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

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

• Question 211:

  Which of the following rights is a holder of a public corporation's cumulative preferred stock always entitled to?

  A. Conversion of the preferred stock into common stock.
  B. Voting rights.
  C. Dividend carryovers from years in which dividends were not paid, to future years.
  D. Guaranteed dividends.
  C. Dividend carryovers from years in which dividends were not paid, to future years.

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  Choice "c" is correct. Cumulative preferred dividends are dividends that must be paid before any dividend can be paid to holders of non-preferred shares. The right to the dividend accumulates if it is not paid in a particular year. Choice "a" is

  incorrect. There is no right to convert preferred shares into common stock unless that right is specifically granted.

  Choice "b" is incorrect. Preferred stock need not have voting rights.

  Choice "d" is incorrect. Preferred dividends are not guaranteed. They must be paid before any common shareholder can be paid a dividend, but no dividend might ever be paid.

• Question 212:

  Micro Manufacturers uses a performance reporting system that combines both financial and nonfinancial measures to evaluate division performance. All of the following measure operational efficiency, except:

  A. Operating leverage.
  B. Days' sales in accounts receivables.
  C. Inventory turnover.
  D. Residual income.
  D. Residual income.

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  Choice "d" is correct. Residual income measures profitability in excess of a target rate of return.

  Operational efficiency is not considered.

  Choices "a", "b", and "c" are incorrect. Operating leverage, days' sales in accounts receivable, and inventory are all measures of operational efficiency, specifically, efficiency in managing working capital.

• Question 213:

  Which of the following parties generally has the most management rights?

  A. Minority shareholder in a corporation listed on a national stock exchange.
  B. Limited partner in a general partnership.
  C. Member of a limited liability company.
  D. Limited partner in a limited partnership.
  C. Member of a limited liability company.

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  Choice "c" is correct. Unless the articles or operating agreement provides otherwise, all members of the LLC have a right to participate in management. A member of a limited liability company has the most management rights of any of the parties listed. A minority shareholder in a corporation has no management rights (and neither does a majority shareholder). A limited partner has no day-to-day management rights but may have some rights in extraordinary circumstances. It is unclear what a limited partner in a general partnership would even be; the existence of a limited partner would make a partnership a limited partnership and not a general partnership. Choice "a" is incorrect. Stockholders have very limited rights to run the corporation. They generally only have the right to elect directors and to vote on fundamental changes in the corporation. Such fundamental changes would include dissolutions, amendments to the articles, mergers, consolidations, compulsory share exchanges, and sale of substantially all of the corporation's assets. Choice "b" is incorrect. There are no limited partners in a general partnership. There are only general partners. Since there are no limited partners, there are no management rights for limited partners. Choice "d" is incorrect. Limited partners in a limited partnership have very limited rights to participate in the management of the business. In fact, if they do participate in management, they face potential liability to those who thought they were a general partner (i.e., if a limited partner becomes involved in day-to-day management is some way (participating in control), she may be treated as a general partner and lose her limited liability).

• Question 214:

  The collection of accounts receivable can be accelerated by the use of:

  A. Turnaround documents.
  B. A lockbox system.
  C. Bank drafts.
  D. Remittance advices.
  B. A lockbox system.

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  Choice "b" is correct. Lockboxes are systems of mailboxes, usually in many locations, where customers send payments. The company's bank checks these mailboxes frequently and immediately deposits checks received. This accelerates the

  collection of accounts receivable.

  Choice "a" is incorrect. A turnaround document is a computer output that can later be used as a source document. No relevance to A/R collections.

  Choice "c" is incorrect. A bank draft is a document issued by a bank to indicate that payment has been made.

  Choice "d" is incorrect. A bank remittance advice is a document generated by a bank to indicate that payment has been made by a customer.

• Question 215:

  Which of the following actions may a corporation take without its stockholders' consent?

  A. Consolidate with one or more corporations.
  B. Merge with one or more corporations.
  C. Dissolve voluntarily.
  D. Purchase 55% of another corporation's stock.
  D. Purchase 55% of another corporation's stock.

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  Choice "d" is correct. Directors are free to make most corporate decisions unilaterally. However, decisions that might fundamentally change the nature of the corporation require the consent of the shareholders. The purchase of 55% of

  another corporation's stock can be quite insignificant to the purchaser and is not a fundamental corporate change.

  Choice "a" is incorrect because a consolidation is a fundamental corporate change.

  Choice "b" is incorrect because a merger is a fundamental corporate change.

  Choice "c" is incorrect because a dissolution is a fundamental corporate change.

• Question 216:

  Companies that adopt just-in-time purchasing systems often experience:

  A. A reduction in the number of suppliers.
  B. Fewer deliveries from suppliers.
  C. A greater need for inspection of goods as the goods arrive.
  D. Less need for linkage with a vendor's computerized order entry system.
  A. A reduction in the number of suppliers.

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  Choice "a" is correct. Just-in-time purchasing systems usually results in a reduction in the number of suppliers. Because a company that adopts J-I-T is very dependent on supplier performance, usually fewer suppliers are used and a very

  close working relationship is developed.

  Choice "b" is incorrect. Just-in-time requires more deliveries from suppliers.

  Choice "c" is incorrect. Usually there is more reliance on quality control by the supplier. Finding defective goods as they arrive is too late; a stock-out could cause production to shut down. Choice "d" is incorrect. There is much more need for

  linkage with the vendor's order entry system with JI- T because the company is dependent on timely deliveries from the vendor.

• Question 217:

  Williams, Inc. is interested in measuring its overall cost of capital and has gathered the following data. Under the terms described below, the company can sell unlimited amounts of all instruments.

  A. 6.8 percent.
  B. 4.8 percent.
  C. 6.5 percent.
  D. 9.1 percent.

  A. 6.8 percent.

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  Choice "a" is correct. 6.8%.

  This question pertains to the manner in which changes in the required amount of capital will impact the weighted average cost of capital governed by the target capital structure. The rates are given, and you must derive the weights. The

  company needs a total of $1,000,000. The total Retained Earnings is $100,000, which will only represent 10% of the total amount needed. In J92-1.01, we computed the cost of new common share issues at 7.6%, and we know that we can

  issue unlimited amounts of each security. Based on these assumptions, we know that the target capital structure will remain unchanged but that the components of common equity will be priced differently because Retained Earnings only

  equals $100/$1,000 (or 10%).

  If the target capital structure calls for 50% common stock and only 10% is available from retained earnings, then 40% must come from the issuance of new common shares. The weighted average is computed as follows:

  

  Choices "b", "c", and "d" are incorrect, per the above calculation.

• Question 218:

  In order to increase production capacity, Gunning Industries is considering replacing an existing production machine with a new technologically improved machine effective January 1, 1997. The following information is being considered by Gunning Industries.

  A. $13,817
  B. $15,200
  C. $16,762
  D. $20,725

  A. $13,817

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  Choice "a" is correct. $13,817 discounted annual depreciation tax shield for the year 1997.

  

  Choices "b", "c", and "d" are incorrect based on the above Explanation.

• Question 219:

  The Moore Corporation is considering the acquisition of a new machine. The machine can be purchased for $90,000; it will cost $6,000 to transport to Moore's plant and $9,000 to install. It is estimated that the machine will last 10 years, and it is expected to have an estimated salvage value of $5,000. Over its 10-year life, the machine is expected to produce 2,000 units per year with a selling price of $500 and combined material and labor costs of $450 per unit. Federal tax regulations permit machines of this type to be depreciated using the straight-line method over 5 years with no estimated salvage value. Moore has a marginal tax rate of 40 percent. What is the net cash outflow at the beginning of the first year that Moore Corporation should use in a capital budgeting analysis?

  A. $(85,000)
  B. $(90,000)
  C. $(96,000)
  D. $(105,000)
  D. $(105,000)

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  Choice "d" is correct. $(105,000) net cash outflow at the beginning of the first year.

  

• Question 220:

  On dissolution of a general partnership, distributions will be made on account of:

  I. Partners' capital accounts.

  II. Amounts owed partners with respect to profits.

  III. Amounts owed partners for loans to the partnership.

  In the following order:

  A. III, I, and II.
  B. I, II, and III.
  C. II, III, and I.
  D. III, II, and I.
  I. Partners' capital accounts. II. Amounts owed partners with respect to profits. III. Amounts owed partners for loans to the partnership. In the following order:
  A. III, I, and II.

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  Choice "a" is correct.

  Rule: On dissolution of a general partnership the "order of distribution" would be as follows:

  III.

  General partner loans.

  I.

  Partners' capital accounts.

  II. General partners' profits.

  Choices "b", "c", and "d" are incorrect, per the above rule.