CORPORATE FINANCE CHAPTER 1-3 STUDY GUIDE QUESTIONS & CORRECT ANSWERS 2026/2027

Corporate Finance Chapter 1-3 Study Guide rv rv rv rv rv




1. When the present financial ratios of a firm are compared with similar ratios for
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another firm in the same industry, it is called trend analysis.: False
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2. A company with negative net income will also have negative operating cash flo
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w.: False rv




3. An income statement reports a firm's cumulative revenues and expenses fr
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om the inception of the firm through the income statement date.: False
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4. If company A has a higher current ratio than company B, it means company A m
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ust also have a higher quick ratio than company B.: False
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5. Borrowing money causes a corporation's return on assets to decrease be- rv rv rv rv rv rv rv rv rv rv




cause of the interest that must be paid.: True
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6. If company A has lower days in inventory than company B, then company A will
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have a higher inventory turnover.: True
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7. Suppose two companies have the same operating income. In that case, their ne
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t incomes will still differ if one company finances its assets with more debt and th
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e other with more equity.: True
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8. According to accrual accounting, revenues are recognized when earned, and ex rv rv rv rv rv rv rv rv rv rv




penses are recognized when incurred.: True rv rv rv rv rv




9. Nishaa has been promoted and is now in charge of all external financing. In oth
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er words, she is in charge of:
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- capital structure management. rv rv




- asset allocation. rv




- risk management. rv




- capital budgeting. rv




- working capital management.: Capital Structure Management rv rv rv rv rv




10. Vera opened a used bookstore and is both the 100 percent owner and the
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store's manager. Which type of business entity does Vera own if she is perso
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nally liable for all the store's debts?
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- Sole proprietorship rv




- Limited partnership rv




- Corporation
- Joint stock company rv rv




- General partnership: Sole Proprietorship rv rv rv



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, Corporate Finance Chapter 1-3 Study Guide rv rv rv rv rv




11. Which one of the following forms of business organization offers liability pr
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otection to some of its owners but not to all of its owners? rv rv rv rv rv rv rv rv rv rv rv rv




- Sole proprietorship rv




- General partnership rv




- Limited partnership rv




- Limited liability company rv rv




- Corporation: Limited Partnership rv rv




12. A firm has common stock of $89, paid-in capital of $260, total liabilities of
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$405,currentassetsof$380,andnetfixedassetsof$590.Whatistheamount of the
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shareholders' equity?
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- $970 rv




- $525 rv




- $565 rv




- $754 rv




- $185: $565rv rv



Shareholders' equity = Current assets + Net fixed assets − Total liabilities
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13. At the beginning of the year, long-
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term debt of a firm is $286 and total debt is $328. At the end of the year, long-
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term debt is $258 and total debt is $338. The interest paid is $24. What is the am
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ount of the cash flow to creditors?
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$28
$24
−$28
−$52
$52: $52 rv



CFC = $24 − ($258 − 286) = $52
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14. For the past year, Momsen Limited had sales of $44,432, interest expense of
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$3,074, cost of goods sold of $14,909, selling and administrative expense of $1
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0,816, and depreciation of $4,965. If the tax rate was 24 percent, what was the
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company's net income? rv rv




- $8,108 rv




- $10,668 rv



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