AGEC 4040 Midterm 1 Exam Questions and Answers Fully Solved Latest Update 2025-2026
Finance - Answers the science and art of managing money
Firm - Answers business organization that sells goods or services
goal of the firm - Answers maximize shareholder wealth
business ethics - Answers standards of conduct or moral judgement that apply to people
engaged in commerce
Principal-agent problem - Answers a problem that arises because the owners of a firm and its
managers are not the same people and the agent does not act in the best interest of the
principal/owner
Accrual Basis - Answers Recognizes revenue at the time of sale and recognizes expenses when
they are incurred (when it happens) (accounting view)
Cash Basis - Answers recognizes revenues and expenses only with respect to actual inflows
and outflows of cash (when it flows) (financial view)
Finance vs Accounting - Answers Accountants collect and present data which financial
managers then make decisions based off that data
Sole Proprietorships - Answers owned by one person and operated for their profit; unlimited
liability: creditors can go after personal assets
Partnerships - Answers owned by 2+ people; joint (unlimited) liability: all partners are liable for
each other and risk their personal assets
corporations - Answers legal business entities with rights/duties similar to those of individuals;
separate from owners; limited liability: owners only liable to lose their initial investments
Stockholders - Answers owners of a corporation (equity typically takes place in form of stock)
articles of partnership - Answers written contract used to formally establish a business
partnership
stock - Answers a security that represents an ownership interest in a corporation
dividends - Answers periodic distributions of cash to the stockholders of a firm
board of directors - Answers elected by a firm's stockholders and are responsible for large
corporate decisions
Pros of Sole Proprietorship - Answers owner receives all profits, low organizational costs,
income taxed on personal level, independence, secrecy, ease of dissolution
, Cons of Sole Proprietorship - Answers unlimited liability, limited fund raising, jack of all trades,
difficult to provide career advancement, lacks continuity upon owner death
Pros of Partnership - Answers can raise more funds than sole, more borrowing power with more
partners, more brain power, income taxed on personal level
Cons of Partnership - Answers unlimited liability, partnership dissolved when a partner dies,
difficult to liquidate or transfer
Pros of Corporation - Answers limited liability, can get large through stock sales, easily
transferable, long life, can hire professional managers, better access to financing
Cons of Corporation - Answers double taxation, most expensive organizational costs, more
government regulation, lacks secrecy
marginal tax rate - Answers the rate at which the next dollar of income is taxed
average tax rate - Answers taxes paid / taxable income
Ordinary income - Answers income earned by a business through the sale of goods or services
capital gains - Answers income earned by selling an asset for more than it costs
double taxation - Answers when business income is taxed twice- once at the business level and
once at individual level when cash is distributed to owners
agency costs - Answers costs that shareholders bear due to managers' pursuit of their own
interests
corporate governance - Answers rules, processes, and laws by which companies are operated,
controlled, and regulated
Stock options - Answers securities that allow managers to buy shares of stock at a fixed price
(profit the difference based on market price)
restricted stock - Answers shares of stock paid as part of compensation that do not fully
transfer until certain conditions are met
activist investors - Answers investors who specialize in influencing management
Sarbanes-Oxley Act (2002) - Answers aimed at eliminating corporate disclosure and conflict of
interest problems
Financial Institutions - Answers intermediaries that channel the savings of individuals,
businesses, and governments into loans or investments
suppliers and demanders of funds - Answers individuals are net suppliers,
businesses/governments are net demanders
Finance - Answers the science and art of managing money
Firm - Answers business organization that sells goods or services
goal of the firm - Answers maximize shareholder wealth
business ethics - Answers standards of conduct or moral judgement that apply to people
engaged in commerce
Principal-agent problem - Answers a problem that arises because the owners of a firm and its
managers are not the same people and the agent does not act in the best interest of the
principal/owner
Accrual Basis - Answers Recognizes revenue at the time of sale and recognizes expenses when
they are incurred (when it happens) (accounting view)
Cash Basis - Answers recognizes revenues and expenses only with respect to actual inflows
and outflows of cash (when it flows) (financial view)
Finance vs Accounting - Answers Accountants collect and present data which financial
managers then make decisions based off that data
Sole Proprietorships - Answers owned by one person and operated for their profit; unlimited
liability: creditors can go after personal assets
Partnerships - Answers owned by 2+ people; joint (unlimited) liability: all partners are liable for
each other and risk their personal assets
corporations - Answers legal business entities with rights/duties similar to those of individuals;
separate from owners; limited liability: owners only liable to lose their initial investments
Stockholders - Answers owners of a corporation (equity typically takes place in form of stock)
articles of partnership - Answers written contract used to formally establish a business
partnership
stock - Answers a security that represents an ownership interest in a corporation
dividends - Answers periodic distributions of cash to the stockholders of a firm
board of directors - Answers elected by a firm's stockholders and are responsible for large
corporate decisions
Pros of Sole Proprietorship - Answers owner receives all profits, low organizational costs,
income taxed on personal level, independence, secrecy, ease of dissolution
, Cons of Sole Proprietorship - Answers unlimited liability, limited fund raising, jack of all trades,
difficult to provide career advancement, lacks continuity upon owner death
Pros of Partnership - Answers can raise more funds than sole, more borrowing power with more
partners, more brain power, income taxed on personal level
Cons of Partnership - Answers unlimited liability, partnership dissolved when a partner dies,
difficult to liquidate or transfer
Pros of Corporation - Answers limited liability, can get large through stock sales, easily
transferable, long life, can hire professional managers, better access to financing
Cons of Corporation - Answers double taxation, most expensive organizational costs, more
government regulation, lacks secrecy
marginal tax rate - Answers the rate at which the next dollar of income is taxed
average tax rate - Answers taxes paid / taxable income
Ordinary income - Answers income earned by a business through the sale of goods or services
capital gains - Answers income earned by selling an asset for more than it costs
double taxation - Answers when business income is taxed twice- once at the business level and
once at individual level when cash is distributed to owners
agency costs - Answers costs that shareholders bear due to managers' pursuit of their own
interests
corporate governance - Answers rules, processes, and laws by which companies are operated,
controlled, and regulated
Stock options - Answers securities that allow managers to buy shares of stock at a fixed price
(profit the difference based on market price)
restricted stock - Answers shares of stock paid as part of compensation that do not fully
transfer until certain conditions are met
activist investors - Answers investors who specialize in influencing management
Sarbanes-Oxley Act (2002) - Answers aimed at eliminating corporate disclosure and conflict of
interest problems
Financial Institutions - Answers intermediaries that channel the savings of individuals,
businesses, and governments into loans or investments
suppliers and demanders of funds - Answers individuals are net suppliers,
businesses/governments are net demanders
