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BUSI 101 Exam 4 solutions complete answers
BUSI 101 Exam 4 solutions complete answers
You have just calculated the acid-test ratio for Peak Performance Sporting Goods [acid test ratio = 1.0]. As a loan officer for the local bank, you are called into your boss's office to interpret the results of this ratio. Which of the following statements best reflects an understanding of these results?
Which of the following is an example of a financial transaction?
The reports and financial statements prepared by accountants:
Hap owns and operates a small business with only four full-time employees and less than $500,000 in annual sales. He currently uses a manual accounting system and relies on a part-time bookkeeper to keep his records in order. In evaluating the possible adoption of a computerized accounting system, Hap will probably discover that:
Although managers who work for large firms must know something about accounting, people who run small businesses only need to know the basics of bookkeeping.
Bark Three Times Pet Store's owner is concerned with how his business decisions affect the bottom line. This is another way of saying that he is concerned with the impact of his decisions on net income after taxes.
The Sarbanes-Oxley Act prohibits accounting firms from providing certain nonauditing work (such as consulting services) to companies they audit.
The purpose of liquidity ratios is to indicate the degree to which a firm relies on borrowed funds in its operations.
A _________ forecast predicts the revenues, costs, and expenses a firm will incur for a period of one year or less.
Which of the following would be most helpful for a company looking to know the income potential during the next five years?
The managers of Dakota Clothing regularly compare their actual profits with the firm's projected profits. When deviations occur, the managers use the feedback to take corrective action when necessary. The management of Dakota Clothing is exercising financial:
Long-term financing would normally be used to purchase:
A tool that provides lots of convenience, credit cards are a source of a readily available line of credit for a small business because they provide convenience.
By identifying variances from the financial plan, managers are able to focus on those departments that require corrective action.
An effective strategy to manage cash flows requires retail businesses to eliminate their inventory.
Generally accepted accounting principles require that any assessment of a firm's financial statements be performed by independent outside auditors.
Roberto directed his broker to buy 75 shares of New Mexico Technologies at the best possible price available that day. These directions indicate that Roberto placed a ________ order with his broker.
The ABC Corporation issues a $1,000 bond, with an interest rate of 10%, and a maturity date of 2025. This creates a liability for the ABC Corporation to pay the bondholder:
Seattle Music, Inc., recently offered bonds for sale to the public. The unsecured corporate bond paid interest of 9% to investors for the twenty-year life of the bonds. Seattle Music is obligated to:
A share of preferred stock currently sells for $120. It offers the investor a dividend rate of 8%, on a par value of $100. If the investor owns 500 shares, her total annual dividend will equal:
Preemptive rights provide common stockholders the first right to purchase any new shares of common stock issued by the firm.
The Securities and Exchange Commission does not intercede in any way in the process of an IPO. Doing so would disrupt the natural process of the capital markets.
The interest rate paid to bondholders is sometimes called the coupon rate.
The secondary market is where investors (both individuals and companies) go to find someone who is interested in selling their investments to them.
Juan has an authorized work permit issued by the U.S. government to work in the U.S. Each day, Juan travels from Mexico to El Paso, TX, to work in the construction trade. At the time that he was first employed, his U.S. employer issued him a(n) ___________. Each week, the employer scans his work stipend onto it. Juan can purchase with it, access cash through an ATM with it, and transfer funds with it. The risk for Juan is _________.
If the Fed increases interest rates in the U.S. relative to other nations:
When the Fed buys U.S. government securities, the:
The World Bank's mission is to lend money to developing nations to help boost their economic development in various industries. Since its inception, the World Bank has taken significant criticism of its programs. Farmers in a cooperative in the developing nation of Urozil have benefited by World Bank loans. Most recently, however, their processing facilities that employ several laborers are taking criticism from human rights organizations. After studying this chapter, which of the following is a common criticism of these groups?
The Federal Reserve is the "bankers' bank."
Certificates of deposit (CDs) represent demand deposits issued by banks.
The rate of interest charged by the Federal Reserve is called the federal funds rate.
A barter exchange is a system where you input into a system the goods and services that you are willing to trade, and receive trade credit.
Which of the following deductible levels would result in the lowest premium for automobile insurance?
About _______ of all U.S. households own stock in corporations.
The total cost of purchasing a stereo or television with cash is ________ the cost when using credit cards to finance the same assets.
Large corporations with at least 500 employees can offer their employees a simple 401(k) retirement plan that allows for greater contribution maximums.
If you find yourself regularly running out of cash, your only real option is to focus your attention on finding ways to increase your income.
One of the keys to financial success is never to apply for a credit card.
MyIRA is a Roth IRA-type retirement savings plan for low and middle-income individuals.
Accounting is an easy subject for people to understand because almost everyone is exposed to basic accounting concepts in their everyday life.
Although managers who work for large firms must know something about accounting, people who run small businesses only need to know the basics of bookkeeping.
It is impossible to run a company effectively without the ability to read and understand basic accounting reports and financial statements.
With increased computer technology, the ability to read and understand financial statements is no longer an important skill for managers.
Accounting provides information about the financial condition and operating performance of a firm.
The sole purpose of accounting is to help managers evaluate the financial condition of the firm so that they may make better pricing decisions.
Inputs to the accounting system include sales documents.
Purchasing insurance, paying employees, and using supplies are examples of financial transactions.
Accounting provides financial information that can be useful to owners, creditors, suppliers, employees, and competitors of an organization.
Accountants do the work involved in recording financial events and transactions, but the actual classifying and interpreting of this data is left to financial managers.
Accounting involves both the recording and the interpreting of financial events.
In an effort to maintain a competitive advantage, firms do not share accounting information with people outside of the firm.
The U.S. government is a user of a firm's accounting information.
A business manager who keeps his/her customers satisfied can be successful without having a great deal of knowledge about accounting practices.
Good decisions are based on good information. Organizations need accounting—to provide good financial information.
A firm's financial statements represent a health report regarding the condition of the firm.
Referring to an accounting system, inputs refers to events and transactions that occur within the business, while outputs refers to the journal entries and ledger categorization that occurs after the events and transactions are recorded.
Government organizations such as the IRS and other government regulatory agencies are interested in a firm's accounting information in order to help the firm strategize about ways to cut costs in order to minimize net income before taxes.
Jeremy operates his own small business, but he doesn't want to be bothered with accounting information. He tells his friends, "All I need accounting for is to prepare my income tax return for my business. I'll hire someone to do that for me." Jeremy's attitude would be disastrous if he managed a large firm, but is a reasonable view for a small business owner.
There are five key working areas in accounting: financial accounting, managerial accounting, auditing, tax accounting, and government and not-for-profit accounting.
Accounting information is not relevant for nonprofit organizations.
Churches, schools, and charitable organizations all hire accountants.
The accounting profession is divided into two main fields: bookkeeping and auditing.
Budget preparation is one aspect of managerial accounting.
The work of a certified management accountant is intended to enable people outside of the organization to make investment decisions.
Activities of managerial accountants include measuring and reporting the costs of production, marketing and other functions within the organization.
Financial accounting and managerial accounting are similar in that they both provide information intended primarily for people inside the organization.
Financial accounting involves activities such as preparing budgets and measuring production costs.
Financial accounting is used to provide information and analysis managers within the organization can use to assist them in decision making.
Financial accountants prepare reports for owners, creditors, suppliers, and others outside of the organization.
A firm's annual report is a yearly statement of the financial condition, progress, and expectations of the organization during one year.
An individual who provides accounting services to individuals and businesses on a fee basis is referred to as a private accountant.
All firms with more than four employees should have a full-time accountant.
The job of reviewing and evaluating the records used to prepare a company's financial statements is referred to as auditing.
Independent audits are prepared by accountants within the organization to ensure that proper accounting procedures are followed.
An independent audit is an evaluation and unbiased opinion about the accuracy of a company's financial statements.
A tax accountant is responsible for preparing tax returns and developing tax strategies.
An accountant who has a bachelor's degree, two years of experience in internal auditing and who has passed an exam by the Institute of Internal Auditors can become recognized as a certified internal auditor.
The Internal Revenue Service is responsible for establishing accounting standards used by accountants working in government accounting.
Citizens and special interest groups often have interest in the information generated by government accounting.
GAAP refers to a set of standards concerning accounting principles that were established by the Financial Accounting Standards Board.
Information contained in a firm's annual report largely represents work done by managerial accountants.
A series of high-profile scandals in the early 2000s put the accounting profession under intense scrutiny.
Accounting is not important for nonprofit organizations since financial data is not critical to their success.
Accounting, as the language of business, is solely concerned with providing information useful to managers of profit-seeking firms.
As a certified public accountant, you would be working in the area of managerial accounting.
Managers who are concerned about keeping costs under control should be very interested in the information and advice provided by their company's managerial accountants.
Recent accounting scandals raised serious questions about the legitimacy of an accounting firm performing both auditing and consulting work for the same company.
As a certified public accountant (CPA), Kay might become involved in helping clients select appropriate accounting computer software for their firm.
In large companies, certified internal auditors are usually responsible for preparing tax returns and developing tax strategies for businesses.
As the burden of taxes grows, the role of the auditor becomes increasingly important to the organization.
The Sarbanes-Oxley Act strengthens the protection for whistleblowers who report wrongful actions of company officers.
The Sarbanes-Oxley Act prohibits accounting firms from providing certain nonauditing work (such as consulting services) to companies they audit.
According to the Adapting to Change box, the SEC is determined to crack down on and punish those accused of fraud. However, so many auditors and CPAs are trained in how to search for fraud that there are too many cases to prosecute.
As mentioned in the Adapting to Change box, accountants that search for fraudulent activities are called forensic accountants.
Jamal is an accountant employed full-time by The Barkley Company. Jamal is an example of a public accountant.
Because each business is unique, the accounting profession recognizes that the accounting principles followed by one company may need to be completely different from the accounting principles followed by another firm.
Derek has a bachelor's degree in accounting and additional training in tax law. He is responsible for preparing tax returns and developing tax strategies for his employer, and has done so for the past seven years. Derek is a certified government accountant.
Citywide Insurance Corporation's internal accountants can prepare an audit for the company.
Martha is a member of a conservative political group that wants to identify and publicize examples of wasteful government spending. The type of accounting information Martha and her group will follow most closely is provided by certified public accountants.
Bookkeeping is part of the accounting cycle, but accounting goes far beyond the activities involved in bookkeeping.
A major part of a bookkeeper's job is to interpret financial data and suggest strategies for improving the firm.
After recording a business's transactions, bookkeepers usually classify the recorded transactions into groups with common characteristics.
A bookkeeper's first task is to record the firm's transactions in a journal.
The books where accounting data are first entered are called ledgers.
Double-entry bookkeeping requires that every transaction be recorded in two places.
Double-entry bookkeeping can help identify a recording error made by a bookkeeper.
A journal is where the initial record of a day's transactions is entered.
The accounting book that provides all the information about a single account in one place is called the ledger.
At present, accounting software packages have proven to be too complex and expensive to be useful for owners of small businesses.
The accounting cycle is a six-step procedure that results in the preparation and analysis of major financial statements.
Posting is a step in the accounting cycle that involves transferring information from the journal into the appropriate accounts in a ledger.
There are two major financial statements prepared at the completion of the accounting cycle: the journal and the ledger.
The accounting cycle usually involves the work of both the bookkeeper and the accountant.
The purpose of a trial balance is to prepare a practice balance sheet.
One of the statements prepared in the accounting cycle is the statement of cash flows.
Many businesses now use computers and accounting software to simplify the mechanical aspects involved in accounting.
Accounting software for small businesses has become so sophisticated that most small business owners will never need to consult with an actual accountant or understand accounting information themselves.
Accounting software has proven to be especially helpful for small-business owners.
One advantage of the double-entry method of bookkeeping is that it helps to identify mistakes made in recording financial transactions.
Computerized accounting programs have eliminated the need to prepare a trial balance.
In addition to the tasks of recording and classifying accounting information, the best accounting software programs currently available for small businesses have the ability to make financial decisions, thus eliminating the need for owners of small businesses to consult with accountants or understand accounting terminology.
The steps in the accounting cycle do not need to be followed in the order stated. Monthly financial statements can be prepared with a good amount of accuracy, prior to posting in the ledger or preparing the trail balance.
Carol has worked as a bookkeeper for a small clothing store for almost three years. Her old boss recently retired and a new manager took over. The new manager frequently asks her for information and advice about how to interpret the information she records. Carol's experience as a bookkeeper means she is qualified to provide this type of advice.
Bark Three Times Pet Store recently hired an accountant to make sense of each day's transactions, and keep better financial records for the business. The accountant showed the owner that the ledger in a computerized accounting system would automatically take entries and post them to the correct accounts in the ledger, making the bookkeeping tasks much easier.
Olivia is a public accountant. She prepares monthly financial statements for her client, Chick's Auto Body Shop. Presently, though, she must summarize the data in the accounting ledgers to determine if the figures are correct and balanced. Olivia will prepare a statement of cash flows in order to complete this step of the cycle.
Mike is the head of the accounting department at Micro Flash. After completing the trial balance, he will proceed with the preparation of the balance sheet, the income statement and the statement of cash flows.
Juliet has found that her small business needs a better way to maintain accounting records and analyze business opportunities. Currently, she uses a manual accounting system. These days, any off-the-shelf accounting package available should do an excellent job of meeting her firm's accounting needs.
Courtney McRae started the Row-Your-Boat paddle boat and row boat business at a nearby lake resort. She wanted to combine her accounting degree with her love of the outdoors and fishing. One of her first business purchases was a computerized accounting system. She learned in her college classes that a good software system will eliminate accounting cycle steps and the time it takes for her to interpret the results. As she put it, "It should make the decisions for me!"
The key financial statements are the balance sheet, the income statement, and the statement of cash flows.
The income statement reports the difference between a firm's assets and its liabilities as of a certain date.
A firm's balance sheet reports its financial condition on a specific date.
The balance sheet reports revenues and selling costs for a period of time.
An income statement reports what a company owns and owes on a certain day.
Assets are reported on the firm's balance sheet.
Liabilities are reported on the income statement.
Assets are economic resources that are owned by a firm.
The fundamental accounting equation is as follows: Assets = Liabilities + Owners' equity.
The balance sheet reflects the fact that assets equal the sum of liabilities and owners' equity.
A balance sheet is composed of assets, liabilities, and revenues.
The cost of goods sold includes all the costs of buying and keeping merchandise available for sale.
Rent, salaries, insurance and depreciation are examples of the cost of goods sold.
Gross profit represents profit after the deduction of cost of goods sold, and before the deduction of all other selling expenses, general expenses, and tax expense.
Rents, salaries, utilities and insurance are examples of operating expenses.
The two major classes of operating expenses are current expenses and long-term expenses.
General expenses include office salaries, rent, and insurance.
Net income before taxes is found by deducting total operating expenses from gross profit.
A statement of cash flows summarizes a company's cash receipts and cash payments over a period of time.
Cash flow statements identify three sources of cash receipts and disbursements: assets, liabilities and owners' equity.
The statement of cash flows calculates cash flows from operations, investing activities, and financing activities.
An analysis of the statement of cash flows can help a firm prevent cash shortages.
The statement of cash flows shows a firm's revenues, costs of goods sold, expenses, and net income.
The equipment a firm owns and the money it has in its bank account are considered assets.
Brand names such as Coca-Cola and McDonald's are examples of intangible assets.
Assets are listed on the balance sheet in order of liquidity, with the most liquid assets listed first.
The firm's most valuable assets are listed at the top of its balance sheet.
Patents and copyrights are examples of intangible assets.
Liquidity refers to how quickly liabilities must be paid.
Net income is simply the difference between revenue and cost of goods sold.
The cost of goods sold reflects the selling price of the merchandise sold over a period of time.
The cash a firm raised from issuing new debt or equity capital would be reported on a statement of cash flows.
One important source of financing for most small businesses is the owner's savings. If the owner contributes money to the business from his/her personal savings, it will be recorded in the owners' equity account on the balance sheet.
The income statement computes net income by subtracting liabilities from assets.
Revenue on the income statement represents the dollar amount of what is received for goods sold, services rendered and/or from other revenue sources.
When an accountant "writes off" the cost of a tangible asset over its estimated lifetime, it is called depreciation.
Although a firm may use different inventory valuation methods, generally accepted accounting principles (GAAP) states that these methods must produce the same dollar value for the cost of goods sold.
FIFO and LIFO are two common methods used to compute the depreciation of tangible assets.
FIFO is a method of computing net cash flows by subtracting financial inflows from financial outflows.
FIFO is a method of inventory valuation that assumes the items most recently purchased are also the items that are sold first.
The LIFO method of inventory valuation assumes the newest items in inventory are sold first.
According to generally accepted accounting principles (GAAP), a firm must use the inventory valuation method that most accurately reflects the actual movement of goods through its inventory.
Banks are likely to request a firm's balance sheet when determining whether or not to loan money to the firm. However, banks would have little interest in the firm's income statement since it covers a short period of time.
The best way for a firm to avoid serious cash flow problems is to sustain a rapid growth in sales.
Cash flow difficulties are unlikely for a firm that is profitable.
The Barkley Company's balance sheet shows: what the business owns, minus what the business owes, which equals the book value (or net worth) of the business.
Hendry, Inc., has recorded its unpaid bill for supplies under a current liabilities account on the balance sheet. This payment will be due to the supplier in less than a year.
The McGowan Group wants to know the value of its owners' equity. It will total its assets and subtract its liabilities.
The Montgomery Company balance sheet shows the following items: accounts payable totaling $50,000; salaries payable totaling $65,000; and notes payable totaling $100,000. These are liabilities, or money that the firm owes others.
The bottom line of the Collins Corporation's income statement is equal to the net worth of the firm.
Luther Landscapes will refer to its income statements to determine whether it was profitable, or whether it lost money over the past year.
O'Donnell Construction has several trucks that are used in the business. Recently, the owners were told that even though the government permits the firm to depreciate the vehicles, it is not a deductible expense on the income statement.
Harrison Manufacturing owns land worth $600,000 and has $130,000 worth of cash in its bank account. In the asset section of the balance sheet, Harrison lists its land holdings prior to listing its cash since it is a higher value.
Julio borrowed money from a close friend to obtain a liquor license for his pub, and gave him a written promise to repay the amount within six months. Julio should list this business debt as an operating expense on his pub's balance sheet.
Bark Three Times Pet Store established a line of credit with its local banker and used (borrowed) $85,000 against it to purchase its first year's inventory. Since it is required to repay the money before the end of its fiscal year, the company's accountant lists this liability with the current liabilities on the balance sheet.
At this point in time, Bark Three Times Pet Store's balance sheet shows $100,000 in assets and $90,000 in liabilities. The company's accounting system will show the owners' equity as $190,000.
Marissa is taking her first course in accounting this semester. One of the first things she learns is that revenue and net income mean the same thing.
Bark Three Times Pet Store's owner is concerned with how his business decisions affect the bottom line. This is another way of saying that he is concerned with the impact of his decisions on net income after taxes.
Money received from tickets sold for the Katy Perry concert is recorded as net income on the concert promoter's income statement.
Potential investors are interested in both a firm's balance sheet and income statement when evaluating whether or not to invest in a firm.
When valuing items in inventory for financial reporting purposes, generally accepted accounting principles (GAAP) requires firms to value the cost of goods sold by assuming that the items that have been in inventory the longest are the ones that are sold first.
If prices of inventory are unchanged throughout the year, LIFO and FIFO inventory valuation methods will produce the same reported net income.
During a period of rising prices, the FIFO technique of inventory valuation will result in a lower net income figure than would the LIFO technique.
In businesses that handle a lot of perishable items (such as supermarkets) the actual movement of goods through inventory most closely resembles the LIFO inventory valuation technique.
If the economy began experiencing a prolonged period of deflation in which the prices of most goods are falling, many firms would find that the LIFO method of inventory valuation would result in higher reported profits.
During periods of rising prices, firms that want to report more attractive profits would tend to favor the FIFO technique of inventory valuation.
If the goal of a business is to pay lower taxes on its income during an inflationary period, it is likely to use the FIFO inventory costing method.
A hospital emergency room serves several patients from a ten-car pile-up on the local interstate. Most of the victims require bandages, antibiotics, foot and arm casts, topical ointments, and pain pills. These items are part of the costs of good sold for the hospital emergency room.
Preferred Pet Care, Inc., a mobile veterinary care clinic, has more appointments than it ever expected to have when it opened its doors. Each week it orders more vaccines, antibiotics, and preventive care supplies from a major veterinary supplier, with the understanding that it will pay for these supplies in one month's time. Most of the company's clients are elderly and on fixed incomes, and often do not pay for services for two or more months. This is not a problem because as long as the company continues to increase its appointments, it will create profits and growth.
Cash revenues from the sale of new cars at Pete's Auto Emporium would be listed as a cash inflow from operations on Pete's statement of cash flows.
A loan officer at Southwest Bank is considering a loan application from Preferred Pet Care, Inc. He is concerned about the company's ability to make payments on the loan. The loan officer is likely to be interested in Preferred Pet Care's statement of cash flows.
Preferred Pet Care, Inc., successfully took out a loan for $130,000 from Southwest Bank. It used $80,000 of this loan to pay off an existing loan that had a higher interest rate, and purchased X-ray equipment with the remaining funds. These events were noted as financing and investing activities on its balance sheet.
Financial ratios are used to analyze a firm's financial condition and financial performance.
Liquidity ratios are of particular importance to stockholders, but have little relevance for creditors.
The purpose of liquidity ratios is to indicate the degree to which a firm relies on borrowed funds in its operations.
Liquidity refers to how fast an asset can be converted to cash.
The current ratio is used to evaluate a firm's ability to pay its short-term debts.
The current ratio is found by dividing the firm's total assets by its total liabilities.
The current ratio is a good indicator of the degree to which a firm relies on borrowed funds in its operations.
Both the current ratio and the acid-test ratio are liquidity ratios.
The acid-test ratio is found by dividing inventory by cost of goods sold.
For firms that sometimes have difficulty selling their inventory, the current ratio is likely to be a better measure of liquidity than the acid-test ratio.
A firm that takes on too much debt could experience problems repaying its lenders or meeting promises made to stockholders.
Leverage ratios are concerned with the extent to which a firm relies on borrowed funds in its operations.
The debt to owners' equity ratio is a common type of liquidity ratio.
Profitability ratios are often used to measure management's earnings performance.
A firm's basic earnings per share measures how much profit was earned for each dollar invested by the firm's owners.
The return on sales ratio measures a firm's use of leverage.
The basic earnings per share ratio does not take stock options, warrants, and preferred stock into account.
Activity ratios measure the effectiveness of the firm's management in using its various resources to achieve profits.
The inventory turnover ratio measures the speed of inventory moving through the firm and its conversion into sales.
An extremely high inventory turnover ratio may represent lost sales due to holding inadequate stocks of merchandise.
The acid-test ratio emphasizes the ability to convert inventory quickly into cash.
The inventory turnover ratio for all firms should be greater than 2 times.
One way to make ratio analysis more meaningful is to compare the ratios of one firm to those of other firms in the same industry.
A debt to owners' equity ratio of 25% indicates that a firm has more debt than equity.
The basic earnings per share and the diluted earnings per share would have quite different values for a firm that relied heavily on preferred stock and convertible debt securities to acquire funds.
A lower than average inventory turnover ratio indicates excellent inventory management practices.
Preferred Pet Care, Inc., has recorded the following on its income statement for the period ending December 31, 2016: The return on sales = 34%. This return is outstanding and there is no need to compare this return to competitors in the veterinary services industry.
Bark Three Times Pet Store's accountant has recorded the following: Total current assets = $60,000, including Cash = $24,000; Accounts Receivable = $20,000; and Inventory = $16,000. Total assets = $230,000; Total current liabilities = $48,000; and Total current and long-term liabilities = $98,000. The store's current ratio = 1.25. The store's acid-test ratio = .92.
An important difference between accounting and other business functions, such as marketing and management, is that:
To effectively run a business, it is necessary to:
Which of the following is an example of a financial transaction?
Although accounting has several specific uses, the overall purpose of accounting can be summarized as:
Which of the following responses is the best and most comprehensive? "A company's accounting information is useful to ____________."
Accountants record, classify, and ____________ the results of the financial information they gather.
The reports and financial statements prepared by accountants:
A person's pulse rate and blood pressure are indicators of a person's health. Similarly, _________ can help assess the health of a business.
Accounting transactions are very important to a firm's operations. Which of the following activities would affect the firm's account balances?
As an accountant, Joe's responsibilities include:
Jill wants to start her own business, but knows little about how to set up an accounting system or interpret financial information. "I'm not worried about accounting," she tells her friends. "I'll just hire a part-time bookkeeper to handle all that type of stuff, and focus my attention on what I like—finding ways to satisfy my customers." Which of the following is the best response to Jill's comments?
Before starting his landscape business, Andrew took a marketing class at the local community college. He decided that his time would be better utilized in this class because if he could learn to sell his services well, the revenues and profits would follow. Your assessment of his plan might include which of the following?
Phil O'Keefe is opening a small sports store in his town. At the advice of a friend who is a bookkeeper, he keeps the receipts of everything he purchases for the business in the bottom drawer of his desk, along with all other business expenses, such as his retail license, his rent expense, and insurance expense. You suggest that _______.
Given that measuring a firm's financial health is important to its survival, which of the following strategies is good advice for a person just starting a business?
The accounting profession is divided into 5 key working areas, two of which are:
The area of accounting that provides managers inside the organization with information they need to make decisions is called:
The preparation of financial statements for people outside the firm (creditors, unions, suppliers, and others) is the goal of:
A(n) __________ provides accounting services to individuals or firms on a fee basis.
An accountant who works for a single business or government agency is referred to as a:
__________ involves the review and evaluation of the records that are used to prepare the organization's financial statements.
A(n) _________ is a yearly published statement of the financial condition, progress and expectations of an organization.
A(n) ___________ is an evaluation and unbiased opinion of the accuracy of a firm's financial statements.
Skilled professionals who are responsible for the development of strategies to minimize taxes are called:
The accounting scandals of the early 2000s led many people to question the legitimacy of:
The accounting profession follows generally accepted accounting principles as defined by __________________.
Important provisions of the Sarbanes-Oxley Act:
The __________ sets accounting standards used in government accounting.
As U.S. firms focus on cost cutting in order to stay competitive with producers in low-wage countries, they will rely on __________ to create strategies to help reduce costs.
Which of the following agencies would have the greatest impact on the methods used to record, classify, summarize, and interpret accounting information for the State of Kentucky's Department of Transportation?
Benjamin works in the accounting department for a textbook publishing firm preparing budgets and reporting production costs. He is a:
For the past several years, Bill Reynolds has retained accountant Chelsea Jones for help in preparing his personal income tax forms. Bill's boss recommended Chelsea because she had done a good job setting up the company's new accounting system. Bill is very satisfied with Chelsea's work and feels that the fees she charges are quite reasonable. Chelsea would be classified as a(n):
Jose just graduated from college with a bachelor's degree in accounting. He plans to go to work for the American Cancer Society as an accountant. Jose will be a(n):
Taylor Casual, a chain of retail clothing stores, wants to assure investors and other outsiders that its financial statements are accurate. One way to do so would be to hire a public accounting firm to:
Kelley's Kloset, LLC, has applied for a business loan. Her prospective banker has requested information concerning the financial condition of her business. Which accounting discipline is responsible for providing accounting information to outside stakeholders?
Stockholders of the Sasha Deal Company are concerned about irregularities in the firm's accounting system. One approach to identify problems in the records of the company would be to have a(n) ________ performed.
Becky Hunter is an accountant employed by FAF Enterprises. Recently she has spent much of her time working on defining measures of costs for the production department and checking to ensure that various departments are staying within their budgets. Becky is a:
A basic difference between managerial accounting and financial accounting is that managerial accounting:
While reviewing the books at his firm, Chad Cooper noticed discrepancies between how the firm recorded revenues last year and how it elected to record revenues during the recent quarter of the current year. As a recent business graduate, Chad felt confident that the changes needed clarification. To get another opinion, Chad suggested to the company's controller that the firm solicit ______________.
As a first step in the accounting cycle, _________ involves the recording of business transactions.
__________ is the accounting practice of recording each transaction in two places in the accounting journal.
A __________ is a specialized accounting book, where transactions are categorized according to type. For example, all utility transactions are recorded in the same category.
A bookkeeper's first task is to:
In the course of their jobs, bookkeepers:
The accounting book or computer program where each day's transactions are first recorded is called a:
A _________ summarizes all the data from the account ledgers to verify that they are correct and balanced.
The purpose of a trial balance is to:
The __________ is a six-step procedure that results in the preparation and analysis of the major financial statements.
Once a trial balance has been prepared, the next step of the accounting cycle involves:
One of the key financial statements prepared in the fifth step of the accounting cycle is:
The Balance Sheet, the Statement of Cash Flows, and the ______________ are three key financial statements prepared by accountants.
The sixth and final step in the accounting cycle involves:
Careful consideration of the use of computers in accounting indicates that computers ____________________.
Today's computerized accounting programs are:
Accountants not only provide financial information to the firm, they:
A comparison of bookkeeping and accounting indicates that:
Sales receipts, purchase orders, and payroll records are all examples of accounting transactions that would be recorded by a(n):
Which of the following is a key step in the accounting cycle?
The main reason an accountant would conduct a trial balance is to:
The use of computerized accounting systems _____________.
Jasmine is categorizing journal entries in order to post to the _______.
Hap owns and operates a small business with only four full-time employees and less than $500,000 in annual sales. He currently uses a manual accounting system and relies on a part-time bookkeeper to keep his records in order. In evaluating the possible adoption of a computerized accounting system, Hap will probably discover that:
Brianna is a bookkeeper for Monograms, Limited. She takes the firm's transactions and records them in a record book or computer program referred to as:
Jim works in the accounting department at the Kansas Sunflower Corporation, where it is his job to record all transactions into journals. After completing this task, the next step in the accounting process is to:
Perry is responsible for recording sales transactions at Turncoat Enterprises. Perry's company utilizes _____________________, to help minimize entry errors.
Heather works in the accounting department of Colorado Manufacturing. Today she will use the firm's ledger to summarize information that was posted over the most recent time period. Her goal is to determine if the accounts are balanced as required by the double-entry method of bookkeeping. To be sure they are correct, Heather will prepare a(n):
Tyler works as an accountant for a mid-sized retail store. He has just completed a trial balance that resulted in no unexpected problems. Tyler's next task is likely to be:
Accountant Alan Wingspan has just finished working on the balance sheet, income statement, and statement of cash flows for his company. The next step in the accounting cycle involves:
Oklahoma Chemicals plans to use its computers to post information from journals to the ledger instantaneously. One obvious benefit of this technology is:
Johnson Products is a small manufacturing firm specializing in custom-order tool and die work. A computerized accounting system would help Johnson Products by:
The three important financial statements prepared by accountants are:
The __________ is an accounting statement that reports the financial condition of a firm at a specific point in time.
A firm's ________ reports the profit or loss for the firm over a specified time period.
The _____ shows the assets, liabilities, and owners' equity of a firm, at a specific point in time.
Which financial statement reports the company's revenues and selling costs over a period of time?
A ___________ provides a summary of cash coming into and money going out of a firm from operations activities, financing activities, and investing activities.
The balance sheet is composed of the following types of accounts:
A balance sheet lists assets in order of their ______________.
_________ refers to how quickly an asset can be converted into cash.
When companies owe money to creditors, suppliers, and others, these outstanding amounts are recorded on the balance sheet as _________.
_______ refers to the value that stockholders or owners have in a company.
The fundamental accounting equation states: Assets = _________.
Company resources that are purchased with the intention that they will convert to cash within one year are:
Resources that a firm owns are called:
The most liquid asset is:
Patents and copyrights are classified as ___________ on the Balance Sheet.
Debts that are due in one year or less are classified on the balance sheet as:
The value of resources the firm owns, minus the amount of money the firm owes to others = ___________.
The _____ account on the balance sheet shows profits that the firm has reinvested in the company.
Revenue, minus cost of goods sold = ____________.
Rent, depreciation, and salaries are examples of:
________ is the monetary value that is received for goods sold, services rendered and money received from other sources.
Net profit refers to:
Depreciation is a systematic write-off of the cost of a tangible asset that is listed on __________.
The statement of cash flows identifies cash receipts and disbursements that result ______________.
The balance sheet is set up to reflect the Fundamental Accounting Equation. This equation shows:
The bottom line of an income statement shows the firm's:
Expenses a firm incurs for insurance, office salaries, and rent are classified as:
Debts owed by a business are called __________.
FIFO and LIFO are two common:
The LIFO method of inventory valuation bases the cost of goods sold on the cost of:
_________ is the systematic write-off of the value of a tangible asset over its useful life.
Accounting recognizes that assets, such as machinery and buildings, lose value over time. Accountants will record a portion of the cost of an asset as an expense each year through the use of:
The ______________ shows how the capital is structured in the business, including the value of assets and the amount the firm owes at a specific point in time.
Use the fundamental accounting equation to solve the following: Assets minus liabilities equals:
Many business decisions are made in hopes of improving a firm's bottom line. Which of the following financial statements will reveal a firm's bottom line?
A company's income statement is important to accountants and other stakeholders. It reveals a:
When creating the income statement, which of the following statements is accurate?
Which of the following would be classified as a general expense on an income statement?
During a period of rising prices, using FIFO (first-in, first-out) inventory valuation method will result in ________ net income figures than would LIFO (last-in, firstout).
Retailers attempt to sell older merchandise before more recently acquired merchandise is sold. The assumptions made by the __________ method of inventory valuation are most consistent with this approach.
During a period of rising prices, if a firm desires to report a low gross profit figure in hopes of reducing their income tax liability, the firm will use the __________ inventory valuation method.
Rapidly growing companies often buy increasing amounts of merchandise from suppliers on credit, and then sell the goods to their customers on credit. These companies sometimes have difficulty repaying their suppliers when customers who buy on credit don't pay on time. Firms that experience this difficulty need to do a better job of:
In the Making Ethical Decisions box titled "Would You Cook the Books?" the situation provides the student with an ethical dilemma that might present itself to an accounting professional. The story focuses on: Is it ethical to __________________________
As Hector was packing to return to State University after his summer vacation, he realized that he owned many valuable things such as a laptop computer, a stereo system, and a DVD player. An accountant would list all of these as Hector's:
Keith will graduate from Southern State University this year. He has accumulated $18,000 in student loans during his four years at college. An accountant would classify the loans as:
The balance sheet for Renuvation LLC shows assets totaling $107,000 and liabilities totaling $75,000. Which of the following statements is correct?
When reviewing the balance sheet for Preferred Pet Care, Inc., a mobile small animal care business, Julian noted the following information: Company assets totaling $3.5 million, and liabilities totaling $1.3 million. On paper, the net worth (owners' equity) for this business = ___________.
Scott Drilling Contractors recently issued a corporate bond on which it expects to pay interest for the next twenty years. Scott would record this as a __________ on its balance sheet.
Meg Malloy is running an income statement on her QuickBooks computer accounting program. Which of the following accounts will be used to calculate gross profit?
At the time the Jepson Plumbing Supply prepared its financial statements, it had several customers who bought goods over the past three months on its "90 days same as cash" credit plan. These customers had not yet paid their bills, but they have good credit ratings and Jepson is confident that they will make their payments on time. The amount these credit customers owe would show up as part of the:
Green Living Construction Company installs solar panels in large newly constructed buildings. The company employs several expert installers who work on a full-time basis. Although the installers work every day, the company pays them at the end of the month, for the previous month's work. Employee salaries are recorded as ___________ on Green Living's balance sheet.
Lisa is preparing her homework for her accounting class. She is uncertain as to the proper handling of patents and copyrights on a firm's financial statements. Which of the following is correct?
McCartney Consulting Group is a management-consulting firm that provides its expertise to businesses that employ its services. Since it does not hold an inventory of goods or produce any goods itself:
Cindy is concerned because during the past four months her company has experienced difficulty in paying its bills on time. She knows if this continues, the firm will have difficulties in accomplishing its goals. Cindy is concerned with:
Monica noted that she disbursed $6,347 in payments for operations in her travel agency and received $6,189 in cash receipts for services rendered. She had no cash receipts or disbursements from investments or financing activities. Thus, Monica had a:
Similar to the example of FIFO and LIFO inventory accounting methods, a college store purchased sweatshirts for the upcoming fall semester. Using the following data, where a total of 100 sweatshirts were purchased by the store and placed in inventory, select the correct statement from the following choices.
Nebraska Communications is considering the purchase of a new satellite. The firm believes the satellite will help generate future earnings. In addition, the firm recognizes the tax benefits of a lower net income provided by the annual ________ of the asset.
Carole Grand and Bonnie Lamore run a shuttle service from Western Illinois to the busy Chicago O'Hare airport. Last month, they recorded the following: Carole and Bonnie's gross profit for the past month was:
Carole Grand and Bonnie Lamore run a shuttle service from Western Illinois to the busy Chicago O'Hare airport. Last month, they recorded the following: If 25% of their net income is paid to the government in taxes, what is their net income after taxes?
Costas Calendar Company's Statement of Cash Flows showed the following activities for the year ended December 31, 2016: The year-end cash balance for this firm is:
The financial ratios that measure a firm's ability to pay its short-term debts are called:
The current ratio is a type of ________ ratio.
Which of the following ratios is a liquidity ratio?
The purpose of the current ratio is to evaluate the firm's ability to:
The _______ ratio helps determine the ability of a firm to repay its short-term debts even if it has difficulty selling its inventory.
Financial ratios that reflect the degree to which a firm relies on borrowed funds are called ________ ratios.
Earnings per share, return on sales, and return on equity are examples of:
________ measures the amount of profit earned by a company for each share of outstanding common stock.
__________ earnings per share measures the amount of profit a firm earns per share of outstanding common stock when preferred stock, stock options, warrants and convertible debt securities are also taken into account.
Generally the higher the risk involved in an activity, the ________ the rate of return expected by investors.
A firm's efficient use of its assets in running the business is key to maintaining sufficient cash flow. Ratios that accountants utilize to measure the efficient use of assets are called ____________ ratios.
________ measures the speed of inventory moving through the firm and its conversion into sales.
In order to understand if the results of ratio calculations indicate a financially strong company, the results:
If a firm has a debt to owners' equity ratio of .54 (or 54%) we can conclude that:
Generally, a high ___________ ratio could lead investors and creditors to view the company as being very risky.
In order to calculate the current ratio for your firm, you divide the total value of current assets by:
Leverage ratios indicate the extent to which ________ has been used to fund a business's operations.
The Music Museum, LLC, sells a unique assortment of sheet music. The company indexes just about any published music ever written before 1970. Its customers are high school and college band directors, church choir directors, and glee clubs who require several copies of the same music, including music written for a variety of instruments. To buy inventory for resale, the business seeks out wholesalers with large inventories. Due to the fact that cash flow is always an important concern, the owner keeps a watchful eye on how quickly various genres of sheet music sell. To help him in this assessment, which of the following ratios would be an important part of this company's financial analysis?
Your firm is a supplier to a major chain of discount stores. You have heard rumors that this chain of discount stores is in financial difficulty. Which financial ratios would indicate the discount store's ability or inability to pay its short-term debts?
As a bank loan officer, you are considering a loan application by Peak Performance Sporting Goods. The company has provided you with the following information from its balance sheet: Peak Performance's current ratio is:
Peak Performance Sporting Goods Company has just applied for a bank loan in order to expand the business. Using the most recent balance sheet data provided by the company owner, you calculate that the company's current ratio is 2.5. In your presentation to the company boss, you remark:
As a bank loan officer, you are considering a loan application by Peak Performance Sporting Goods. The company has provided you with the following information: Peak Performance's debt to owners' equity ratio (rounded to the nearest tenth of a percent) is:
Zoey was asked by the company controller to determine if the company could borrow more money for an expansion project. When she calculated a leverage ratio, she determined that the company already had 1.5 times as much debt as equity. Do you agree with her assessment that the company should back off with borrowing more funds at this time?
You have just calculated the acid-test ratio for Peak Performance Sporting Goods [acid test ratio = 1.0]. As a loan officer for the local bank, you are called into your boss's office to interpret the results of this ratio. Which of the following statements best reflects an understanding of these results?
As a recent college graduate with a degree in accounting, Jeff is helping a newly formed construction company set up its accounting system. Although the company had purchased accounting software, Jeff wants to make certain that future reports will distinguish between current liabilities and long-term liabilities. In the future, he will need to know the amount of total current liabilities in order to ___________________.
Peak Performance Sporting Goods Company continues to perform well in spite of an economic recession. Company executives credit this to the strong partnerships it enjoys with category killer and large discount chains. Last week Peak Performance reported basic EPS [earnings per share] = $.80/share. If the firm has 4,000,000 shares outstanding, net income after taxes for the same period = _____.
The top managers of Highbrow Bookstores want to indicate to the firm's shareholders how effectively they have managed the company. Perhaps the most meaningful way to do this would be by reporting strong:
Peak Performance Sporting Goods Company has reported net income after taxes = $3,750,000, with 18,250,000 shares outstanding. Basic Earning per Share for Peak Performance = ________.
Bob Stewart plans to visit his financial planner today to discuss investment strategy. As a young accountant, he knows he can afford to invest in a few riskier investments. Which of the following ratios will be an important measure of profitability for Bob?
Marshall McBride inherited $10,000 from his Great Aunt Martha. He invested $5,000 in a new, risky start-up venture, 10th Generation, Inc., and the other $5,000 in Major Chemicals, Inc., a well-known chemical company that's been around for years. Today, his financial planner called to inform him that the Return on equity on 10th Generation = 6.28%; and, Return on equity on Major Chemicals = 10.50%. Which of the following facts is important information for Marshall McBride?
Allison Robards is the owner of Backstreet Books, a small eclectic-style bookstore in a bustling college town. Allison prides herself in selecting hard to find books and magazines that her clientele enjoy. Recently, Allison is experiencing a cash flow shortage, and she is concerned that she may be purchasing too many copies of each title. Having recently completed a business class, you suggest to Allison that she calculate the ______________ ratio for her store, and then compare it to other stores in her industry.
We would expect the inventory turnover ratio for a ski shop to be _______ than the turnover for a convenience store.
Minnie A. Wright-Hoff works as an accountant for Double Entry Doors, Inc. Her company sells and installs oversized garage doors needed by large vehicles. Most of Minnie's work involves helping department heads and other decision makers by measuring and reporting costs for their departments, and by identifying areas where departments are exceeding their budgets. However, as one of only three accountants employed by Double Entry Doors, Minnie is something of a "jill-of-alltrades" in terms of her accounting assignments. For example, she recently spent several hours summarizing all of the financial data in account ledgers to see if the information was correct and balanced. Her efforts revealed no problems, so she is now ready to start working on the firm's financial statements. Minnie is interested in this part of the accounting cycle because she likes to be one of the first to know the "bottom line" her company will report. She knows that she and the other accountants who work on these statements can influence the results by the choices they make about the way they report certain items.
The fact that Minnie spends most of her time measuring costs and checking to see if departments are staying within their budgets suggests that she is often involved in:
The last major task Minnie completed before getting ready to prepare the firm's financial statements was the preparation of the:
The fact that Minnie wants to determine the "bottom line" for Double Entry Doors means that she is particularly interested in preparing her firm's:
Double Entry Door's suppliers maintained very stable prices for many years, but Minnie has noticed that the cost of doors has been rising steadily for the past few years. She is concerned that, given the company's current accounting methods of basing its cost on the most recent doors purchased, this will result in a much lower net income than in the past. The most likely reason for her concern is that Double Entry has apparently been using:
Minnie knows that Double Entry has a lot of short-term debt coming due in the next year, and wants to make sure that the company will have the ability to make the required payments. Given a troubling downturn in construction activity over the past couple of months, she is not confident that Double Entry can count on selling its current inventory of doors before the debt comes due. Which of the following ratios would be most relevant to Minnie?
Finance is the function in a business that acquires funds for the firm and manages those funds within the firm.
Managing a firm's resources so that it can meet its goals and objectives is the goal of financial accounting.
A financial manager makes recommendations to top executives regarding strategies for improving the financial strength of a firm.
The duties and responsibilities of a financial manager are virtually identical to the duties and responsibilities of an accountant.
Financial managers use data prepared by accountants to develop strategies for improving the financial performance of the firm.
There is actually a stronger relationship between finance and marketing than there is between finance and accounting.
Financial managers examine the data prepared by accountants and make recommendations to top management regarding strategies for improving the financial performance of the company.
Financial management is more important for a large firm than it is for a small firm.
The chief financial officer (CFO) is responsible for accounting and financial functions.
The chief financial officer of a company is responsible for managing cash, accounts receivable, and inventory.
While finance is a critical activity for profit-seeking organizations, by definition nonprofit organizations are not required to fulfill the finance function.
A comptroller is responsible for the acquiring and managing of funds for an organization.
Inability to attract and retain qualified employees is one of the most common ways for a firm to fail financially.
Financial managers are responsible for controlling cash flows.
Undercapitalization refers to the problem of insufficient start-up funds.
Investors and entrepreneurs should have an understanding of financial issues.
Financial managers are responsible for budgeting, auditing, and advising top management on financial matters.
One of the most common ways for a firm to fail financially is poor control over cash flow.
Inadequate control of expenses represents a common financial problem that contributes to business failure.
A comptroller is the chief accounting officer of an organization.
Tax payments are important to the finance manager because they represent a cash inflow to a firm.
An internal auditor is responsible for paying the company's bills and collecting overdue payments from customers.
Financial managers are responsible for buying merchandise on credit and collecting payment from accounts receivable.
Accountants truly represent the financial managers of a business.
Inadequate expense control typically occurs as a result of undercapitalization.
The importance of financial managers to firms with large cash inflows is greater than for firms with smaller cash flows.
Financial managers are responsible for the management of accounts receivable and accounts payable.
Tax management by financial managers involves the development of strategies to evade tax liabilities.
Generally accepted accounting principles require that any assessment of a firm's financial statements be performed by independent outside auditors.
To be effective, an internal auditor must be critical of any improprieties or deficiencies found in the financial activities of the firm.
As a financial manager, Sabrina's responsibilities include the interpretation of financial statements provided by the firm's accountants and the preparation of recommendations to top management.
Mark manages credit and collections at Polly Parrot Pet Supplies, Inc. He is responsible for accounts receivable and accounts payable. These activities suggest that his job is in financial management.
Is there something in a name? April Gardner was told that she would grow up to be a master gardener. She didn't really believe that stuff, but now she finds herself in charge at a large city-owned botanical garden. She is requiring her staff to pursue continuing education. To put her money where her mouth is, she will enroll in a couple of accounting and finance courses at the local community college because this is an area where she is weak. This is a good plan, especially since she is the boss.
The overall objective of financial planning is to optimize the firm's profitability and make the best use of its money.
The first step in financial planning is to develop a budget to better control costs.
One step in the financial planning process is to establish financial control procedures that allow managers to monitor the organization's performance.
The timing of a short-term forecast is more important than the forecast's accuracy.
A firm's short-term financial forecast provides a projected sales estimate.
The primary focus of a cash flow forecast is the firm's revenue and costs for the current operating period.
A firm's most recent financial statements often serve as the basis for predicting future sales, costs and expenses.
The long-term financial forecast plays a crucial part in the company's long-term strategic plan.
The long-term financial forecast gives top management some sense of the profit potential of various strategic decisions.
A budget reflects management's expectations for revenues and allocates the use of specific resources throughout the firm.
Budgets are prepared after the financial forecasts are developed.
To be effective, budgets are prepared independently of organizational forecasts.
A capital budget highlights the expected funds provided by owner investments.
An operating budget analyzes the firm's spending plans for long-lasting assets that require large sums of money.
A capital budget highlights a firm's spending plans for major assets, such as property, buildings, and equipment.
A capital budget combines all of the other budgets into one detailed plan for monitoring the operations of the firm.
The operating (master) budget identifies the funds (and the allocation of those funds) required to operate a business at a projected level of revenue.
A cash budget helps managers anticipate borrowing, debt repayment, operating expenses, and short-term investment opportunities.
The main objective of financial control is to establish priorities for the purchase of plant and equipment.
By identifying variances from the financial plan, managers are able to focus on those departments that require corrective action.
Financial control is a process where firms compare actual revenues and costs with budgeted revenues and costs.
Since short-term financial forecasts predict expected future events, they should not be influenced by recent financial statements.
A budget's primary purpose is to provide managers with a financial summary of past operations.
Forecasting means determining how closely the actual revenue and expense results matched up with the predicted revenues and expenses.
Budgets assist managers in performing the functions of planning and control.
A company's capital budget helps management plan for cash shortages or surpluses.
Preferred Pet Care, Inc., plans to purchase a second mobile unit next year that will cost an estimated $55,000. The finance manager will include this projected purchase in the company's capital budget.
As a financial manager of a small firm, Jerry needs to determine how much his company will have to borrow in the coming months, and when the borrowed funds will be needed. The preparation of the cash budget will help.
Karen, a financial manager with Bigbux Incorporated, regularly compares actual revenues and expenses against their projected values. After identifying areas with significant deviations from planned values, she investigates to find the cause of these variances. Karen's activities represent the steps involved in the preparation of Bigbux's capital budget.
Preferred Pet Care, Inc., a mobile pet care company, is planning for the future. The company owners (two seasoned veterinarians) have brought together the vice president of marketing and the director of information systems to talk about their expansion campaign, "We come to you!" The talks are in the preliminary stages, so there is no need to concern the finance team at this time because cash flow is currently not a problem.
Big Bear Ski Lodge owners know that the lifts on the north slope will need replacing in the next two years. Three months prior to replacement, they will include the expenditure in their cash budget.
Big Bear Ski Lodge's cash budget for the month of March 2015 shows a negative amount. Due to the fact that the months of January and February were quite lucrative and showed positive amounts, the finance manager will not borrow any money in the short term to cover for March's deficit.
One very important responsibility of the finance department in both large and small businesses involves acquiring needed funds to operate the business.
Finance managers need funds for capital purchases, but seldom for the day-to-day operations.
The concept of the time value of money is based on the interest-earning power of money.
When his firm is owed money, the financial manager tries to collect as early as possible.
Financial managers generally oppose credit sales because of the impact on cash flows.
Effective financial managers evaluate customers' ability to pay for merchandise purchased on credit.
With added competition, firms prefer not to offer the availability of credit sales to their customers.
Accepting credit cards, such as MasterCard or Visa, enables a firm to decrease the expense of extending credit to customers.
The cost to a retailer of accepting credit cards is generally greater than the benefits provided.
Acquiring and storing inventory represents a sizable expenditure for many businesses.
To improve cash flow and profitability, effective managers attempt to minimize the firm's investment in inventory.
Capital expenditures are major investments in long-term assets such as property and equipment.
Sound financial management involves determining the most appropriate sources of funds to meet short-term and long-term needs of an organization.
While firms finance their long-term needs with debt financing, their short-term needs are served by equity financing.
Short-term financing refers to borrowed funds that must be repaid in a year or less.
Equity financing must be repaid.
Equity financing represents funds acquired from within the firm or through the sale of stock, representing ownership in the company.
Business organizations always use long-term financing for (both) short-term and long-term needs, but they never use short-term financing for (both) short-term and long-term needs.
Debt financing refers to funds acquired from the profitable operations of a firm or through the sale of ownership in the firm.
Expansion into new markets (either domestic or global) is sometimes financed with long-term funds.
Companies raising funds must choose either debt or equity sources, but not both.
Financial managers understand the time value of money. They try to maximize cash expenditures, as opposed to minimizing cash expenditures.
Based on the time value of money, $100 received a year from today is worth more than $100 received today.
Money has time value due to the fact that if invested, it has the potential to earn more money at some point in the future.
Efficient cash management requires firms to pay their bills as quickly as possible, and delay the collection of accounts receivable.
Successful businesses establish restrictive credit policies encouraging customers to pay cash.
Offering cash discounts to customers who pay their bills by a certain date represents an effective technique to manage accounts receivable.
An effective strategy to manage cash flows requires retail businesses to eliminate their inventory.
A firm will choose to seek debt financing only for the purpose of paying for short-term operating needs.
Equity financing may involve the sale of stock (representing ownership) to new investors.
As a financial manager for a large manufacturing firm, Gail evaluates the purchase of expensive machinery and construction of new facilities. She is analyzing capital expenditure proposals.
Anna operates a florist shop specializing in weddings. While she knows that her competitors allow customers to buy on credit, she is concerned about the risk and expense of unpaid customer accounts. One strategy to reduce risk and collect sales revenue more quickly would be to accept bank-issued credit cards.
White Palace operates a chain of restaurants specializing in hamburgers. The corporation plans to expand to new communities. The acquisition of land and construction of new restaurants represent major capital expenditures.
After thoroughly studying the feasibility for expansion, Preferred Pet Care Inc., a mobile pet care company that operates in the greater Chicago area, plans to offer a similar service in the Indianapolis metropolitan area. This endeavor will require a large capital expenditure. Due to the nature of this project, the firm will consider only equity financing.
Allison Robards, owner of Backstreet Books, an eclectic bookstore near a large university, is seeking additional financing for books and CDs that she plans to buy and sell in the same fiscal year. Even though it will be a sizeable investment in inventory, Allison is seeking short-term financing.
Backstreet Books is seeking financing to fund the opening of two more locations in a major university town. There is no need to consider debt financing for this project. It will require a sizeable investment in equity funds.
Financial managers devote the majority of their time obtaining long-term financing to fund the firm's capital expenditures.
Small businesses rely heavily on long-term financing.
Much of a financial manager's day-to-day activities involve managing the short-term financial needs of the firm.
The most widely used source of short-term funding is trade credit.
Trade credit represents one of the most expensive forms of short-term financing.
Trade credit is the practice of buying goods now and paying for them later.
The terms "2/10, net 30" indicate that the seller is offering a 20% discount for early payment.
Trade credit means the seller will sell and deliver products and/or services to the buyer, with the understanding that the buyer will pay for these products and/or services at a later date.
Suppliers prefer to offer trade credit to customers with poor credit ratings or no credit history.
A promissory note is a written contract between a supplier and a business customer, with a promise that customer will pay supplier a specified amount by a certain date.
Family and friends represent problem-free sources of financing for most small businesses.
A revolving credit agreement is designed to reduce the risk of lending money.
Inventory financing represents the selling of accounts receivables as collateral for a loan.
A secured loan means the borrower has the security of knowing repayment is not due for several years.
An unsecured loan does not require a borrower to provide collateral to secure a loan.
A line of credit represents a guarantee from a bank to lend a firm a given amount of money.
A revolving credit agreement represents a line of credit that is guaranteed.
Commercial finance companies normally charge lower rates on short-term loans than those charged by commercial banks.
Factoring refers to the process of selling accounts receivable for cash.
Factoring refers to the process of selling inventory to generate short-term funds.
Factoring represents the least expensive way for a firm to raise short-term funds.
A tool that provides lots of convenience, credit cards are a source of a readily available line of credit for a small business because they provide convenience.
Commercial paper is unsecured short-term debt.
Financially stable firms are able to sell commercial paper to raise short-term funds.
Many sellers offer a 2% discount to a buyer that makes payment 20 days before the due date, (2/10, net 30). Firms that fail to take advantage of this early payment discount are giving up approximately 36%.
If a buyer is offered the terms of sale of "3/10, net 30" this means that the buyer can receive a 10 percent discount by making full payment within 30 days of the billing date.
A line of credit from a bank guarantees a firm that a specified amount of financing will be available when it is needed.
According to the box, Adapting to Change, it is impossible for small businesses to bring in venture capital from investors.
Bill is a financial manager for Great View Eye Care, a local chain of Milwaukee retail stores offering glasses and optical health care. The majority of Bill's day likely involves efforts to locate and secure long-term financing to fund Great View Eye Care's capital expenditures.
Rod was required to pledge his house and car as collateral for a loan he received from the First National Bank. The money from the loan was used to start his new business, which unfortunately failed within 6 months. The bank can now claim Rod's house and car to satisfy its claim.
As the chief financial officer (CFO) for a medium-sized service company, Shelley is concerned about the possibility of temporary cash shortages. Given the irregular cash flows from seasonal sales, she wants to ensure that her company's bank will provide adequate funds to cover any potential cash flow problem. The best strategy to ease Shelley's concern would be to arrange a revolving credit agreement with the bank.
Tri-State Concrete Construction Company relies on factoring to meet its short-term financing needs. This means that Tri-State borrows money from a finance company and pledges its accounts receivable as collateral.
Big Ticket Technologies holds commercial paper issued by Prude Insurance Corporation that matures in 180 days. However, shortly after Big Ticket purchased the commercial paper, Prude Insurance went out of business. The finance manager for Big Ticket is not worried because his loan to the corporation is secured by collateral that he can now claim.
Most companies require long-term capital to purchase fixed assets such as plant and equipment, to develop new products and services, or to finance an expansion.
Equity financing refers to the money a firm receives from the sale of bonds.
When using equity financing, firms incur a legal obligation to repay the amount of money invested.
A term-loan agreement requires the borrower to repay the loan in one lump sum at the end of the loan period.
The interest paid for debt financing is a tax-deductible expense for the firm.
According to the risk/return trade-off, the higher the risk, the lower the interest rate charged by the lender.
A share of stock represents a company-issued IOU including a promise to repay on a certain date.
A bond represents a long-term debt obligation of a corporation or government.
An unsecured corporate bond is known as a debenture bond.
A debenture bond is backed only by the reputation of the issuer.
The types of organizations which can issue bonds are privately and publicly held corporations, exclusively.
The indenture terms refer to the agreements of a bond issue, such as how much interest it promises to pay and when it promises to repay the issue.
Funds obtained from venture capitalists are considered equity financing.
Retained earnings represent a source of equity financing.
The first time a company offers to sell its stock to the general public is called an initial private label (IPL).
Corporations must comply with the Securities and Exchange Commission (SEC) requirements in order to sell their stock publicly.
Venture capital is money that is invested in new or emerging companies that are perceived as having great profit potential.
Venture capitalists expect lower than average returns on their investment since they are exposed to little risk.
Most companies have the ready cash available to make large purchases.
Acquiring funds through equity financing requires the firm to pay annual dividends.
Acquiring funds through debt financing actually decreases the overall risk of the firm.
Acquiring funds through debt financing enhances the firm's ability to increase profits.
Leverage refers to the use of borrowed funds to increase a firm's rate of return.
The cost of capital is the rate of return a firm must earn in order to meet the demands of its lenders and expectations of its equity holders.
Long-term loans are often more expensive than short-term loans.
Corporations that issue debenture bonds are required to provide collateral.
Corporations that issue stock to raise long-term funds accept the legal obligation to repay the amount borrowed.
Unlike bonds, stocks offer the advantage of tax-deductible interest payments.
One important consideration for a firm accepting funds from a venture capitalist is the ownership interest demanded by the venture capital firm.
According to the Reaching Beyond Our Borders box, some of the largest sovereign wealth funds are operated by Norway, Saudi Arabia, and Singapore.
As mentioned in the Reaching Beyond Our Borders box, sovereign wealth funds can easily purchase more than 10% of a U.S. company without investigation by the U.S. government.
Central Vermont Power issued $200 million of bonds to finance a major upgrade of one of its largest power plants. The issuance of these bonds indicates that Central Vermont utilizes equity capital to meet its long-term financing needs.
As a financial manager for a very profitable manufacturer of specialty steel, Kurt has been asked to investigate sources of long-term funds to finance the construction of a new facility. Kurt would prefer a funding source that does not require interest payments or involve major underwriting fees. Kurt will consider using retained earnings to fund the construction project.
Financial managers at Sasha Deal Electronics have always had a conservative attitude toward long-term financing. In particular, they are interested in keeping risk to a minimum. This philosophy suggests that managers at Sasha Deal consider the extensive use of leverage an attractive financial strategy.
An example of a firm using leverage to its advantage is a firm that borrows funds at 9% and invests those funds to earn 14%.
If a firm earns 10% return on funds they borrowed at 15% interest, the owners of the firm realize a benefit from using leverage.
________ examine the data prepared by ________ and then make recommendations to top management regarding strategies for improving the firm.
_____________ is the function in business that is responsible for acquiring funds for the firm, and managing funds within the firm.
Which of the following correctly identifies areas of authority and responsibility for a chief financial officer (CFO)?
No matter the size of the business, finance is a critical activity for:
Undercapitalization refers to the problem of:
Which of the following statements is most accurate?
Which of the following is a primary area of concern for financial managers?
Which business function involves credit management/collecting funds from customers?
Which of the following statements about taxes is accurate?
A(n) __________ is responsible for verifying that the accounting procedures within a firm are consistent with established accounting principles.
Which of the following commonly results in the financial failure of a firm?
A(n) _____________ job includes forecasting, budgeting, cash flow analysis, cost control, taxes, and credit management.
Which of the following companies is undercapitalized?
Susan started a cake decorating business that failed. She is convinced that she lacked the necessary funds to promote her business and get it off the ground. Susan experienced:
Carlos is the manager of Oh! Canada Sporting Goods. During the past six months, his cash expenditures have exceeded his cash receipts. Oh! Canada is suffering from a(n) ________ problem.
Ariel, a recent graduate in finance from a well-known university, was hired by a large corporation to work in tax management. Ariel's goal is:
Robert intends to major in business. He has never had much interest in subjects with numbers. He would like to avoid taking any finance courses if possible. Robert should:
Which of the following activities is most likely to be performed by a financial manager?
When Preferred Pet Care Inc., a mobile veterinary care company, first started operations, it extended three months of credit to customers. It soon began to experience a cash flow problem. A finance professional was hired to:
The overall objective of financial planning is to:
The first step in the financial planning process is:
A _________ forecast predicts the revenues, costs, and expenses a firm will incur for a period of one year or less.
A _________ forecast predicts the future cash inflows and outflows in future periods.
A _________ forecast predicts the revenues, costs, and expenses a firm will incur for a period longer than one year.
In order to assist in revenue realization, a(n) ________ allocates resources throughout the firm.
Which of the following shows a firm's spending plans on fixed assets such as large equipment?
The budget that estimates a firm's projected cash inflows and outflows, as well as cash shortages or surpluses during a given time period is called the ________ budget.
___________ refers to the process that identifies variances by comparing actual revenues and expenses to projected revenues and expenses.
An effective budget requires:
If a company wants to predict how much money it can make this coming year, it would benefit from developing a:
Which of the following would be most helpful for a company looking to know the income potential during the next five years?
Carolina Financial Services is considering the purchase and installation of an expensive computer network. This is the type of expenditure that would be included in a(n):
The managers of Dakota Clothing regularly compare their actual profits with the firm's projected profits. When deviations occur, the managers use the feedback to take corrective action when necessary. The management of Dakota Clothing is exercising financial:
As a management consultant, Lamont knows that regardless of how good his firm's product might be, the business has little chance of success without a(n):
Akiko realizes the importance of developing a ________ for her interior design business. Akiko understands the importance of appropriately allocating resources in order to achieve the goals of her firm.
As a finance manager at AllSports Communication, Charlie worries about the firm's borrowing requirements for the upcoming year. He knows the benefit of estimating AllSports’ cash disbursements and short-term investment expectations. Facing these concerns, a(n) ________ would provide Charlie with valuable information by providing a good estimation of whether the firm will need to do short-term borrowing.
The finance manager at AllSports Communication has asked his assistant, Ben, to prepare the ________ budget. Ben will gather as much information as possible by utilizing the firm's other budgets and any documents that summarize proposed financial activities.
One of the challenges of effective financial management is:
The concept time value of money indicates:
Money has a time value because:
The rationale behind offering customers credit is:
A major concern for firms selling on credit is:
To reduce the time and expense of collecting their accounts receivable, some firms:
A just-in-time inventory system allows a firm to:
Acquiring funds through borrowing represents:
If a firm sells shares of stock, it is financing with ________.
If a company secures a three-year bank loan, this is considered __________.
If a company secures a one-year bank loan this is considered _______.
The effective management of accounts receivable requires financial managers to:
Which of the following would normally involve long-term financing?
The Making Ethical Decisions box “Good Finance or Bad Medicine” has an important message for managers who make financial decisions. Which of the following statements summarizes this message?
With plans to build a $50 million theme park, Extreme Entertainment, Inc., intends to finance this project through the sale of additional shares of ownership in their firm. Selling new shares of stock represents ___________ financing.
The owner of Mountain Cycle Shop worries that cash flows this winter may be insufficient to meet his current operating expenses. While he anticipates a surplus of cash inflows as warm weather approaches, he needs funds now to meet his immediate obligations. He can best resolve his cash flow concerns by obtaining ________ financing.
Lancer Wholesale Company wants to improve cash flow. Which of the following strategies would be most likely to help Lancer achieve this objective?
Which of the following presents an effective technique to improve cash management?
If you are at the Phoenix Sky Harbor International Airport, you will no longer get a pat-down if you go through the metal detector. The airport now has full body screening ports that scan the entire body and readily detect weapons or explosive devices that someone may want to take on board a plane. These expensive devices represent:
Green Builder's Supply, Inc., does not offer customers a cash discount for early payment of their accounts receivable. As a result, most customers wait to pay their bill on the last day before late penalties are charged. These customers apparently understand the:
Which of the following represents a capital expenditure?
By selling shares of ownership in their company, California Scientific acquires the funds needed to finance their research and development projects. California Scientific provides for their long-term funding needs through ________ financing.
The CFO of a satellite radio company was trying to work his magic today as he solicited another telecommunications/entertainment company to invest in his company in order to prevent bankruptcy. Having refinanced the company less than a year ago, the satellite radio finance manager had a $75 million note coming due today. The current financing arrangement represents:
Which of the following statements represents good advice prior to making capital expenditures?
When Liberty Industries renegotiated their loan agreement, they borrowed an additional $2 million. The new loan requires Liberty to repay the new amount in nine months. Liberty's activity represents ________ financing.
Finance managers spend the majority of their time managing _____.
Which of the following represents a source of short-term funding?
The most widely used source of short-term funding is:
________ is a form of short-term financing. Businesses buy merchandise from their suppliers, but are not required to pay for their purchases until some future date.
Some suppliers hesitate to offer trade credit to firms with a poor credit history. In these cases, the supplier may insist that the customer sign a(n):
A loan backed by collateral represents a(n):
Typically, only highly regarded customers with financial stability receive ___________.
Lending institutions may offer a borrower a percentage of the value of the borrower's accounts receivable so the borrowing firm can continue to operate while it waits to collect on its credit sales. This process is called __________.
A firm negotiates a(n) _________ with its bank. This arrangement gives the firm access to a specified amount of unsecured short-term funds, provided the bank has the funds available.
A ________ refers to a line of credit that is guaranteed by the bank.
___________ offer short-term secured loans to high-risk borrowers. These loans usually require collateral.
Selling accounts receivable to obtain short-term funds is called:
Since commercial finance companies offer loans to higher-risk customers than commercial banks, the interest rates they charge are usually ________ than rates charged by banks.
_________ offers financially stable corporations a technique to raise short-term funds by issuing unsecured promissory notes to the general public with the promise of repayment within 270 days.
Although best used as a last resort, many small businesses find it convenient to use __________ as a short-term source of financing. Although this form short-term debt comes with high interest rates, it provides a quick line of credit for many firms, including start-up companies who may not be able to secure bank loans.
Many small businesses rely on factoring as a source of short-term financing because:
Which of the following organizations would be most likely to acquire short-term funding by issuing commercial paper?
As a result of cash flow shortages, Millard's Department Stores has fallen behind in payments to suppliers. Some suppliers are withholding shipments to Millard's until they receive payments on overdue accounts. To meet their immediate needs, Millard's Department Stores should utilize:
Maryland Nursery offers customers credit terms of 3/15 net 30. This gives customers a:
To secure financing for a planned expansion, Ohio Electronics borrowed $400,000 from King Finance. The ________ loan agreement requires that Ohio Electronics provide the title to their factory as collateral.
Farmers Savings and Loan agreed to extend Eckert's Orchards $200,000 of unsecured short-term funds, contingent upon the bank having the funds available. This arrangement represents a:
Energy-wise Builders, Inc., a leader in residential housing, recently negotiated a financing arrangement with First Pennsylvania Bank. The short-term funding agreement guarantees a specified amount of funds would be made available upon Energy-wise's request. This arrangement represents a:
Virginia Supply offers their customers trade credit with terms 2/15 net 30. This implies that:
The financial manager of Carolina Graphics negotiated a ________ with her bank that allows Carolina to borrow up to $50,000 without collateral. This arrangement eliminates the need to renegotiate the terms of the loan and complete new paperwork each time Carolina borrows money. The preapproved short-term loan agreement is contingent upon the bank having the funds available.
Vitale Jewelers obtains needed short-term funds by selling its accounts receivable to the Friendly Finance Company. Friendly Finance usually pays Vitale about 80% of the value of the receivables. Vitale Jewelers utilizes ________ as a means of raising short-term funds.
Long-term financing would normally be used to purchase:
Businesses match their long-term capital needs to:
Businesses acquire long-term financing from two major sources:
When using ________ financing, the company incurs a legal obligation to repay the amount borrowed.
A promissory note that requires the borrower to repay the loan in specified installments is called a(n):
A less-established company, or a company with a high debt to equity ratio, would be considered a riskier investment to the lender. Which of the following principles attests to this axiom?
A _________ represents a long-term debt obligation issued by a corporation or a government.
The terms of the agreement in a bond issue are referred to as the:
Which of these is backed only by the reputation of the issuer?
Which of the following provides the buyer with collateral?
Through equity financing, stockholders become _________ of the firm.
__________ represent a favorable source of meeting long-term financing needs because there are no interest payments, dividends, or underwriting fees required when using this source.
__________ provide financing to new or emerging companies with high profit potential. In return, these organizations expect a share of ownership in the company.
__________ refers to the strategy of using borrowed funds to increase the rate of return for stockholders.
The rate of return a company must earn to meet the demands of its lenders and expectations of its equity holders is called:
The interest paid on ________ represents a tax-deductible business expense.
Which of these is a common source of long-term financing for a corporation?
One of the primary factors that influences the interest rate a firm pays on long-term loans is the:
Venture capital firms look to invest their funds in firms that __________.
Which of these statements about corporate bonds is correct?
Successful use of financial leverage requires a firm to:
To maximize the benefits of using financial leverage, a firm should:
As John considers approaching a venture capital firm to provide funding for his new software firm, he should realize that a venture capital firm will:
By purchasing stock in Entertainment Today, Veronica has become a(n) ________ the company.
After earning $30 million in net income, Rolatrim Industries distributed $5 million in dividends to their stockholders. The board of directors of the firm decided to invest the remaining $25 million back into the business. This $25 million reinvestment of profits represents:
After enjoying increased sales of and profits from several popular products, Braggs & Stritton plans to expand their production facilities. The firm, a well-known producer of lawn care products, prefers financing this project with a funding source that avoids interest and dividend payments as well as underwriting costs. Which of the following best meets the needs of Braggs & Stritton?
Chunky Chicken, Inc., announced yesterday that it plans to issue $100 million in debenture bonds to fund the expansion of its fast food chain of restaurants. In financial terms, this means:
Arborview Plant Science Company has invented a drought resistant grass seed that only needs watering three times each year. In order to expand distribution worldwide, the company whose product produces lush green foliage needs a large amount of funding— fast! The handful of seed scientists that own the company decide to offer shares of stock to general investors. This first-time offering is a(n):
Arborview Plant Science Company has invented a drought resistant grass seed that only needs watering three times each year. In order to expand distribution worldwide, the company whose product produces lush green foliage needs serious funding. The handful of seed scientists that own the company are seeking ____________, but understand that they will relinquish a sizeable share of ownership in order to obtain the funds.
Which of the following situations represents a successful use of financial leverage?
Tishian's Funeral Home has been in business for over 80 years. Throughout its history, the firm has been a family-run operation. Today, the business is managed by Mort Tishian, a grandson of the founder. Unfortunately, Mort Tishian's tenure has been plagued with problems neither his father nor grandfather before him experienced. The reason is simple: the funeral business is undergoing rapid change. Small, family-owned funeral homes are losing ground to a new type of competitor, a large national network service that resembles a franchise system. More and more families "in their time of need" are choosing the new, highly promoted competitors instead of the traditional small family-operated funeral homes. This trend has required a response from organizations like Tishian's Funeral Home. Bigger and better facilities are needed to remain competitive. All of this puts more pressure on the family owners to be more active in the financial side of the business. Mort summed it up best when he said, "Grandpa told people, 'You pay me when you can, I ain't goin' nowheres.'" His creditors did the same with him. Today, it's a different game. Cash flow is key, and obtaining funds is no simple task. Additionally, creditors want their money now, not later. Banks are also more demanding. "Heck, Grandpa knew all the bankers he dealt with personally. I see new faces every time I go to the bank. If things don't get better, I suspect after eighty years of service, Tishian's Funeral Home will have its own funeral."
Mort Tishian feels it's necessary to predict revenues, costs, and expenses on a six-month basis. "It's the only way you get an idea of what to expect," explains Mort. In order to obtain these predictions, Mort needs to develop a(n):
Mort is seriously considering a major expansion in the size of his funeral home. The money spent on this type of project would be classified as a(n):
To raise the funds for the major improvements needed at the funeral home, Mort has talked to two investors about incorporating his business and selling them shares of stock in the company. Mort is considering the use of:
Mort approached the chief lending officer at First Virginia Bank about obtaining a $75,000 loan. The banker said she would approve the loan provided that the funeral home's building was pledged as collateral. The banker was offering a(n):
After much searching, Mort located an old banking friend of his father's. The banker offered Mort up to $25,000 in unsecured funds, which Mort's firm could borrow any time within a year, as long as the bank has the money available. Mort was offered a(n):
After seeing Mort's advertisement: "You Aren't Gettin' Any Younger! Start Planning for Heaven Today!" a(n) ___________ firm decided the aging population was a good investment. Although they typically look at start-ups with great promise, they approached Mort with $6 million dollars for his new idea of a major three-city expansion that included six new funeral homes, a crematory, and mausoleum. After researching the offer, Mort agreed to give up 50% ownership of the business in order to secure these funds. His last thoughts as he began to sign the papers were: "Now, I'll be able to compete with the big guys!"
Securities markets represent the financial marketplaces for stocks and bonds.
Securities markets provide private investors a place to buy and sell stocks, bonds, and mutual funds.
An initial public offering (IPO) represents the first time a corporation's stock is offered and sold to persons outside of the company.
The proceeds from a secondary market sale of securities go to the corporation whose security is being traded.
In a secondary market sale of stock, the proceeds go to the investor selling the stock, not to the corporation.
Corporations sell a new issuance of securities in the Primary Market.
The primary market allows an investor to purchase financial securities from other investors.
The secondary market is where investors (both individuals and companies) go to find someone who is interested in selling their investments to them.
When given a choice, businesses prefer to obtain long-term financing through retained earnings or by borrowing from a lending institution such as a bank.
Issuing stock is considered equity financing.
Issuing bonds is considered debt financing.
It is easier for a small business to raise funds through a stock issuance than for a large, well-known company.
Before issuing stock or bonds, corporations must meet the disclosure requirements of the Federal Trade Commission (FTC).
An investment banking firm assists corporations in selling the new security issue.
When investment bankers underwrite an issue, they buy at a discounted price, the entire stock issue of a firm and then sell the stock, at full price, to private investors.
Only government employees represent institutional investors.
Examples of institutional investors are pension funds, mutual funds, and insurance companies.
Securities markets help companies raise long-term debt and equity financing.
Many observers suggest that the stock market is dominated by the buying and selling activities of institutional investors.
Investment bankers assist in the issuing and selling of new securities.
Institutional investors include insurance companies, individual investors, and mutual funds.
Corporations receive needed funds when they sell a new issuance of a security in the primary market.
Investors who trade securities, buy securities they are interested in holding or sell securities to make a profit or cut losses by trading in the secondary market.
The Securities and Exchange Commission does not intercede in any way in the process of an IPO. Doing so would disrupt the natural process of the capital markets.
Government employees, public school system employees, and even employees of some large companies pay a percentage of their monthly earnings into pension funds. These funds collect a large pool of money that they invest in securities. Pension funds, insurance companies and mutual fund companies - who collect large sums of money and then invest these funds into stocks, bonds or other securities are called institutional investors.
Investment bankers are in the business of underwriting securities. They profit from purchasing the new stock offering of a corporation at a discount, and then selling those shares of stock to the public at the market price.
Your privately held firm needs additional funding for a planned expansion. Having never issued stock to the public, your firm is well advised to seek the assistance of an investment banker prior to an initial public offering of stock.
Hottie Potatee, Inc. wants to raise an undisclosed amount of funds in order to expand the company-owned potato bar stores overseas. The CFO (Chief Financial Officer) of the company will negotiate with an expert at the FTC (Federal Trade Commission) who will underwrite the issue of stock that Hottie Potatee plans to offer.
Ina Vestor inherited $75,000 when her grandfather died and decided to invest it in the Hottie Potatee company. As a student of business, you inform her that she can call a stockbroker who will help her purchase stock on the secondary market.
Sam Schiester, a stockbroker at Schemes Financial Services Company called you the other day asking if you would like to purchase an IPO. "The hot new company, Hottie Potatee is going public, and I thought you might want to get in on it," he exclaimed. If you agree to buy shares of this company, this trade will occur on the secondary market.
Idle Time Gaming, Inc., has reached a point in its life where it needs several million dollars in order to expand and become the international company that it says it wants to be in its strategic plan. After consulting with an investment banker who is willing to underwrite the issue, it learned that investors will purchase the stock for $22/share. Idle time will receive a smaller amount for each share that is sold.
If investor Jones buys a share of stock in the ABC Corporation from investor Smith, the ABC Corporation automatically receives a fixed percentage of the selling price.
Stocks that are not listed as trading on one of the national or international stock exchanges can be traded on the OTC, Over-The-Counter exchange.
A stock exchange provides a marketplace where the public can directly buy and sell securities without the help of intermediaries.
Only those individuals and/or companies with a membership on a stock exchange can buy and sell securities on that stock exchange.
Securities and Exchange Commission (SEC) rules prohibit the listing of the stock of foreign firms on U.S. stock exchanges.
The over-the-counter market utilizes an electronic securities trading system.
The stock of companies that fail to meet a stock exchange's minimum requirements can be delisted.
The NASDAQ is a floor-based exchange.
Stock exchanges compete with each other for the listing of a corporation's stock.
The Federal Trade Commission (FTC) regulates the security markets in the United States.
Before a corporation's stock can be sold on a major stock exchange, the firm must provide detailed financial information to the Securities and Exchange Commission.
Insider trading involves the sale of stock to employees at discounted prices.
The Securities and Exchange Commission requires that all prospective investors receive a copy of a firm's prospectus prior to investing.
Insider trading refers to someone who benefits unfairly from information about a security not available to the general public.
Insider trading laws prevent employees from buying or selling the securities of their employers.
Well-known foreign exchanges that also exchange the securities of U.S. firms include the London Exchange and the Tokyo Exchange.
The number of U.S. companies that are listed on foreign stock exchanges is declining.
The prospectus is summarization of the results of detailed financial documents that a firm files with the SEC prior to being given approval to issue securities.
Once a stock exchange agrees to list a company, the firm can be assured that it will always be listed by that exchange.
With recent mergers of stock exchanges, beginning with the New York Stock Exchange merger with Archipilago, and subsequently with Euronext and then Deutsche Borse, most exchange floors are symbolic because trades usually take place via computers.
If you want to buy the stocks of largely capitalized companies (companies with millions, and even billions worth of assets), your broker will need to make the trade through the NYSE Euronext.
According to the Securities Act of 1933 it is against the law for a firm that is publicly trading securities to deny an investor from knowing how the firm is doing financially.
In an effort to profit from stock market trading, Chad landed a job with the ABC Corporation. Chad intends to use his position to obtain privileged information about his new employer that would not be available to the public. While Chad realizes that he may be benefiting unfairly, as an employee he is not acting illegally.
An executive secretary at a major investment banking firm is asked to copy documents that detail a major merger that's going to be finalized in the next two weeks. This merger will be a positive outcome for one of the companies in this deal. The secretary is thrilled to read about the merger, plans to call her broker immediately and buy stock in the company, and suggests that you should also act on her stock tip. Since you are not employed at her firm your purchase is legal.
Stocks represent shares of ownership in a company.
Stock certificates identify per share dividends, expressed as a percentage of par value.
Par value reflects the current market price for a stock.
Dividends represent a portion of a firm's profits that are distributed to bondholders first then stockholders.
Although companies that issue bonds are required to pay interest, companies issuing stock are not required to pay dividends.
When a corporation enjoys a profitable year, dividends must be paid.
Issuing new common stock usually expands ownership, giving all owners the right to vote for the firm's board of directors.
Issuing new stock increases the firm's outstanding debt on their balance sheet.
If paid, dividends come from any profits remaining after the firm has paid taxes. The company cannot deduct dividends as an expense of doing business.
Corporate management decisions are influenced by the desire to keep stockholders happy.
Preferred stockholders have voting rights privileges not shared by common stockholders.
Preferred stockholders receive dividend payments before common stockholders are paid any dividends.
If the firm should find itself in bankruptcy, preferred stockholders would have claim to the value of any remaining assets before common stockholders.
Preferred stock may include callable and convertible provisions.
Preemptive rights provide common stockholders the first right to purchase any new shares of common stock issued by the firm.
Cumulative preferred stockholders enjoy the first right to purchase any new shares of stock issued by the firm.
Cumulative preferred stockholders enjoy a promise that missed dividends will accumulate and be paid later, before any dividends are paid to common stockholders.
Both preferred stocks and bonds represent funding sources that require repayment to investors.
Corporations that issue preferred stock incur a legal obligation to pay dividends to those stockholders.
For the firm, the cost of paying dividends to common stockholders is higher than the cost of the same amount of interest paid to bondholders.
The similarities between common stocks and bonds include a face or par value and a fixed rate of return for investors.
While common stockholders of corporations have voting rights, preferred stockholders generally do not.
A preferred stock's par value establishes the base used for calculating the preferred stockholders' dividend.
A company with cash flow shortages must pay common stockholders their dividends before paying preferred stockholders their dividends.
Preferred stockholders possess the first right to purchase any new stock the company issues.
Zach purchased 200 shares of Fast Track Corporation last year. This year, he plans to hire an attorney to go after the company for failure to pay dividends. If Zach follows through with his plan, he will probably win the lawsuit because companies are obligated to pay their stockholders dividends for owning and holding the firm's stock.
Through disciplined investing, Alyssa now owns 10% or 50,000 shares of a small biotech company. Although she has enjoyed a lot of control, she realizes that in order for the firm to acquire the funds to grow in a recessionary economy, it will need to issue more stock. Her regret is that it will dilute her ownership.
A share of preferred stock currently sells for $120. It offers the investor a dividend rate of 8%, with a par value of $100. If the company is able to pay dividends, preferred stockholders would receive a dividend of $9.60 per share.
When acquiring funds through the sale of a bond, the business incurs a legal obligation to pay regular interest payments.
A bond represents a contract of indebtedness issued by a corporation that promises payment of a principal amount plus interest at a specified future date.
Interest represents the payment to bondholders for the use of their money.
The interest paid to bondholders represents the principal of the bond.
The interest rate paid to bondholders is sometimes called the coupon rate.
Although the interest rate is fixed when the bond is issued, the interest rate that one firm must pay compared to another may vary depending upon risk factors such as the reputation of the firm.
U.S. government bonds are considered safe investments. Therefore such government bonds usually have a lower interest rate than corporate bonds.
The maturity date of a bond refers to the date on which the interest payment is due to be paid.
The maturity date represents the date on which a corporation must pay investors the principal (face value) of their bond.
Bond classifications include, but are not limited to Corporate bonds,T-bills, Treasury bonds, Treasury notes, and Municipal bonds.
Standard and Poor's and Moody's are well-known companies that rate bonds.
Bond interest is usually paid in two times each year, even though the interest rate that is usually quoted is an annual rate.
Interest rates vary with changes in the state of the economy.
Bonds represent a permanent source of funding for companies. The money firms acquire by issuing bonds does not need to be repaid.
In the language of bonds, the terms "principal" and "face value" are synonymous.
Bondholders represent creditors of a firm.
As a legal contract, bonds issued by different companies carry the same level of risk.
Firms are at a disadvantage when issuing bonds because the interest rate that they must pay to bondholders is not tax deductible.
As creditors of a firm, bondholders enjoy voting privileges for the firm's board of directors' elections.
Both stocks and bonds represent temporary sources of funding for a firm. Eventually they must be repaid.
By issuing bonds, a firm's debt level increases which may adversely affect the firm's image in the financial community.
Debenture bonds represent bonds that are not secured by collateral.
A sinking fund is a reserve account where the firm will periodically deposit funds in anticipation of repayment of a bond issue on the maturity date.
A callable bond allows a bondholder to exchange his/her bond for shares of common stock in the same corporation.
The owner of a convertible bond can exchange the bond for a specified number of shares of common stock in the same corporation.
Raising long-term funds through the sale of bonds requires the firm to make debt repayment when and if the organization has sufficient cash flow.
With everything else constant, investors prefer a bond issued with a sinking fund compared to a bond without a sinking fund.
A bond sold with a sinking fund provision requires the firm to allow a stockholder to exchange his/her bond for a specified number of shares of common stock.
A company often exercises the call provision of a bond if it's available when prevailing interest rates fall below the interest rate currently being paid to bondholders.
Taking into account the risk/return tradeoff, it would stand to reason that a secured bond holds a lower interest rate than an unsecured bond.
A sinking fund provision decreases the risk of repayment in the minds of the investors.
After retirement, Hector began a search for a low-risk investment. He should consider buying a secured bond of a major corporation.
The U.S. government just announced an increase in the interest rate paid on U.S. government bonds. This will likely cause a decrease in the interest rates paid on corporate bonds.
Tyler is looking for an investment that will pay a little better than what he can get from a government bond. You suggest that he consider a new issue of debenture bonds by Very Vegetarian that pay 8.5% annually. You explain that Very Vegetarian has operated for a long time, and the debenture feature makes these bonds more secure than others.
Investors and corporations are on the opposite sides of the interest rate risk scenario. If interest rates go up to 7%, the bondholder holding a bond with a 6% interest rate knows that he could do better. If he is forced to sell his bond on the secondary market before it matures, he will receive less than the face value.
As a registered representative of a stock brokerage firm, a stockbroker works as an intermediary to buy and sell securities for clients.
The high start-up costs of web-based businesses cause online brokers to charge higher commissions than traditional brokerage firms.
Online investors expect more expert advice than investors using traditional brokerage firms.
Young investors place more importance on low risk investments, while elderly investors prefer significant growth in the value of their investments.
Diversification means buying several different types of investments with the funds you have available for investment.
For starters, investors should consider the return on investment, the liquidity and riskiness of an investment.
A well-diversified portfolio would consist of a variety of investments and even cash for emergencies. The important thing is that the choice of investments spreads the risk. Some investments may perform very well in any one year while others may lag. Those performing well will balance out those that are underperforming.
The advantage of using an online broker is that these services usually provide you with a wealth of information and help you allocate your assets. Sometimes they even help you create an investment plan for life!
Monica met with a financial planner last week and he urged her to consider only government bonds and mutual funds in her portfolio. Since she is in her 20's, Monica believes she can tolerate a little more risk. You suggest that it is a better plan to follow the advice of the financial planner, rather than research her choices on her own.
Raul and his grandfather receive individualized investment advice from the same chartered financial analyst. When comparing their customized investment recommendations, it is likely that Raul's strategy targets lower risk investment options than the advice received by his grandfather.
Having just returned from the Iraq war, David, a young soldier has $25,000 in his savings account. His girlfriend suggested that he talk with an investment advisor and let his money "make more money". David has his eye on a new Ford truck, but he knows that his old Jeep Cherokee will probably last another four years, at which time he will definitely need this money as a down payment or purchase of something new. David should buy high growth stock with his funds because even though they are risky, they also have the greatest potential of bringing in the better return on his investment.
Buying a stock makes the investor an owner in the firm.
An investor earns a capital gain when they sell a stock for more than they paid for it.
The market price and growth potential of a common stock depends heavily on the performance of the firm in meeting its objectives.
A bull market occurs when overall stock prices increase.
A bear is an investor that expects stock prices to rise.
Growth stocks are the stocks of corporations whose earnings are expected to grow faster than the overall economy.
Growth stocks offer investors the attractive combination of low risk and high returns.
A blue chip stock represents a highly speculative stock investment.
An income stock offers investors a relatively high dividend yield on their investment.
A penny stock generally sells for a low initial price, pays regular dividends and provides consistent growth in the stock's value.
Penny stocks represent a high-risk stock investment.
When you place a limit order, it means you are willing to buy or sell the stock at the best price available.
An investor placing a market order with a broker agrees to buy or sell a stock immediately at the best price available.
If a company announces a stock split, the investor may receive two or more shares of the company stock, for every one share that he/she holds.
When brokers talk about trading round lots, they are referring to 50 shares of stock.
A stock split immediately increases the value of an investor's holdings.
The stocks of high quality companies such as Coca-Cola and Microsoft are called blue chip stocks.
Buying stock on margin lowers the overall risk for the investor.
A margin call requires an investor to repay money borrowed from the broker used to purchase the stock.
Buying on margin means you are borrowing part of the value of the stock purchase from the brokerage firm.
Buying on margin is a relatively risk-free way of investing in the stock market.
Corporations and brokers prefer to have stock purchases conducted in round lots of 100 shares.
A stock split refers to buying a share of stock at a discounted price if full payment is made at the time of purchase.
A round lot refers to the purchase of 100 shares of stock in the same company in a single transaction.
Investing in common stock can give an individual the opportunity to participate in the success or failure of a corporation.
If you are willing to hold on to your growth stock long enough, at least five years or more, you will realize capital gains.
Buying stock on margin allows investors to increase the potential rate of return made on a stock investment.
If you buy 100 shares of IBM for $120/share, and the margin on your account is 50%, the broker will float you an interest free loan of $6,000, until the price of IBM sufficiently rises to the point where you are willing to sell. You pay the broker back its $6,000, and you enjoy the capital gain.
Lamont bought a share of stock in the ABC Corporation for $50. When he sold the stock later that year, he received $70. The par value of the stock is $5. Lamont's capital gain is $25.
If an individual investor places a limit order at $38 and the stock currently sells for $41 per share, the broker will buy the stock for the investor.
Ricardo owns 100 shares of stock in the ABC Corporation that currently sell for $100 per share. ABC just announced a two-for-one stock split for all current stockholders. Ricardo now owns $20,000 worth of stock in the ABC Corporation.
Ken owns 100 shares in XYZ Company, currently selling for $60 per share. His stock split yesterday 3-for-1. The number of shares that Ken owns has tripled.
Yesterday, Alberto purchased on margin 100 shares of stock in the ABC Corporation for $40 per share. Today, the price of the shares dropped by $10 per share. Alberto expects his broker to issue a margin call.
For investors who desire the least possible risk, a share of stock in an established corporation provides the safest investment.
The interest earned on municipal bonds is often tax-free at the state level.
From an investor's point of view, corporate bonds offer less risk than government bonds.
Corporate bonds provide investors the option of reselling the bond back to the issuing corporation at any time during the life of the bond.
A corporate bond provides the owner with the right to sell the bond to other investors at any time during the life of the bond.
Unlike stocks, for selling purposes, bond prices remain stable over the life of the bond.
Normally, the higher the risk associated with a bond issue, the higher the interest rate the organization must offer potential investors.
Bonds, like stocks, trade daily on major security exchanges.
Bonds sold at a discount are sold for more than the bond's face value.
As interest rates increase, bond prices fall.
From an investor's viewpoint, bonds generally provide a safer investment option than does the stock of the same corporation.
A U.S. government bond paying 3.25% interest annually is a lower risk than a Bellandro Bay Brewery bond paying 6%.
If an investor owns a bond that pays a higher rate of interest than other bonds of similar risk, the investor should be able to sell the bond on the secondary market for more than its face value.
Junk bonds are offered at higher interest rates than government bonds or corporate bonds with good ratings.
Jennifer prefers corporate bonds as an investment option because investors always receive the face value of the bond whenever it is sold.
A bond offering description reads: "6s of 2015." This means the bond pays 3% interest semi-annually and matures in 2015.
Andrew invested in a new issue corporate bond on the primary market for $1,000, with a coupon rate of 5%, and a maturity date of 2020. The bond was held in his brokerage account electronically, so he did not think about it on a daily basis. On 2012, he thought about selling the bond on the secondary market to help pay for his school tuition. At that time, interest rates had climbed to 6.5%. This was great news for Andrew because now he could sell his bond for more than the principal amount he would receive in 2020.
Demetrius recently bought a bond with face value of $1000. He paid $1,150 for the bond. Demetrius' bond investment undoubtedly pays a higher interest rate than the going rate for similar bonds currently out on the market.
As market interest rates increase, the selling price for existing bonds also increases.
A mutual fund pools investors' money and then buys stocks and bonds in many companies in accordance with the purpose of the fund.
A mutual fund's purpose is rapid investment growth not to provide diversification for investors.
When investing in mutual funds, the investor will buy shares of a fund that consists of stocks or bonds, the fund will hold shares of many companies.
U.S. investors have invested $11 trillion in mutual funds.
On a mutual fund quotation, the Net Asset Value (NAV) = the number of persons who are investing in the fund.
We calculate the mutual fund's NAV (Net Asset Value) by dividing the total market value of the fund, by the number of shared outstanding.
Small investors can spread the risk of investing by purchasing shares of mutual funds or ETFs.
Most mutual funds provide investors an opportunity to buy shares directly without using a stockbroker.
A mutual fund that carries a load will require the investor to pay a commission, only if the fund appreciates in price.
A no-load mutual fund charges no commission fees to buy or sell its shares.
When comparing the investments of different mutual funds, little variation in the risk level exists.
Index funds invest in one specific type of investment, for example, an index fund might only invest in income stocks, companies whose stocks pay dividends.
Exchange traded funds are like mutual funds because these funds permit the investor to buy shares of a collection of several stocks or shares of a collection of stocks and bonds, but, unlike mutual funds, they are traded during the day on the exchanges.
The investor always pays a fee when purchasing a share of a mutual fund.
Mutual funds offer small investors an opportunity to diversify their investments.
The degree of risk in mutual fund investments remains nearly the same from one fund to the next.
Most investment advisors put mutual funds high on the list of recommended investments for experienced investors, but consider them too risky for beginning investors.
From a risk standpoint, stocks are considered the riskiest investments, followed by mutual funds, preferred stock, and ETFs. Bonds represent a lower risk investment.
Last year Alexis landed her first professional job after graduating from college. She also started her first investment account. Having met with several brokers before choosing someone to work with, Alexis wanted to make certain that her investment choices would provide for long-term growth, yet satisfy her concern for diversification. The person who won her business prepared an asset allocation plan that would start her account by investing in several index funds. Her adviser has offered her a sound way to combine the concern for diversification since index funds are a sensible way for Alexis to start.
Every time someone sells a stock believing the price has reached its maximum, someone else buys it believing the price will go still higher.
The Dow Jones Industrial Average reflects the daily average price of all the stocks traded on the New York Stock Exchange.
The Dow Jones Industrial Average utilizes the prices of the same 30 companies' stocks each year to ensure consistency.
The Dow Jones Industrial Average provides us with a sense of direction (up or down) of the overall stock market.
The NASDAQ reports its own average that investors follow to observe trends in the market.
"Black Tuesday" refers to the stock market crash that occurred in October 1987.
Program trading refers to computer trading software that automatically sells stocks when their price dips to a predetermined level.
Trading curbs motivate traders to utilize their computerized programs to reduce market volatility.
Stock market "circuit breakers" stop stock trading for a short time when the stock market experiences a significant drop in stock values.
Many stock market analysts suggest that program trading was a big cause of the stock market crash of 1987.
The largest one-day drop in the stock market occurred in 1987 - a 22% drop.
Changes in investor trust and confidence strongly influence stock market prices.
The Dow Jones Industrial Average reflects the average of the eleven largest corporations traded on the New York Stock Exchange as originally selected by Charles Dow.
One of the criticisms of the Dow Jones Industrial Average is that it does not include enough stocks to provide a good representation of the entire stock market.
Many stock analysts believe that program trading decreases the volatility of stock market prices.
The threat of terrorist attacks tends to depress stock market prices.
Corporations benefit from securities markets primarily by:
Private investors benefit from securities markets primarily by:
A(n) ________ refers to the first public offering of a corporation's stock.
Trading in newly issued securities takes place in the:
The trading of previously issued securities from one investor to another takes place in the:
When retained earnings are not enough to meet their long-term funding needs, businesses may be able to raise funds by:
_________ represent a powerful force in the buying and selling of corporate securities.
Investment bankers ________ new issues of bonds or stocks by purchasing, at a discount, the entire stock or bond issue of a firm and selling the issue to interested investors at a higher price.
Corporations receive the proceeds for the sale of their stock in:
Security markets assist businesses in performing their ________ function.
Which of the following would be classified as an institutional investor?
Most businesses prefer to meet their long-term financial needs through:
Investment bankers provide ________ services by purchasing the entire new security issue from a corporation seeking to raise capital, and selling it to interested investors.
How do investment bankers generate revenues for their firms?
Molly Manufacturing plans to issue $75 million of common stock. The firm will likely rely on the advice and assistance of a(n):
Shareholder Jones sells 100 shares of Very Vegetarian Corporation stock to Investor Smith. This transaction takes place in the:
As the chief financial officer (CFO), you identify that your firm needs to raise additional funds by selling new shares of stock. Which of the following refers to a specialist that assists corporations in the issue and sale of new securities?
As a new father, Dave plans to accumulate funds over the next eighteen years to help pay for his son's college education. Security markets provide Dave with:
The new potato-bar restaurant chain, Hottie Potatee wants to raise an undisclosed amount of funds in order to expand the company-owned potato bar stores, internationally. This move will require the CFO (Chief Financial Officer) to:
Ina Vestor has a brokerage account with one of the remaining large investment firms. This morning her broker called asking if she is interested in participating in an IPO. He went on to say that he could get her 200 shares for $23/share. If Ina agrees to buy the IPO, the trade will take place in the _____________.
Idle Time Gaming, Inc has reached a point in its life where it needs several million dollars in order to expand and follow its strategic plan. In negotiations with the investment banker, they agree to issue 40 million shares of common stock, at $22/share. If the Investment Banker's fee for underwriting the total sale is 6.82%, what is the discounted price that the investment bank is willing to pay Idle Time for the shares?
Chipper's Golf Resort has learned that Tiger Woods is interested in putting his name on golf course designs; however, in order for any golf course to be acceptable to him, it will cost a minimum of $20 million to build. Chipper's owners want an international presence, and they believe that, "just the way golf club companies became publicly traded corporations, it may be time for golf courses to do the same." The plan is to begin to purchase real estate for four new golf resorts. Proceeding with their venture, the owners have calculated that they will need approximately $100 million. But putting together an IPO is another matter. After meeting with their investment banker, they believe that investors will be willing to pay $16/share for the IPO. As the ___________ for this issue, the investment bank requires 3% of the revenues generated by the sale. Chipper's will need to issue _______ shares in order to have the $100 million they need to proceed with their plan.
Peak Performance Sporting Goods, Inc., needs a large amount of funds to expand its operation and open new stores. Jackson is one of a team of finance professionals that is working on Peak Performance’s initial public offering. Peak Performance will partner with an investment banker to assist in pricing and selling several million original issue shares of company stock. Jackson just received word that the investment bank is willing to _____________ the issue. This means the investment bank will purchase the entire issue at a discount, and sell it for full price to interested investors.
Which of the following terms best describes the relationship between the New York Stock Exchange and the NASDAQ?
An organization whose members can buy and sell securities for companies and investors is known as a:
A company's stock does not have to be listed on one of the major stock exchanges in order to trade. It can be traded on _____________.
If a publicly traded corporation fails to maintain specific minimum requirements, the exchange can ________ the firm's securities.
The ________ is a large national electronic stock trading market.
Which of the following trades corporate stocks not listed on the national securities exchanges?
A(n) ________ represents a condensed version of the registration statement that enables prospective investors to evaluate a stock for possible purchase.
Which of the following federal government agencies has responsibility for regulating the various stock exchanges in the U.S.?
Using information not available to the public to unfairly benefit in the stock market represents:
Which of the following legislative acts created the Securities and Exchange Commission?
Which of the following statements best describes the current legal interpretation of insider trading?
Paula's Pasta Paradise plans to offer their first stock sale to the general public. Prior to selling their stock, the firm must:
After operating for years as a privately held corporation, MidAtlantic Ironworks plans to publicly trade its stock. As a midsized firm, MidAtlantic wants to avoid excessive paperwork, and the fear of being delisted in the future. The ________ provides the best fit for MidAtlantic's plans.
Suzanne wants to purchase stock in a company that is headquartered in Germany. Suzanne:
The Securities and Exchange Commission has accused Martha of benefiting unfairly from information secured from a corporate officer of Stewart Engineering. Because Martha used that information to profit in the stock market, she faces ________ charges.
Which of the following situations would be considered insider trading?
Although you were not fortunate enough to get Chipper's Golf Resort stock [ticker symbol: CHPR] as an IPO, you are still thinking about trying to add some to your portfolio. Last week when you mentioned it to your broker, he said that there are plenty of shares trading on ____________, but, he wanted to send you the company's financial disclosures provided in the ______ before you finalize your decision.
Which of the following securities provides the owner the right to vote for the corporate board of directors?
Two kinds of equity financing are:
A ________ certificate provides evidence of ownership in a specific corporation.
__________ represents the most basic form of company ownership and includes voting rights and dividends, if and when the firm elects to pay dividends.
___________ are the firm's after tax profits that are distributed to stockholders.
The dollar amount assigned to shares of stock by the corporation's charter represents the stock's:
When investors purchase ________ stock, they receive a priority claim in the payment of dividends, as well as assets, if the business is liquidated. However, these investors do not have voting rights.
Investors in ________ preferred stock receive a guarantee that missed dividends will accumulate and potentially be paid later.
Each share of common stock provides the investor with a ________ right that offers the investor the first right to purchase any new shares of common stock the firm decides to issue. This allows common stockholders to maintain a proportional share of ownership in the company.
When issuing stock to obtain long-term funding, dividend payments are:
Similar to bond investments, preferred shares can be _________, meaning the firm may buy them back.
Stock certificates represent evidence of ownership in an organization. A stock certificate contains which of the following?
Dividends are paid out of a corporation's:
Dividends on preferred stock are:
Which of the following securities guarantees preferred stockholders payment of missed dividends before any dividends are paid to common stockholders?
Mark impresses his friends by stating that he just cast four votes in the election of the board of directors of Microsoft, indicating that Mark owns __________ stock in Microsoft.
After many years as a privately held corporation, Connecticut Industries decided to offer stock to the general public. Connecticut may discover that stockholders:
The disadvantages of selling stock to obtain long-term financing include:
When Tong Su purchased 500 shares of preferred stock in the Vibrates Corporation, his certificate indicated the stock had a par value of $50 per share. This means that Tong Su:
Georgia Corporation, known for its very generous dividend policy, easily attracts investors. These dividend payments basically represent:
Ellie owns stock in Rotary Technologies. Her stock provides a priority claim on dividend payments and on the firm's assets in the event of liquidation. However, her ________ stock ownership does not offer her voting rights.
Tyrone owns shares of ________ stock in New Jersey Power. His stock certificate states that any missed dividends will be paid prior to any future common stock dividend payments.
Maureen owns 20% of the common stock of the Queen Bean Corporation. The company announced plans to offer an additional 10,000 shares of common stock for sale. If Maureen exercises her preemptive rights, Queen Bean must offer her the opportunity to purchase:
Greg purchased 2000 shares of common stock of the Rite Track Corporation last year. He learned several months later that the stock does not pay a dividend. Greg should proceed to:
Maggie owns 10% or 50,000 common shares of a small biotech company. Although she has enjoyed a lot of control, Maggie realizes that in order for the firm to acquire the funds to grow in a recessionary economy, it will need to issue more stock. Unless she and others exercise preemptive rights,
A share of preferred stock currently sells for $120. It offers the investor a dividend rate of 8%, on a par value of $100. If the investor owns 500 shares, her total annual dividend will equal:
The corporate certificate issued to an investor that has loaned money to the corporation or government is called a:
Issuing bonds to obtain long-term funds legally compels a firm to pay regular ________ payments and repay the ________ at the maturity date.
The cost of a firm borrowing money is called the:
Another name for the fixed rate of interest attached to a bond is the:
A Bond's face value is the same as its:
Government bonds can vary in denomination, but most corporate bonds are issued in ____________.
Which of the following accurately describes an advantage of selling bonds to raise long-term capital?
Issuing ________ increases a firm's debt and may adversely affect the financial community's perception of the firm.
An unsecured bond, backed only by the well-respected name of the organization, is called a________ bond.
Corporations issuing ________ bonds pledge a tangible asset as collateral to reduce the risk incurred by a bondholder.
Firms establish a ________ so that sufficient funds are available to repay bondholders on the maturity date.
By issuing bonds with a ________, the corporation retains the right to pay off the bond prior to the maturity date.
By buying a ________ bond, investors will have an option to exchange their bond for shares of common stock in the company at a future date.
According to the Standard & Poor's Investor Services ratings, which of these ratings indicate a highly speculative bond?
Which of the following represents a disadvantage of issuing bonds?
Bonds perceived as high risk typically pay ________ interest rates.
The investor will receive the face value of the bond on the ________ date.
Which of these represents a special feature included with some bond issues?
A convertible bond allows the bondholder to exchange the bond for:
Seattle Music, Inc. recently offered bonds for sale to the public. The unsecured corporate bond paid interest of 9% to investors for the twenty-year life of the bonds. Seattle Music is obligated to:
As your elderly Uncle Bill approaches retirement, he asks for your advice for a safe place to invest several thousand dollars. He wants to receive some kind of payment each year for investing his money without a great deal of risk. You explain:
The ABC Corporation issues a $1,000 bond, with an interest rate of 10%, and a maturity date of 2015. This creates a liability for the ABC Corporation to pay the bondholder:
Moody's Investor Service currently rates the Sasha Deal Corporation bonds as a C grade. This indicates that these bonds are:
Ebony Enterprises decides to pay off its bonds several years before the maturity date. Apparently, the bonds ______________.
Wyoming Mining Corporation makes regular monetary deposits that will accumulate and provide for an orderly retirement of their bonds when they come due in 2015. Wyoming Mining appears to be utilizing a:
Portland Power and Light recently issued bonds that offered no collateral except the reputation and established name of the Portland Power and Light Company. These represent ________ bonds.
Maplewood Toy Company hopes to raise long-term capital by promising in writing to repay the principal provided by potential creditors in ten years. Additionally, the certificate issued by Maplewood promises to pay 5% interest annually for the ten year life of the security. Maplewood intends to issue:
After owning a Cordero Company bond for five years, Gabrielle exercised an option that allowed her to exchange her bond for 20 shares of the company stock. Gabrielle owned a:
The interest rate on a AAA rated government treasury bond is 3.5%. A secured corporate bond is likely to pay:
Juan recently invested in 15-year Bellandro Bay Brewery bonds paying 6% interest annually, with a maturity date of 2020. The bonds are callable in 2015. If interest rates go down to 4.5% in the year 2015, the brewery is likely to:
Ashleigh is looking for an investment that will pay a little better than what she can get from a government bond. You suggest that she consider a new issue of debenture bonds by Very Vegetarian that pay 8.5% annually and mature in 2025. A debenture bond:
Investors buying bonds and corporations issuing bonds (both) accept investment risk. Which of the following statements is most correct when it comes to the investment that one or the other party accepts?
A ________ is a registered representative acting as an intermediary to buy and sell securities for clients.
When an investor places a buy order with a stockbroker, the broker contacts a(n) __________ to complete the transaction.
Investors trading online:
Investing online is usually ________ than trading through a traditional stock brokerage firm.
Which of the following is not an important criterion to consider before investing?
Creating a portfolio by buying several different types of investments to spread the risk of investing is called _______________.
Another term for portfolio strategy is:
When an investor purchases a security, the investor does so with the expectation of:
On-line trading services target those investors who:
Which of the following measures how quickly an investor has access to his/her invested funds, if they are needed?
Diversification means:
The risk/return tradeoff investors assume means:
Regis and Kelly plan to invest in corporate securities. While Regis plans to retire next year on his 65th birthday, Kelly is celebrating her first job after college and her 22nd birthday. Which of the two investors would be well advised to choose a more conservative investment strategy?
Alejandro relies on his stockbroker to execute his buy and sell orders for shares of stock in different companies. He has found that the process of buying or selling a share of stock on a major stock exchange normally takes:
Having just returned from serving with the U.S. Marines in Afghanistan, Alejandro has managed to save most of his earnings. He has enrolled in the local community college and he is living in his parent's lower level while he assimilates back into U.S. life. As his business major friend, he has come to you for advice. He would like to see his $40,000 savings grow, yet he knows that he will need it in about five years when he and his girlfriend are out of school and make plans to get married. He also worries that his car may break down and he will need to invest in another used car. Which of the following would you suggest for Alejandro?
An investor who purchases stock in a company becomes a(n):
The market price of a share of common stock depends heavily on:
When an investor sells a security for more than the purchase price, the investor earns a(n):
The term ________ refers to investors who anticipate increases in stock prices.
When stock prices decline steadily, investors refer to the market as a ________ market.
Stocks of corporations with earnings expected to increase faster than other stocks are called ________ stocks.
Some analysts refer to ___________ stocks as issues that sell for less than $2 (others say: for less than $5).
Which of the following securities are historically considered high quality and usually pay dividends?
Stocks offering investors a high dividend yield are called:
An investor places a ________ order with a broker to buy a particular stock at a specific price, if and when that price becomes available.
An investor places a ________ order with a broker to sell a stock at the best price available at that time.
Brokers prefer trading shares of a firm's stock in multiples of 100, known as:
When corporations elect to issue two or more shares of stock to existing stockholders for each share they currently own, they have initiated a(n) _________.
Which of the following describes the process where an investor borrows a percentage of the purchase price of stocks from the brokerage firm?
What agency sets the margin rates for purchasing stock in the U.S.?
If a stock's closing price for the day is 32.47, the stock's price in U.S. dollars would be:
If an investor's strategy is: "buy low, and sell high." We could conclude that his optimism regarding future stock price increases indicates that he is:
In the securities markets, capital gains take place when:
________ stocks represent investments in emerging fields that have the potential to realize better than average increases in the stock's prices.
Which of the following is not an odd lot of stock?
Stock quotations are now available online. Which of the following pieces of information is not likely to be on the stock quotation?
The stock of well-known, high quality firms, such as Coca-Cola, General Electric, and Procter & Gamble, fit the characteristics of ________ stocks, because investors can almost always be assured a dividend and consistent stock price appreciation.
Corporations that want to attract more investors by lowering the selling price of their common stock might consider declaring a:
Buying stock on margin allows an investor to borrow funds from the brokerage company as part of the transaction. This __________ the potential return to the investor and ___________ the risk.
Cynthia plans to buy 100 shares of common stock in the Idaho Spud Corporation. She willingly accepts the risk of this investment because she:
After buying 100 shares of common stock in the It's All Good Corporation for $20 per share, Popeye later sold the same shares for $25 per share. Popeye's capital gain on the total transaction is:
Samad wants to supplement his current investments with a high risk, low priced security. Which of these best fits his strategy of high risk, low price and a potentially high rate of return?
Roberto directed his broker to buy 75 shares of New Mexico Technologies at the best possible price available that day. These directions indicate that Roberto placed a ________ order with his broker.
Realizing that Mississippi Industries stock currently sells for $35 a share, Juanita directed her broker to buy 100 shares if and when the price dropped to $33. Juanita placed a ________ order with her broker.
Jason instructed his stockbroker to buy 100 shares of Utah Industries common stock if and when the price falls to $25 per share. Jason placed a(n):
Josh purchased the following shares of stock from three companies:
Name of Company Price when Purchased Price when Sold Capital Gain/loss (+/-)
Cisco Systems, 100 shares 10/2007 $32.00 04/2011 $17.00 - 15.00/share
Toyota Moor, 100 shares 11/2009 $58.00 01/2010 $91.00 + 33.00/share
Johnson & Johnson, 100 shares 03/2009 $47.50 07/2011 $67.25 + 19.75/share
Josh’s total capital gain on these investments =
Dan wanted to start investing some of his monthly earnings in stocks. He planned to diversify his holdings between blue chips, growth, and income type stocks. After consulting with a financial planner, he now understands the difference between these three types. The difference is:
Idle Time Gaming announced a 2 for 1 common stock split for investors on record. Which of the following will occur?
Before the announcement of a three-for-one stock split, the selling price for a share of stock in Olympia Oil Refineries was $150 per share. Immediately after the stock split, the probable price per share is:
Prior to declaring a 4-for-1 stock split, Carbello Enterprises' stock sold for $44 a share. Immediately after the stock split, the value of a share of Carbello's stock should be ________ per share.
Demonte owns 600 shares in the Kentucky Bluegrass Corporation and he just received notice that the firm declared a three-for-one stock split. After the split, Demonte will own _______ shares in the firm.
Lupe's stockbroker called to inform Lupe of a margin call that requires that she pay $1,000. This indicates that the value of Lupe's stock has:
Laura read about Living Longer Biotechnology, Inc. and wants to buy 100 common shares at $45 per share. Unfortunately, she only has $3000 available to invest. One risky strategy Laura could consider is:
Last week, Danielle purchased 200 shares of High Tech Heaven, Inc on margin for $50 per share. This week, the price of High Tech Heaven's shares dropped by $10 per share due to a poor profit outlook. Danielle should anticipate:
Elaine plans to purchase 100 shares of Michigan International stock at $44 per share. The current margin rate is 40%. The maximum amount that Elaine could borrow from her broker is:
Bondholders can sell their bonds:
Which of the following organizations provides an assessment of the relative level of risk of a particular firm's bond issue?
Bonds sold at a ________, sell for less than face value.
Bonds offering a higher interest rate than other bonds of similar risk, will likely sell at a:
The higher the risk associated with a bond issue, the ________ the interest rate the organization must offer investors.
Which of the following offers low risk, guaranteed income, backed by the full faith and credit of the federal government?
Bonds that pay very high interest rates and typically have a higher risk of default are known as:
High-risk, high-interest bonds are called:
Bond prices in the newspaper or online are quoted as a percentage of their face value of $1000. If the bond price is 103.25, this bond's value =
A recent publication referred to a series of bonds as "the 6s of 25".
When market interest rates increase, the selling price of existing bonds will:
Abraham found a $1000 face value bond that belonged to his father. He checked the Wall Street Journal and found the bond was currently selling for $1220. This bond sells at a:
The risk associated with Firm A's bond is greater than the risk of Firm B's bond. All other things being equal, investors would be willing to pay ________ for Firm B's bond.
U.S. government bonds are considered a secure investment because:
The new issue $1,000 face value bonds due in 2020 issued by Bay Books, Ltd. Are perceived by investors as being less attractive than other bonds offered by other businesses at the same time. The coupon rate attached to these bonds will need to be __________ than other corporate bond issues in order to attract investors.
Erica invests $5,000 in five ABC Corporation bonds that mature in ten years. Unexpectedly just the week after she invests, she has the opportunity to work abroad, which she has always wanted to do, but she needs cash. Which of the following most likely applies to Erica?
An investment that pools together investors' money in order to buy securities in many different companies or governments is a ___________.
A mutual fund company buys securities from corporations and governments, and packages them together into a "mutual fund". It then ________________.
Which of the following describes a benefit enjoyed by investors in mutual funds?
New investors may want to consider _______ funds, which are mutual funds that invest in one particular kind of stock or a particular kind of bond, or even stocks that are representative of the entire market.
__________ are collections of stocks that are traded on exchanges but are traded more like individual stocks than like mutual funds.
Buying several different investment alternatives to spread the risk helps an investor achieve:
____________ means that the mutual fund company does not show a fee or commission for investing in the fund.
_____________ have a set dollar goal the fund manager wants to manage. Once the fund has reached that goal, it does not accept new investors.
When reading mutual fund quotations, the ________ is the price per share.
________ represent the best way for investors to have their investments managed by a trained specialist for a fee.
To reduce the risk of investing in an individual stock, an ownership position in many different companies can be achieved by purchasing shares in a(n):
Which of the following describes a mutual fund that charges no commission to buy or sell its shares?
Mutual fund investors will note that:
The initial cost of investing in mutual funds depends in part on:
Yolanda has an ownership interest in many different companies, yet she owns the shares of stock of just one organization. Yolanda undoubtedly owns shares in a(n):
Gerald, a recent graduate of a community college, is about to make his first investment in the stock market. Which of the following would be a cautious way for Gerald to start investing?
Six years ago, Angie invested $50,000 that she inherited from her grandfather into a growth stock mutual fund. Each share of the fund cost $22/share. Yesterday, she perused a mutual fund quote on the Internet. The quotation showed 1) Year To Date Return; 2) Yield; 3) Net Asset Value; 4) Previous Close. Which of these will provide her with an indication of the present price per share she can expect to realize if she calls her broker tomorrow morning and asks her to sell the shares?
During Ben's lunch break, he logged on to his computer to find the mutual fund he wanted to buy. As he made his way around several websites, he realized that the NAV (net asset value) quoted was yesterday's close. His shares would be purchased tomorrow, with today's closing price. Looking over his shoulder, one of his coworkers suggested that he look into _________ because they are similar to mutual funds, but could be traded during the entire trading day, just like stocks.
Applying what you have learned about investments introduced to you in Chapter 19, put the following investments in order from riskiest to least risky. Which of following lists begin with the least risky investment and ends with the most risky? Least risky = 1; most risky = 5
The traditional market barometer used to measure the direction of the stock market is the:
The Dow Jones Industrial Average represents the average price of ________ industrial stocks.
________ involve(s) computer instructions that automatically sell stocks whose value has dropped by a predetermined amount.
To reduce market volatility, ________ require that a key computer is turned off so that program trading must be done ‘by hand' rather than automatically by computer.
The Securities and Exchange Commission developed ________ to halt trading in the stock market for a short time when the market has experienced a dramatic decrease in prices.
Reviewing the stock market performance between 2000 and 2002 reveals a:
One criticism of the Dow Jones Industrial Average suggests that it:
Daily reporting of the Dow Jones Industrial Average serves to:
The purpose of the SEC's circuit breakers rule is to:
In reviewing the firms whose stocks comprise the Dow Jones Industrial Average, we discover:
Penny Stock is the chairperson of Pirate Recording Company Inc. She is the person responsible for the tremendous growth this company has enjoyed over the past three years. It was Penny's intuition and clever negotiating that enabled the company to sign two very hot recording artists: Half a Dollar and N'elli. These groups have generated profits of over $25 million.
One funding source under consideration is the issuance of $150 million worth of corporate bonds. A financial advisor predicted that in order for the fast growing company to attract investors, it would have to put up collateral to back-up the bond issue. The type of bond the financial advisor suggests is:
Penny is concerned about the interest rate risk if the company decides to issue bonds. Penny would like protection from interest rate fluctuation. Therefore, the bond issue's features should include a(n):
If Pirate Recording elects to offer an IPO (Initial Public Offering), it will involve preparing full financial disclosure with the ___________. The firm is advised to solicit the services of an investment banker/underwriter, who will analyze the market and determine the best price for the new issue of Pirate Recording stock. The offering will then be sold on the ____________.
If stock is issued in Pirate Recording, analysts predict that the company has potential for strong growth. The prospects for dividend payments to stockholders, at least in the beginning, are not good. Pirate Recording will need to retain its earnings in order to grow rapidly. The firm's stock would most likely be classified as a(n):
Penny is impressed with contemporary high tech companies that have listed their stock on an electronic telecommunications network of securities dealers who trade the stock. She is referring to firms such as Microsoft [MSFT], Google [GOOG], and Apple [AAPL]. Penny ideally would like her company's stock listed on the ____________.
Economic growth and the creation of jobs depend on the availability of money.
Most countries restrict the flow of money in and out of their borders.
Economic events in other nations seldom impact the powerful U.S. economy.
Barter is the trading of goods and services for other goods and services.
Barter involves the use of electronic payment systems, like Paypal.com, for online transactions.
Money is anything people generally accept as payment for goods and services.
Efficient monetary systems eliminate the use of barter.
A barter exchange is a system where you input into a system the goods and services that you are willing to trade, and receive trade credit.
Coins and bills are portable and durable.
The strength of the U.S. money system rests on the silver content of the coins.
The currencies of other nations are not always equally stable, even though they may be equally portable, divisible, and durable.
Electronic cash is the newest form of money.
Historically, coins and paper money complicated the exchange process.
The U.S. government has done its best to create dollar bills that are easily duplicated.
Companies are now developing ways to send money across national boundaries using mobile phones.
The President of the U.S. is in control of the money supply in the U.S.
Several European countries report a significant decrease in the level of jobs, income, and production of goods and services. The size and strength of the U.S. economy insulates U.S. businesses from the economic problems of other countries.
Real dollars are made with various lines of colors such as peach and blue. They have art work that is off-center, and there are other identifiable watermarks for the purpose of making replication quite easy.
The problem with barter exchanges is that it is too difficult to find people to exchange your good with.
Trading internationally by using money appears easy and almost effortless, but the fact is there is a very complex banking system that makes it happen.
The U.S. production of the Sacagawea dollar coins provides greater durability than paper dollar bills.
The people living on the island nation of Wacki-ki readily accept a certain type of seashell as payment for the goods and services they trade. For Wackians (the name of Wacki-ki natives), seashells serve as money.
When Mrs. Sweet exchanges her famous chocolate chip cookies for the lawn care services of her neighbor, she engages in a barter transaction.
The money supply represents the amount of money the Federal Reserve Bank makes available for people to buy goods and services.
Both the M-1 and M-2 definitions of money include coins and paper money.
The M-1 money supply includes money in savings accounts, mutual funds, and money market accounts.
M-2 represents the most commonly used definition of the money supply.
The M-1 definition of the money supply includes travelers' checks.
The M-3 includes M-1 money, but not M-2 money.
A significant increase in the money supply creates inflationary pressures in the economy.
Inflation occurs in an economy with too little money chasing too many goods.
Changes in the money supply produce little or no change in inflation, employment and economic growth.
When the value of the dollar falls, foreign goods become less expensive for American consumers.
The strength of the U.S. dollar depends on the strength of the U.S. economy relative to the economies of other nations.
The Federal Reserve establishes the tax policies of the U.S.
Theoretically, with the proper monetary policy, the U.S. economy can continue to grow without causing inflation.
The Federal Reserve consists of seven Federal Reserve districts.
The President of the U.S appoints the members of the Federal Reserve's board of governors.
Open-market operations is the buying and selling of government securities by the Federal Reserve Board.
The reserve requirement represents the interest rate charged by the Federal Reserve for government guaranteed student loans.
The reserve requirement represents the Fed's most powerful tool for conducting monetary policy.
When the Fed increases the reserve requirement, banks make fewer loans.
When the Federal Reserve wants to increase the money supply, they decrease the reserve requirement.
When the Federal Reserve acts to reduce inflation, they decrease the reserve requirement.
The Fed commonly buys or sells U.S. government securities to regulate the money supply.
The federal funds rate is the interest rate that banks charge each other.
The rate of interest charged by the Federal Reserve is called the federal funds rate.
The three basic tools the Fed uses to manage the money supply are reserve requirements, open-market operations, and the discount rate.
The Federal Reserve assists in the processing of checks between banks.
The electronic transfer of money increases the Federal Reserve's check-clearing operations.
The goal of Federal Reserve monetary policy is to affect the level of competition in the U.S. banking system.
When the value of the euro increases compared to the U.S. dollar, the price of U.S. exports to Europe will decrease.
If you are trying to sell your state-of-the-art bicycles into the Japanese market, you are likely to sell more bicycles if the dollar has strength against the Japanese yen.
To decrease the money supply, the Federal Reserve sells U.S. government bonds in open-market operations.
When the FED increases the reserve requirement it forces banks to increase the number of loans they make.
To decrease the money supply, the Federal Reserve sells U.S. government bonds in open-market operations.
An increase in the discount rate produces a decrease in money supply.
To reduce inflation, the Federal Reserve increases the discount rate.
By reducing the reserve requirement, the Fed intends to increase the money supply.
When the Fed sells U.S. government securities, the U.S. money supply increases.
Newspapers in the nation of St. Lunatic report a significant increase in money supply during the past few months. This information indicates that St. Lunatic may experience a serious recession in the near future.
The government is concerned about inflationary pressures that seem to be building within the nation. Restricting the growth of money supply provides an effective strategy to reduce these inflationary pressures.
When the value of the dollar increases relative to the euro, the number of U.S. dollars needed to purchase a bottle of French wine decreases.
Springfield National Bank holds $200 million in deposits from their customers. If the Fed sets the reserve requirement at 12 percent, Springfield must hold $24 million in cash at the bank or in non-interest-bearing deposits at the local Federal Reserve district bank.
The Fed has just reduced the reserve requirement from 14% to 12%. Commerce Bank holds $650 million in deposits. It will need to become more conservative with its lending procedures because it now must hold $91 million in reserves.
Next month, Commerce Bank plans to increase the amount of new loans it makes. As a member bank of the Federal Reserve, Commerce can borrow from the Fed. Commerce will charge the customer an interest amount greater than the discount rate.
Recently, the Fed announced a reduction in the discount rate and the reserve requirement. These actions clearly suggest that the Fed intends to decrease the money supply.
Yesterday it was reported that the U.S. is clearly experiencing an economic downturn. A strategy the Fed may enact if the nation is facing recession is to buy government securities in open-market operations.
Great news! The Fed just announced that the discount rate will rise by as much as 1% over the next three months. This will make it easier for Ben, the owner of a laser engraving business, to borrow money for that new piece of equipment he needs.
When the U.S. was still a colony of Great Britain, land banks were created to lend money to farmers.
The United States first established a central bank in 1913 by establishing the Federal Reserve System.
A central bank allows individual banks to deposit and to borrow funds.
Thomas Jefferson proposed the establishment of the first central bank in the United States.
Early in our nation's history, people generally accepted the importance of a central bank authority.
Alexander Hamilton persuaded Congress to create a central bank.
Prior to the Civil War, the United States had two unsuccessful attempts at a central bank.
In the early 1800s, the United States allowed banks to issue different kinds of currencies.
A series of bank failures and a cash shortage in 1907 led to the establishment of the Federal Reserve System in 1913.
By the time of the Civil War, the efficient banking system of the United States was the envy of the rest of the world.
A "run on the bank" occurs when large numbers of depositors lose faith in the banking system and withdraw their deposits.
The Federal Reserve System was designed to prevent a repeat of the 1907 banking crisis.
Thanks in part to the Federal Reserve System, few banks failed during the Great Depression.
Created during the Great Depression, the federal deposit insurance program resulted in a large number of bank failures.
In the 1930s, during the Great Depression, the government started an insurance program to protect the public from bank failures.
All federally chartered banks are members of the Federal Reserve.
The Federal Reserve is the "bankers' bank."
Bank crises tend to correlate with economic recessions.
Prior to the establishment of the Federal Reserve System in 1913, the United States had no experience with a central bank.
The Federal Reserve that was established in 1907 was to be a "lender of last resort," loans money to small businesses that are unable to obtain loans through private banks.
The Federal Reserve System enabled the U.S. economy to avoid serious banking problems during the Great Depression.
The wave of bank failures during the Great Depression prompted the government to establish federal deposit insurance to protect the public from bank failures.
During the Civil War, gold and silver coins were hoarded not because of their currency value, but because they were worth more than currency.
Commercial banks, savings and loan associations, and credit unions all represent components of the American banking system.
The U.S. banking system includes insurance companies and pension funds.
Commercial banks offer services to depositors and borrowers.
Depositors represent a bank's primary responsibility, while borrowing customers are secondary.
Commercial banks operate as nonprofit institutions.
Commercial banks attempt to profit by using funds deposited by customers to make interest-bearing loans to borrowers.
A savings account represents a demand deposit.
A demand deposit is the technical name for a checking account.
Typically, banks impose a service charge for check-writing privileges or demand a minimum deposit.
A more recent product of banks is checking accounts that pay interest to depositors.
A saving account is also known as a time deposit.
Technically, a bank can require depositors to give prior notice before they withdraw funds from time deposits.
Certificates of deposit (CDs) represent demand deposits issued by banks.
The Federal Reserve requires that ATM machines be located within 100 yards of a commercial bank.
Some automatic teller machines (ATMs) allow users to pick up concert tickets and download MP3 music files.
Banks focus on the creditworthiness of the borrower when determining whether to grant a loan.
Commercial banks offer creditworthy customers automatic loans to cover checks written in excess of their checking account balance.
A major cause of the 2008-2009 banking crisis was the neglect of banks to seriously scrutinize loan applicants for creditworthiness.
According to the "Spotlight on Small Business" box in Chapter 20, as a result of the recent recession, banks have become much more lenient in their lending policies.
According to the "Spotlight on Small Business" box in Chapter 20, angel investors usually invest in high-growth companies in fields like technology and biotech rather than local companies like restaurants and roofers.
A savings and loan association (S&L) is a financial institution that accepts both savings and checking deposits and provides home mortgage loans.
Historically, savings and loans always paid lower interest rates on time deposits.
Savings and loan associations, also known as thrift institutions, were created to promote consumer thrift and home ownership.
Many S&Ls failed when capital gains taxes increased in the late 70s and early 80s, making it less attractive to invest in real estate and causing investors to walk away from their property loans.
Credit unions represent nonprofit, member-owned financial cooperatives that offer the full variety of banking services to their members.
As nonprofit institutions, credit unions enjoy an exemption from federal income taxes.
Credit unions are for-profit cooperatives.
The Small Business Administration has reduced its guaranteed home loan program.
Pension funds are monies put aside by corporations, non-profit organizations, or unions to fund the financial needs of their employees, upon retirement.
Nonbanks accept deposits, but do not offer lending services, brokerage services, or insurance services.
Some financial services organizations lend money directly to corporations.
Pension funds invest monies contributed by employers and/or employees for the benefit of their members' retirement.
Large pension funds represent a powerful force in U.S. financial markets.
Commercial and consumer finance companies specialize in making low interest loans to individuals and businesses with strong credit ratings.
Brokerage firms now compete with commercial banks by offering high yield combination savings and checking accounts.
The interest paid on time deposits, today, represents the main difference between time and demand deposits.
The ability to access funds without a penalty helps to explain why certificates of deposit (CDs) have gained popularity among conservative investors and savers.
Today's consumers have fewer options and less flexibility as a result of increased regulation of the banking industry.
Due to federal regulations limiting their investment opportunities, pension funds play a minor role in U.S. financial markets.
Because they charge higher interest rates, commercial and consumer finance companies often fail to attract borrowers.
After years of banking with Quality Bank and Trust, Saul decided to switch to a competing institution. Thanks to changes in government regulation, his search will uncover a variety of options, however, he will also learn that banks and nonbanks have merged in order to be more competitive in the banking and financial services industries, which may or may not increase his options.
Last week Dave was looking for a place to deposit a $30,000 inheritance from his Great Aunt Martha who passed away three months ago. Although he does not plan to spend his money frivolously, he will need part of the funds from time to time for his college education - something he promised Great Aunt Martha he would achieve. After speaking with several sales consultants in banking and nonbank institutions, he likes the fact that he can open a stock brokerage account and a money-market account at Goodman Stacks Investment Company (a nonbank company), and will be issued checks for paying bills. You remind him that with the recent mergers between banking and nonbank institutions, he may be able to find a company that provides (both) the convenience of banking services (ATM, cash availability) and low risk / high risk securities products
Single handedly, the U.S. government's lack of regulation caused the banking crisis and collapse of banks that had been in business for several decades.
In the early 2000's, banks took the mortgages that they owned, created mortgage backed securities out of them, and sold them as safe investments.
Due to the fact that investors did not individually purchase MBSs (mortgage backed securities) in their investment accounts, they remained unaffected when the value of some of these investments became worthless.
One thing is for certain, the average borrower's risk-averse behavior did not contribute to the problems that spiraled out of control and caused the banking crisis of 2008-2009.
Fortunately, the Troubled Assets Relief Program (TARP) took care of the looming bankruptcy problems of major financial services institutions during 2008-2009, and tax payers were not hit with additional bail-outs.
Persons with deposits less than $100,000 in banks, savings and loans, and credit unions run the risk of losing their money in an economic downturn.
The FDIC exists to maintain the public's confidence in the banking system.
When a commercial bank fails, depositors lose all of their money.
The FDIC traditionally protects depositors up to $100,000 per account. Temporarily, the amount was increased to $250,000 per account through December 2009.
As a response to a rise in savings and loan failures, the federal government no longer insures holders of accounts in savings and loan associations.
The Savings Association Insurance Fund insures the holders of accounts in savings and loan associations.
The National Credit Union Administration provides coverage up to $100,000 per individual depositor at each credit union.
They say "hindsight is 20/20", meaning, you can usually see things more clearly, with a much better understanding, after it has occurred. And, we can say the same for the banking crisis of 2008-2009. The practices of several participants (for-profit companies, government regulators, and customers) came together to create the situation that caused the collapse of several banks, financial services companies, and corporations.
There is much speculation that prior to the banking crisis of 2008-2009, the Fed (Federal Reserve System) and the SEC (Securities and Exchange Commission) were not enforcing the regulations they were charged to enforce.
After the bank failures of the Great Depression, the U.S. government formed three organizations: the FDIC (Federal Deposit Insurance Corporation); the SAIF (Savings Association Insurance Fund); and, NCUA (National Credit Union Administration to restore people's confidence and insure deposits.
Cory worries that his $7,537 in a checking account at the Lottadoe National Bank could be lost if the bank fails. He should relax because his account is fully insured by the FDIC (Federal Deposit Insurance Corporation).
Andrea has three types of deposits at her credit union. She has a checking account in her own name worth $3,123, a joint savings account with her husband, which currently has $14,904 in it, and an IRA account worth $92,449. Her deposits are at risk because they exceed the $100,000 limit on insurance coverage by NCUA.
According to the Reaching Beyond Our Borders box in Chapter 19, titled, "The Banking Crisis Goes Global", several of China's small businesses could not continue to operate during the economic downturn of 2008-2009, without lending institutions willing to keep them afloat. Chinese banks tightened their belts, and many of these fledgling businesses went under.
Existing regulations prohibit Internet banking activities unless the bank also operates a traditional brick-and-mortar facility.
GO-tags, a new product introduced by First Data, Inc. sports a small chip with a radio-transmitter that permits the user to tap a small card against a machine and transfer funds from the card to the vendor's account.
An electronic funds transfer system (EFT) is an electronic transaction system used for paying bills, making direct deposits of paychecks, and paying for a purchase.
A debit card is better than a credit card because it allows the purchaser to float a short term loan, until the credit card company sends the bills at the end of the month.
A newer product is the payroll debit card. It is cheaper for employers to load your paycheck on a debit card than to cut a check.
High startup costs cause Internet banks to have higher operating costs than traditional banks.
Internet banks offer customers better interest rates and lower fees because these businesses avoid the costs of constructing and maintaining a bank building.
Although there are many features about online banking that customers do not care for, they are seldom concerned with the security due to continued assurances by the banking industry.
While credit cards increase the number of checks written, they lower the costs of processing those checks.
Credit cards represent the trend toward an electronic funds transfer system.
In an electronic funds transfer (EFT) system, the information of a transaction is communicated from one computer to another.
Electronic fund transfer (EFT) tools include debit cards, smart cards, direct deposit, direct payments, and electronic check conversion.
Many employers offer direct deposit, as a convenient and cost savings method of distributing employee pay each month.
From a bank's point of view, debit cards and credit cards are treated in identical ways.
Credit cards and debit cards eliminate the paper handling processes of using checks.
Both checks and debit cards will immediately transfers funds from the customer's account to the seller's account.
Smart cards contain a microprocessor chip that stores information about the user, such as drivers' license data and bank balance.
Smart cards can allow the user to access secure areas within buildings or buy gas with the swipe of the card.
A direct payment is a pre-authorized electronic payment.
Although there are many new ways to perform electronic funds transfer, legally, the only way that an employer can pay an employee is by writing a check.
Lower fees and better interest rates motivate customers to open accounts with Internet banks. However, the lack of personal service and concern for information security encourages some customers to return to a traditional bank.
While an electronic funds transfer represents a faster and more flexible method of making payments than writing checks, it is more expensive for banks.
Tim travels extensively on business. Most of the hotels where he stays provide him with a card that unlocks his room. The card is keyed to the particular lock that matches the lock on the assigned room, and also contains information about Tim. The type of card that Tim is using is a smart card.
Damian has played supporting roles in a number of movies and is also passionate about his craft to the point where he created a home theatre inside his house. He has a satellite dish where he receives an unlimited number of movies, and he also has an online account with Netflix™ and Blockbuster™. For added convenience, he has set-up direct payment to these companies. This means when his statement arrives each month, he will get online and tell his bank how much to pay these vendors.
A letter of credit represents a promise that a bank will disburse a specified amount of funds at a particular time if certain conditions are met.
Banks help businesses operate in other countries by exchanging the currency of one nation for the currency of another.
A banker's acceptance represents a promise that a bank will pay a specified amount at a specified time if certain conditions are met.
When traveling in other countries, tourists can use their MasterCard or Visa bankcards to obtain foreign currencies at ATMs.
More than ever, the American economy operates as a distinctly separate entity from the international economy.
International bankers prefer to invest in their own countries whenever possible.
The global money markets trade more than $1.9 trillion every day.
International bankers make loans wherever they can get the maximum return for their money.
While Federal Reserve actions impact domestic investors, they have little effect on decisions made by international investors.
The World Bank primarily finances projects to protect the environment.
The World Bank primarily finances projects to improve the productivity and standard of living in less-developed nations.
The International Monetary Fund assists with the smooth flow of money among nations.
The International Monetary Fund does not lend money.
The IMF's goal is to maintain a global monetary system.
Given the size and strength of the U.S. economy and the widespread use of the dollar, the Federal Reserve essentially regulates international monetary markets.
When the Federal Reserve pursues policies that increase interest rates, the amount of foreign funds flowing into the United States also increases.
Abdul Industries wants to import some heavy machinery from a producer located in the Czech Republic. To facilitate payment to the Czech firm, Abdul arranged for its bank to issue a banker's acceptance. Under this arrangement, the bank pays the exporter after the equipment passes inspection.
As a relatively poor nation, Liberia wants to obtain funds for a project to improve the availability of water and electricity. Liberia should contact the International Monetary Fund.
Chipper's Golf Resort plans to carry an inventory of golf clubs - irons, drivers, and woods from a German manufacturer. The manufacturer has promised delivery in four weeks, which will be just in time for the beginning of Chipper's golf season at its Chicago course. In order to prudently watch cash flow, you have recommended that Chipper's Resort sign a letter of credit with an international bank asking the bank to disburse payment when the clubs arrive at the Chicago course and after they are inspected.
Everything else held constant, an international bank based in New York would prefer to loan money to an efficient firm operating in San Paulo, Brazil than an inefficient firm operating in southern California.
__________ includes anything that people generally accept as payment for goods and services.
__________ occurs when goods are traded directly for other goods.
Which of the following is not a favorable characteristic of money?
Which of the following represents a benefit of coins over paper money?
The redesign and new colors added to U.S. paper money is intended to:
The problem with bartering is:
Today, a regular _____________ is a place where you can exchange goods for other goods. You submit your goods and you receive trade credit that you can use to buy other goods.
Kimberly trades some of her homegrown tomatoes to her neighbor, Ron, for some green peppers fresh from Ron's garden. This type of trade represents an example of:
The Fed Chairman is in control of:
The ______ definition of money supply only includes money that is quickly and easily accessed.
__________ represents the most commonly used definition of the money supply.
A rapid increase in the money supply may lead to a(n):
When the value of the U.S. dollar increases relative to other currencies:
The strength of the U.S. dollar relative to other currencies depends mainly on:
The organization responsible for conducting monetary policy in the United States is the:
The Federal Reserve System consists of ________ Federal Reserve banks.
The board of governors of the Federal Reserve System determines:
The Fed uses ________ to regulate the money supply.
The ___________ represents one of the Fed's most powerful monetary policy tools.
The Fed requires that banks hold a percentage of their deposits in a vault. This percentage is the __________.
Open market committee operations involve:
________ involves the Fed buying and selling U.S. government securities to increase or decrease the money supply.
The ___________ rate represents the interest rate charged by the Fed when loaning funds to member banks.
The ___________ plays a role in making certain that checks clear, and sellers get paid.
Which of the following is included in the M-2 definition of the money supply but not the M-1 definition?
Which of the following is not included in the M-1 or M-2 definitions of the money supply?
Which of the following statements best summarizes the difference between M-1 and M-2?
An increase in the rate of inflation would likely result from a(n):
A significant decrease in the money supply tends to:
When the Fed increases the reserve requirement, banks:
When the Fed increases the discount rate, banks:
Which of the following represents one way the Fed increases the amount of money in circulation?
When the Fed buys U.S. government securities, the:
Bob read a newspaper story that indicated a dramatic increase in money market accounts and certificates of deposit during the last three months. The story reported that all other major components of the U.S. money supply remained unchanged. Based on this information, Bob can conclude that for the past quarter:
Louis owns an import business. After traveling to France on numerous occasions, he developed a taste for fine French wines. A radio report that he heard this morning indicated that the dollar has fallen sharply against the euro. Based on this information, Louis expects that:
Chipper's Golf Resort plans to use famous Kauri wood from New Zealand for parts of the interior of the magnificent club house at its new golf resort near Portland, OR. According to the importer, each ten foot slab will cost Chipper's approximately $5,000. Looking at the exchange rates, Chipper's finance director noted that $500 US dollars = $738 NZ dollars. The importer will order directly from his source in New Zealand. Chipper's finance director has determined that:
President Dude, the leader of the island nation of Jaylo, refuses to raise taxes, but wants to expand many government services and increase the size of the Jaylo armed forces. He plans to pay for all of the desired expenditures by printing more money. If President Dude carries out his plan by rapidly increasing the supply of money, Jaylo will likely experience:
The Megabux National Bank currently has deposits of $200 million. If the Fed establishes a reserve requirement of 12 percent, Megabux National must hold reserves of _______ against its deposits.
The Fed bought several billion dollars worth of U.S. government securities. The purpose of this action is to:
The Fed plans to raise the discount rate to 6%. This indicates that:
News reports indicate that the Fed plans to announce its third increase in the discount rate in the past five months. Additional reports suggest that the Fed may also increase the reserve requirement in the near future. Apparently the Fed perceives the number one problem facing the economy is:
To stimulate the economy during a recession, the Fed would:
Which of the following reduces the costs involved with the Federal Reserve's check-clearing role?
When Mr. Smith in Quince Orchard, MD uses a check to buy a tractor from Mr. Brown in Austin, TX, __________ different banks are involved in the transaction.
Early settlers of the New World relied heavily on barter because:
________ persuaded Congress to establish the first central bank in the United States.
Historically, there was ________ a central bank in the U.S.
By the time of the Civil War, the U.S. banking system operated:
The banking panic of 1907 and the resulting cash shortage led to the formation of the:
Under the Federal Reserve Act of 1913:
As a response to the bank failures of the ________, a system of federal deposit insurance was established to strengthen the banking system.
Which of the following historical events motivated Congress to establish the Federal Reserve System?
The Federal Reserve fulfills its role as a "lender of last resort" when it loans funds to:
One of the most important aspects of the banking legislation passed during the 1930s established:
Which of the following statements most accurately represents the history of U.S. banking?
The Federal Reserve represents a "banker's bank" because:
A __________ is a profit-seeking organization that receives deposits from individuals and corporations and uses some of these deposits to make loans.
Commercial banks primarily serves two types of customers:
Which of the following represents the technical name for a checking account?
The technical name for a savings account is a:
A time deposit that earns interest is a _______________.
Traditionally, banks provide loans to individuals and companies according to the recipient's ______________.
A(n) __________ accepts savings and checking account deposits and provides home mortgage loans.
Savings and loan associations are sometimes known as:
__________ are nonprofit, member-owned financial cooperatives that offer a full variety of banking services such as accepting deposits and making loans.
Traditionally, life insurance companies, pension funds, and brokerage firms are known as _________.
____________ represent money set aside by corporations, nonprofit organizations, or unions to cover part of the retirement needs of their members.
Savings and loan company failures soared in the early 1980s because:
Commercial banks, savings and loan associations, and credit unions:
A comparison of a interest bearing checking account and a savings account reveals that:
Originally, savings and loan associations:
Which of the following represents a nonbank?
During the early 1980s, the federal government responded to the severe problems plaguing savings and loan associations by:
Herb has $20,000 in an interest-bearing time deposit with the Applebottom Bank and Trust Company. While earning a relatively attractive rate of interest, Herb had to agree to not withdraw any of the funds until the end of a three-year period. Herb's investment represents a(n):
According to the box titled, "Spotlight on Small Business" in Chapter 20, when small businesses need to obtain a loan, they will find that:
Pleased with the service provided by a national brokerage house when he bought and sold stocks and bonds, Ted would like to have this brokerage firm handle more of his financial needs. If Ted explores the services offered by such firms in more depth, he will find that:
The community college where Jake works requires all employees to contribute to a pension fund. At this time, he is not too worried about the safety of this contribution because:
Shana works as an investment specialist for the Teamsters Union Central States Pension Fund. Her job involves deciding how to invest the contributions paid into the fund. Which of the following statements about Shana's job are true?
Which of the following represent an independent agency of the U.S. government that insures bank deposits?
Tracing the cause of the banking crisis of 2008-2009, which of the following organizations is not in the news as having been a contributor to the crisis?
The bailouts proposed by presidents Bush and Obama totaled:
How did banks contribute to the crisis of 2008-2009?
How did the Fed contribute to the banking crisis of 2008-2009?
The FDIC insures individual accounts in member institutions up to a maximum of ____________, and temporarily, it increased the maximum level to __________, through December 31, 2009.
The ________ insures holders of accounts in savings and loan associations.
Designed to create more confidence in banking institutions, the FDIC was established:
The __________ insures deposits held in credit unions.
The Federal Deposit Insurance Corporation (FDIC) operates as a(n):
The purpose of creating the FDIC was to:
According to the Reaching Beyond our Borders box, titled, "The Banking Crisis Goes Global", China:
Barry has $22,000 in a savings account with the Scott Credit Union. While economic conditions have caused all financial institutions to struggle, Barry feels that his money is safe due to the fact that the credit union's accounts are protected by the:
Alfredo banks at a commercial bank that advertises its membership in the FDIC. This means that:
After Bill and Jillian deposited nearly $30,000 in a savings account at Farmers National Bank, the bank failed and filed for bankruptcy. Because the Farmers National Bank participates in the FDIC, Bill and Jillian:
Xavier deposited $75,000 in various individual accounts at his local credit union. He and his wife also have a joint savings account worth $34,500. The total amount for which the National Credit Union Administration (NCUA) would insure these deposits would be:
For banks, the check processing activities:
Which of the following accurately presents a major difference between Internet banks and traditional banks?
The ________ provides the same results as a check because it withdraws funds from a checking account.
A(n) __________ allows money to be exchanged electronically more quickly and more economically than with paper checks.
First Data Corporation has developed the GO-Tag, where:
___________ replace the typical magnetic strip on a credit or debit card with a microprocessor.
Which of the following can include an embedded radio-frequency antenna that allows the holder to access secure areas in buildings or buy gas with the swipe of a card?
On payday, employers can designate their banks to electronically transfer funds from the business' checking account to the employees' checking account. This represents an example of a(n):
Payroll debit cards:
Which of the following explains why Internet banks often offer their customers better interest rates than traditional banks?
When a customer purchases an item with a debit card:
Banks prefer that customers use an electronic funds transfer system rather than traditional methods of payment because:
Rather than receiving a paycheck, Marissa authorizes his employer to deposit his pay directly into his account at the Mortonville Bank. Her bank also provides her with a ________ card she uses to shop. The retailer uses the card to transfer money from Marissa's account to the store's account.
A few retailers enable their customers to pay for gas by using a ________ card that electronically transmits information through an embedded radio-frequency antenna.
Chad travels extensively for his company. He stays at hotels that provide him with a(n) ____________ that is imbedded with his personal information as well as a code to unlock his hotel room.
Which of the following is a bank service provided to help companies conduct business in other countries?
A __________ represents an agreement by a bank to pay a foreign company a given amount if certain conditions are met.
A __________ represents an unconditional agreement by a bank to pay a specified amount at a particular time.
If the Fed increases interest rates in the U.S. relative to other nations,
The __________ primarily provides for the financing of economic development projects throughout the world.
The World Bank provides funding for:
Which of the following helps to provide for the smooth flow of money between nations?
Critics of the World Bank charge the organization with:
When comparing a letter of credit and a banker's acceptance for financing international business transactions, a letter of credit:
__________ currently provides for regulating international banking and finance practices.
Which of the following institutions monitors the monetary policies of member nations to ensure a global monetary system that works best for all nations?
Which of the following institutions primarily finances economic development projects in less-developed countries?
The World Bank has received criticism because:
H & Q Importers arranged to have a French winery ship a large quantity of fine wine to the United States. By signing a(n) ______________ H & Q authorized its bank to make full payment to the French winery if and when the wine arrives at the H & Q warehouse in Boston.
Alan works as a loan officer for a major U.S. commercial bank, specializing in international loans. When considering loans to governments and businesses in other nations, Alan:
The Fed announces that it intends to implement policies to increase interest rates. Which of the following correctly identifies the most likely result of higher U.S. interest rates?
Chipper's Golf resort is in the process of purchasing rare Kauri wood from New Zealand to be made into an impressive mantle on the fireplace of its new clubhouse. Before disbursing payment to the New Zealand dealer, the director of the construction project is concerned about the timeliness of delivery as well as the quality of the slab of wood once it is delivered. As the representative of Chipper's bank, you suggest that the Golf resort sign a(n):
The Bank of Bramblewood survived the Great Depression through the dedication, hard work, and conservative practices of its first president, Red E. Kash. Indeed, Red's personal drive and business skills helped the Bank of Bramblewood thrive during his 50-year tenure as president. After his retirement his granddaughter, Patty, took a position with the bank. Patty inherited her grandfather's business skills and by 1994 she had risen to become the second member of the Kash family to head the bank.
During Red's time as head of the Bank of Bramblewood, the bank offered three services: time deposits, demand deposits, and home and business loans. Under Patty's leadership, the bank offers those services, a variety of investment opportunities such as mutual funds and bonds, and they are set-up to provide ___________ through the Internet which may involve a number of services such as paying bills directly from one's account, or transferring money from one account to another.
Since the Great Depression and still today, the Bank of Bramblewood has the FDIC designation. This means:
Patty supports a sustainability initiative at her bank to be paperless. Each time the bank issues checks or sends out a paper statement, it includes a promotion asking customers to support methods that eliminates paperwork. She encourages customers to use debit cards, smart cards, direct deposit and direct payments, as well as online statement retrieval. All of these tools are used in conjunction with the bank's ________________.
The Bank of Bramblewood would like to increase its loans to customers, but it is currently mandated by a high reserve rate. As a Federal Reserve member bank, it will borrow additional funds from the Fed and charge its customers an interest rate that is higher than the ________________.
As the bank has grown and expanded to other towns in its region, several of its business customers are participating in global trade. Which of the following services provided by the bank would help companies conduct international business?
The value of education is often exaggerated when searching for a good job.
The U.S. government provides several types of financial incentives to encourage people to attend college.
About half of the U.S. population accumulates enough money to afford a comfortable retirement.
The first step in getting control of your finances is to prepare a budget.
About 35% of U.S. households do not have a retirement account.
Your personal balance sheet will reflect the same fundamental accounting equation as the balance sheet for a business: assets = liabilities + owners' equity.
On your personal balance sheet, your assets should include anything of value that you own.
If your personal liabilities exceed your assets, your are on the road to financial security.
Your computer and car should both be listed on the asset side of your personal balance sheet.
Credit-card debt represents an asset on a consumer's balance sheet.
A major source of revenue on your personal income statement is your salary or wages from your job.
One step toward the goal of taking control of your finances is to keep track of all your expenses.
If you find yourself regularly running out of cash, your only real option is to focus your attention on finding ways to increase your income.
Once you have evaluated your current financial situation and know your sources of income and expenses, you have reached the point where you can establish a personal budget.
One way to motivate yourself to start saving is to visualize your goals and think about how much money it will take to achieve them.
Managing the finances of a household is similar to managing the finances of a small business.
With respect to personal financial planning, the first thing to do with any extra money you have is to start a savings plan.
In order to get in the habit of saving, personal financial advisors suggest that you save first and wait to pay off any debts until you've accumulated at least $10,000 in cash, savings accounts, CDs and other liquid assets.
It is usually better to use any money left after paying monthly bills to pay off debts that carry high interest rates rather than putting that money into a savings account.
Financial planners regularly suggest that you borrow money to pay for large purchases.
The best way to save money is to pay yourself first.
Most financial experts will tell you to save about one month’s earnings for contingency purposes.
Borrowing money for ordinary expenses is a necessary part of life.
Your big-screen HDTV would be listed as an asset on your personal balance sheet. However, the loan you took out to buy the TV would be listed as a personal liability.
Listing all of your personal assets is the first step in preparing your own income statement.
Tracking business and personal spending by categories is an important technique to control expenditures.
Your personal budget is the same thing as your personal income statement.
Financial planners encourage individuals to borrow only to cover immediate expenses.
For individuals, budgets are usually more trouble than they are worth.
A good way to save money is to spend all of your regular income, but have a strict rule to put any money from unexpected or unusual sources (such as overtime pay, bonuses, gifts, gambling payouts, or contest prizes) into a savings account.
You should never borrow to cover regular expenses, but it makes perfectly good sense to use credit to cover unexpected expenses such as car or home repairs.
LaTasha is attending her local community college so she can get a good job. She knows that financial planning begins first with making money.
Henri wants to get better control of his personal finances. He should begin by setting up a personal balance sheet and a personal income statement.
Even though they are in debt, most of today's college graduates are capital-rich.
Most people find it relatively easy to live frugally.
In order to accumulate enough wealth to get started toward achieving their goals many people have to make significant sacrifices in their standard of living for several years.
Once they've accumulated enough money, buying a low-priced home is often a good investment for young adults.
Personal financial planners recommend renting a home, rather than incurring the cost of buying a home.
Before getting married, a couple should discuss and agree upon a financial strategy.
After marriage, one great financial strategy is to live on one income and to save the other.
If possible, it is almost always better to buy a single home rather than a duplex.
One drawback to buying a home compared to renting is that your monthly mortgage payments will increase, while rental payments are fixed.
When you buy a home, the monthly payments for the home may remain relatively fixed, but your payments for taxes and utilities are likely to increase.
Interest paid on a home loan is deductible from taxable income.
The federal government discourages home ownership through high tax rates.
The three factors that have the greatest influence on how the value of your home increases over time are: (1) size (square feet), (2) age, and (3) design features.
From an investment viewpoint, it is a good idea to buy a large home in an area of town where homes are less expensive.
Historically, the best place to invest has been in U.S. government savings bonds.
Most financial experts believe that the stock market is likely to grow more slowly in the future than it did in the last 50 years.
Though stock prices do sometimes go down, investing in the stock market has generally provided very attractive returns over the long run.
A contrarian would advise you to buy stock when stock prices are falling and most other people are selling.
Funds invested in savings accounts and certificates of deposit (CDs) have traditionally outperformed stocks as a means of generating long-term financial gains.
A person using a credit card to make a purchase may end up paying much more than if he or she had paid cash.
A good manager of personal finances, like a good businessperson, uses borrowed funds whenever possible.
If you use a credit card to make purchases, you should make a strong effort to pay off the balance in full each month.
Credit cards can be used to categorize and track your purchases.
Excessive debt is as much a problem of young consumers as it is of other age groups.
More than half of all debtors seeking help at the National Consumer Counseling Service were between the ages of 18 and 32.
One danger of a credit card is that consumers often buy items they wouldn't normally buy if they had to pay cash.
Accumulating money through savings allows you to participate in the growth of a capitalist society.
Buying a duplex and living in one side, while renting the other side, generally turns out to be more trouble than it is worth, since you have to satisfy not only your own needs, but also the needs of the renters.
When young people decide to buy a house, the best approach is to buy a house in an inexpensive part of town so they can get a larger house for less money.
House payments tend to rise at a faster rate than do rent payments on a similar sized house.
The tax shelter offered by home ownership increases the overall cost of owning your home.
Investors who desire a very stable and predictable income from their investments (such as people who are nearing retirement) would be reluctant to invest heavily in the stock market.
During the first few years of a home mortgage, almost all the payments go for interest on the loan. This high interest is a reason it is better for young people to rent rather than buy.
One of the keys to financial success is never to apply for a credit card.
The best strategy to follow in using credit cards is to pay only the minimum amount required each month.
If you are in the 25 percent tax bracket and your home mortgage interest is $1,000 per month, then your after-tax mortgage interest cost is $750 per month.
Shuichi graduated from college two years ago. He has already accumulated enough money in his savings account and money market to meet basic contingencies, and now wants to begin investing a portion of each paycheck to earn a high rate of return over the long run. His best choice as a young recent graduate would be to put money into a bank savings account regularly.
During the most recent drop in stock prices, Homer took the opportunity to buy a wide variety of stocks even though many of his friends and relatives were selling. Homer's investment strategy appears to be consistent with contrarian views.
Term life insurance is a combination insurance plan and savings plan.
Term life insurance offers pure insurance with no savings feature.
The younger you are when you buy term life insurance, the lower the premiums tend to be.
Multiyear level-premium insurance is a form of term insurance with fixed premiums for the life of the policy.
Most families only need to buy enough life insurance to replace about three years of income.
Whole life insurance premiums provide the insured with both pure insurance and a savings plan.
Unlike whole life policies, a universal life insurance policy typically invests part of the premium in very aggressive, high-risk assets.
The death benefits of a variable life insurance policy vary depending upon the performance of the investment.
An annuity is a contract to make regular payments to a person for life or for a fixed period.
Fixed annuities have become much more popular than variable annuities.
Variable annuities offer investment choices identical to mutual funds.
People who have health insurance seldom need disability insurance.
If you are relatively healthy, there is no real reason to buy health insurance.
Everything else constant, the higher the deductible on your car insurance policy, the higher the premium for your car insurance.
Many employers offer health insurance coverage for their full-time employees.
Disability insurance provides a relatively low cost way of protecting against lost income due to an accident or illness that prevents you from working for an extended period of time.
Due to the high cost of the insurance premiums, many people have found that it makes financial sense to carry medical insurance only if their employer provides it.
The chances of becoming disabled at an early age are much higher than your chances of dying from an accident.
Guaranteed replacement cost insurance coverage provides the insured with the depreciated cost of assets.
Most homeowner's insurance policies do not cover certain types of expensive items unless you purchase a rider for the additional coverage.
An umbrella policy is an inexpensive policy that provides financial protection only in the event of clearly defined major catastrophes such as hurricanes or earthquakes—events which are referred to in the insurance industry as "rainy days."
One strategy used to lower car insurance premiums is to choose a policy with a large
deductible.
Don is young and newly married. He and his wife plan to have children in the near future and Don wants to get a significant amount of life insurance coverage at as low a cost as possible. He would be well advised to purchase a term insurance policy.
Wendy wants to obtain life insurance at the lowest possible cost, but is leery of term insurance because she has heard the premiums tend to go up every few years. One way for her to avoid this concern would be to purchase multiyear level-premium insurance.
Carrie is trying to find a way to reduce her car insurance premium. She would be well advised to decrease her insurance policy's deductible.
Pete wants life insurance to provide benefits for his family if he were to die. He also wants part of his premium to go into a savings plan that he will need if he lives to retirement age. His best strategy to achieve insurance and savings with one premium is term insurance.
As a recent college graduate just starting out on his own, Greg needs health, disability, car, and auto insurance. He may be able to save money by obtaining an umbrella policy.
Social Security is the term used to describe the Old Age, Survivors, and Disability Insurance Program.
One problem with the Social Security system is that the number of people retiring and living longer is declining dramatically.
It is likely that young adults today will benefit from the recent trend in the Social Security system to increase benefits and expand the cost-of-living adjustments.
The number of workers paying into Social Security per retired individual receiving benefits is decreasing.
Regardless of potential changes, you can count on Social Security to provide you with a comfortable retirement.
An IRA (individual retirement account) is a tax-deferred investment plan that encourages workers to save for retirement.
A traditional IRA affords workers who qualify the opportunity to deduct from their reported income the money they put into a qualified retirement account.
Both the Roth and traditional IRA allow individuals to put as much money as they want into their retirement account.
A Roth IRA allows workers who qualify to get an up-front deduction for any money they invest in the plan.
An advantage of both traditional and Roth IRAs is that both the income invested and the earnings from these investments are never taxed.
The benefit of opening an IRA while you're young is the compounding of the money invested tax-free over your working lifetime.
Funds deposited into an IRA cannot be withdrawn until you retire.
In order to qualify as a tax shelter, IRA saving plans must be invested in mutual funds.
Withdrawals from an IRA prior to age 59½ generally are subject to taxes and a penalty.
Earnings from traditional IRA investments are taxable at the time they are earned.
A simple IRA, which allows workers to contribute larger amounts than a regular IRA, is available to employees who work for firms with fewer than 100 employees.
MyIRA is a Roth IRA-type retirement savings plan for low and middle-income individuals.
The money a worker invests in a 401(k) retirement account reduces that worker's present taxable income.
Employers often match part of the contribution of their employees into a 401(k) retirement plan.
Large corporations with at least 500 employees can offer their employees a simple 401(k) retirement plan that allows for greater contribution maximums.
Many small-business owners invest in 401(k) plans for their retirement.
The best way to invest in a 401(k) plan is to use all of the money to buy stock in the company where you work.
Keogh plans are intended to help small business owners save for retirement.
Keogh plans are most useful for stockholders of major corporations who earn most of their income from dividends rather than wages or salaries.
Employees of small businesses can contribute to a Keogh plan.
IRAs, 401(k), and Keogh plans all include incentives to encourage saving for retirement.
Earnings of Keogh plans are not taxed until the funds are withdrawn from the retirement account.
The best financial planners are actually insurance salespeople.
If you have minor children, the first step in estate planning is to select their guardian.
The person who is named in your will to assemble the assets in your estate, handle taxes, and distribute the assets is called your proxy.
The reason you would prepare a durable power of attorney is to make sure that someone was named to take over your finances if you become incapacitated.
Recent demographic trends suggest that the financial condition of the Social Security program soon will begin to improve.
An individual retirement account (IRA) is a tax-deferred investment plan designed to encourage workers to save for retirement.
IRA funds are not available for withdrawal until you are 59 ½ years old.
A person in the 25 percent tax bracket who invests $1,000 in a traditional IRA immediately postpones $250 in taxes.
Monica expects to be in a much higher tax bracket when she retires than she is now, so she wants to invest in a retirement account in which her withdrawals will be tax-free. One way for her to achieve this is through a traditional IRA.
Ricardo desires to reduce his current taxable income and save for retirement. He should consider a traditional IRA.
Roberta has just opened a 401(k) retirement plan. The money she invests in this plan will reduce Roberta's present taxable income.
Bernie owns a sports card-trading business. He can participate in a Keogh plan to save for his retirement.
Mikel is in need of advice regarding investments, taxes, and insurance for herself and her family. She would be well advised to seek the advice of an insurance salesperson.
Harriett has just made out a will. The will names her brother Harold as the executor. This means that Harold will have the authority to take over Harriett's finances if she becomes incapacitated.
Financial planning begins with:
Throughout history an investment in ________ has yielded an excellent return, regardless of the state of the economy or political changes.
Approximately what percent of the population is successful in saving enough money for retirement to live comfortably?
The only way to accumulate enough money to do all of the things you want to do late in life is to:
Which of the following would be included as an asset in the preparation of a personal balance sheet?
In preparing an income statement for yourself, the wages from your job would be shown as:
When you prepare your personal balance sheet, remember that your ________ is equal to your total assets minus any liabilities you have.
The first step you would take to get control of your personal finances is to:
Personal financial planners often encourage their clients to write down every single penny they spend each day. The main purpose of this is to:
A(n) _______ is a personal financial plan that allows you to take control of future spending.
Budgets are:
Preparing and living with a personal budget is:
A financial planner would encourage you to borrow money:
Many financial experts advise that you set up a contingency fund equal to about ________ of your earnings and keep these funds in highly liquid accounts.
Once you have set up a budget and handled your ordinary expenses, the first thing to do with any extra money you have is to:
Which of the following accounting statements would assist an individual in taking inventory of personal assets and liabilities?
Young married couples that find themselves running out of money at the end of the month might be well advised to:
The best way to save money is to:
Bob's credit card charges him 14% interest on his unpaid balance. His bank is offering him 5% interest on a savings account. The first thing Bob should do with any extra money he may have is to:
Luke and Beth were recently married soon after graduating from college. Although they incurred a significant amount of debt to finance their education, both recently got good-paying jobs and appear to have promising careers. Given their situation, down the road Luke and Beth:
Romeo and Juliet are experiencing marriage difficulties regarding money. One technique to help them control and forecast their future financial situation, as well as allow them to achieve their financial goals, would be to prepare a(n):
Lucy has prepared her personal balance sheet and found that her total assets are $54,000 and her total liabilities (largely college loans) are $48,000. This indicates that Lucy's:
John is considering starting his degree in business this semester at State University. John will likely find that:
The path to success in a capitalist system is to:
In order to accumulate capital, young adults are likely to have to:
The key to generating enough capital for investment for many individuals is to:
Investing in a home is generally considered a:
Which of the following is a benefit of buying a home rather than renting?
Buying a _______ is often an attractive strategy for young couples, since they can live in one unit and rent the other half to supplement their income, while taking tax deductions on interest and real estate taxes.
The goal of accumulating capital is to allow an individual to:
Real estate people agree that the key to getting the optimum return on the purchase of a home is:
About _______ of all U.S. households own stock in corporations.
According to contrarians, the big decline in the stock market during the early 2000s was:
Real estate taxes and mortgage interest payments are both:
The total cost of purchasing a stereo or television with cash is ________ the cost when using credit cards to finance the same assets.
A benefit of using credit cards is that they:
When purchasing with a credit card, it's important to remember that ________ if you do not pay the balance in full within a stated time period.
One disadvantage of having credit cards for personal use is that:
Which of the following is a benefit unique to buying a duplex, as opposed to the purchase of a single-family home?
The factor likely to have the greatest impact on how fast the value of a home appreciates over time is the:
Mortgage interest payments and property taxes are:
The greatest return over a period of several years is likely to be earned by investing in a:
For a young person, one of the worst places to invest money for the long-term is:
From a financial viewpoint, it is best to buy a:
Which of the following is true of credit cards?
Slobo is an immigrant to the United States from a formerly communist country. He is searching for advice to help him succeed in a capitalist system. He would be well advised to:
Bonnie and Clyde are newly married college graduates. Both have jobs with bright futures. One strategy that they could use to accumulate capital for investment purposes, would be to:
Which of the following is an advantage of home ownership?
During her sophomore year in college Melody received a letter indicating she was eligible for a credit card along with a free gift from Metro State Bank. Melody was really excited until she remembered that any cash she has usually "burns a hole" in her pocket. Melody would likely not be successful with a credit card because:
Given a 25% tax bracket, the after-tax cost of a house mortgage interest payment of $1,000 would be:
Joseph and Mack are good friends who have similar jobs that pay them well. Both have established budgets that allow them to invest several hundred dollars each month. Mack has a strategy of putting most of his money in bank CDs and a savings account. Joseph has opted for a strategy of investing in the stock market. According to the evidence of the past 50 years, it is likely that over the long run:
Petulia has been following the stock market, and has noticed that it has generally been declining for the last several weeks. Many of her friends have sold stock, but Petulia looks at this situation as a good opportunity to buy. Petulia's views are consistent with the ___________ approach to investing in the stock market.
Hannah is excited about getting her first credit card. However, she should be aware of the fact that:
Leonardo is in the habit of using his credit card for expenditures made on business trips. The most likely reason he does this is to:
Which of the following is the best advice about the use of credit cards?
________ life insurance offers pure insurance protection for a given period of time.
One disadvantage of term life insurance is that:
Which of the following is a new form of term insurance that guarantees fixed premiums for the life of the policy?
According to Newsweek magazine, a young couple with a new baby should have life insurance coverage equal to:
_________ is a form of life insurance that provides both a savings plan and pure insurance coverage.
Which of the following is a form of whole life insurance that provides a death benefit that varies with the performance of the investments of the insurance company?
A contract that calls for regular payments to an individual for life or for a fixed period of time is called a(n):
Your chances of becoming disabled at an early age are ________ than your chance of dying from an accident.
Purchasing ________ insurance is a relatively low cost way of protecting yourself from lost income due to an accident or prolonged illness.
________ insurance provides protection from the cost of medical care for illnesses and injuries.
________ insurance provides protection from losses of furniture, appliances, and clothes.
A homeowner's insurance policy that includes a provision for __________ would provide the homeowner with enough cash to replace the items lost.
One strategy to lower the cost of automobile insurance is to purchase a policy with a:
A(n) ________ can be added to a homeowner's insurance policy that provides for coverage at a reasonable cost for items that the policy otherwise would not cover.
Many insurance providers offer __________ policies that give a discount to families who buy several types of insurance coverage from them.
A comparison of variable life insurance to a standard whole life plan would reveal that:
A common purpose of a rider added to a homeowner's policy is to:
Which of the following deductible levels would result in the lowest premium for automobile insurance?
Stan and Heidi are married and both have careers in business. If one of the two were to die, there would be a sudden drop in income. To provide protection from this risk the couple should purchase:
Hernando and Margarita have decided to take out an umbrella policy from an insurance company. The main reason they would probably want to do this would be to:
Although he has a good health insurance policy, Ken is concerned that a serious accident or lengthy illness would still be devastating to his family because of the lost income and other expenses not covered by his policy. Ken would probably be interested in obtaining:
Annette and Ron just got married. They received some very expensive wedding gifts including some beautiful silverware and jewelry. Their homeowner's policy:
The Social Security program was established in:
The number of workers paying into Social Security for each retiree receiving Social Security benefits is:
In the future, the Social Security system is likely to:
Trends in the number of workers contributing to the Social Security system and the number of workers drawing benefits from the system suggest that future generations will:
The tax-deferred investment plan that allows employees to save part of their income for retirement is called a(n):
The earnings on a traditional IRA are:
A Roth IRA offers employees an incentive to save for their retirement by:
Investments in IRA accounts:
One benefit of a simple IRA is that it allows:
A retirement plan where employers often match part of an employee's contribution is known as a:
Withdrawals from a traditional IRA prior to the age of 59½ are:
The new simple IRA plans allow employees of ________ companies to contribute larger amounts than the traditional IRA.
The tax-sheltered program to encourage self-employed people to accumulate retirement funds is called a(n):
The people who assist families in developing a comprehensive program that covers investments, taxes, insurance, and retirement plans are called:
For someone with a family that includes young children, the first step in estate planning should be to:
A _______ is a document that names a guardian for your children, states how you want your assets distributed, and names an executor to handle your estate when you die.
A(n) __________ is the person named in a will to assemble and value the assets of the deceased, handle tax matters, and distribute the assets.
Which of the following is least likely to result from the problems facing the Social Security system?
The earnings of a traditional individual retirement account (IRA) are:
The biggest advantage of the Roth IRA is that:
The increase in the number of retirement plans approved by the federal government likely indicates that:
For workers who qualify, the earnings from income invested in a traditional IRA are:
A Keogh retirement plan would be used by a(n)
Financial planners encourage individuals to begin contributing funds into an IRA as early as possible. The major benefit of early and regular contributions is that:
Jack is thinking about preparing a durable power of attorney. This indicates that he wants to:
As an employee of New Hampshire Industries, Kathleen has an opportunity to invest pre-tax income in an employer-sponsored retirement plan. Her employer will contribute 50 cents for every dollar that Kathleen contributes to this fund. This is an example of a(n):
Zach quit his job to open his own Internet consulting business. He now realizes that he no longer has the benefit of a corporate retirement system. He should consider investing in a(n):
Bob has decided to contribute $2,800 to a Roth IRA. He is currently in the 25% tax bracket. How will his contribution affect his income tax for the current year?
James is in the 30% tax bracket. What is the after-tax cost of a $3,000 contribution to his traditional IRA account?
Hilda has contributed to a Roth IRA for the last several years. She is now in her late sixties and has just retired. She plans to withdraw $3,000 this year from her Roth IRA. If she is in the 25 percent tax bracket, how much tax will she have to pay on her withdrawal?
Which of the following is an indication that the government has recognized that problems with Social Security funding make it highly unlikely that future Social Security benefits will be sufficient to provide retirees with enough income for a comfortable retirement?
Shorty is worried that his health may soon deteriorate to the point where he will no longer be able to take care of his own finances. One way he could ease his mind would be to:
Ira Roth and Penny Weiss met and married in the early 1990s, during their days at State University. Both came from families with limited financial resources. They had to work at part-time jobs during school, and still needed student loans to help pay for their college education. Ira and Penny shared a strong work ethic and had a great desire to succeed financially and enjoy the good life.
Penny and Ira quickly experienced financial success in the latter half of the booming 1990s. Ira used his marketing major and extensive knowledge of computers to obtain a high-paying job in a successful dot-com business. Penny, who cleaned homes to earn money during college, used her experience to start her own business. Her entrepreneurial spirit surprised Ira and their friends, and she built a successful cleaning business with a growing base of residential clients and even a few commercial customers. She soon had to hire several part-time employees to keep up with demand. With money rolling in, Ira and Penny began to live the good life, buying an expensive new car, a state-of-the-art home entertainment center, and expensive wardrobes. As busy as they were, and as hard as they both worked, they often found it easier to dine at a nice restaurant rather than fix meals at home.
When the dot-com bubble burst in the early 2000s, Ira was lucky enough to keep his job, but was forced to take a significant pay cut. The economic downturn forced some of the households and businesses that used Penny's company to cut back on professional cleanings, so her business suffered too. Soon the couple was struggling to pay the rent on their upscale apartment. They began relying on credit cards to cover expenses, but after a few months the credit limits on their cards had been reached. They fell behind in paying off their student loans and started getting some unpleasant calls from bill collectors. The stress and frustration led to arguments that began to threaten their personal relationship. With their personal finances out of control, Ira and Penny knew that they had to make changes to save not only their financial dreams, but also their marriage. However, they were at a loss as to where to start. Family members encouraged them to seek the advice of a financial planner. The couple reluctantly agreed that this was something they needed to do.
One of the first things the financial planner is likely to have them do would be to:
By using the financial planner's advice, Penny and Ira were able to find ways to cut back on their spending and began to live more modestly. They began to have a few hundred dollars left over each month after handling their normal expenses. Which of the following is the first thing they should do with their extra money?
As their situation began to improve, the financial adviser began discussing investment strategies with Penny and Ira. He suggested that they might want to invest in the stock market. He surprised them by saying that they should try to buy stocks during a major downturn in the market—just when most people were trying to sell. This statement suggests that the financial adviser agreed with the:
Once Ira and Penny achieved a more solid financial foundation, they began to consider the purchase of a home. From a financial standpoint, a sound strategy for them to consider would be to:
In saving for retirement, Penny could take advantage of the unique tax shelter offered only to small-business owners in a:
