Assignment 1

Question 1: MCQ
1. What is the primary goal of financial management?
a) Maximize shareholder wealth
b) Maximize total revenue
c) Minimize financial risk
d) Maximize profits

2. Which of the following is NOT considered a financial management function?

a) Investment decisions
b) Marketing strategy
c) Financing decisions
d) Dividend decisions

3. What is the main difference between cash basis and accrual basis accounting?
a) Cash basis recognizes transactions when they occur, while accrual basis
recognizes them when cash is received.
b) Accrual basis recognizes revenue and expenses when incurred, regardless of
cash flow.
c) Cash basis provides a more accurate measure of financial performance.
d) There is no difference.

4. What is a key disadvantage of profit maximization as a financial goal?

a) It ignores cash flows.
b) It considers the time value of money.
c) It is the same as shareholder wealth maximization.
d) It reduces business risk.

5. A firm that increases its earnings per share (EPS) always results in:
a) Higher shareholder wealth
b) Increased risk
c) Higher stock price
d) None of the above
6. What is the trade-off between return and risk in financial management?
a) Lower risk always leads to higher returns.
b) Higher risk generally requires higher expected returns.
c) There is no relationship between risk and return.
d) Risk is always undesirable.

7. Why do financial managers prefer cash inflows earlier rather than later?
a) Because future cash flows are less valuable than present cash flows.
b) Because they want to spend money quickly.
c) Because profits always come later.
d) Because taxes are lower on earlier earnings.

8. What is the main reason higher earnings do not always translate into higher stock
prices?
a) Investors focus on future cash flows rather than reported earnings.
b) Stock prices only depend on market speculation.
c) Earnings are irrelevant to stock prices.
d) Investors do not consider cash flows in decision-making.

9. A firm that records revenue when a sale is made, regardless of whether cash is
received, follows:
a) Cash basis accounting
b) Accrual basis accounting
c) Hybrid accounting
d) None of the above

10. In the context of financial management, risk refers to:

a) The possibility that actual outcomes will differ from expected outcomes.
b) The guarantee of high returns.
c) The total amount of profits a company makes.
d) None of the above

11. What does the income statement primarily show?

a) The company’s financial position at a given time
b) A summary of the company's financial performance over a period
c) The company's cash inflows and outflows
 d) The breakdown of shareholder equity

12. The earnings available for common stockholders are calculated by:
a) Subtracting preferred stock dividends from net profits after taxes
b) Adding retained earnings to total revenue
c) Deducting depreciation from total revenue
d) Adding operating profits to gross profits

13. What does EPS (Earnings Per Share) measure?

a) The total revenue a company earns
b) The profit available for each share of common stock
c) The cash flow of a company
d) The amount of stock issued by a company

14. Which of the following is a current asset?

a) Land and buildings
b) Accounts receivable
c) Machinery
d) Long-term debt

15. What is the difference between gross profit and operating profit?
a) Gross profit includes interest expenses, whereas operating profit does not
b) Operating profit is the amount left after deducting operating expenses from
gross profit
c) There is no difference; they are the same
d) Gross profit is net profit before taxes

16. What happens when accounts payable increases?

a) It is recorded as an outflow of cash
b) It is recorded as an inflow of cash
c) It has no impact on cash flow
d) It increases net income

17. A decrease in inventory will appear on the statement of cash flows as:
 a) A source (inflow) of cash
b) A use (outflow) of cash
c) Increasing on owner equity
d) A decrease in liabilities

18. Which of the following transactions would be classified under investing activities in
the cash flow statement?
a) Purchase of fixed assets
b) Issuance of new common stock
c) Payment of dividends
d) Increase in accounts payable

19. If a company has a negative net cash flow from financing activities, what does this
indicate?
a) The company has issued more debt and equity than it has repaid
b) The company has repaid more debt and paid dividends than it has raised
through financing
c) The company has generated more revenue than expenses
d) The company has increased its retained earnings

Question 2 : True or False

1. The primary goal of financial management is to maximize profit

2. Higher risk always results in higher returns.

3. Financial managers focus only on accounting data when making decisions.

4. Accrual accounting provides a more accurate picture of a firm’s financial health

than cash basis accounting. True

5. A company can be profitable but still fail due to poor cash flow management.

6. The time value of money means that a dollar today is worth more than a dollar in the
future.
7. A firm’s stock price is only affected by its earnings

8. Shareholder wealth maximization always leads to the highest short-term profits.

9. Financing decisions involve choosing between different investment projects.

10. Risk-averse investors prefer lower-risk investments with lower returns. True

11. The income statement reflects a company’s financial position at a specific point in
time.

12. Retained earnings are cash reserves that a company keeps for future use.

13. Depreciation is a non-cash expense that reduces taxable income.

14. If a company pays off long-term debt, this will be recorded as a cash outflow under
financing activities.

15. The balance sheet must always balance, meaning total assets must equal total
liabilities and stockholders' equity.

16. A company with a positive net income must always have a positive cash flow.

17. Paying dividends increases retained earnings.

18. If a firm records an increase in accounts receivable, this represents an increase in

cash inflows.

19. Preferred stock dividends must be deducted before calculating earnings per share
(EPS).
 20. An increase in depreciation expense reduces operating profits but does not affect
cash flow directly.

21. Liquidity ratios measure a firm’s ability to satisfy its obligations.

22. The responsibility for making financial decisions lies with the accountant, not the
financial manager.

23. Technical financial insolvency arises when the firm has no liquidity at all, while the
firm suffers from real financial insolvency if it is unable to meet its obligations for a
temporary period.

24. A firm's liquidity refers to the ease and speed of converting an asset into cash.

Question 3 :
1. What is the goal of the firm and, therefore, of all managers and employees? Discuss
how one measures achievement of this goal.

2. For what three main reasons is profit maximization inconsistent with wealth
maximization?

3. What is risk? Why must risk as well as return be considered by the financial
manager who evaluating a decision alternative or action?

4. What are the major differences between accounting and finance with respect to
emphasis on cash flows and decision making?

5. The Aurora Metals Company refines and trades silver. At the end of the year, it sold
3,000 ounces of silver for $1.2 million. The company had acquired the silver for $1
million at the beginning of the year. The company paid cash for the silver when it was
purchased. Unfortunately, it has yet to collect from the customer to whom the silver
was sold.
a. Determine the net profit using the accrual basis of accounting.
b. Determine the net cash flow using the cash basis of accounting.