D076 TEST QUESTIONS WITH CORRECT ANSWERS

In which way is accounting different from finance? Accounting is backward looking, while finance is focused on the future. Accounting is focused on allocating capital, while finance is focused on bringing in capital. Accounting is about budgeting, saving, and borrowing, while finance is about investing, forecasting, and lending. - ANS Accounting is backward looking, while finance is focused on the future. What is the main question that both individuals and companies must consider when making financial decisions to reach a goal? Will the benefits of the action outweigh the costs? Will this decision require debt or equity financing? Will utility be maximized through this decision? - ANS Will the benefits of the action outweigh the costs? A financial manager at a company is trying to determine whether to issue new stocks or new bonds to cover the costs of a project the company is doing the next year. Which main task in business finance is this situation an example of? Making financing decisions Making investment decisions Managing interdepartmental loans - ANS Making financing decisions How can investing help a person reach personal financial goals? It provides access to potential revenue or increases in value to help meet goals faster. It ensures money is placed in a safe, risk-free, and easily accessible financial asset. It helps a person understand how money was spent previously in order to reliably predict future expenses. - ANS It provides access to potential revenue or increases in value to help meet goals faster. A sign company is planning to have an initial public offering (IPO). In which type of market will its stock first be sold to the public? Efficient market Secondary market Money market Primary market - ANS Primary market Which type of economic indicator changes after the economy changes and helps identify trends in the long term? Yield curve indicator Leading indicator Coincident indicator Lagging indicator - ANS Lagging indicator How does an investment institution, such as a mutual fund, facilitate the circulation of money in the economy? By insuring deposits in investment accounts up to $250,000 to promote public confidence By raising capital on a contractual basis, such as an insurance contract By providing individuals and firms access to financial markets to buy or sell financial securities - ANS By providing individuals and firms access to financial markets to buy or sell financial securities Which type of economic indicator is used by governments and policymakers to implement or alter policies in an effort to avoid or minimize the effects of an economic downturn? Correlated indicator Coincident indicator Lagging indicator Leading indicator - ANS Leading indicator What should a potential bondholder (lender) do to prevent a company (borrower) from taking on risky projects? Set strict covenants that the company cannot uphold if it chooses a risky project Encourage manipulation of accounting procedures to optimize the company's profit Separate owners from management so their interests do not conflict - ANS Set strict covenants that the company cannot uphold if it chooses a risky project Which factor contributes to the inflation of the prices of goods and services over time? Increase in demand for goods and services Decrease in costs of production Decrease in employee demand for higher wages - ANS Increase in demand for goods and services