has opened up across the street from the lamp store. D) Online sales of similar businesses in the area have increased substantially over the years. E) A neighborhood supplier of lamp products just moved to another county. Answer: D Explanation: D) The positive online selling experiences of similar businesses can indicate success for this particular business with the same customers in the area. Page Ref: 335 Difficulty: Difficult AACSB: Reflective thinking skills Objective: 13.1 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Critical Thinking 70) A supermarket is considering automated checkouts that would allow customers to scan the prices of their foods while shopping. Scanners would be placed around the store in different locations. Which statement, if true, would BEST support the claim that this idea would work better than a floating checkout idea? A) There are good locations in the meat, dairy, and bakery aisles to support scanners. B) Scanners would be operated by customers during peak times. C) Portable scanners require yearly training for staff and customers. D) Handheld scanner technology doesn't require extra resources to operate and isvirtually self-managed. E) The scanners are not portable and hence cannot be broken by customers. Answer: D Explanation: D) The scanner technology would have minimal cost to operate on a daily basis. Page Ref: 338 Difficulty: Difficult AACSB: Reflective thinking skills Objective: 13.2 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Application 71) Black Friday is well-known as the start of the end-of-the-year holiday shopping season in the U.S. retail market. Stores offer a variety of up-to-the-minute deals to attract customers into the store between certain hours. Customers have begun to utilize electronic PDAs and cell phones to keep up with the myriad sales and deals in the stores. Which condition would MOST threaten customers' use of mobile technology while shopping in stores? A) Customers, upon entering stores, were body-scanned with magnetic detectors. B) Store sales were broadcast over loudspeakers. C) There were a limited number of Wi-Fi transmission hotspots inside the stores. D) Lighting inside of stores was too dim. E) Store personnel were not as helpful to customers with smartphones in their hands. Answer: C Explanation: C) Limited transmission ability would greatly hinder the use of the mobile devices while customers were shopping in stores. Page Ref: 338 Difficulty: Difficult AACSB: Reflective thinking skills Objective: 13.2 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Application 72) Home Garden Center uses mobile customer service representatives in all of its stores. These floating personnel walk the huge warehouse with smart phones answering customer questions, pointing out locations of items, and directing customers to checkout. Which condition would MOST threaten the use of the mobile customer service at Home Garden Centers in the next business season? A) Incoming employees seem less technically savvy with mobile devices. B) Several store departments are swapping locations within the store facility. C) The size of the smartphone is causing some employees to continually drop the device. D) The current model of smartphone uses an operating system that no longer supports the store's customer service application program. E) There is a slight increase in the theft rate of smartphones from the stores. Answer: DExplanation: D) Upgrading the operating system on the smartphones would be a huge incurred cost for the company. Page Ref: 338 Difficulty: Difficult AACSB: Reflective thinking skills Objective: 13.3 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Application 73) Which piece of information would be MOST helpful for college officials to determine whether the latest college open house was a success? A) The total number of attendees indicated more interest than in the past five years. B) The percentage of people interested in enrolling within six months was 20 percent. C) The number of people who attended was the highest in the past five years. D) The number of enrollment applications received was 80 percent of the total number of attendees. E) The number of attendees showing interest was high. Answer: D Explanation: D) A high percentage of the attendees applied for enrollment. Page Ref: 341 Difficulty: Difficult Objective: 13.3 Learning Outcome: Describe the major components of effective promotion Skill: Application 74) Which piece of information would be MOST helpful for executives at Sanmina-Sci, Inc. to determine whether they should close their service and repair facilities during the last week of the year? A) The employees of the facility have more vacation time toward the end of the year. B) The amount of service and repair calls in the facility is at the lowest levels during that week. C) New equipment deliveries are at their lowest prior to that week. D) The amount of work completed by employees prior to that week is the highest in the past year. E) The businesses that need equipment repaired from Sanmina-Sci are closed for holidays during that week. Answer: B Explanation: B) The lack of work during that week would warrant closing the company. Page Ref: 341 Difficulty: Difficult AACSB: Reflective thinking skills Objective: 13.3 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Application75) Sally wants to determine any changes in the plant's performance based on an estimated 20 percent increase in sales. What device will Sally most likely use? A) decision support system (DSS) B) groupware application C) spyware application D) CAD system E) enterprise resource planning (ERP) Answer: A Explanation: A) A DSS is an interactive system that creates virtual business models and tests them with different data to see how they respond; in other words, the managers can look at "what-if" scenarios by inputting various pieces of data and then studying the system's results. Page Ref: 344 Difficulty: Moderate Objective: 13.3 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Application 76) Greg feels comfortable that no one can open and read his e-mails. What does Greg have installed in his computer? A) anti-virus software B) spyware C) encryption software D) a Trojan horse E) a worm Answer: C Explanation: C) The encryption system works by locking an e-mail message to a unique code number for each computer so only that computer, not others, can open and read the message. Page Ref: 347 Difficulty: Difficult Objective: 13.5 Learning Outcome: Identify the different types of technologies used in business and describe their uses Skill: Application Chapter 14 The Role of Accountants and Accounting Information 33) Which of the following terms refers to the comprehensive system for collecting, analyzing, and communicating financial information? A) bookkeeping B) accounting C) controlling D) auditing E) budgeting Answer: BExplanation: B) Accounting is the practice of making financial information useful to internal and external parties. Page Ref: 358 Difficulty: Easy Objective: 14.1 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 34) Which of the following terms refers to the recording of financial transactions? A) bookkeeping B) accounting C) controlling D) budgeting E) auditing Answer: A Explanation: A) Bookkeeping is the accurate recording of transactions, which accountants use to generate useful information. Page Ref: 358 Difficulty: Easy Objective: 14.1 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 35) Which of the following terms refers to the examination of a company's accounting system to determine whether its financial reports fairly represent its operations? A) company-wide analysis B) forensic accounting C) portfolio analysis D) audit E) preliminary investigation Answer: D Explanation: D) An audit is an examination by an external party to ensure that a company's financial reports are faithful and accurate. Page Ref: 359 Difficulty: Easy Objective: 14.1 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 36) Which of the following terms refers to any economic resource that is expected to benefit a firm or individual who owns it? A) asset B) liability C) equity D) account E) deposit Answer: AExplanation: A) An asset counts as something of value for accounting purposes. Page Ref: 363 Difficulty: Easy Objective: 14.2 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 37) Which of the following terms refers to the amount of money that owners would receive if they sold all of a company's assets and paid all of its liabilities? A) asset B) owners' equity C) inventory D) liability E) credit Answer: B Explanation: B) Owners' equity is that value that represents the financial stake in a company by the owners. Page Ref: 364 Difficulty: Easy Objective: 14.2 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 38) Which of the following refers to the financial statement detailing a firm's assets, liabilities, and owners' equity? A) income statement B) statement of cash flows C) balance sheet D) expense report E) annual budget Answer: C Explanation: C) A balance sheet uses the accounting equation to show the current value of a company. Page Ref: 364 Difficulty: Easy Objective: 14.3 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 39) Which of the following describes assets such as land, building, and equipment? A) liquid assets B) fixed assets C) intangible assets D) current assets E) limited assets Answer: B Explanation: B) Fixed assets are tangible things of value.Page Ref: 364 Difficulty: Easy Objective: 14.3 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 40) Which of the following best describes depreciation? A) the process of the decreasing value of fixed assets due to use B) the process of deducting operating expenses from the value of fixed assets C) the process of reducing the value of fixed assets equally over time D) the process of distributing the cost of liabilities equally over time E) the process of distributing the cost of intangible assets equally over time Answer: C Explanation: C) Depreciation is the natural reduction of value of certain assets over time. Page Ref: 365 Difficulty: Easy Objective: 14.3 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 41) Which of the following describes assets such as patents and trademarks? A) liquid assets B) fixed assets C) intangible assets D) current assets E) limited assets Answer: C Explanation: C) Intangible assets are nonphysical items that still have monetary value attached to them. Page Ref: 364 Difficulty: Easy Objective: 14.3 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 42) Which of the following terms refers to the amount paid for an existing business beyond the value of its other assets? A) goodwill B) excess compensation C) licensing D) asset promotion E) liability deduction Answer: A Explanation: A) Goodwill is the intangible value of the expectation that a company will continue to do business wisely. Page Ref: 366 Difficulty: EasyObjective: 14.3 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 43) Which of the following terms refers to the difference between operating income and income taxes ? A) gross revenue B) net income C) gross profit D) cash flow E) leverage Answer: B Explanation: B) Net income is operating income minus taxes. Page Ref: 368 Difficulty: Easy Objective: 14.3 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 44) Which of the following ratios measures a firm's ability to meet its current debt obligations? A) short-term solvency ratio B) long-term solvency ratio C) profitability ratio D) activity ratio E) equity ratio Answer: A Explanation: A) The short-term solvency ratio is calculated by dividing current assets by current liabilities. Page Ref: 372 Difficulty: Moderate Objective: 14.5 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 45) Which of the following ratios measures a firm's potential earnings? A) short-term solvency ratio B) long-term solvency ratio C) profitability ratio D) activity ratio E) equity ratio Answer: C Explanation: C) This ratio is calculated by dividing net income by the number of common shares of stock. Page Ref: 373 Difficulty: Moderate Objective: 14.5Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 46) ABC Company has a net income of $5 million. ABC's number of outstanding shares of stock is 3,870,000 shares. What is the company's earnings per share? A) $1.29 B) $.77 C) $1.25 D) $.80 E) $18.75 Answer: A Explanation: A) Earnings per share = Net Income/Number of Common Shares Outstanding; therefore, in this scenario, $5,000,000/3,870,000 = $1.29. Page Ref: 373 Difficulty: Easy AACSB: Analytic skills Objective: 14.5 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Application 47) Which of the following ratios evaluates management's use of resources? A) short-term solvency ratio B) long-term solvency ratio C) activity ratio D) profitability ratio E) equity ratio Answer: C Explanation: C) The activity ratio is used to compare relative efficiencies between similar companies. Page Ref: 374 Difficulty: Moderate Objective: 14.5 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 48) Which are the two major fields of accounting? A) managerial and forensic B) financial and managerial C) bookkeeping and advisory D) corporate and individual E) public and private Answer: B Explanation: B) The two fields of accounting can be classified according to the users they serve; it is convenient and accurate to classify users as those outside the company and those inside the company. Page Ref: 358-359 Difficulty: EasyObjective: 14.1 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 49) Bennequin Accounting has been hired by XYZ Manufacturing to help plan its merger with ABC Distribution. Which of the following terms best describes the capacity for which Bennequin has been hired? A) regulatory accounting B) corporate bookkeeping C) company auditing D) fraud investigation E) management advisory Answer: E Explanation: E) In this capacity, private accountants help management make decisions. Page Ref: 361 Difficulty: Moderate Objective: 14.1 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Application 50) Which of the following statements is true? A) As common practice, a union representative for the workers at a firm receives information from the firm's financial accounting system. B) As common practice, a union representative for the workers at a firm receives information from the firm's managerial accounting system. C) As common practice, a union representative for the workers at a firm receives information from both the firm's managerial accounting system and its financial accounting system. D) As common practice, a union representative for the workers at a firm receives information from the firm's forensic accounting system. E) As common practice, a union representative for the workers at a firm does not receive any information from the firm's accounting system. Answer: A Explanation: A) The financial accounting system is concerned with external users, such as unions. Page Ref: 358 Difficulty: Moderate Objective: 14.1 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Application 51) Which of the following statements is true? A) As common practice, a sales representative for a firm receives information from the firm's financial accounting system. B) As common practice, a sales representative for a firm receives information from the firm's managerial accounting system. C) As common practice, a sales representative for a firm receives information from boththe firm's managerial accounting system and its financial accounting system. D) As common practice, a sales representative for a firm receives information from the firm's revenue accounting system. E) As common practice, a sales representative for a firm does not receive any information from the firm's accounting system. Answer: B Explanation: B) The managerial accounting system is concerned with internal users. Page Ref: 358 Difficulty: Moderate Objective: 14.1 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Application 52) Due to investor disgruntlement, Howard Industries needs to provide a complete review of its financial records in order to confirm that they have been conforming with generally accepted accounting principles. Which of the following processes does Howard Industries need to start? A) company-wide analysis B) company-wide audit C) portfolio analysis D) preliminary investigation E) fraud investigation Answer: B Explanation: B) An audit examines a company's accounting information system to determine whether financial reports reliably represent its operations. Page Ref: 359 Difficulty: Moderate Objective: 14.1 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Application 53) Which of the following refers to the rules and procedures governing the content and form of financial reports? A) national bookkeeping standards B) core competencies for accounting C) accounting and financial rules D) national guidelines of accounting principles E) generally accepted accounting principles Answer: E Explanation: E) GAAP is formulated by the Financial Accounting Standards Board (FASB) of the AICPA and should be used to determine whether a firm has controls to prevent errors and fraud. Page Ref: 359 Difficulty: Moderate Objective: 14.1 Learning Outcome: Identify the basic concepts of and tools used for business accountingSkill: Concept 54) Jose is a recent college graduate who has been hired for an entry-level professional position in the accounting department of a large corporation. Which of the following terms best describes Jose's capacity as an accountant? A) public accountant B) private accountant C) forensic accountant D) advisory accountant E) management accountant Answer: B Explanation: B) Private accountants are hired by individual businesses to perform dayto-day activities. Page Ref: 361 Difficulty: Moderate Objective: 14.1 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Application 55) Which of the following describes a liability? A) the potential profit from selling a firm's assets and settling all of its debts B) a debt owed by a firm to an outside organization or individual C) any economic resource expected to benefit a firm or an individual who owns it D) any economic deficit expected to cost a firm or an individual who owns it E) the amount of money originally invested in a business by its owners Answer: B Explanation: B) All debts owed to others are liabilities. Page Ref: 363 Difficulty: Moderate Objective: 14.2 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 56) Which of the following statements best describes the difference between current and long-term liabilities? A) Current liabilities are debts that need to be paid immediately, whereas long-term liabilities do not. B) Current liabilities are those which will cost less in debt interest than long-term liabilities. C) Current liabilities are debts that are settled sooner than long-term debts. D) Current liabilities are debts on tangible assets, whereas long-term liabilities are debts on intangible assets. E) Current liabilities are debts on current assets, whereas long-term liabilities are debts on fixed and intangible assets. Answer: C Explanation: C) Current liabilities include accounts payable: unpaid bills to suppliers for materials as well as wages and taxes that must be paid in the coming year. Long-termliabilities are debts that are not due for at least a year. Page Ref: 366 Difficulty: Moderate Objective: 14.3 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 57) A company's owners invested $10,000 total into the company, which made a profit of $3,500 last year. Its total liabilities are currently at $7,000. What is the value of the total assets of this company? A) $3,000 B) $3,500 C) $6,500 D) $13,500 E) $27,500 Answer: C Explanation: C) 6500 = (10,000 + 3500) - 7000 Page Ref: 366 Difficulty: Moderate AACSB: Analytic skills Objective: 14.2 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Application 58) A company has an assets-to-liabilities ratio of 3:2 and total assets worth $6 million. What is its owners' equity? A) $1 million B) $2 million C) $3 million D) $9 million E) $12 million Answer: B Explanation: B) assets/(assets - owners' equity) = 3/2 Page Ref: 366 Difficulty: Moderate AACSB: Analytic skills Objective: 14.2 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Application 59) How much profit does a company which has a total of $5 million invested by its owners and $4 million in liabilities need to make in order to have an assets-to-liabilities ratio of 2:1? A) $2 million B) $3 million C) $5 millionD) $7 million E) $8 million Answer: D Explanation: D) (profits + investment - liabilities)/liabilities = 2 Page Ref: 366 Difficulty: Difficult AACSB: Analytic skills Objective: 14.2 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Application 60) What distinguishes the two most commonly used categories of owners' equity? A) the amount of equity within each type of asset—current versus fixed and intangible B) the financial form of the equity—cash investments versus stock and bond investments C) the source of the equity—investments versus earnings D) the use of the equity—invested versus saved E) the age of the equity—older investments and earnings versus newer investments and earnings Answer: C Explanation: C) Paid-in capital is additional money invested by owners; retained earnings are net profits kept by a firm rather than paid out as dividend payments to stockholders. Page Ref: 366 Difficulty: Moderate Objective: 14.3 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 61) What are the major categories within an income statement? A) operating costs and profits, investing costs and profits, and financing costs and profits B) current revenue, long-term revenue, and net revenue C) revenue, sales, and income D) assets, liabilities, and owners' equity E) revenues, cost of revenues, operating expenses, and net income Answer: E Explanation: E) An income statement shows the financial results that occurred during a period of time, such as a month or a quarter or a year. Page Ref: 366 Difficulty: Moderate Objective: 14.3 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 62) Which of the following is the difference between revenues and the cost of revenues? A) net income B) gross profitC) accounts payable D) interest expense E) cash flow Answer: B Explanation: B) Managers are often interested in gross profit, a preliminary profit figure that considers revenues and cost of revenues from the income statement. Page Ref: 367 Difficulty: Easy Objective: 14.3 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 63) Which of the following best illustrates cash flow from operations? A) the revenue from selling bread at a local bakery B) the revenue from selling stocks by an insurance company C) the revenue from new investors in a software start-up D) the revenue from selling obsolescent trucks by a delivery company E) the revenue from issuing stock by a financial management firm Answer: A Explanation: A) This figure represents how much of the year's cash balance results from the firm's main line of business. Page Ref: 368 Difficulty: Moderate Objective: 14.3 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Application 64) Which of the following documents would most likely come from a planning strategy meeting? A) income statement B) flow of cash statement C) balance sheet D) budget E) statement of projected earnings Answer: D Explanation: D) A budget is the most important internal financial statement. Page Ref: 369 Difficulty: Moderate Objective: 14.3 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 65) A company brings in $3.25 million in revenue and has a revenue cost of $1 million. Which of the following statements is true? A) In order to have a net income of more than $1.5 million, the operating expenses and income taxes need to be less than $0.25 million. B) In order to have a net income of more than $1.5 million, the operating expenses andincome taxes need to be less than $0.75 million. C) In order to have a net income of more than $1.5 million, the operating expenses and income taxes need to be less than $1.75 million. D) In order to have a net income of more than $1.5 million, the operating expenses and income taxes need to be less than $2.25 million. E) In order to have a net income of more than $1.5 million, the operating expenses and income taxes need to be less than $2.75. Answer: B Explanation: B) operating expenses + taxes = net - gross profit Page Ref: 369 Difficulty: Moderate AACSB: Analytic skills Objective: 14.3 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Application 66) A company ended the year with $4.5 million in cash. During this year, it had earned $2.4 million in operating and financing activities. Which of the following statements is necessarily true? A) The company started the year with less than $2.1 million. B) The company started the year with more than $2.1 million. C) The company started the year with $2.1 million minus the amount of investing activities during the year. D) The company started the year with $2.1 million plus the amount of investing activities during the year. E) The company started the year with $4.5 million in cash. Answer: D Explanation: D) net cash flow = start + revenue - all costs Page Ref: 368 Difficulty: Moderate AACSB: Analytic skills Objective: 14.3 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Application 67) Which of the following terms refers to the formal recording and reporting of revenues in financial statements? A) full disclosure B) revenue recognition C) compliance D) ethical practice E) materiality Answer: B Explanation: B) Revenue recognition is the formal recording and reporting of revenues at the appropriate time; although a firm earns revenues continuously as it makes sales, earnings are not reported until the earnings cycle is completed. Page Ref: 370Difficulty: Easy Objective: 14.4 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 68) Which of the following are the three categories on a company's cash flow statement? A) operating activities, purchase activities, taxes B) profit inflow, debt outflow, taxes C) profitable activities, deficit activities, taxes D) operating activities, investing activities, taxes E) operating activities, investing activities, financing activities Answer: E Explanation: E) Those are the three main figures by which net cash flow is calculated. Page Ref: 368 Difficulty: Easy Objective: 14.4 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 69) Financial statements that do not include interpretation and explanation by management are in violation of which GAAP principle? A) principle of sincerity B) principle of continuity C) principle of full disclosure D) principle of regularity E) principle of prudence Answer: C Explanation: C) Because they know about events inside the company, the people in management prepare additional information to explain certain events or transactions or to disclose the circumstances behind certain results. Page Ref: 370 Difficulty: Moderate Objective: 14.4 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 70) A large company specializing in bread baking has made its annual balance sheet available to its investors. Profits were slightly lower than expected this year. Which of the following items does NOT need to be included in this statement in order to fulfill the principle of full disclosure? A) The current rise of local micro-bakeries has not affected and probably will not affect the revenue of the company. B) The company is contemplating a merger with another major baking company. C) Much of the loss of profits can be explained by the sudden rise in the price of wheat during the past year. D) A baking start-up company founded by some former executives of the company looks like it will be a major competitor in the upcoming years.E) The company and the union for its workers were able to halt a labor strike by negotiating increased health benefits for its workers, causing a slight increase in operating costs. Answer: B Explanation: B) Since this would be a company secret at this point and not directly affect costs or revenues from the previous year, this would be unnecessary (and probably unwise) to reveal. Page Ref: 370 Difficulty: Moderate Objective: 14.4 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Application 71) A company ends the year with a banker's ratio of 5.3. How much current liabilities does it have if its current asset total is $15.3 million? A) $3.1 million B) $5.1 million C) $10.1 million D) $10.2 million E) $15.1 million Answer: A Explanation: A) current assets/current liabilities = 5.3 Page Ref: 372 Difficulty: Moderate AACSB: Analytic skills Objective: 14.4 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Application 72) A company ends the year with a net income of $7.5 million and an earnings per share value of $1.50. What is the number of common shares outstanding for this company? A) 3 million B) 4.5 million C) 5 million D) 6.5 million E) 11.25 million Answer: C Explanation: C) 1.5 = net income / # of shares Page Ref: 373 Difficulty: Moderate Objective: 14.4 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Application 73) A local bakery is suddenly inundated with many more orders for wedding cakes than it has the physical capacity to make. Rather than turn away customers, the owner decides to rent another kitchen across town to fulfill all of the orders. But she needs to borrowmoney to pay for the rent and additional workers, the additional cost of which will be paid by the profits from the additional cakes. Which of the following ratios will be most affected by this decision? A) the bakery's short-term solvency ratio B) the bakery's long-term solvency ratio C) the bakery's profitability ratio D) the bakery's activity ratio E) the bakery's equity ratio Answer: A Explanation: A) Since this involves a short-term loan with no additional assets, this ratio will temporarily go down. Page Ref: 372 Difficulty: Moderate Objective: 14.5 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Application 74) Which of the following bodies formulates the generally accepted accounting principles ? A) Accounting Disclosure Board B) Financial Accounting Standards Board C) Association of Certified Fraud Examiners D) Securities and Exchange Commission E) American Institute of Certified Public Accountants Answer: B Explanation: B) GAAPs are formulated by the Financial Accounting Standards Board (FASB) of the AICPA and should be used to determine whether a firm has controls to prevent errors and fraud. Page Ref: 359 Difficulty: Moderate Objective: 14.1 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 75) Which of the following bodies enforces accounting and auditing rules and procedures? A) Accounting Disclosure Board B) Financial Accounting Standards Board C) Association of Certified Fraud Examiners D) Securities and Exchange Commission E) American Institute of Certified Public Accountants Answer: D Explanation: D) The Securities and Exchange Commission, a government regulatory agency, requires firms to file such disclosures so that potential investors have valid information about their financial status. Page Ref: 359 Difficulty: ModerateObjective: 14.1 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 76) Which of the following statements is true? A) Forensic accounting is mostly used as a tool for government regulation and investigation. B) Forensic accounting is mostly used as a tool for intracompany investigations. C) Forensic accounting is rarely used to investigate the misuse of government funds. D) Forensic accounting is often used to investigate the misuse of government funds. E) Forensic accounting is mostly used as a tool for local police enforcement. Answer: D Explanation: D) Forensic accountants may be called upon for both investigative accounting and litigation support in crimes against companies, crimes by companies, and civil disagreements. Page Ref: 361 Difficulty: Moderate Objective: 14.1 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 77) Which of the following BEST describes a certified fraud examiner? A) a specialized managerial accountant concerned with issues of fraud B) a specialized certified public accountant concerned with issues of fraud C) a specialized forensic accountant concerned with issues of fraud D) an accounting agent for the Securities and Exchange Commission concerned with issues of fraud E) an accounting agent provided by the Sarbanes-Oxley Act of 2002 concerned with issues of fraud Answer: C Explanation: C) The CFE's activities focus specifically on fraud-related issues: fraud detection, evaluating accounting systems for weaknesses and fraud risks, investigating white collar crime on behalf of law enforcement agencies, evaluating internal organizational controls for fraud prevention, and expert witnessing. Page Ref: 362 Difficulty: Moderate Objective: 14.1 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 78) Which of the following areas of the Certified Fraud Examiner (CFE) exam includes theories of fraud prevention? A) criminology and ethics B) financial transactions C) fraud investigation D) fraud litigation E) legal elements of fraudAnswer: A Explanation: A) The criminology and ethics section includes theories of fraud prevention and ethical situations. Page Ref: 362 Difficulty: Moderate Objective: 14.1 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 79) Which of the following inequalities is always true? A) liabilities + assets < assets + owners' equity B) liabilities < assets - owners' equity C) assets < owners' equity + liabilities D) owners' equity < assets - liabilities E) assets < owners' equity - liabilities Answer: E Explanation: E) Since assets = owners' equity + liabilities, this is always true. Page Ref: 364 Difficulty: Difficult AACSB: Analytic skills Objective: 14.2 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 80) Bennequin Manufacturing was a highly profitable firm five years ago but has since been severely declining in net revenue, even though the amount of business has held steady. Marlena has been hired as the new Chief Executive Officer to help turn things around for the company. She would like to understand what happened financially to the company in the past five years in order to start coming up with possible solutions. Which of the following documents would be most useful for her? A) income statements from the past five years B) debt statements from the past five years C) statements of cash flows from the past five years D) budgets from the past five years E) balance sheets from the past five years Answer: E Explanation: E) All of these might be helpful. But, since balance sheets give a detailed accounting of the financial condition at a particular time, by comparing several in a row Marlena might be able to pinpoint more accurately what is causing Bennequin's problems. Page Ref: 364 Difficulty: Difficult AACSB: Reflective thinking skills Objective: 14.3 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Application81) Which of the following scenarios would most likely occur with a company that has reported disappointing earnings recently but still looks to be financially stable for quite some time? A) high long-term solvency ratio but low profitability ratio B) high short-term solvency ratio but low profitability ratio C) high long-term solvency ratio but low activity ratio D) high short-term solvency ratio but low activity ratio E) high long-term solvency ratio but low short-term solvency ratio Answer: A Explanation: A) Many of these situations may apply, but this one is the most certain. Page Ref: 372-373 Difficulty: Difficult AACSB: Analytic skills Objective: 14.5 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Synthesis 82) With fixed assets of $4 billion and current assets of $1.7 billion, Realm Company has long-term liabilities of $2 billion and current liabilities of $0.34 billion. What is Realm's current ratio? A) 0.85 B) 2 C) 2 .44 D) 5 E) 11.76 Answer: D Explanation: D) The current ratio = current assets/current liabilities; in this scenario, $1.7/.34 = 5. Page Ref: 372 Difficulty: Difficult AACSB: Analytic skills Objective: 14.5 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Application 83) Which organization provides guidelines for ethical conduct for the accounting profession? A) AICPA B) SEC C) GAAP D) FASB E) CMA Answer: A Explanation: A) The code of professional conduct for public accountants in the United States is maintained and enforced by the AICPA (American Institute of Certified Public Accountants). Page Ref: 374Difficulty: Easy Objective: 14.6 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept 84) Which of the following statements BEST describes the need for global accounting standards? A) The complexity of the global market increases the risk of unethical accounting behavior by allowing accountants to choose which national GAAP standards are best for their clients. B) The rise of the global market increases the risk of money laundering and offshore accounting. C) The rise of the global market increases the risk of fraudulent business transactions across borders. D) The rise of the global market increases the risk of international dumping and profitskimming. E) The rise of the global market increases the risk of the creation of dummy companies and accounts for the purpose of dumping toxic assets. Answer: A Explanation: A) All of these statements are true, but this one is the only one that is best addressed by an international code of conduct. Page Ref: 376 Difficulty: Difficult AACSB: Reflective thinking skills Objective: 14.6 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Application 85) Which of the following is NOT an unethical or illegal accounting action? A) hiding expenses B) underreporting liabilities C) overestimating depreciation value of equipment D) inflating revenues E) maximizing the value of a company's intangible assets Answer: E Explanation: E) This is not illegal nor unethical as long as it is done legitimately. Page Ref: 375 Difficulty: Difficult AACSB: Ethical understanding and reasoning abilities Objective: 14.6 Learning Outcome: Identify the basic concepts of and tools used for business accounting Skill: Concept Chapter 15 Money and Banking 34) Which of the following has a fixed term? A) demand deposits B) time depositsC) money market mutual funds D) credit card accounts E) savings accounts Answer: B Explanation: B) Time deposits are intended to be held until maturity. Page Ref: 390 Difficulty: Easy Objective: 15.1 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 35) Which of the following financial institutions is considered a thrift institution? A) pension fund B) credit union C) commercial bank D) savings and loan association E) securities investment firms Answer: B Explanation: B) Credit unions formed to help certain groups of people manage their money with more thrift. Page Ref: 392 Difficulty: Easy Objective: 15.2 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Application 36) The Norton County Bank performs such tasks as making monthly bill payments, managing investment portfolios, and managing the estates of deceased persons. What are such services called? A) special banker's services B) financial advice services C) public services D) trust services E) amalgamation services Answer: D Explanation: D) For a fee, a bank's trust department will perform all of these functions. Page Ref: 393 Difficulty: Easy Objective: 15.2 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Application 37) Which of the following agencies guarantees the safety of all of its members' bank accounts?A) Internal Revenue Service B) Federal Open Market Committee C) Federal Reserve Bank D) Federal Deposit Insurance Corporation E) Federal Exchange Commission Answer: D Explanation: D) This is the primary responsibility of this agency. Page Ref: 396 Difficulty: Easy Objective: 15.3 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 38) Which of the following terms refers to the percentage of its deposits a bank must hold, in cash or on deposit, with a Federal Reserve bank? A) discount rate B) key rate C) prime rate D) federal insurance premium E) reserve requirement Answer: E Explanation: E) This is controlled by the Fed. Page Ref: 398 Difficulty: Easy Objective: 15.4 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 39) Which of the following terms refers to the interest level at which member banks can borrow money from the Federal Reserve System? A) discount rate B) key rate C) prime rate D) federal insurance premium E) reserve requirement Answer: A Explanation: A) This is one of the many interest controls that the Fed has at its disposal. Page Ref: 399 Difficulty: Easy Objective: 15.4 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept40) Which of the following terms refers to the interest level at which commercial banks lend reserves to each other, usually overnight? A) discount rate B) key rate C) prime rate D) federal insurance premium E) reserve requirement Answer: B Explanation: B) The Fed has no direct control over this. Page Ref: 399 Difficulty: Easy Objective: 15.4 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 41) Which of the following best describes what is called the "open-market operations" of the Federal Reserve System? A) the development of new financial opportunities for banks B) the minting of new money to disperse into the money market C) the control of interest rates among banks D) the maintenance of a well-functioning lending system among banks E) the buying and selling of securities Answer: E Explanation: E) This allows the Fed to ensure an active market. Page Ref: 399 Difficulty: Easy Objective: 15.4 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 42) Which of the following indices indicates the relative strength of the currencies of two countries? A) trade rate B) exchange rate C) trade balance D) relative gross national products E) international loan rate Answer: B Explanation: B) This is the ratio of one currency against the other. Page Ref: 403 Difficulty: Easy Objective: 15.6 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary systemSkill: Concept 43) Toyota, based in Japan, would like to build a new factory and a new retail distribution center. Both or either of these may be built in the United States and in Canada. Currently, the U.S. dollar is weak compared to the Canadian dollar. Which of the following would be in Toyota's best interest? A) build the cars in Canada and sell them in the United States B) build the cars in the United States and sell them in Canada C) build the cars in Canada and sell them in both countries D) build the cars in the United States and sell them in both countries E) build the cars in both countries and sell them in both countries Answer: B Explanation: B) Since transportation costs would be negligible here, it would behoove Toyota to build the cars where it would be cheaper to build them and to sell them where they could get the higher price. Page Ref: 404 Difficulty: Moderate Objective: 15.6 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Application 44) Which of the following best describes the portability characteristic of money? A) It neither dies nor spoils and if it wears out, it can be replaced. B) Units of money can be matched with the value of goods. C) It can be exchanged across national borders. D) It allows people to measure the relative value of goods and services. E) It is light and easy to handle. Answer: E Explanation: E) Money is easy to carry, which makes it easy to use. Page Ref: 388 Difficulty: Moderate Objective: 15.1 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 45) Which of the following is a consequence of the divisibility characteristic of money? A) Units of money do not expire after a certain time limit. B) Units of money can be accurately matched with the value of goods. C) Units of money are easily carried. D) Units of money have relatively stable value. E) Units of money of different nations are easily converted to other units of money. Answer: B Explanation: B) Modern currency is easily divisible into smaller parts, each with a fixed value; one dollar can be exchanged for 10 dimes. Thus, the actual value of goods can be approximated very well by units of money.Page Ref: 388 Difficulty: Moderate Objective: 15.1 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 46) Which of the following affects the value of money? A) how much currency is in circulation B) how many units the currency can be divided into C) how portable the form of currency is D) how durable the form of currency is E) how much currency has been saved Answer: A Explanation: A) If there is too much money in circulation, we end up with inflation. If there is too little, everyone starves. Page Ref: 389 Difficulty: Moderate Objective: 15.1 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 47) Which of the following best describes the durability characteristic of money? A) Units of money do not expire after a certain time limit. B) Units of money can be matched with the value of goods. C) Units of money allow people to measure the relative value of goods and services. D) Units of money of different nations are easily converted to other units of money. E) Units of money have lasting value. Answer: A Explanation: A) In addition, currency is difficult to counterfeit. Page Ref: 388 Difficulty: Moderate Objective: 15.1 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 48) Which of the following best describes the stability characteristic of money? A) Units of money do not expire after a certain time limit. B) Units of money of different nations are easily converted to other units of money. C) Units of money can be matched with the value of goods. D) Units of money allow people to measure the relative value of goods and services. E) Units of money have relatively constant value. Answer: E Explanation: E) The value of currency fluctuates a little, though its value is related to what we can buy with it.Page Ref: 388 Difficulty: Moderate Objective: 15.1 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 49) Money frees society from a system of barter. In doing so, money is performing which of the following functions? A) store of value B) measure of worth C) unit of account D) determination factor E) medium of exchange Answer: E Explanation: E) We use money as a way of buying and selling things; without money, we would all be involved in a system of barter. Page Ref: 389 Difficulty: Moderate Objective: 15.1 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 50) Which of the following is NOT part of the M-1 supply? A) currency at hand B) currency amount of written checks C) currency available through a debit card D) currency in checking accounts E) currency value of time deposits Answer: E Explanation: E) M-1 includes only the most liquid forms of money: cash, checks, and checking accounts. Page Ref: 389 Difficulty: Moderate Objective: 15.1 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 51) Which of the following is NOT part of the M-2 money supply? A) debit card account B) time deposits C) money market mutual funds D) savings account E) credit card account Answer: EExplanation: E) The major components of M-2 are M-1, time deposits, money market mutual funds, and savings accounts. Page Ref: 390 Difficulty: Moderate Objective: 15.1 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 52) Which of the following financial institutions earn profits from loans taken from the funds in each of its depositors' accounts? A) securities investment firms B) pension funds C) credit unions D) commercial banks E) mutual savings banks Answer: D Explanation: D) This is one of the primary ways that commercial banks earn a profit. Page Ref: 391 Difficulty: Moderate Objective: 15.2 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 53) Which of the following statements is true? A) Since insurance companies generate the vast majority of revenue from investments of premium payments, market fluctuations will not affect one's health care benefits. B) Since insurance companies generate the vast majority of revenue from premium payments, market fluctuations generally do not affect one's health insurance premium. C) Since insurance companies also generate revenue from investments of premium payments, market fluctuations may affect one's health insurance premium. D) Since insurance companies also generate revenue from investments of premium payments, market fluctuations may affect one's health care benefits. E) Since insurance companies generate revenue from both premium payments and investments thereof, market fluctuations will not generally affect one's health insurance benefits. Answer: C Explanation: C) Insurance premiums are set to make a profit, not simply to have an expected break-even value (as they were originally meant to do). Thus, if market fluctuations get too erratic, premiums might be set higher to compensate for this. Page Ref: 392 Difficulty: Moderate AACSB: Reflective thinking skills Objective: 15.2 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary systemSkill: Synthesis 54) Which of the following financial institutions are considered to be owned by their depositors? A) commercial banks and savings and loan associations B) savings and loan associations and mutual savings banks C) mutual savings banks and credit unions D) credit unions and pension funds E) pension funds and savings institutions Answer: C Explanation: C) These are the co-owned institutions. The others are owned by the investors. Page Ref: 391-392 Difficulty: Moderate Objective: 15.2 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 55) When buying from a supplier in France, LTD, based in Cleveland, Ohio, has arranged for its bank to pay the supplier the cost of the desired material when it has passed customs in the United States. Which of the following terms is this type of bank promise called? A) banker's acceptance B) bank trust service C) certified check D) letter of credit E) currency exchange agreement Answer: D Explanation: D) A letter of credit is payable only after certain conditions are met. Page Ref: 393 Difficulty: Moderate Objective: 15.2 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Application 56) David has a savings account and a home mortgage with a financial institution. Each year, this institution sends him a dividend check based on his accounts. Which of the following financial institutions is David using here? A) commercial bank B) savings institution C) credit union D) savings and loan association E) mutual savings bank Answer: E Explanation: E) In mutual savings banks, all depositors are considered owners of thebank; all profits are divided proportionately among depositors, who receive dividends. Page Ref: 391-392 Difficulty: Moderate Objective: 15.2 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Application 57) Which of the following actions can the Federal Deposit Insurance Company take in the event of a failure of one of its insured banks? A) The FDIC can seize the assets of the bank and its investors and settle the bank's debts. B) The FDIC can allow the bank to stay afloat by granting a loan of federal money. C) The FDIC can conduct an inquiry into the investors' assets and actions to determine if there was any malfeasance that caused the bank failure. D) The FDIC can allow another bank to take responsibility for the failed bank's liabilities through sale of the failed bank. E) The FDIC can settle the bank's debts through its insurance deposit fund and regulate the bank's transactions more strictly. Answer: D Explanation: D) The FDIC can do one of two actions: sell the failed bank or pay off its debts by seizure of its assets (and not those of the investors). Page Ref: 397 Difficulty: Moderate Objective: 15.3 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Application 58) Which of the following statements best explains how financial institutions create money? A) By opening new checking accounts and giving more people access to readily available cash, financial institutions expand the money supply. B) By issuing money through government contracts, financial institutions expand the money supply. C) By taking deposits and loaning out these funds, financial institutions expand the money supply. D) By collecting interest on its accounts through investments, financial institutions expand the money supply. E) By giving interest from its accounts to its clients, financial institutions expand the money supply. Answer: C Explanation: C) Further, the money supply expands because banks are allowed to loan out most (although not all) of the money they take in from deposits. Page Ref: 396 Difficulty: Moderate Objective: 15.3 Learning Outcome: Discuss the functions of different types of financial institutions inthe monetary system Skill: Concept 59) Which of the following political bodies appoints the members of the board of governors for the Federal Reserve System? A) the Senate B) the House of Representatives C) the President of the United States D) the Council of American Governors E) the people of the United States Answer: C Explanation: C) The Fed's board of governors consists of seven members appointed by the President for overlapping terms of fourteen years. Page Ref: 397 Difficulty: Moderate Objective: 15.4 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 60) How are the individual Federal Reserve Banks organized? A) by size of financial institution members—small, medium, large, etc. B) by type of financial institution members—commercial banks, credit unions, etc. C) by geographical region—Southeast, Northeast, West, etc. D) by financial purpose—buying, lending, interest controlling, etc. E) by legislative districts—10th District of Massachusetts, 1st District of Colorado, etc. Answer: C Explanation: C) There are a total of 12 districts. Page Ref: 397 Difficulty: Moderate Objective: 15.4 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 61) Which of the following best describes two of the three primary functions of the Federal Reserve System? A) developing new financial markets and aiding banks in conducting their business B) aiding banks in conducting business and managing the U.S. money supply and interest rates C) managing the U.S. money supply and interest rates and monitoring interbank relationships D) monitoring interbank relationships and acting as a bank for the federal government E) acting as a bank for the federal government and developing new financial markets Answer: B Explanation: B) In addition, the Fed also clears checks—about 56 million each day—for commercial banks.Page Ref: 398 Difficulty: Moderate Objective: 15.4 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 62) Which of the following is NOT a primary tool for controlling the money supply? A) taxation B) reserve requirements C) discount rate controls D) credit controls E) open-market operations Answer: A Explanation: A) The Fed uses four primary tools for controlling the money supply: reserve requirements, discount rate controls, open-market operations, and selective credit controls. Page Ref: 398 Difficulty: Moderate Objective: 15.4 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 63) Which of the following statements best describes why U.S. Treasury securities have always been considered risk-free investments? A) They are backed by the U.S. government. B) They have a guaranteed rate of return. C) They are easily sold. D) They are readily available for purchase. E) They earn a great profit on the international money market. Answer: A Explanation: A) The other reasons here are all true because of the backing of the U.S. government. Page Ref: 399 Difficulty: Moderate Objective: 15.4 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 64) Which of the following laws has had significant effects in maintaining bank identity records? A) the Check Clearing for the 21st Century Act B) the USA Patriot Act C) the Bank Secrecy Act D) the Federal Reserve ActE) the Emergency Economic Stabilization Act Answer: B Explanation: B) The CIP is a part of this law. Page Ref: 401 Difficulty: Easy Objective: 15.5 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 65) Which of the following federal laws made transactions between banks significantly more efficient? A) the Check Clearing for the 21st Century Act B) the Bank Secrecy Act C) the USA Patriot Act D) the Federal Reserve Act E) the Economic Emergency Recovery Act Answer: A Explanation: A) It made electronic clearing of checks legal. Page Ref: 401 Difficulty: Easy Objective: 15.5 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 66) Which of the following statements best describes how the Automated Clearing House Network (ACH) maintains its integrity as a processor of electronic payments? A) The ACH network is an institution within the Federal Bank System and is regulated by strict government standards. B) The ACH network is a for-profit company and is regulated by its need to make a profit, which it can only do by strictly regulating itself. C) The ACH network is a financial institution and is thus regulated by its obligations to its investors. D) The ACH network is a not-for-profit association and is regulated by its independence from outside interests. E) The ACH network is a professional organization to which all financial institutions are obligated to contribute resources and is regulated by the interests of these institutions. Answer: D Explanation: D) It is no longer a part of NACHA, but as a non-profit, it cannot be swayed by the personal interests of the investors and other institutions. Page Ref: 401 Difficulty: Moderate Objective: 15.5 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept67) Which of the following financial institutions was taken over by the Federal House Finance Agency in 2008 as a part of the Emergency Economic Recovery Act? A) Lehman Brothers Holdings B) Bear Stearns Companies C) Federal Home Loan Mortgage Corporation D) Federal Home Loan Banks System E) Federal Agricultural Mortgage Corporation Answer: C Explanation: C) The Federal Home Loan Mortgage Corporation was taken over by the government in order to ensure that no more subprime loans and other abuses were made. Page Ref: 400 Difficulty: Moderate Objective: 15.5 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 68) Which of the following transactions is not included among Automated Clearing House payments? A) ATM deposits B) business-to-business electronic payments C) checks D) Internet-initiated debit card payments E) local tax payments Answer: A Explanation: A) This is handled by the individual banks. Page Ref: 401 Difficulty: Moderate Objective: 15.5 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 69) Which of the following pieces of information is not required by the USA Patriot Act for banks to collect for every customer? A) name B) address C) date of birth D) place of birth E) tax identification number Answer: D Explanation: D) This is the only one not necessary to be collected. Page Ref: 401 Difficulty: Moderate Objective: 15.5 Learning Outcome: Discuss the functions of different types of financial institutions inthe monetary system Skill: Concept 70) Which of the following institutions most helps simplify transactions made among buyers and sellers in different countries? A) the U.S. State Department B) the International Monetary Fund C) the World Bank D) commercial banks E) the Internet Answer: D Explanation: D) If money inflows and outflows are equal for two countries, money does not have to flow between them; if inflows and outflows are not equal, a flow of money is made to cover the difference. Page Ref: 404 Difficulty: Moderate Objective: 15.6 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 71) Which of the following is the main justification for the World Bank to fund national improvements by making loans to build roads and hospitals? A) The resulting improvements will help stabilize the political situation, and hence the international trade, of certain developing countries. B) The resulting improvements will help increase the productive capacity, and hence the international trade, of certain developing countries. C) The resulting improvements will help increase the population morale, and hence the international trade, of certain developing countries. D) The resulting improvements will help increase the overall quality of life, and hence the international trade, of certain developing countries. E) The resulting improvements will help increase the value of the currency, and hence the international trade, of certain developing countries. Answer: B Explanation: B) The World Bank provides only a very limited scope of services; the resulting improvements, however, eventually enable borrowing countries to increase productive capacity and international trade. Page Ref: 405 Difficulty: Moderate Objective: 15.6 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 72) Which of the following describes the requirements that the International Monetary Fund has made on certain developing countries? A) that the government decrease spending in order to bring inflation under controlB) that private industries decrease prices in order to bring inflation under control C) that the government increase loans in order to create more money in the local markets D) that the local banks increase loans in order to create more money in the local markets E) that the government and private industries partner in creating more jobs in the region Answer: A Explanation: A) The IMF likes austerity in governments, but not private industries. Page Ref: 405 Difficulty: Moderate Objective: 15.6 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 73) David is saving $25 a week toward getting a new truck. Which function of money does this illustrate? A) stabilization of value B) foundation of banking C) medium of exchange D) store of value E) measure of worth Answer: D Explanation: D) In the form of currency, money can be used for future purchases and thus "stores" value. Page Ref: 389 Difficulty: Difficult Objective: 15.1 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Application 74) A jeweler assesses the value of a flawless white diamond as considerably more than that of a rhinestone. Which function of money does this illustrate? A) foundation of banking B) medium of exchange C) store of value D) measure of worth E) stabilization of value Answer: D Explanation: D) Money lets us measure the value of goods and services. Page Ref: 389 Difficulty: Difficult Objective: 15.1 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Application 75) In which of the following financial institutions would all of the people who allow it tohold their funds be able to participate in major decision-making? A) commercial bank B) savings and loan association C) savings institutions D) credit union E) pension fund Answer: D Explanation: D) A credit union is a nonprofit institution owned and run by its members. Page Ref: 391-392 Difficulty: Difficult Objective: 15.2 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 76) Which of the following reasons is the primary motivator for a commercial bank to acquire new depositors? A) A new deposit account will make more funds available to pay the interest on other deposit accounts. B) A new deposit account will make more funds available to pay the bank's employees. C) A new deposit account will make more funds available to give out in loans. D) A new deposit account will make more funds available to give out in dividends to its investors. E) A new deposit account will make more funds available to facilitate brokerage transactions. Answer: C Explanation: C) A commercial bank makes its profits from investments and loans derived from its depositors' cash. Page Ref: 391 Difficulty: Difficult Objective: 15.2 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 77) Suppose a list of all American deposit institutions were created and a name chosen randomly from this list. Which of the following would the chosen institution most likely be? A) a commercial bank B) a savings institution C) a savings and loan association D) a mutual savings bank E) a credit union Answer: A Explanation: A) Despite the plethora of possible deposit financial institutions, the overwhelming majority of them are commercial banks.Page Ref: 391-392 Difficulty: Difficult Objective: 15.2 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 78) Which of the following statements best describes why a decrease in reserve requirements often results in an increase in the money supply? A) A decrease in reserve requirements gives banks more money to better determine their interest rates. B) A decrease in reserve requirements gives banks more money to pay off their debts. C) A decrease in reserve requirements gives banks more money to lend out. D) A decrease in reserve requirements gives banks more money to offer in dividend payments to their clients. E) A decrease in reserve requirements gives banks more money to reward their employees for meritorious financial ventures. Answer: C Explanation: C) A decrease in the reserve requirement "frees up" extra money that can be distributed in the form of loans, for example. Page Ref: 398 Difficulty: Moderate Objective: 15.4 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 79) Which of the following statements best describes why an increase in the discount rate often results in a decrease in the money supply? A) An increase in the discount rate will lower the overall values of loans from the Federal Reserve Banks to individual banks. B) An increase in the discount rate will lower the overall values of loans from individual banks to other financial institutions. C) An increase in the discount rate will lower the overall number of banks issuing loans to individuals. D) An increase in the discount rate will lower the overall number of loans from the Federal Reserve Banks to individual banks. E) An increase in the discount rate will lower the overall number of loans from the Federal Reserve Banks to individuals. Answer: D Explanation: D) An increase in the discount rate increases the amount of money each local bank will pay to the Federal Reserve bank to borrow money, for example; this tightens money supply. Page Ref: 397 Difficulty: Moderate Objective: 15.4 Learning Outcome: Discuss the functions of different types of financial institutions inthe monetary system Skill: Concept 80) Under which of the following circumstances would the Federal Reserve System want to increase the money supply by increasing the discount rate? A) The economy is experiencing severe inflation, and market activity is very low. Yet the financial institutions have a great deal of M-1 resources at their disposal that they are not investing. B) The economy is experiencing severe inflation, and most financial institutions have low M-1 resources at their disposal. Yet there is a great deal of market activity. C) The economy is experiencing severe deflation, and market activity is very low. Yet the financial institutions have a great deal of M-1 resources at their disposal that they are not investing. D) The economy is experiencing severe deflation, and most financial institutions have low M-1 resources at their disposal. Yet there is a great deal of market activity. E) The economy is experiencing wild fluctuations, and most financial institutions have low M-1 resources at their disposal. Answer: A Explanation: A) The Fed helps counteract inflation by decreasing the money supply. By increasing the discount rate, the Fed is discouraging further loans from itself and encouraging the institutions to use their own funds for investment. Page Ref: 399 Difficulty: Difficult AACSB: Analytic skills Objective: 15.4 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Application 81) Under which of the following circumstances would the Federal Reserve System want to decrease the money supply by increasing the reserve requirement? A) The economy is experiencing severe inflation, and market activity is very low. Yet the financial institutions have a great deal of M-1 resources at their disposal that they are not investing. B) The economy is experiencing severe inflation, yet market activity has been extremely high and erratic. C) The economy is experiencing severe deflation, and market activity is very low. Yet the financial institutions have a great deal of M-1 resources at their disposal that they are not investing. D) The economy is experiencing severe deflation, yet market activity has been extremely high and erratic. E) The economy is experiencing severe deflation, market activity is very low, and most financial institutions are low on M-1 resources. Answer: B Explanation: B) The Fed helps counteract inflation by decreasing the money supply. Here the market needs to be stabilized. By increasing the reserve requirement, the Fed will lower the amount of investments made by the financial institutions.Page Ref: 398 Difficulty: Difficult AACSB: Analytic skills Objective: 15.4 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Application 82) Which of the following recent events represents the two most significant impacts on changes in the money and banking system since 2000? A) the rise in government intervention in helping to stabilize the U.S. financial system and the increasingly strict regulation of the mortgage industry B) the increasingly strict regulation of the mortgage industry and the enactment of antiterrorist policies C) the enactment of anti-terrorist policies and the rise of electronic technologies D) the rise of electronic technologies in banking and the rise in government intervention in helping to stabilize the U.S. financial system E) the rise in government intervention in helping to stabilize the U.S. financial system and the enactment of anti-terrorist policies Answer: D Explanation: D) These changes have been the most far-reaching in banking practices. Page Ref: 400-401 Difficulty: Difficult AACSB: Reflective thinking skills Objective: 15.5 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Synthesis 83) Regarding the international payments process, which statement is true? A) In international trade, money will flow from the country with the strongest currency to that of the weakest. B) The World Bank monitors the trade of its members to insure that money is flowing properly between the various countries. C) The World Bank monitors the national banks of its members to insure that money is flowing properly between the various countries. D) By international law, international trade must involve money flowing between two countries. E) Money does not actually have to flow between two countries. Answer: E Explanation: E) If trade between the two countries is in balance, meaning that money inflows and outflows are equal for both countries, money does not have to flow between the two countries. Page Ref: 404 Difficulty: Difficult Objective: 15.6 Learning Outcome: Discuss the functions of different types of financial institutions inthe monetary system Skill: Concept Chapter 16 Managing Finances 26) What value of a stock is calculated by dividing total shareholders' equity by the total number of shares of stock issued? A) par value B) market value C) book value D) chime value E) total value Answer: C Explanation: C) Book value is usually less than market value. Page Ref: 417 Difficulty: Easy Objective: 16.1 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 27) Which of the following statements is NOT true about dividend payments? A) Many companies distribute between 30 and 70 percent of their profits to shareholders. B) Some firms, especially fast-growing companies, do not pay dividends. C) Many fast-growing companies use cash earnings for expanding the company so that future earnings can grow even faster. D) During unprofitable years, companies are still required by law to pay dividends to their stockholders. E) Dividend payments are made to stockholders on a regular basis. Answer: D Explanation: D) Companies are not compelled by law to pay dividends; stockholders receive dividends only if the company makes money. Page Ref: 418 Difficulty: Easy Objective: 16.1 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 28) Which of the following is an advantage of ETFs over mutual funds? A) ETFs can be traded throughout the day like a stock. B) ETFs have high operating expenses. C) ETFs do not require high initial investments. D) ETFs are not regulated by the government. E) ETFs are difficult to sell in a timely manner. Answer: A Explanation: A) ETFs are traded on the stock exchange, just like stocks.Page Ref: 419 Difficulty: Easy Objective: 16.2 Learning Outcome: Describe the goals and stages of financial management for companies Skill: Concept 29) Which of the following are stocks, bonds, and mutual funds representing secured, or financially viable, claims on the part of investors? A) private placements B) securities C) exchanges D) commodities E) dividends Answer: B Explanation: B) The name "securities" comes from the fact that these represent secured, or financially viable, claims on the part of investors. Page Ref: 420 Difficulty: Easy Objective: 16.3 Skill: Concept 30) New stocks and bonds are sold in what market? A) private placement market B) secondary market C) primary market D) tertiary market E) open market Answer: C Explanation: C) Sales may be public or private in the primary market. Page Ref: 420 Difficulty: Easy Objective: 16.3 Skill: Concept 31) Which of the following is the federal government agency that regulates U.S. securities markets? A) New York Stock Exchange B) Federal Reserve C) Commerce Department D) Securities and Exchange Commission E) Treasury Department Answer: D Explanation: D) The SEC must approve a new security before it is brought to market. Page Ref: 420 Difficulty: EasyObjective: 16.3 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 32) Which of the following is an organization of individuals coordinated to provide an institutional setting in which stock can be bought and sold? A) stock exchange B) brokerage C) server D) over-the-counter market E) commission Answer: A Explanation: A) Each exchange regulates where and when trading may occur. Page Ref: 420 Difficulty: Easy Objective: 16.3 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 33) Which of the following is a requirement for a firm to be listed on the New York Stock Exchange? A) capital value of at least $35 million B) total value of outstanding stock C) number of shareholders must exceed 100 D) number of shares of stock must exceed 1 million E) company must be headquartered in North America Answer: B Explanation: B) The number of shares of stock offered by firms listed on the NYSE varies widely, and there is no requirement for the number. Page Ref: 421 Difficulty: Easy Objective: 16.3 Skill: Concept 34) Which of the following receives and executes buy-and-sell orders for other people in return for commissions? A) stock exchanges B) stock brokers C) investment banks D) stock agents E) savings banks Answer: B Explanation: B) Stock brokers usually work on commission. Page Ref: 421Difficulty: Easy Objective: 16.3 Skill: Concept 35) Lito is working with a discount broker. Which service would Lito NOT be likely to receive? A) stock research B) industry analysis C) face-to-face consultations D) screening for specific types of stocks E) quality suggestions for investments Answer: C Explanation: C) Although such consultations are not offered, discount brokers can be much less expensive than traditional brokers. Page Ref: 422 Difficulty: Easy Objective: 16.3 Skill: Application 36) Which of the following is a summary of price trends in a specific industry and/or the stock market as a whole? A) investment index B) average index C) market indicator D) market index E) prospectus Answer: D Explanation: D) Market indexes do not indicate the status of individual securities. Page Ref: 423 Difficulty: Easy Objective: 16.3 Skill: Concept 37) Hugh is an investor who opts for no-risk U.S. Treasury Bills and intermediate-term high-grade corporate bonds. What kind of investor is Hugh? A) professional B) aggressive C) amateur D) conservative E) sporadic Answer: D Explanation: D) Generally speaking, the higher the risk, the higher the return. Page Ref: 426 Difficulty: Moderate Objective: 16.4 Skill: Application38) If you purchased a share of GE stock for $33.82, then sold it one year later for $36.50, what would the price appreciation be? A) $1.68 B) $2.68 C) $33.82 D) $36.50 E) $67.24 Answer: B Explanation: B) Price appreciation is an increase in the dollar value of an investment, thus you would subtract $33.82 from $36.50. Page Ref: 427 Difficulty: Easy AACSB: Analytic skills Objective: 16.4 Skill: Application 39) Kim has investments in stocks, and wants to calculate her total return. What should she do? A) Divide the yearly dollar amount of dividend income by the investment's current market value. B) Compare the dividend against current yields from other investments. C) Subtract the cost of the stock from what she sold it for. D) Divide the current dividend payment plus capital gain by the original investment. E) Subtract current liabilities from current assets. Answer: D Explanation: D) Total return is expressed as a percentage. Page Ref: 427 Difficulty: Easy Objective: 16.4 Skill: Application 40) What is the formula for measuring a firm's working capital? A) current assets = working capital /current liabilities B) working capital = current assets - current liabilities C) current liabilities = current assets + working capital D) working capital = current assets x current liabilities E) current liabilities = current assets / working capital Answer: B Explanation: B) Subtracting liabilities from assets lets you know how much money a firm has to work with. Page Ref: 429 Difficulty: Easy Objective: 16.5 Skill: Concept 41) Which of the following is a formal pledge (an IOU) obligating the issuer to pay interest periodically and repay the principal at maturity (a preset future date) to thelender? A) commercial bank loan B) corporate bond C) mutual fund D) bond indenture E) prospectus Answer: B Explanation: B) Bondholders have no claim to ownership in the firm and do not receive dividends. Page Ref: 430 Difficulty: Easy Objective: 16.5 Skill: Concept 42) What is a stock's market value? A) the current price of a share of stock in the stock market B) the average price of one share of stock over the past year C) the face value of a share of stock, set by the issuing company's board of directors D) the price of the stock plus the previous year's dividend E) the monthly average of a stock's price over a year Answer: A Explanation: A) Market value represents what buyers are willing to invest in a firm. Page Ref: 417 Difficulty: Moderate Objective: 16.1 Skill: Concept 43) What is a stock's book value? A) the current price of a share of stock in the stock market B) the average price of one share of stock over the past year C) the face value of a share of stock, set by the issuing company's board of directors D) the value of a common stock expressed as total stockholders' equity divided by the total number of shares of stock issued E) the value of a preferred stock as expressed by the number of stock shares issued by the board of directors Answer: D Explanation: D) Book value is used as a comparison indicator because the market value for successful companies is usually greater than its book value. Page Ref: 417 Difficulty: Moderate Objective: 16.1 Skill: Concept 44) Don Dillon is a 24-year-old graphic designer. He eventually wants to get married, raise a family, and buy a house. He knows that he has to start putting money away so that his goals can someday become a reality. He has heard that investing is risky because you can lose money as well as make money. So Don decides to play it safe and deposit moneyin a bank on a regular basis. Why might this not be his best strategy? A) Stock investments will always result in high returns. B) It pays to take chances with your money. C) You can actually lose money with bank savings due to inflation and taxes. D) People usually benefit from risky investments. E) Most savings accounts are insured by the FDIC. Answer: C Explanation: C) The interest on your savings is taxed, which is partly how you can lose money. Inflation can make the dollars in your savings account worth less over time. Page Ref: 416 Difficulty: Difficult Objective: 16.1 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Critical Thinking 45) Which of the following is a function performed by an investment bank? A) handling a client's portfolio in the secondary market B) establishing relationships for a client with a commercial bank C) underwriting purchases of stocks and bonds D) arranging travel abroad for purchasers of foreign currencies E) providing insurance services for clients Answer: C Explanation: C) Investment banks advise companies on timing and financial terms of new issues, underwrite new securities, and create distribution networks for moving new securities through groups of other banks and brokers into the hands of individual investors. Page Ref: 420 Difficulty: Moderate Objective: 16.3 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 46) Peter Kim wanted to buy a new car. To help finance the purchase, he decided to sell his Organic Markets bond in the secondary market. Peter's bond had a par value of $10,000 and a coupon of 6 percent. Current interest rates were 3 percent. What would Peter's bond sell for? A) for par value B) for $10,600 C) at a discount to par value D) for $9,700 E) at a premium to par value Answer: E Explanation: E) Bonds trade in the secondary market at prices at a premium or discount to par value. A bond whose coupon is higher than prevailing interest rates will sell at a premium to its par value.Page Ref: 420 Difficulty: Difficult Objective: 16.3 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Application 47) Hector Rivera was interested in buying shares of ABC Computer Corp, which was currently trading at $50 per share. Analysts expected the share price to rise sharply in the next few months. Hector decided to buy a call option for $400, giving him the right to purchase 100 shares of ABC Computer for $60 per share at any time between his purchase and the option's expiration date. Three months later at the expiration date, ABC stock was trading at $73. Hector used his option and purchased 100 shares of ABC Computer. How much money could Hector have saved had he bought the shares three months earlier instead of the call option? A) $1,400 B) $400 C) $1,000 D) $2,300 E) $200 Answer: A Explanation: A) By buying the call option for $400 and then the stock shares for $6,000, Hector spent $6,400. Had he bought the shares in the first place, he would have spent only $5,000 and therefore would have saved $1,400. Page Ref: 420 Difficulty: Difficult AACSB: Analytic skills Objective: 16.3 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Application 48) Which of the following is considered by many to be the best single indicator of the U.S. equities market? A) NASDAQ Composite B) Russell 2000 C) Dow Jones Industrial Average D) Standard & Poor's 500 E) New York Stock Exchange Answer: D Explanation: D) The S&P 500 considers more companies than the Dow Jones, and so is regarded as a better indicator. Page Ref: 424 Difficulty: Easy Objective: 16.3 Skill: Concept49) Which of the following is an electronic securities exchange? A) Pacific Stock Exchange B) NASDAQ C) Osaka Securities Exchange D) Securities and Exchange Commission E) Europa Answer: B Explanation: B) The NASDAQ telecommunications system operates the NASDAQ Stock Market by broadcasting trading information on an intranet to more than 350,000 terminals worldwide. Page Ref: 421 Difficulty: Moderate Objective: 16.3 Skill: Concept 50) Which stock exchange has the highest volume of shares traded? A) American Stock Exchange B) New York Stock Exchange C) NASDAQ D) Philadelphia Stock Exchange E) SEC Answer: C Explanation: C) Although the volume of shares traded surpasses that of the New York Stock Exchange, the total market value of NASDAQ's U.S. stocks is less than that of the NYSE. Page Ref: 421 Difficulty: Moderate Objective: 16.3 Skill: Concept 51) Twenty-six-year-old Lisa Lamont became an investor one day after a friend explained that there was a much better way to make her money work for her than by letting it sit in a savings account earning a very low rate of interest. Lisa decided to withdraw $10,000 from her savings account and invest it in stocks. She wanted to invest it in such a way as to minimize her risk. Which one of the following strategies makes the most sense for a new investor like Lisa? A) Invest all $10,000 in a small fast-growing computer company. B) Invest $5,000 in a gold mining company and $5,000 in a silver mine. C) Invest the $10,000 in four different home builders. D) Invest $10,000 in ten different oil companies. E) Invest $10,000 in a large-cap mutual fund. Answer: E Explanation: E) As a person investing in stocks for the first time, the possibility of losing money can be scary. For peace of mind, the safest way to go is to choose maximum diversification. A large-cap mutual fund offers this diversification, and large-cap companies offer potential capital gains with less risk than small-cap companies. Page Ref: 420Difficulty: Moderate Objective: 16.3 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Critical Thinking 52) Which of the following allows after-hours trading and protects traders' anonymity? A) National Association of Securities Dealers Automated Quotation (NASDAQ) B) New York Stock Exchange (NYSE) C) Electronic Communication Networks (ECNs) D) Standard & Poor's 500 E) mutual funds Answer: C Explanation: C) ECNs must register with the SEC as broker-dealers. Page Ref: 422 Difficulty: Moderate Objective: 16.3 Skill: Concept 53) What is the term for buying several different kinds of investments rather than just one? A) spreading B) shorting C) margin buying D) diversification E) management Answer: D Explanation: D) The risk of loss is reduced by spreading the investment across stocks. Page Ref: 427 Difficulty: Moderate Objective: 16.4 Skill: Concept 54) Javier wants to invest, but wants to reduce his risk of loss by spreading the total investment across more stocks. Javier would be most interested in which of the following? A) spreading B) shorting C) margin buying D) diversification E) asset allocation Answer: D Explanation: D) Diversification means buying several different kinds of investments rather than just one. Page Ref: 427 Difficulty: ModerateObjective: 16.4 Skill: Application 55) What is the term for the proportion of funds invested in each of several investment alternatives? A) spreading B) shorting C) margin buying D) asset allocation E) diversification Answer: D Explanation: D) For example, you may decide to allocate $10,000 to common stocks, $5,000 to a money market mutual fund, and $2,500 to a U.S. Treasury bond fund. Page Ref: 428 Difficulty: Moderate Objective: 16.4 Skill: Concept 56) Which of the following is figured by dividing the yearly dollar amount of dividend income by the investment's current market value? A) bond yield B) current dividend yield C) debenture D) trading volume E) EBIDA Answer: B Explanation: B) In 2008 each share of GE stock was receiving annual dividend payments of $1.24. If on a particular day the share price was $33.82, the current yield would be 3.66 percent ($1.24/$33.82 × 100). Page Ref: 426 Difficulty: Moderate Objective: 16.4 Skill: Concept 57) Marty and his sister Robin both invested in shares of the Heavy Metal Steel Company. Marty bought common shares and Robin bought the company's preferred shares. The two had been holding their stock for several years and had been pleased with their stock's performance. But sadly, Heavy Metal's business took a turn for the worse. After several quarters of disappointing numbers, the company suddenly announced it was going out of business. Marty and Robin, had they seen this coming, could have sold their shares at any time. But now it was too late. Which one of the following is the most likely outcome? A) Marty loses his entire investment, but Robin might receive a partial repayment after Heavy Metal's bondholders are repaid. B) Marty and Robin lose their entire investment. C) Robin is repaid immediately, while Marty is eventually repaid after the sale of all ofthe company's assets. D) Marty and Robin are repaid all of their initial investment due to a successful shareholder lawsuit. E) Marty and Robin's investments regain value once Heavy Metal restarts operations. Answer: A Explanation: A) As a common shareholder in Heavy Metal, Marty is likely to lose his entire investment. As a preferred shareholder, Robin is in a better position, being next in line for repayment after the company's bondholders. Page Ref: 417 Difficulty: Difficult Objective: 16.1 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Application 58) Diamond Electronics has ascertained that it is has positive working capital. Which of the following must be true of Diamond Electronics? A) The firm's current liabilities are large enough to pay off current assets. B) The firm may need to borrow money from a commercial bank. C) The firm's current assets are large enough to pay off current liabilities. D) The firm does not need to issue stock. E) The firm would be a bad risk for any investor to consider. Answer: C Explanation: C) Working capital is calculated by subtracting current liabilities from current assets. Page Ref: 429 Difficulty: Moderate Objective: 16.5 Skill: Application 59) What is the term for a division of stock that gives stockholders a greater number of shares but does not change each individual's proportionate share of ownership? A) stock dividend B) stock split C) stock yield D) stock warrant E) stock exchange Answer: B Explanation: B) For example, a 2-for-1 split would indicate that 50 shares of a $10 stock become 100 shares of a $5 stock. Page Ref: 432 Difficulty: Moderate Objective: 16.6 Skill: Concept 60) The stock of Simonsen, Inc. is being bought up by an individual who intends to take over Simonsen and sell off its assets for a profit. What is the individual in this scenariocalled? A) angel investor B) corporate raider C) inside trader D) stock broker E) bondholder Answer: B Explanation: B) If a corporate raider succeeds, the company will disappear. Page Ref: 432 Difficulty: Moderate Objective: 16.6 Skill: Application 61) "I am a chemist with the nation's largest chemical company. We have secretly developed a cure for three of the world's most serious epidemics. Before this news breaks out, I'm going to buy as many shares of stock in my company as I can get my hands on. Then I'll sit back and watch the stock price head for the sky." What is the person making this statement about to engage in? A) selling shares of stock B) insider trading C) blue-sky trading D) open-market operations E) investment banking Answer: B Explanation: B) Insider trading occurs when individuals use special knowledge about a firm for profit or gain. Page Ref: 435 Difficulty: Moderate Objective: 16.7 Skill: Application 62) Before Allied Corporation sells securities, it is required by law to offer future investors the opportunity to read through a document which contains complete information on both the new issue and the corporations. What is that required document called? A) book report B) affidavit C) prospectus D) portfolio E) balance sheet Answer: C Explanation: C) Further, false statements are subject to criminal penalty. Page Ref: 436 Difficulty: Difficult Objective: 16.6 Skill: Application63) Trina is a loan borrower, and the terms of her loan say she must keep a portion of the loan amount on deposit with the bank in a non-interest-bearing account. What is Trina required to have? A) a compensating balance B) an unsecured loan C) an angel investor D) venture capital E) collateral Answer: A Explanation: A) Such an account protects the bank's investment. Page Ref: 429 Difficulty: Moderate Objective: 16.5 Skill: Application 64) Jessica Jenkins, a 30-year-old history teacher, planned to invest $10,000 in an equity mutual fund. She wanted a fund with maximum geographical diversification. Jessica was seeking high capital gains from her investment and was comfortable with a fair amount of risk. Which one of the following types of mutual fund would Jessica most likely choose? A) large-cap technology fund B) global large-cap value fund C) global small-cap growth fund D) Asian large-cap growth fund E) foreign medium-cap growth fund Answer: C Explanation: C) A global fund gives maximum geographical diversification because it includes U.S. stocks as well as foreign stocks. And small-cap growth stocks have the potential of delivering higher capital gains than large-cap value stocks. Page Ref: 418 Difficulty: Moderate Objective: 16.2 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Application 65) Which of the following is the name for a portion of the ownership of a corporation? A) Schedule C B) stock C) partnership D) LLC E) dividend Answer: B Explanation: B) A corporation will sell stocks, portions of ownership, in order to raise capital. Page Ref: 417 Difficulty: EasyObjective: 16.1 Skill: Concept 66) Which of the following statements is true about common stocks as investments? A) Stocks are among the riskiest of all investments. B) Stocks are most suitable for investors who seek security. C) Stocks will never become worth less than their purchase price. D) Stock prices reflect only government action. E) Stock prices are easily manipulated. Answer: A Explanation: A) Stocks are a volatile and risky investment, and crashes can lead to sizable losses. Page Ref: 417 Difficulty: Moderate Objective: 16.1 Skill: Concept 67) Shawna has gotten into investing and is interested in aggressive growth funds. Which of the following must be true about Shawna? A) She is interested in the best possible returns over time. B) She is interested in making money as quickly as possible. C) She has comparatively little money to invest. D) She wants to make as secure an investment as possible. E) She is investing for a financial thrill ride. Answer: A Explanation: A) The chance to make more money on an investment appeals to investors who are not risk averse. Page Ref: 426 Difficulty: Moderate Objective: 16.4 Skill: Application 68) The profit realized when the market value of an investment increases is known as which of the following? A) capital gains B) asset allocation C) diversification D) price appreciation E) profiteering Answer: A Explanation: A) The capital gain can be calculated by subtracting the purchase price from the end value of the investment. Page Ref: 427 Difficulty: Moderate Objective: 16.4 Skill: Concept69) The time it takes to double an investment can be estimated by using which of the following? A) book value B) the Rule of 72 C) blue-chips D) dividends E) market value Answer: B Explanation: B) By dividing the interest rate by 72, you can estimate how many years it will take to double your investment. Page Ref: 416 Difficulty: Easy Objective: 16.1 Skill: Concept 70) Tim wants to invest in stocks and bonds that will double his money in seven years. Which of the following interest rates should he be targeting? A) 7% B) 7.2% C) 8% D) 10% E) 10.3% Answer: E Explanation: E) Using the Rule of 72, dividing 72 by 7 years gives an interest rate of 10.3% to double the money in 7 years. Page Ref: 416 Difficulty: Moderate AACSB: Analytic skills Objective: 16.1 Skill: Application 71) Marco is a bullish investor, but the stock market is currently bearish. What is Marco most likely to do? A) sell every stock and go to a 100 percent cash position B) sell certain winning stocks to realize a profit and put the cash to work when the market decline appears to have ended C) maintain all stock positions until the market completely recovers and then buy more stocks D) sell losing stocks to avoid further losses, and hold onto winners E) buy defensive stocks in the expectation that they will not fall much Answer: B Explanation: B) Many investors in a bear market become bearish on stocks and gloomy about the market's prospects. A bullish investor, however, will continue to believe in the market's eventual recovery. Such an investor will look for opportunities to sell certain stocks if any profits can be realized, and take the opportunity to buy stocks at low prices in anticipation of higher prices ahead once the market recovers. Page Ref: 423Difficulty: Moderate Objective: 16.3 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Application 72) While it's invested, money grows by earning interest or yielding some other form of return. What is this known as? A) compound growth B) dividend C) capital gains D) security E) diversity Answer: A Explanation: A) The compound growth comes from interest paid over time. Page Ref: 416 Difficulty: Moderate Objective: 16.1 Skill: Concept 73) Dynamo Motors has begun to sell corporate securities. Dynamo is required by law to offer future investors the opportunity to read a document that contains complete information on both the new issue and the corporation itself. What is that required document called? A) book report B) affidavit C) prospectus D) order blank E) corporate profile Answer: C Explanation: C) Further, false statements are subject to criminal penalty. Page Ref: 434 Difficulty: Moderate Objective: 16.6 Skill: Application 74) Which is the most widely cited U.S. stock market index? A) Standard & Poor's Composite Index of 500 Stocks B) the NYSE index C) Dow Jones Industrial Average D) Moody's Stock List E) the NASDAQ Answer: C Explanation: C) Further, the Dow measures the performance of U.S. financial markets by focusing on 30 blue-chip companies as reflectors of economic health. Page Ref: 423 Difficulty: ModerateObjective: 16.2 Skill: Concept 75) Tonio has some stocks and is carefully watching the stock market. Which of the following should he pay attention to in order to find out the performance of the largest companies? A) Standard & Poor's 500 B) the NYSE index C) Dow Jones Industrial Average D) Moody's Stock List E) the NASDAQ Answer: C Explanation: C) The Dow includes only 30 of the thousands of companies on the market, but these companies are the largest and most important. Page Ref: 423 Difficulty: Moderate Objective: 16.3 Skill: Application 76) Marcia has purchased some corporate bonds, which come with bond indentures that stipulate the terms. What is the most important detail of the bond indenture that Marcia should pay attention to? A) maturity date B) face value C) par value D) dividend payments E) amount invested Answer: A Explanation: A) This is the date by which the firm must repay the bondholder. Page Ref: 430 Difficulty: Moderate Objective: 16.5 Skill: Application 77) What are low gy os? A) bankruptcy B) default bonds C) junk bonds D) corporate bonds E) grade B bonds Answer: C Explanation: C) These bonds have very low credit ratings. Page Ref: 426 Difficulty: Easy Objective: 16.4 Skill: Concept