Test Prep BUSINESS-ENVIRONMENT-AND-CONCEPTS Online Practice Questions and Exam Preparation

Test Prep BUSINESS-ENVIRONMENT-AND-CONCEPTS Online Questions & Answers

• Question 121:

  In 1992, Anchor, Chain, and Hook created ACH Associates, a general partnership. The partners orally agreed that they would work full time for the partnership and would distribute profits based on their capital contributions. Anchor

  contributed $5,000; Chain $10,000; and Hook $15,000.

  For the year ended December 31, 1993, ACH Associates had profits of $60,000 that were distributed to the partners. During 1994, ACH Associates was operating at a loss. In September 1994, the partnership dissolved. In October 1994,

  Hook contracted in writing with Ace Automobile Co. to purchase a car for the partnership. Hook had previously purchased cars from Ace Automobile Co. for use by ACH Associates partners. ACH Associates did not honor the contract with

  Ace Automobile Co. and Ace Automobile Co. sued the partnership and the individual partners.

  Determine whether (A) or (B) is correct. Select the answer that corresponds to the correct statement.

  A. ACH Associates and Hook would be the only parties liable to pay any judgment recovered by Ace Automobile Co.
  B. Anchor, Chain, and Hook would be jointly and severally liable to pay any judgment recovered by Ace Automobile Co.
  B. Anchor, Chain, and Hook would be jointly and severally liable to pay any judgment recovered by Ace Automobile Co.

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  Choice "b" is correct. Since Ace brought suit against both the partnership and the individual partners, if judgment is rendered against the partnership, all partners could be held jointly and severally liable.

• Question 122:

  Which of the following statements is correct if there is an increase in the resources available within an economy?

  A. More goods and services will be produced in the economy.
  B. The economy will be capable of producing more goods and services.
  C. The standard of living in the economy will rise.
  D. The technological efficiency of the economy will improve.
  B. The economy will be capable of producing more goods and services.

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  Choice "b" is correct. If there is an increase in the resources available in an economy, the economy will be capable of producing more goods and services. This increase is really an increase in the long-run aggregate supply (potential GDP).

  On the aggregate supply and demand chart, the long-run aggregate supply line (LRAS) is the vertical line that represents the potential or equilibrium level of output. If that line shifts to the right, then the economy is capable of expanding, but it

  will not automatically expand just because the line shifts to the right.

  Choice "a" is incorrect. Just because there is an increase in the resources available in an economy, it does not mean that more goods and services will automatically be produced. There would have to be increased demand (a shift upward in

  the aggregate demand line) for more goods and services to actually be produced.

  Choice "c" is incorrect. If there is an increase in the resources available in an economy, the standard of living in the economy will not necessarily rise. It could rise, but it will not necessarily do that. Choice "d" is incorrect. If there is an increase

  in the resources available in an economy, the technological efficiency of the economy will not automatically improve. This statement is backwards. An increase in technological efficiency of an economy will normally increase the resources

  available in the economy by increasing productivity.

• Question 123:

  A parent corporation owned more than 90% of each class of the outstanding stock issued by a subsidiary corporation and decided to merge that subsidiary into itself. Under the Revised Model Business Corporation Act, which of the following actions must be taken?

  A. The subsidiary corporation's board of directors must pass a merger resolution.
  B. The subsidiary corporation's dissenting stockholders must be given an appraisal remedy.
  C. The parent corporation's stockholders must approve the merger.
  D. The parent corporation's dissenting stockholders must be given an appraisal remedy.
  B. The subsidiary corporation's dissenting stockholders must be given an appraisal remedy.

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  Choice "b" is correct. In a short form merger (one between a parent and a subsidiary 90% of which is owned by the parent), the subsidiary's shareholders have a right to dissent and take advantage of the appraisal remedy.

  Choice "a" is incorrect. The subsidiary's board is not required to take any action in a short-form merger.

  Choice "c" is incorrect. The parent corporation's shareholders have no right to approve or disapprove a short-form merger.

  Choice "d" is incorrect. The parent corporation's shareholders have no right to dissent to a short-form merger.

• Question 124:

  A company obtained a short-term bank loan of $250,000 at an annual interest rate of 6 percent. As a condition of the loan, the company is required to maintain a compensating balance of $50,000 in its checking account. The company's

  checking account earns interest at an annual rate of 2 percent.

  Ordinarily, the company maintains a balance of $25,000 in its checking account for transaction purposes. What is the effective interest rate of the loan?

  A. 6.44 percent.
  B. 7.11 percent.
  C. 5.80 percent.
  D. 6.66 percent.
  A. 6.44 percent.

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  Choice "a" is correct. 6.44%. To calculate the effective interest rate:

  

• Question 125:

  If the elasticity of demand for a normal good is estimated to be 1.5, then a 10% reduction in its price would cause:

  A. Total revenue to fall by 10%.
  B. Total revenue to fall by 15%.
  C. Quantity demanded to rise by 15%.
  D. Demand to decrease by 10%.
  C. Quantity demanded to rise by 15%.

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  Choice "c" is correct. The elasticity of demand is calculated as:

  % Change in demand

  % Change in price

  If the elasticity of demand is 1.5 (assumed to be the absolute value, as the elasticity of demand for a normal good is always negative), then a 10% price reduction would cause an increase in the quantity demanded by 15% (a ratio of 15 to 10

  or 1.5).

  Choices "a", "b", and "d" are incorrect, per above.

• Question 126:

  A period of inflation:

  A. Increases the price level, which benefits those who are entitled to receive specific amounts of money.
  B. Enhances the positive relationship between the price level and the purchasing power of money.
  C. Harms anyone who has an obligation to pay a specific amount and benefits anyone who is entitled to receive a specific amount.
  D. Increases the price level, which is negatively related to the purchasing power of money.
  D. Increases the price level, which is negatively related to the purchasing power of money.

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  Choice "d" is correct. A period of inflation increases the price level, which is negatively related to the purchasing power of money (inflation erodes the value of money).

  Choice "a" is incorrect. When price levels increase, those with fixed amounts of money are hurt.

  Choice "b" is incorrect. The relationship between price levels and the purchasing power of money is negative, or inverse.

  Choice "c" is incorrect. Inflation helps anyone with a fixed obligation since the debt can be repaid in inflated dollars. Those receiving a specific fixed amount are harmed.

• Question 127:

  Willis, Inc. has a cost of capital of 15 percent and is considering the acquisition of a new machine, which costs $400,000 and has a useful life of five years. Willis projects that earnings and cash flow will increase as follows.

  

  The net present value of this investment is:

  A. Negative, $64,000
  B. Negative, $14,000
  C. Positive, $18,600
  D. Positive, $200,000
  C. Positive, $18,600

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  Choice "c" is correct. Positive NPV, $18,600.

  

• Question 128:

  All of the following are valid reasons for a business to hold cash and marketable securities, except to:

  A. Satisfy compensating balance requirements.
  B. Maintain adequate cash needed for transactions.
  C. Maintain a precautionary balance.
  D. Earn maximum returns on investment assets.
  D. Earn maximum returns on investment assets.

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  Choice "d" is correct. There are three primary motives for holding cash:

  1.

  Transactions demand

  2.

  Precautionary demand

  3.

  Speculative demand

  However, cash is generally held in very short-term liquid investments which are low risk, low return.

• Question 129:

  A change in credit policy has caused an increase in sales, an increase in discounts taken, a reduction in the investment in accounts receivable, and a reduction in the number of doubtful accounts. Based upon this information, we know that:

  A. Net profit has increased.
  B. The average collection period has decreased.
  C. Gross profit has declined.
  D. The size of the discount offered has decreased.
  B. The average collection period has decreased.

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  Choice "b" is correct. Whenever accounts receivable (AR) are decreasing when sales are increasing (and the decrease in AR is not due to an increase in bad debt write offs), this would indicate that the average collection period for AR has

  decreased.

  Choices "a", "c", and "d" are incorrect. There is insufficient information in the question to draw conclusions about these items.

• Question 130:

  If the Federal Reserve wanted to implement an expansionary monetary policy, which one of the following actions would the Federal Reserve take?

  A. Raise the reserve requirement and the discount rate.
  B. Purchase additional U.S. government securities and lower the discount rate.
  C. Raise the discount rate and sell U.S. government securities.
  D. Lower the discount rate and raise the reserve requirement.
  B. Purchase additional U.S. government securities and lower the discount rate.

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  Choice "b" is correct. Fed purchases of government securities increase the money supply (putting money into circulation), and lowering the discount rate encourages borrowing by member banks and increases the money supply. Hence,

  these measures would help implement an expansionary monetary policy.

  Choice "a" is incorrect. Raising the reserve requirement and the discount rate would have the opposite effect of decreasing the money supply.

  Choice "c" is incorrect. Raising the discount rate and selling government securities would reduce the money supply.

  Choice "d" is incorrect. Raising the reserve requirement would decrease the money supply, but lowering the discount rate would increase the money supply.