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Accounting – True/False Problems

1.Capital gains to stockholders neither enter into the calculation of the value of the firm, nor the value of the common stock of the firm.A) TrueB) False2.The rise of institutional capitalism (as defined in the lecture) has further lessened the pressures on management to maximize shareholder value.A) TrueB) False3.The SEC ruling in the early ’90s pertaining to stock owned by financial institutions reduced the ability of those institutions to influence the governance of the corporation in which they owned stock.A) TrueB) False4.When companies rely upon retained earnings to finance expansion, it lessens the influence of capital market forces on those corporate decisions.A) TrueB) False5.Allowing dividends to be deducted from profits to arrive at taxable income, just as interest on debt has been treated, will tend to reduce the dividend payment from after-tax profits.A) TrueB) False6.Allowing dividends to be deducted from profits to arrive at taxable income, just as interest on debt has been treated, will tend to reduce the degree of financial or debt leverage employed by corporations.A) TrueB) False7.Profit satisficing, rather than profit maximizing, is more consistent with the increasing rise in the percentage of corporate stock owned by institutional investors.A) TrueB) False8.Excessive management compensation is less likely to occur as the percent of stock owned by institutional investors increases.A) TrueB) False9.In determining accounting profits, to the extent that expenditures generate revenues in future periods, they should be capitalized, not expensed.A) TrueB) False10.Excessive accruals of revenues tend to understate profits, rather than overstate them for a given accounting period.A) TrueB) False11.Failure to accrue expenses that generate revenues in the current period is more likely to overstate profits than to understate them.A) TrueB) False12.A positive cash flow during an accounting period cannot occur unless there are accounting profits for the same period.A) TrueB) False13.If a firm reports accounting profits during a period, there need not be a positive cash flow for the period.A) TrueB) False14.Depreciation is an example of a noncash charge.A) TrueB) False15.Estimates are necessary in capital budgeting based on discounted cash flows, but are not necessary for accounting for profits on an accrual basis.A) TrueB) False16.The market price of a stock is not affected by the expectations of future profits of the firm.A) TrueB) False17.The rate of discount used to determine the value of an average share of stock would be higher than the rate of discount on the average bond.A) TrueB) False18.Market Value Added (MVA) is more dependent upon balance sheet ratios for its determination than is Total Return to Shareholders (TRS).A) TrueB) False19.As interest rates rise persistently and significantly, the rate of discount in determining share price is more likely to be falling than rising.A) TrueB) False20.If the Efficient Market Hypothesis (EMH) is valid, the use of historical data by stock analysts is more likely to improve the accuracy of his or her recommendation than if he or she did not use it.A) TrueB) False21.The validity of indexing a portfolio to improve long-term rates of return is proven to be unjustified to the extent that the Efficient Market Hypothesis (EMH) is valid.A) TrueB) False22.The greater depreciation expense is, the lesser are a firm’s profits and the cash flow for the period in question.A) TrueB) False23.Efficient diversification by investors reduces a stock’s systematic risk but does not affect its unsystematic risk. A) TrueB) False24.The higher a firm’s use of debt or financial leverage, the more volatile is the firm’s return on equity. A) TrueB) False25.Firms that operate in highly cyclical markets tend to have higher costs of capital than do firms that operate in markets that are not significantly affected by business fluctuations.A) TrueB) False26.A higher return on invested capital or ROIC usually results in higher cash flows. A) TrueB) False27.Growth in the value of a firm is reduced if the ROIC is less than the cost of capital. A) TrueB) False28.If a firm has a high ROIC but low growth, it will benefit more from seeking an even higher ROIC than on a strategy of more rapid growth.A) TrueB) False29.Expanding a firm’s portfolio of products is usually less expensive than attempting to expand its market share of its existing products.A) TrueB) False30.Acquisition of other successful firms is usually the cheapest way to expand ROIC. ?A) TrueB) False31.The Principle of Value states that anything that does not increase cash flow does not increase value.A) TrueB) False32.Changing capital structure can create value even if it does not increase cash flow.A) TrueB) False33.Prior to the relatively recent change in the tax treatment of corporate dividends, an increase in the degree of debt leverage increased the cash flow but also increase the risk of bankruptcy. A) TrueB) False34.An entrenched management with little independent stockholder pressure, and following a behavior of profit satisficing rather than maximizing shareholder value, could rationally choose a strategy of expansion even if that expansion did not increase cash flow. A) TrueB) False35.Efficient diversification of a portfolio reduces unsystematic risk but does not alter systematic risk. A) TrueB) False36.Changing from straight-line depreciation to accelerated depreciation for tax purposes reduces the cash flow of the firm.A) TrueB) False

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