How should a finance manager support company objectives?
A Raise share prices alone
B Replace all operations
C Manage money to meet goals
D Approve every purchase
Answer: C. Manage money to meet goals Financial management helps a firm manage funds so it can meet its objectives.
Why should non-finance managers consider financial effects?
A Every department’s choices affect finances
B Only finance handles money
C Budgets replace management
D Accounting prevents strategy
Answer: A. Every department’s choices affect finances Operating, marketing, and staffing choices all affect a firm’s revenues, costs, cash, or investment needs.
Which set lists core financial management responsibilities?
A Hire, train, and reward
B Produce, price, and sell
C Audit, file, and report
D Plan, invest, raise funds
Answer: D. Plan, invest, raise funds Financial managers plan finances, decide how funds are invested, and arrange financing.
Which function manages cash, receivables, inventory, and payables?
A Capital budgeting
B Working capital management
C Capital structure planning
D Dividend policy
Answer: B. Working capital management Working capital management focuses on short-term assets and liabilities.
How is net working capital calculated?
A Current assets minus current liabilities
B Sales minus operating expenses
C Debt minus owners’ equity
D Cash receipts minus payments
Answer: A. Current assets minus current liabilities Net working capital equals current assets less current liabilities.
Current assets are $90,000 and current liabilities are $70,000. What is net working capital?
A $160,000
B $70,000
C $20,000
D -$20,000
Answer: C. $20,000 Subtract current liabilities of $70,000 from current assets of $90,000 to get $20,000.
Why is positive net working capital generally useful?
A It guarantees higher profits
B It removes all business risk
C No borrowing is needed
D It supports short-term payments
Answer: D. It supports short-term payments Positive net working capital can provide a buffer for meeting near-term obligations.
How is the current ratio computed?
A Current liabilities / assets
B Current assets / liabilities
C Net income / sales
D Total debt / equity
Answer: B. Current assets / liabilities The current ratio divides total current assets by total current liabilities.
Which liquidity measure excludes inventory?
A Debt-to-equity ratio
B Net profit margin
C Quick ratio
D Inventory turnover
Answer: C. Quick ratio The quick ratio excludes inventory to assess short-term payment capacity without selling stock.
What forecasts the timing of cash receipts and payments?
A A cash budget
B A balance sheet
C An income statement
D A dividend schedule
Answer: A. A cash budget A cash budget projects cash inflows and outflows over a future period.
Why might a seasonal firm keep a minimum cash balance?
A To increase depreciation
B To avoid preparing budgets
C To replace receivables
D To cover unexpected expenses
Answer: D. To cover unexpected expenses A cash reserve helps a firm handle unexpected costs or temporary shortfalls.
Why can excess inventory weaken a firm’s cash position?
A It raises equity automatically
B Cash becomes tied in stock
C It removes supplier credit
D It guarantees lower costs
Answer: B. Cash becomes tied in stock Inventory uses working capital and may require borrowing when too much cash is tied up in stock.
Which practice can improve receivables collection?
A Delay customer invoices
B Remove credit checks
C Use clear terms and follow-up
D Extend every payment deadline
Answer: C. Use clear terms and follow-up Clear credit terms and timely follow-up can help customers pay receivables sooner.
Which finance function evaluates a factory upgrade’s long-term cash flows?
A Working capital management
B Cash reconciliation
C Short-term borrowing
D Capital budgeting
Answer: D. Capital budgeting Capital budgeting evaluates major long-term investment projects such as equipment upgrades.
When discounted inflows exceed outflows, what is the project’s NPV?
A Positive
B Negative
C Always zero
D Not measurable
Answer: A. Positive NPV is present-value inflows minus present-value outflows, so it is positive when inflows are greater.
Which discount rate often represents a firm’s financing cost?
A Inflation alone
B Cost of capital
C Sales growth rate
D Dividend yield only
Answer: B. Cost of capital Capital investment analysis commonly discounts cash flows using the firm’s cost of capital.
At what rate does a project’s NPV become zero?
A Payback rate
B Growth rate
C Internal rate of return
D Current ratio
Answer: C. Internal rate of return The internal rate of return is the discount rate that sets a project’s NPV to zero.
Which question does the payback period answer?
A How much revenue is earned?
B What is the tax rate?
C How large is working capital?
D How long until cost recovery?
Answer: D. How long until cost recovery? Payback period measures the time needed for project cash flows to recover the initial investment.
Giving up the next-best alternative when choosing a project represents what?
A Sunk cost
B Opportunity cost
C Fixed cost
D Operating leverage
Answer: B. Opportunity cost Opportunity cost is the value of the next-best alternative given up by a choice.
Why discount cash received in a later year?
A Time value of money
B Inventory turnover
C Retained earnings
D Capital structure
Answer: A. Time value of money Money available sooner can earn a return and is usually more valuable than the same amount received later.
What does future value describe?
A Today’s value of debt
B Past value of inventory
C A current amount’s later worth
D The firm’s current liabilities
Answer: C. A current amount’s later worth Future value measures what a present amount grows to after earning interest or returns over time.
How does present value interpret a future cash flow?
A As a nominal sales figure
B As today’s equivalent value
C As a debt ratio
D As an inventory estimate
Answer: B. As today’s equivalent value Present value discounts future money to its equivalent value today.
At 5% simple annual interest, how much does $2,000 earn in one year?
A $50
B $200
C $1,000
D $100
Answer: D. $100 Simple interest is principal multiplied by the rate and time: $2,000 × 5% × 1 = $100.
How does compound interest differ from simple interest?
A Interest earns further interest
B It excludes the original deposit
C It applies only to loans
D It removes investment risk
Answer: A. Interest earns further interest Compounding adds earned interest to principal, so later interest can accrue on earlier interest.
Selling shares to finance operations is what type of funding?
A Trade credit
B Equity financing
C Accounts payable
D Commercial paper
Answer: B. Equity financing Selling shares raises equity capital by giving investors an ownership interest.
Which mix does capital structure describe?
A Cash and inventory
B Current assets and liabilities
C Long-term debt and equity
D Sales and operating costs
Answer: C. Long-term debt and equity Capital structure is the mix of long-term debt and equity financing.
If a firm issues new shares, what may happen to existing owners’ percentages?
A They automatically double
B Debt disappears
C Dividends become guaranteed
D Their ownership may dilute
Answer: D. Their ownership may dilute Issuing more shares can reduce each existing shareholder’s percentage ownership.
What funding source consists of profits kept in the business?
A Retained earnings
B Accounts receivable
C Trade payables
D Short-term notes
Answer: A. Retained earnings Retained earnings are accumulated profits kept for reinvestment rather than distributed.
What does a corporate bond represent to its issuer?
A An ownership share
B Borrowed debt
C A customer deposit
D A retained profit
Answer: B. Borrowed debt A bond is a debt security; the issuer borrows funds and promises payments under its terms.
Financial leverage refers to relying on what source?
A Retained earnings
B Customer deposits
C Borrowed funds
D Inventory sales
Answer: C. Borrowed funds Financial leverage uses borrowing to finance assets or operations, which can magnify gains and losses.
What tradeoff do investors generally face?
A Sales versus inventory
B Debt versus accounts receivable
C Liquidity versus advertising
D Risk versus expected return
Answer: D. Risk versus expected return Investors generally require compensation for taking greater financial risk.
Where are assets, liabilities, and equity reported at a date?
A Income statement
B Balance sheet
C Cash budget
D Sales forecast
Answer: B. Balance sheet The balance sheet reports assets, liabilities, and owners’ equity at a point in time.
Which statement summarizes revenues and expenses over a period?
A Cash flow statement
B Balance sheet
C Income statement
D Capital budget
Answer: C. Income statement The income statement reports revenues and expenses for a period and shows net income or loss.
What report groups operating, investing, and financing cash flows?
A Statement of cash flows
B Accounts receivable ledger
C Balance sheet
D Income statement
Answer: A. Statement of cash flows The statement of cash flows classifies cash movements into operating, investing, and financing activities.
How can net income differ from cash available?
A Inventory always equals profit
B Debt is never paid
C Sales are always cash
D Accrual timing differs from cash
Answer: D. Accrual timing differs from cash Accrual accounting may record revenue or expense before the related cash is received or paid.
Supplier bills come due before cash arrives. What is the immediate concern?
A Overcapitalization
B Liquidity risk
C Product positioning
D Market share
Answer: B. Liquidity risk Liquidity concerns a firm’s ability to meet short-term cash obligations when due.
Current assets are $120,000 and liabilities are $80,000. What is the current ratio?
A 0.67
B 2.0
C 1.5
D 40,000
Answer: C. 1.5 Divide current assets of $120,000 by current liabilities of $80,000 to get 1.5.
Net profit margin is calculated using which relationship?
A Total debt / equity
B Net income / total assets
C Sales / inventory
D Net profit / net sales
Answer: D. Net profit / net sales Net profit margin divides net profit by net sales and measures profit per sales dollar.
What does return on equity measure?
A Profit relative to owners’ equity
B Cash relative to inventory
C Sales relative to liabilities
D Debt relative to assets
Answer: A. Profit relative to owners’ equity Return on equity relates net profit to owners’ equity invested in the firm.
How is the debt-to-equity ratio commonly calculated?
A Current assets / liabilities
B Total liabilities / owners’ equity
C Net sales / net profit
D Cash flow / inventory
Answer: B. Total liabilities / owners’ equity The ratio compares total liabilities with owners’ equity to show the relationship between debt and equity financing.
Inventory turnover uses which relationship?
A Current assets ÷ liabilities
B Net income ÷ sales
C COGS ÷ average inventory
D Debt ÷ equity
Answer: C. COGS ÷ average inventory Inventory turnover divides cost of goods sold by average inventory.
Which operating period does the cash conversion cycle summarize?
A Time to repay long-term debt
B Time to earn annual profit
C Time to approve a budget
D Days cash remains committed
Answer: D. Days cash remains committed The cash conversion cycle tracks how long cash is tied up as inventory and receivables, net of supplier credit.
When actual spending exceeds budget, what should a manager review?
A Variance causes and assumptions
B Brand colors and packaging
C Only employee attendance
D The firm’s logo
Answer: A. Variance causes and assumptions Reviewing variance causes and planning assumptions helps managers choose an appropriate response.
Fixed costs are $12,000 and contribution is $30 per unit. What is break-even volume?
A 400 units
B 300 units
C 30,000 units
D 12,000 units
Answer: A. 400 units Break-even units equal fixed costs divided by contribution per unit: $12,000 ÷ $30 = 400.
Why compare financial ratios with industry averages?
A To guarantee future profits
B Compare performance with peers
C To eliminate financial risk
D To replace financial statements
Answer: B. Compare performance with peers Industry comparisons give context because a ratio’s meaning can vary across industries.
Receivables, inventory, and payables are being managed together. Which area is this?
A Capital budgeting
B Capital structure
C Working capital management
D Dividend policy
Answer: C. Working capital management Managing current assets and liabilities together is working capital management.
Kept profits can provide which funding for expansion?
A External bond financing
B Customer credit
C New share issuance
D Internal reinvestment
Answer: D. Internal reinvestment Retained earnings let a company finance investment internally from accumulated profits.
What is the direct cash effect of paying a dividend?
A Cash available declines
B Inventory turnover rises
C Debt becomes equity
D Sales are deferred
Answer: A. Cash available declines Dividend payments distribute cash to shareholders, reducing cash available for other uses.
Which limitation applies to the simple payback method?
A It always overstates profit
B Ignores time value of money
C It requires no cash forecasts
D It measures market share
Answer: B. Ignores time value of money Simple payback does not discount cash flows, so it ignores the time value of money.
Net present value compares discounted inflows with what?
A Future sales growth
B Owners’ equity
C Present value of outflows
D Current inventory
Answer: C. Present value of outflows NPV subtracts the present value of cash outflows from the present value of cash inflows.