FINC 341 EXAM 1 QUESTIONS AND ANSWERS
Explain the flow of power through an organization when it comes to Finance
*HINT: 4 TIERS, 2 PATHS, 6 POSITIONS OF POWER/RANK* - Answers - 1. Board of
Directors
2. CEO
3a. COO 3b. CFO
4a. Marketing, Production, HR, and other Operating Departments
4b. Accounting, Treasury, Credit, Legal Capital Budgeting, and Investor Relations
Who is typically the highest-ranking individual on the board of directs? - Answers - The
Chairperson
True or False:
The chairperson is not allowed to also be a CEO because it gives them too much power
of the company - Answers - This statement is FALSE!
The chairperson is often the CEO because they typically make similar decisions for the
company, so it is easier to eliminate conflict of interest by allowing 1 person to hold both
positions.
What position is often designated President of a firm? - Answers - the COO
What does a COO do? - Answers - The COO is responsible for the company's
operations and operating departments that are listed in the figure attached (look at
bottom left box)
What position is often appointed to be the Senior Vice President of the firm? - Answers -
CFO
What does the CFO do? - Answers - Responsible for all of the company's financial
concerns.
The Treasurer and the Controller report directly to CFO.
List the CFO, CEO, and COO in order of rank from highest to lowest - Answers - 1.
CEO (chairperson)
2. COO (president)
3. CFO (senior vice president)
if the firm is publicly owned, the CEO and CFO must both
___________________________________________________________________.
(finish the sentence) - Answers - The CEO and CFO must both be certified by the SEC
to make sure they can and will accurately record and report annual financial statements
and data.
,What happens when a publicly owned company reports inaccurate financial data to the
SEC? - Answers - the CEO and CFO can be fined or jailed
What law ensures that companies cannot report false or inaccurate data because it
hurts investors, workers, suppliers, and the government? - Answers - Sarbanes-Oxley
Act
When was the Sarbanes-Oxley Act passed and why? - Answers - The Sarbanes-Oxley
Act was passed and 2002 due to a series of corporate scandals involving now-defunct
companies such as Enron and WorldCom.
What are the major 3 areas of Finance? - Answers - 1. Financial Management
2. Capital Markets
3. Investments
Define each of the 3 Major Areas of Finance: - Answers - 1. Financial Management:
- also called corporate finance
- focuses on decisions for acquiring and purchasing assets as well as maximizing firm
value.
2. Capital Markets :
- refers to the markets in which prices for interest rates, stocks, and bonds are
determined.
- Capital Markets often favor the "savers" who have extra money to invest
3. Investments:
- There are 3 Main Types of investment activities: a. Security Analysis b. Portfolio
Theory c. Market Analysis
Investment is one of the 3 Major Areas of Finance, but it can also be broken up into 3
different categories...
What are the 3 Main Types of Investment Activities (Define Each One)? - Answers - 1.
Security Analysis: finding the proper values for individual securities like stocks and
bonds
2. Portfolio Theory: describes the best ways to structure portfolios or group stocks and
bonds into "baskets".
- the goal for rational investors is to have a diversified portfolio with limited risk
3. Market Analysis: the decision-making process where investors decide if stocks or
bonds are "too high", "too low", or "about right".
- Market Analysis is often determined through "Behavioral Finance"
What is Behavioral Finance? - Answers - Cognitive physiological study of why investors
make irrational financial decisions over a sustained period of time (take a risk versus not
take a risk).
- Behavioral Finance is a type of financial market model
,What are the 4 Main Forms of Business Organizations? - Answers - 1. Sole
Proprietorship
2. Partnerships
3. Corporations
4. Limited Liability Companies and Partnerships
LLCs & LLPs)
List and Define Each of the 4 Main Forms of Business Organizations: - Answers - 1.
Sole Proprietorship -
An unincorporated business owned by one individual
2. Partnerships -
an unincorporated business owned by two or more persons
3. Corporations -
A legal entity created by a state, separate and distinct from its owners and managers
having unlimited life, easy transfer of power, and limited liability
4. Limited Liability Companies and Partnerships
LLCs & LLPs) -
There is a distinction between LLCs and LLPs but both try to blend partnerships and
corporations while maintaining limited liability benefits
What are the 3 Advantages and 3 Disadvantages of owning a Proprietorship? - Answers
- Advantages:
1. easy and inexpensive to form
2. subject to few government regulations
3. lower income taxes compared to corporations
Disadvantages:
1. unlimited personal liability for business debts
2. lifespan and quality of business are dependent on the life of the owner thus if you
involve investors to bring in new equity they might require you to change the structure of
your business
3. it is difficult to obtain large sums of capital
How is a firms income allocated and taxed in a Partnership? - Answers - A partnership
is a legal arrangement that states that the firm's income will be allocated on a pro-rata
basis to the partners and is taxed on an individual basis.
What does it mean if a business partners share income on a pro-rata basis? - Answers -
If something is given out to people on a pro-rata basis, it means assigning an amount to
one person according to their share of the whole.
List the Advantages and Disadvantages of a Partnership: - Answers - Advantages:
- allows the firms to avoid corporate income tax
, Disadvantages:
- subject to unlimited personal liability
- due to the fact that partnerships hold unlimited liability that can present a twofold
issue:
a) if one partner is unable to pay their share of taxes/debt the other partners are
obligated to pay it off
b) this amount of liability falling on the weight of the owners can make it difficult to raise
large amounts of capital
List the Advantages and Disadvantages of a Corporation: - Answers - Advantages:
1. separation between owners and managers limits stockholder losses (i.e. the firm can
lose ALL of its money, while the owners can ONLY lose the funds they invested in the
company).
2. unlimited lifespan of the business
3. easy to transfer ownership and shares of stock in the company
4. easier to raise large sums of capital in comparison to other forms of business
Disadvantages:
1. taxation - Most large corporations will be subjected to double taxation
2. qualifying an S corporation means you won't be subjected to double taxation BUT you
can only have 100 stockholders which could hinder the growth of your company
What are the 2 different types of Corporations? What are the differences between the
two Corporation types? - Answers - S Corporations and C Corporations
S Corporations:
- taxed as a partnership (exempt from corporate income tax)
- has no more than 100 stockholders
- usually privately owned firms
C Corporations:
- double taxation
- larger than an S Corporation and there is no cap on the number of stockholders they
can have
- usually publicly-owned firms
What are the similarities and differences between an LLC and an LLP? - Answers -
BOTH LLC & LLP:
- both have limited liability like corporations but are taxed like partnerships
- investors can vote for decisions that serve their best interests
ONLY LLC:
- fields of business aren't typically specialized
- management can be appointed from outside or inside members of the company
Explain the flow of power through an organization when it comes to Finance
*HINT: 4 TIERS, 2 PATHS, 6 POSITIONS OF POWER/RANK* - Answers - 1. Board of
Directors
2. CEO
3a. COO 3b. CFO
4a. Marketing, Production, HR, and other Operating Departments
4b. Accounting, Treasury, Credit, Legal Capital Budgeting, and Investor Relations
Who is typically the highest-ranking individual on the board of directs? - Answers - The
Chairperson
True or False:
The chairperson is not allowed to also be a CEO because it gives them too much power
of the company - Answers - This statement is FALSE!
The chairperson is often the CEO because they typically make similar decisions for the
company, so it is easier to eliminate conflict of interest by allowing 1 person to hold both
positions.
What position is often designated President of a firm? - Answers - the COO
What does a COO do? - Answers - The COO is responsible for the company's
operations and operating departments that are listed in the figure attached (look at
bottom left box)
What position is often appointed to be the Senior Vice President of the firm? - Answers -
CFO
What does the CFO do? - Answers - Responsible for all of the company's financial
concerns.
The Treasurer and the Controller report directly to CFO.
List the CFO, CEO, and COO in order of rank from highest to lowest - Answers - 1.
CEO (chairperson)
2. COO (president)
3. CFO (senior vice president)
if the firm is publicly owned, the CEO and CFO must both
___________________________________________________________________.
(finish the sentence) - Answers - The CEO and CFO must both be certified by the SEC
to make sure they can and will accurately record and report annual financial statements
and data.
,What happens when a publicly owned company reports inaccurate financial data to the
SEC? - Answers - the CEO and CFO can be fined or jailed
What law ensures that companies cannot report false or inaccurate data because it
hurts investors, workers, suppliers, and the government? - Answers - Sarbanes-Oxley
Act
When was the Sarbanes-Oxley Act passed and why? - Answers - The Sarbanes-Oxley
Act was passed and 2002 due to a series of corporate scandals involving now-defunct
companies such as Enron and WorldCom.
What are the major 3 areas of Finance? - Answers - 1. Financial Management
2. Capital Markets
3. Investments
Define each of the 3 Major Areas of Finance: - Answers - 1. Financial Management:
- also called corporate finance
- focuses on decisions for acquiring and purchasing assets as well as maximizing firm
value.
2. Capital Markets :
- refers to the markets in which prices for interest rates, stocks, and bonds are
determined.
- Capital Markets often favor the "savers" who have extra money to invest
3. Investments:
- There are 3 Main Types of investment activities: a. Security Analysis b. Portfolio
Theory c. Market Analysis
Investment is one of the 3 Major Areas of Finance, but it can also be broken up into 3
different categories...
What are the 3 Main Types of Investment Activities (Define Each One)? - Answers - 1.
Security Analysis: finding the proper values for individual securities like stocks and
bonds
2. Portfolio Theory: describes the best ways to structure portfolios or group stocks and
bonds into "baskets".
- the goal for rational investors is to have a diversified portfolio with limited risk
3. Market Analysis: the decision-making process where investors decide if stocks or
bonds are "too high", "too low", or "about right".
- Market Analysis is often determined through "Behavioral Finance"
What is Behavioral Finance? - Answers - Cognitive physiological study of why investors
make irrational financial decisions over a sustained period of time (take a risk versus not
take a risk).
- Behavioral Finance is a type of financial market model
,What are the 4 Main Forms of Business Organizations? - Answers - 1. Sole
Proprietorship
2. Partnerships
3. Corporations
4. Limited Liability Companies and Partnerships
LLCs & LLPs)
List and Define Each of the 4 Main Forms of Business Organizations: - Answers - 1.
Sole Proprietorship -
An unincorporated business owned by one individual
2. Partnerships -
an unincorporated business owned by two or more persons
3. Corporations -
A legal entity created by a state, separate and distinct from its owners and managers
having unlimited life, easy transfer of power, and limited liability
4. Limited Liability Companies and Partnerships
LLCs & LLPs) -
There is a distinction between LLCs and LLPs but both try to blend partnerships and
corporations while maintaining limited liability benefits
What are the 3 Advantages and 3 Disadvantages of owning a Proprietorship? - Answers
- Advantages:
1. easy and inexpensive to form
2. subject to few government regulations
3. lower income taxes compared to corporations
Disadvantages:
1. unlimited personal liability for business debts
2. lifespan and quality of business are dependent on the life of the owner thus if you
involve investors to bring in new equity they might require you to change the structure of
your business
3. it is difficult to obtain large sums of capital
How is a firms income allocated and taxed in a Partnership? - Answers - A partnership
is a legal arrangement that states that the firm's income will be allocated on a pro-rata
basis to the partners and is taxed on an individual basis.
What does it mean if a business partners share income on a pro-rata basis? - Answers -
If something is given out to people on a pro-rata basis, it means assigning an amount to
one person according to their share of the whole.
List the Advantages and Disadvantages of a Partnership: - Answers - Advantages:
- allows the firms to avoid corporate income tax
, Disadvantages:
- subject to unlimited personal liability
- due to the fact that partnerships hold unlimited liability that can present a twofold
issue:
a) if one partner is unable to pay their share of taxes/debt the other partners are
obligated to pay it off
b) this amount of liability falling on the weight of the owners can make it difficult to raise
large amounts of capital
List the Advantages and Disadvantages of a Corporation: - Answers - Advantages:
1. separation between owners and managers limits stockholder losses (i.e. the firm can
lose ALL of its money, while the owners can ONLY lose the funds they invested in the
company).
2. unlimited lifespan of the business
3. easy to transfer ownership and shares of stock in the company
4. easier to raise large sums of capital in comparison to other forms of business
Disadvantages:
1. taxation - Most large corporations will be subjected to double taxation
2. qualifying an S corporation means you won't be subjected to double taxation BUT you
can only have 100 stockholders which could hinder the growth of your company
What are the 2 different types of Corporations? What are the differences between the
two Corporation types? - Answers - S Corporations and C Corporations
S Corporations:
- taxed as a partnership (exempt from corporate income tax)
- has no more than 100 stockholders
- usually privately owned firms
C Corporations:
- double taxation
- larger than an S Corporation and there is no cap on the number of stockholders they
can have
- usually publicly-owned firms
What are the similarities and differences between an LLC and an LLP? - Answers -
BOTH LLC & LLP:
- both have limited liability like corporations but are taxed like partnerships
- investors can vote for decisions that serve their best interests
ONLY LLC:
- fields of business aren't typically specialized
- management can be appointed from outside or inside members of the company
