IET 414 Exam 1 review || A+ Guaranteed.
Primary goal of financial management correct answers The primary goal is to maximize profit or
shareholder wealth maximization.
Drawbacks: change in profit may also represent change in risk. Fails to consider timing benefits.
Impossible task of accurately measuring key variable "Profit". Problems with inflation and
international currency transactions further complicate the issue.
Solo proprietorship correct answers ownership of a business by one person
Advantage: Simplicity in decision making, low organizational and operational costs.
Disadv: unlimited liability to owner
Partnership correct answers A business in which two or more persons combine their assets and
skills
Limited liability partnership correct answers One or more partners designated general partners
and have unlimited liability for debts of the firm. Only partners designated limited partners and
liable only for initial contribution.
Corporation correct answers Unique, legal entity unto itself. Owned by shareholders who enjoy
limited liability.
Adv: Continual Life. Easy divisibility of ownership interest by issuing shares of stock.
Disadv: Potential of double taxation of earnings.
S corporation correct answers Income taxed as direct income to stockholders, thus taxed only
once as normal income
Limited Liability Company (LLC) correct answers Provides limited liability for the owners. Can
be taxed as any business entity depending upon elections of owners.
What is corporate governance? correct answers Refers to the relationship among the board of
directors, top management, and shareholders in determining the direction and performance of the
corporation
What is agency Theory correct answers Examines relationship between owners and managers of
a firm. Identify and reduce potential conflicts of interest.
How do you get to operating income on an income statement? correct answers Sales - COGS -
Selling & Administration - Depreciation Expense = Operating income (EBIT)
What effect on EBITS will an increase or decrease in interest have? correct answers An increase
will result in a smaller EBT value while a decrease in interest will result in a larger EBT.
, How do you calculate earnings per share? correct answers Earnings After Taxes - Preferred
Stock Dividends = Earnings Available to Common Stockholders
Earnings Available to Common Stockholders / Common Shares Outstanding = Earnings Per
Share (EPS)
How do you calculate gross profit margin? Be able to do correct answers Gross Profit Margin =
((Net Sales - Cost of Goods Sold) / (Net Sales)) x100
How do you calculate taxes, rate? correct answers Operating income (EBIT) - Interest Expense =
Earnings Before Taxes (EBT)
Earnings Before Taxes - Taxes = Earnings After Taxes (EAT)
Operating Income (EBIT) correct answers Sales - COGS - Selling & Administration -
Depreciation Expense
Stockholders' Equity correct answers Represents total contribution and ownership interest of
preferred and common stockholders.
Dividends correct answers Maintains necessary payout on common stock and covers preferred
stock obligations.
common stockholders correct answers receive dividends after preferred stockholders.
P/E ratio correct answers a multiplier applied to EPS to determine current value of common
stock.
Gross Proceeds correct answers Net Proceeds + Costs
Issue Price correct answers Gross Proceeds/Number of Shares issued
What is ratio analysis useful for? correct answers Used to weigh and evaluate operating
performance of a firm. Measure in relation to other values. Compares performance record against
firms in industry
Drawbacks: ratios analysis for any one year does not reflect an accurate picture of the firm.
What kind of ratios would short term creditors be interested in? correct answers They would be
interested in current ratio and quick ratio also known as the liquidity Ratios.
Return on Equity correct answers is a profitability ratio.
Satisfactory ROE can be derived through correct answers - High return on total assets
- Generous utilization of debt
Primary goal of financial management correct answers The primary goal is to maximize profit or
shareholder wealth maximization.
Drawbacks: change in profit may also represent change in risk. Fails to consider timing benefits.
Impossible task of accurately measuring key variable "Profit". Problems with inflation and
international currency transactions further complicate the issue.
Solo proprietorship correct answers ownership of a business by one person
Advantage: Simplicity in decision making, low organizational and operational costs.
Disadv: unlimited liability to owner
Partnership correct answers A business in which two or more persons combine their assets and
skills
Limited liability partnership correct answers One or more partners designated general partners
and have unlimited liability for debts of the firm. Only partners designated limited partners and
liable only for initial contribution.
Corporation correct answers Unique, legal entity unto itself. Owned by shareholders who enjoy
limited liability.
Adv: Continual Life. Easy divisibility of ownership interest by issuing shares of stock.
Disadv: Potential of double taxation of earnings.
S corporation correct answers Income taxed as direct income to stockholders, thus taxed only
once as normal income
Limited Liability Company (LLC) correct answers Provides limited liability for the owners. Can
be taxed as any business entity depending upon elections of owners.
What is corporate governance? correct answers Refers to the relationship among the board of
directors, top management, and shareholders in determining the direction and performance of the
corporation
What is agency Theory correct answers Examines relationship between owners and managers of
a firm. Identify and reduce potential conflicts of interest.
How do you get to operating income on an income statement? correct answers Sales - COGS -
Selling & Administration - Depreciation Expense = Operating income (EBIT)
What effect on EBITS will an increase or decrease in interest have? correct answers An increase
will result in a smaller EBT value while a decrease in interest will result in a larger EBT.
, How do you calculate earnings per share? correct answers Earnings After Taxes - Preferred
Stock Dividends = Earnings Available to Common Stockholders
Earnings Available to Common Stockholders / Common Shares Outstanding = Earnings Per
Share (EPS)
How do you calculate gross profit margin? Be able to do correct answers Gross Profit Margin =
((Net Sales - Cost of Goods Sold) / (Net Sales)) x100
How do you calculate taxes, rate? correct answers Operating income (EBIT) - Interest Expense =
Earnings Before Taxes (EBT)
Earnings Before Taxes - Taxes = Earnings After Taxes (EAT)
Operating Income (EBIT) correct answers Sales - COGS - Selling & Administration -
Depreciation Expense
Stockholders' Equity correct answers Represents total contribution and ownership interest of
preferred and common stockholders.
Dividends correct answers Maintains necessary payout on common stock and covers preferred
stock obligations.
common stockholders correct answers receive dividends after preferred stockholders.
P/E ratio correct answers a multiplier applied to EPS to determine current value of common
stock.
Gross Proceeds correct answers Net Proceeds + Costs
Issue Price correct answers Gross Proceeds/Number of Shares issued
What is ratio analysis useful for? correct answers Used to weigh and evaluate operating
performance of a firm. Measure in relation to other values. Compares performance record against
firms in industry
Drawbacks: ratios analysis for any one year does not reflect an accurate picture of the firm.
What kind of ratios would short term creditors be interested in? correct answers They would be
interested in current ratio and quick ratio also known as the liquidity Ratios.
Return on Equity correct answers is a profitability ratio.
Satisfactory ROE can be derived through correct answers - High return on total assets
- Generous utilization of debt
