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1, The transaction demand for money refers to the demand to hold money: B

a. as a buffer against unforeseen event


b. to use in the purchase of goods and services
c. based on the opportunity of risks available on other financial instruments
d. in any of the above circumstance
2. The speculative demand for money will tend to: B
a. fall as the perceived risk on other assets rises
b. rise as the expected returns on other assets fall
c. be inversely related to the transaction demand for money
d. rise as the precautionary demand for money also rises
3. An expansion of money supply would most likely: A
a. lead to a decline in nominal interest rates
b. lead to an increase in nominal interest rates
c. reduce the equilibrium amount of money that economic agents would wish to hold.
d. reduce the inflation rate to minimum level.
4. Which of the following best describes the overarching, long-run objective of most central
banks? D
a. Minimize inflation rates
b. Fast economic growth
c. Current account surplus
d. Price Stability
5. Which action is a central bank least likely to take if it wants to encourage businesses and
households to borrow for investment and consumption purposes? A
a. Sell long-dated government securities
b. Purchase ling dated government treasuries
c. Purchase mortgage bongs or other securities
d. All actions would encourage businesses and households to borrow and invest
6. The least likely goal of a governments fiscal policy is to: C
a. redistribute income and wealth
b. influence aggregate national output
c. ensure the stability of the purchasing power of its currency
d. None of the above
7. Which statement regarding fiscal policy is most accurate? B
a. To raise business capital spending, personal income taxes should be reduced
b. Cyclically adjusted budget deficits are appropriate indicators of fiscal policy
c. An increase in the budget surplus is associated with expansionary fiscal policy
d. A decrease in budget deficit results from expansionary fiscal policy.
8. The primary goal of a publicly-owned firm interested in serving its stockholders should be to D
a. Maximize expected total corporate profit.
b. Maximize expected EPS.
c. Minimize the chances of losses.
d. Maximize the stock price per share.
e. Maximize expected net income.
9. Which of the following is an example of an area of business in which the use of questionable
ethics is considered a necessity? E
a. Attracting and sustaining new customers.
b. Hiring and keeping skilled employees.
c. Keeping up with competition.

d. Dealing with firms who use questionable ethics.


e. None of the statements above is correct.
10. Which of the following statements is most correct? C
a. Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of
U.S. businesses (in terms of number of businesses) are organized as corporations.
b. Most businesses (by number and total dollar sales) are organized as proprietorships or
partnerships because it is easier to set up and operate in one of these forms rather than as a
corporation. However, if the business gets very large, it becomes advantageous to convert to a
corporation, primarily because corporations have important tax advantages over proprietorships
and partnerships.
c. Due to legal considerations related to ownership transfers and limited liability, most business
(measured by dollar sales) is conducted by corporations.
d. Statements a, b, and c are correct.
e. None of the statements above is correct.
11. Last year Aldrin Co. had negative net cash flow, yet its cash on the balance sheet increased.
What could explain these events? E
a. Aldrin issued long-term debt.
b. Aldrin repurchased some of its common stock.
c. Aldrin sold some of its assets.
d. Statements a and b are correct.
e. Statements a and c are correct.
12. A stock analyst has acquired the following information for Palmer Products:

Retained earnings on the year-end 2001 balance sheet was $700,000.


Retained earnings on the year-end 2002 balance sheet was $320,000.
The company does not pay dividends.
The companys depreciation expense is its only non-cash expense.
The company has no non-cash revenues.
The companys net cash flow for 2002 was $150,000.

On the basis of this information, which of the following statements is most correct? A
a. Palmer Products had negative net income in 2002.
b. Palmer Products had positive net income in 2002, but it was less than its net income in 2001.
c. Palmer Products depreciation expense in 2002 was less than $150,000.
d. Palmer Products cash on the balance sheet at the end of 2002 must be lower than the cash it
had on its balance sheet at the end of 2001.
e. Palmer Products net cash flow in 2002 must be higher than its net cash flow in 2001.
13. Which of the following items can be found on a firms balance sheet listed as a current asset?
A
a. Accounts receivable.
b. Depreciation.
c. Accrued wages.
d. Statements a and b are correct.
e. Statements a and c are correct.
14. Below is the equity portion (in millions) of the year-end balance sheet that Glenn Technology
has reported for the last two years:
2002
2001
Preferred stock
$ 80
$ 80
Common stock
2,000
1,000
Retained earnings
2,000
2,340

Total equity
$4,080
$3,420
Glenn does not pay a dividend to its common stockholders. Which of the following statements is
most correct? B
a. Glenn issued preferred stock in both 2001 and 2002.
b. Glenn issued common stock in 2002.
c. Glenn had positive net income in both 2001 and 2002, but the companys net income in 2002
was lower than it was in 2001.
d. Statements b and c are correct.
e. None of the statements above is correct.
15. Analysts who follow Cascade Technology recently noted that, relative to the previous year, the
companys operating income (EBIT) and net income had declined but its operating cash flow had
increased. What could explain these changes? A
a. The companys depreciation and amortization expenses increased.
b. The companys interest expense decreased.
c. The companys tax rate increased.
d. Statements a and b are correct.
e. All of the statements above are correct
16. All else being equal, which of the following will increase a companys current ratio? A
a. An increase in accounts receivable.
b. An increase in accounts payable.
c. An increase in net fixed assets.
d. Statements a and b are correct.
e. All of the statements above are correct.
17. Pepsi Corporations current ratio is 0.5, while Coke Companys current ratio is 1.5. Both firms
want to window dress their coming end-of-year financial statements. As part of its window
dressing strategy, each firm will double its current liabilities by adding short-term debt and
placing the funds obtained in the cash account. Which of the statements below best describes
the actual results of these transactions? D
a. The transactions will have no effect on the current ratios.
b. The current ratios of both firms will be increased.
c. The current ratios of both firms will be decreased.
d. Only Pepsi Corporations current ratio will be increased.
e. Only Coke Companys current ratio will be increased.
18. Which of the following actions can a firm take to increase its current ratio? E
a. Issue short-term debt and use the proceeds to buy back long-term debt with a maturity of
more than one year.
b. Reduce the companys days sales outstanding to the industry average and use the resulting
cash savings to purchase plant and equipment.
c. Use cash to purchase additional inventory.
d. Statements a and b are correct.
e. None of the statements above is correct.
19. All of the following make up the financial system, except: E
a. Savers
b. Users
c. Financial institutions
d. Financial Markets
e. All are components of financial system.
20. Which of the following statements is most accurate? C
a. Bonds are long-term investments and can only be issued by government entities.
b. Shares of stocks represent ownership over a particular firm. Compensation through owning
shares is through interest it pays.

c. Money market instruments are normally short-term investments with interest payments.
d. Statements a and c are correct
e. Statements b and c are correct.
21. The market over which shares of stocks are offered to the general public for the first time: B
a. Stock Market
b. Primary Market
c. Fixed Income Market
d. Secondary Market
e. All of the above
22. Financial institutions include all of the following except: D
a. Commercial Banks
b. Non-depository institutions
c. Savings banks and credit unions
d. Securities and Exchange Commission
e. None of the above
23. The Philippine institution vested the right to oversee and manage trading of fixed income
security in the county: C
a. Philippine Stock Exchange
b. Bangko Sentral ng Pilipinas
c. Philippine Dealings Systems
d. Bureau of Internal Revenue
e. Bureau of Treasury
24. Which of the following clearly depicts the role of financial intermediaries in the financial
system? A
a. They provide a link between savers and users of funds
b. Financial intermediaries provide the needed funds for circulation
c. They function as the oversight body of the entire financial system.
d. Statements a and c are correct.
e. All of the statements are correct.
25. A speculative bond: D
a. Is a low-risk investment
b. Generally are not traded
c. Attractive to risk-averse investors
d. Offers the highest returns to investors
e. None of the above.

Long Problem. Prepare the cash flow statement for the year 2014 using the following information:

HANDI PACK FINANCING INC.


STATEMENTS OF PROFIT AND LOSS
Years Ended Decmber 31, 2014 and 2013
2014
REVENUES

ADMINISTRATIVE EXPENSES
Management and other professional
fees
Members benefits
General assembly expenses
Salaries, wages and benefits
Meetings and conferences
Depreciation
Representation
Communications, light and water
Enterprise expenses
Office supplies
Insurance expense
Bank charges
Travel and transportation
Amortization expense
Miscellaneous

Income Before Interest and Taxes


Interest Expense
Income before Tax
Income Tax
Net Income

3,012,368

2013
P

375,860
299,096
264,182
164,741
95,959
83,459
25,824
22,563
21,681
8,999
8,872
6,315
1,016
333
104,965
1,483,865
P

1,528,503
35,600
1,492,903
447,871
1,045,032

2,154,381

307,540
269,971
114,464
169,999
50,667
82,298
7,588
22,293
47,154
23,597
8,872
20,792
8,882
152,125
1,286,242
P

868,139
23,500
844,639
253,392
591,247

HANDI PACK FINANCING INC.


STATEMENTS OF FINANCIAL CONDITION
December 31, 2014 and 2013

2014

2013

ASSETS
Current Assets
Cash

Loans and receivables


Total Current Assets
Non-Current Assets
Investment in non-marketable equity securities
Property and equipment - net
A
Other asset - net
Total Non-Current Assets

1,592,298
11,111,61
6
12,703,91
4

6,413,004
9,443,466

71,265
148,600
9,667
229,532

12,933,44
6

3,030,462

71,265
232,059
303,324

9,746,790

177,482
24,000
694,511
895,993

LIABILITIES AND MEMBERS' EQUITY


Current Liabilities
Trade and other payables
Interest Payable
Dividends Payable
Total Current Liabilities

EQUITY

11,066,49
5
726,745
11,793,24
0

Share Capital
Retained Earnings
TOTAL EQUITY

Additional information:

57,654
12,600
1,069,952
1,140,206

12,933,44
6

8,594,003
256,794
8,850,797

9,746,790

1. Other asset represent the acquisition of a computer software during the year. The amount
presented is net of amortization expense recognized during the year.
2. Except for dividend declaration, no other changes happened for retained earnings.
3. Trade and other payables represent accruals and payable to suppliers.
4. All expenses, except depreciation and amortization, are in cash.
5. The company does not have inventory.