DSST Principles of Finance Practice Questions Answer Key
1. D: A cash flow statement is also known as statement of cash flows or a funds flow statement. It shows how balance sheet changes affect the totals of cash and cash equivalents, and breaks those down into analyses of operating activities, investing activities, and financing activities.
2. D: Financing activities are manners in which companies find funding other than normal operation, and include gaining money from lenders and investors. Only the issuance of company stock from the options listed fits this description.
4. D: In the current year’s statement of cash flows, Wheels must report a $5,000 cash inflow in the cash from investing activities section of the statement of cash flows.
5. D: Although corporations are not natural persons, they legally have the rights and responsibilities of a person.
6. B: Common stock ownership gives the owner the right to vote in corporate matters, the right to share in any dividends, a percentage of the corporation’s value should it be liquidated, and the preemptive right, which is the right to buy a portion of newly issued stock in order to maintain a consistent percentage of company ownership. However, the owners of preferred stock have priority ahead of common stock owners when dividends are distributed.
7. C: Depreciation is the practice of spreading the expenses of a purchase over a series of accounting periods instead of allocating the entire expense in one period. The period is the expected life of the asset, though this can be adjusted.
8. A: To find equity, take total assets and subtract all liabilities ($2,500,000 – $300,000 = $2,200,000).
9. D: Return on assets shows how a company’s assets compare to the revenue they create. It is determined as: return on assets = (net income + interest expense – interest tax savings) / average total assets.
10. D: To begin with, it is important to know that there are options on the U.S. dollar that trade in the U.S. Consequently, any U.S. dollar based answers will be wrong – the answer will always be in terms of the foreign currency (in this case, the Japanese yen). Since the customer is concerned that the Japanese yen will weaken against the U.S. dollar while he or she is waiting to receive payment, the best answer is one which will protect the customer against depreciation in the currency. Puts offer downside protection against the value of the Japanese yen relative to the U.S. dollar.