Fin 320 Exam#1 Review
What kind of decision does the financial manager make that is the most crucial? -determine the
firm's investment strategy The owner of a factory wants his employees to create as many
widgets as possible, therefore he pays them according to the quantity of widgets they produce.
He does, however, randomly inspect the widgets at different stages of their production to make
sure the employees are not rushing and producing a significant number of subpar widgets. The
whole manufacturing section whose work is affected by a fault in a widget has its pay reduced.
How does this factory owner intend to resolve the issue of agency conflict in this situation? -by
providing rewards that encourage agents to perform in the principal's preferred manner.
What are the primary benefits and drawbacks of setting up a business as a C corporation? - A C
company may have an unlimited number of shareholders, enabling it to raise substantial
amounts of money. - Even if one of the owners passes away, the company can still exist. - The
owners' financial involvement in the business determines the extent of their culpability.
With a C corporation, income is taxed twice: once at the corporate level and once again when it
is distributed to shareholders in the form of a dividend. Compared to other corporate structures,
the C corporation is more difficult to set up and more costly. What distinguishes a public from a
private corporation? -The shares of a private corporation are not traded on a public exchange,
whereas the shares of a public corporation are exchanged on an exchange (or "over the
counter" in an electronic trading system).
A hostile takeover occurs when a wealthy person or group buys a significant portion of the
shares of a company that is not doing well, giving them the necessary votes to remove the CEO
and board of directors. What does "limited liability" mean in the context of a corporation? -
Owners' liability is capped at what they contributed to the business. In particular, shareholders
cannot be held liable for any debts that the company incurs. Stockholders are not accountable
for any of the firm's obligations.
What is the procedure for a C corporation's investors' double taxation? Partnerships are the
most typical kind of commercial organization in the world. The corporation is taxed on the profits
it earns, and the owners are taxed when this profit is given to them. Which of the following is
NOT a function of financial institutions? - FALSE (Sole Proprietorship) -Creating new currency
for debtors
Ch. 2
What are GAAPs and who regulates them? Generally Accepted Accounting Principles is
referred to as GAAP. - The Financial Accounting Standards Board (FASB) created GAAP, which
the SEC requires when businesses file their quarterly and yearly reports.
Which of the following on the income statement is NOT regarded as an operational expense?
Corporate taxes, administrative costs, and overhead (Answer) Salaries, C. amortization and
depreciation, and D.
