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, REVIEW PROBLEMS FOR MIDTERM EXAM 1
1. Joe is a general partner in a limited partnership firm, while Jane is a limited partner in that same firm. Which
of the following statements regarding their respective relationships to the firm are correct?
Jane's liability for the firm’s debts consists solely of her investment in the firm.
2. What is the process of double taxation for the stockholders in a C corporation?
The corporation is taxed on the profits it makes, and the owners are taxed when this profit is
distributed to them.
3. In which of the following ways is a limited liability company like a corporation?
All of its owners' liability is restricted to their investment in the firm.
4. Which of the following is typically the major factor in limiting the growth of a sole proprietorship
The amount of money that can be raised by the firm is limited by the fact that the single owner must
make good all debts.
5. What is the major way in which the roles and obligations of the owners of a limited liability company differ
from the roles and obligations of limited partners in a limited partnership?
The owners of a limited liability company can take an active role in running the company.
6. What is the major advantage corporations have over other business entities?
A) It is easier for a corporation to raise capital than other forms of businesses.
B) A corporation is treated as a separate legal entity for tax and legal purposes.
C) A corporation's shares can be freely traded among its shareholders.
D) All of the above are advantages that a corporation has over other business forms.
7. Which of the following are unique for an S corporation?
A) The firm’s profits and losses are not taxed at the corporate level, but shareholders must include these
profits and losses on their individual tax returns.
B) The shareholders of an S corporation must include the firm's profit and losses in their individual income
taxes even if no money is distributed to them.
C) There is a maximum limit on the number of shareholders for an S corporation.
D) D) all of the above
8. Whose interests should a financial manager consider paramount when making a decision?
the stockholders who have risked their money to become owners of the company
9. How do the shareholders of most corporations exercise their control of that corporation?
by electing members of a board of directors
A) 10. A hostile takeover is when a rich individual or organization purchases a large fraction of the stock of a
poorly performing firm and in doing so gets enough votes to replace the board of directors and the CEO.
1
, 11. Which of the following are major duties of a financial manager?
I. To make investment decisions
II. To make financing decisions
III. To manage cash flow from operating activities
12. Which of the following is NOT a function of the board of directors?
A) day-to-day running of the company
13. The possibility of a conflict of interest between the stockholders (or equity holders) and the managers of a
firm is called: The agency problem.
14. Which of the following best describes why the left and right sides of a balance sheet areequal?
The assets must equal liabilities plus stockholders' equity, because stockholders' equity is the difference
between the assets and the liabilities.
Assets= liabilities + equity
15. What is the main problem in using a balance sheet to provide an accurate assessment of the value of a
company's equity?
A) Valuable assets such as the company's reputation, the quality of its work force, and the strength of
its management are not captured on the balance sheet.
16. Refer to the balance sheet above. What is Luther's net working capital in 2005?
NWC = Current assets - Current liabilities = 144 - 132 = $12 million
2
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Downloaded by: | https://scholarfriends.com/singlePaper/619463/fin-3013-midterm-1-review-with-solutions-contains-
102-qa
Distribution of this document is illegal.
, REVIEW PROBLEMS FOR MIDTERM EXAM 1
1. Joe is a general partner in a limited partnership firm, while Jane is a limited partner in that same firm. Which
of the following statements regarding their respective relationships to the firm are correct?
Jane's liability for the firm’s debts consists solely of her investment in the firm.
2. What is the process of double taxation for the stockholders in a C corporation?
The corporation is taxed on the profits it makes, and the owners are taxed when this profit is
distributed to them.
3. In which of the following ways is a limited liability company like a corporation?
All of its owners' liability is restricted to their investment in the firm.
4. Which of the following is typically the major factor in limiting the growth of a sole proprietorship
The amount of money that can be raised by the firm is limited by the fact that the single owner must
make good all debts.
5. What is the major way in which the roles and obligations of the owners of a limited liability company differ
from the roles and obligations of limited partners in a limited partnership?
The owners of a limited liability company can take an active role in running the company.
6. What is the major advantage corporations have over other business entities?
A) It is easier for a corporation to raise capital than other forms of businesses.
B) A corporation is treated as a separate legal entity for tax and legal purposes.
C) A corporation's shares can be freely traded among its shareholders.
D) All of the above are advantages that a corporation has over other business forms.
7. Which of the following are unique for an S corporation?
A) The firm’s profits and losses are not taxed at the corporate level, but shareholders must include these
profits and losses on their individual tax returns.
B) The shareholders of an S corporation must include the firm's profit and losses in their individual income
taxes even if no money is distributed to them.
C) There is a maximum limit on the number of shareholders for an S corporation.
D) D) all of the above
8. Whose interests should a financial manager consider paramount when making a decision?
the stockholders who have risked their money to become owners of the company
9. How do the shareholders of most corporations exercise their control of that corporation?
by electing members of a board of directors
A) 10. A hostile takeover is when a rich individual or organization purchases a large fraction of the stock of a
poorly performing firm and in doing so gets enough votes to replace the board of directors and the CEO.
1
, 11. Which of the following are major duties of a financial manager?
I. To make investment decisions
II. To make financing decisions
III. To manage cash flow from operating activities
12. Which of the following is NOT a function of the board of directors?
A) day-to-day running of the company
13. The possibility of a conflict of interest between the stockholders (or equity holders) and the managers of a
firm is called: The agency problem.
14. Which of the following best describes why the left and right sides of a balance sheet areequal?
The assets must equal liabilities plus stockholders' equity, because stockholders' equity is the difference
between the assets and the liabilities.
Assets= liabilities + equity
15. What is the main problem in using a balance sheet to provide an accurate assessment of the value of a
company's equity?
A) Valuable assets such as the company's reputation, the quality of its work force, and the strength of
its management are not captured on the balance sheet.
16. Refer to the balance sheet above. What is Luther's net working capital in 2005?
NWC = Current assets - Current liabilities = 144 - 132 = $12 million
2
