WGU C214 Financial Management Final The Complete Exam Preparation Mastery Manual: Advanced Study Guide, Extensive Test Bank Review, Full-Length Practice Questions, and Final Knowledge Assessment

A sharp increase in the market price of gasoline encourages consumers to drive less and motivates producers to increase fuel production. Which two economic roles of prices are most directly illustrated? A. Measuring accounting income and reducing taxes B. Affecting incentives and communicating scarcity C. Guaranteeing equal income and eliminating risk D. Preventing competition and controlling dividends Correct Answer: B. Affecting incentives and communicating scarcity Rationale: Prices communicate information about relative scarcity and influence the behavior of buyers and sellers. A higher gasoline price signals that the product has become more costly or scarce, encouraging reduced consumption and increased production. Friedman also noted that prices influence income distribution, but that role is not the central issue in this scenario. Question 2 A corporation is issuing common stock to outside investors for the first time. The corporation receives the proceeds from the sale, and an investment bank assists with distributing the shares. In which market does this transaction occur? A. Secondary financial market B. Dealer market C. Primary financial market D. Auction market Correct Answer: C. Primary financial market Rationale: A primary financial market is where securities are issued and sold to investors for the first time. The issuing corporation receives the proceeds. A secondary market involves subsequent trading among investors, so the issuing company does not receive those funds. Auction and dealer markets are mechanisms commonly used to facilitate secondary-market trading. Question 3 A corporate manager approves an unnecessary luxury office renovation that provides little benefit to shareholders but substantially improves the manager’s working environment. Which concept best describes the resulting cost? A. Opportunity cost of inventory B. Agency cost C. Underwriting spread D. Systematic risk Correct Answer: B. Agency cost Rationale: Agency costs arise when managers, who act as agents for shareholders, pursue personal interests instead of maximizing shareholder value. The unnecessary renovation uses corporate resources without providing an equivalent shareholder benefit. Systematic risk affects the entire market, while an underwriting spread relates to the difference between an underwriter’s purchase and resale prices. Question 4 An investor wants to sell shares immediately and is willing to accept the best price currently available in the market. Which order is most appropriate? A. Sell limit order B. Market order C. Negotiated order D. Primary-market order Correct Answer: B. Market order Rationale: A market order directs the broker to execute the transaction promptly at the best available market price. It prioritizes speed and likelihood of execution rather than price certainty. A limit order would establish a minimum acceptable selling price but might remain unexecuted if the market never reaches that price. Question 5 A large corporation plans to issue $2 billion in bonds. The lead investment bank invites several other banks and brokerage firms to participate so that the offering’s sales responsibilities and financial risks can be shared. What is this group called? A. Trading floor B. Syndicate C. Regulatory commission D. Dealer network Correct Answer: B. Syndicate Rationale: A syndicate is a group of investment banks or brokerage firms organized to assist in underwriting and selling a large securities offering. Members commit to selling portions of the issue and share the associated risks. A dealer network facilitates securities trading, while a regulatory commission oversees compliance rather than distributing securities. Question 6 A consulting company completes a project in December but receives payment in February. Under accrual accounting, when should the revenue generally be recognized? A. When the contract is first discussed B. When the work is completed and earned C. When the cash is collected D. When the company pays its employees Correct Answer: B. When the work is completed and earned Rationale: Accrual accounting recognizes revenue when the earnings process is substantially complete and the revenue has been earned, even if cash is collected later. Cash accounting would recognize the revenue when payment is received. The timing of employee payments does not determine when revenue from the completed project should be recognized. Question 7 A company’s stock becomes highly volatile following unexpected litigation news. A market maker faces greater uncertainty about the price at which the shares can be resold. What is the market maker most likely to do? A. Eliminate the ask price B. Narrow the bid-ask spread C. Increase the bid-ask spread D. Set the bid price above the ask price Correct Answer: C. Increase the bid-ask spread Rationale: The bid-ask spread compensates a dealer or market maker for inventory, trading, and information risks. When volatility increases, the risk of buying or selling at an unfavorable price also increases. The market maker will therefore generally widen the spread. The bid price must remain below the ask price for the market maker to earn a spread. Question 8 A municipal government invites investment banks to submit bids for a new bond issue. The government intends to choose the underwriter offering the highest purchase price and the lowest interest cost. Which method is being used? A. Negotiated sale B. Private placement C. Competitive sale D. Secondary offering Correct Answer: C. Competitive sale Rationale: In a competitive sale, potential underwriters submit bids specifying factors such as the price they will pay and the interest rate on the bonds. The issuer generally selects the most financially favorable bid. A negotiated sale involves selecting an underwriter through discussions, qualifications, and proposed marketing strategies rather than relying primarily on competitive bidding. Question 9 A manufacturer records sales revenue in December. The cost of the materials and labor used to produce those goods should also be recognized in December. Which accounting principle supports this treatment? A. Historical cost principle B. Matching principle C. Market efficiency principle D. Conservatism of capital structure Correct Answer: B. Matching principle Rationale: The matching principle requires expenses to be recognized in the same period as the revenues they helped generate. Recording the production costs in December allows the company to measure the profitability of the December sales accurately. Historical cost concerns asset valuation, while market efficiency concerns how security prices respond to information. Question 10 A researcher finds that a company’s stock price adjusts within seconds after the company publicly announces unexpectedly high earnings. Which financial-market characteristic is best demonstrated? A. Revenue recognition B. Price efficiency C. Financial leverage D. Cash-flow matching Correct Answer: B. Price efficiency Rationale: Price efficiency refers to the extent to which security prices reflect available information. A rapid price response to an earnings announcement suggests that investors quickly incorporated the new information into the stock’s value. Revenue recognition and cash-flow matching are accounting concepts, while financial leverage concerns the use of debt relative to equity.