ugba-10 Spring 2011 Module 3 Acct/Fin INSTRUCTOR VERSION

1. During the housing bubble many local commercial banks heavily advertised to encourage homeowners to take a secured second mortgage against the equity in their homes to take the vacation of a lifetime. Whats wrong with this? a. Long term loan proposed for a short-term use of funds b. Long term loan proposed for a long-term use of funds c. Short term loan proposed for a long-term use of funds d. Short term loan proposed for a short-term use of funds Ans.: A L1 Although second mortgages have not been discussed, students whove never heard of them should recognize that mortgage is long term; and although vacation of a lifetime implies a long-term use, that is a fraudthe vacation lasts just a few short weeks.

2.

Which of the following is a disadvantage of the partnership form of business that applies to partnerships but not to other forms? a. Difficulty in raising funds b. Lack of control over what the business does c. Inheritance problems d. Double taxation Ans.: C L1 (others have difficulty with raising funds but inheritance is the one thats unique to partnerships.)

3. A successful entrepreneur famously made an angel investment in Google, giving Larry & Sergei $250,000 in return for shares in the firm while it was still a private corporation. He did not sell out at the time of the Google IPO and his shares are now famously worth roughly: a. $250,000 b. $750,000 c. $850,000 d. $1.8 billion Ans.: D L1 discussed, not on student slidesyou had to be there.

ugba-10 Spring 2011 Module 3 Acct/Fin INSTRUCTOR VERSION

4. Southern Charm T-Shirt manufacturer of South Carolina routinely sells its invoices to Clothing Factors Inc. of Columbia, SC. Clothing Factors typically offers Southern Charm 95 cents on the dollar for the invoices due in less than 30 days. Today Southern Charm brings in an invoice for goods sold to AMERICAN APPAREL of LA and the factor notes that AMERICAN has been having cash-flow problems and has been paying in 60 to 70 days rather than the 30 days stated on the invoice. How much will the factor offer on an invoice with a total of $100,000? a. $100,000 b. Less than $95,000 c. $95,000 d. More than $95,000 Ans.: B L1 actually fairly easy as similar Q at Q1. 5. What is the definition of per unit contribution? a. Selling Price X Number Sold b. Selling Price Variable Cost c. Fixed Cost + Variable Cost d. Fixed Cost / Number Sold Ans.: B L2 & Q2 easy, definitional 6. Can a Variable Cost ever be a sunk cost? a. Yes, if its in the future b. No, never c. Yes if it is the cost of past production d. Yes if its relevant Ans.: C L2 Once the t-shirts have been printed up and are on the shelf the Variable Cost becomes sunk (cant be undone). 7. Why does Walmart have to sell more t-shirts than Ralph Lauren? a. Fixed Costs are much higher b. Fixed Costs are lower c. Selling Price is close to Variable Cost d. Selling Price is close to Contribution Ans.: C L2

ugba-10 Spring 2011 Module 3 Acct/Fin INSTRUCTOR VERSION

8. Your sorority hosts a Faculty dinner for 60 sisters and 40 teachers. The expenses of the dinner are $200 for flower arrangements and $10 per attendee for food and labor (kitchen staff). What is $1,200? a. Total Variable Cost b. Total Cost c. Fixed Cost d. Average Cost Ans.: B L2 9. When we looked at Starbucks Income Statement online, we saw the Income went up sharply in the last year. What do the statements show is the cause of this improvement in profitability? a. End of nonrecurring expenses such as closing poorly-performing stores b. Much cheaper coffee prices c. Elimination of SG&A expense d. Doubling Revenue over the 3-year period Ans.: A L3 discussed at lecture 10. Why do companies in an industry tend to choose Fiscal Year end dates that are similar? a. Its required by the SEC b. Its required by the IRS c. Easier comparison to peers is favored by bankers and investors d. Herding: When one starts, the other follows to look-good to their customers Ans.: C L3 discussed at Q3 11. What is most true of corporations published on-paper Annual Reports? a. No modern serious investor would rely on them b. Before purchasing shares a serious investor would write to the firm and ask for a copy of the report to be sent by postal mail c. They usually contradict the information that is filed in the 10(k) d. The contain the Auditors critical analysis of the firms current strategy Ans.: A L3 easy, on slide

ugba-10 Spring 2011 Module 3 Acct/Fin INSTRUCTOR VERSION

12. In accrual accounting, how do we decide what expenses to include for this period on an Income Statement? a. Based on the checks we have actually written this period b. Based on the unpaid bills this period c. Matching: Expenses of the goods sold this period d. Matching: Expenses of the goods produced this period Ans.: C L3 not particularly easy because Accrual Accounting is inherently difficult and (d) is a hard distracter. 13. Has Starbucks been relying much on bond debt for growth, based on our examination of the last 3 years Balance Sheets? a. Bond issuance has grown year to year b. No c. Bond issuance has been heavy in the last year d. Starbucks paid off all their long-term debt during the period Ans.: B L4 14. What is true of Double Entry Bookkeeping? a. It could only really be used once firms started using computers b. It was first used to keep track of materiel (guns, supplies, etc) in World War II c. It was invented by Isaac Newton although Leibnitz also claimed credit for its invention d. It has been in continuous use for several hundred years Ans.: D L4 easy (Newton/Leibnitz was calculus, yuk, yuk, yuk) Picture of Lorenzo the Magnificent de Medici shown in class. 15. American Airlines bought a Boeing 737 in 1991 and depreciated it over 20 years. What happens in 2012? a. American gives the plane back to Boeing b. American sells the plane at Book Value to a South American airline c. Nothing d. American starts Depreciation all over again at the original purchase price Ans.: C L4 discussed in context of Starbucks and espresso machines when fully depreciated

ugba-10 Spring 2011 Module 3 Acct/Fin INSTRUCTOR VERSION

16. Which of the following would be written on the account Accrued Expenses if we make a balance sheet today? a. Health insurance premiums for staff paid at the beginning of the month with 2 weeks still to go in the month b. Wages due to baristas (coffee makers) that have been earned in the first 2 weeks of the month by the employees but not yet paid to them c. Coffee delivered by the firm, invoice has been sent but not yet paid d. Coffee delivered by the firm but the invoice has not yet been sent out Ans.: B L4 Moderately difficult; C &D are Accounts receivable matters and A is a pre-paid expense. 17. What is true of Starbucks dividends shown on the Statement of Cash Flows? a. SBUX has never paid a dividend b. The firm did not pay dividends for many years but paid dividends last year c. The firm has paid gradually increasing dividends year to signal the companys financial strength d. The firm has a very high payout ratio distributing almost all its profits to shareholders every year Ans.: B L5 18. What is the one thing that auditors say they may be unlikely to detect? a. Fraud b. Theft c. Manipulation of the accounting records d. A concerted scheme Ans.: D L5 easy on the slides 19. Dennis Koslowski and Mark Schwartz (respectively CEO and CFO) were each sentenced to 25 years in the Tyco scandal which was one of many audit failures that led to the passage of the Sarbanes-Oxley (Sarbox) Act. What were they doing that would now be illegal under Sarbox? a. Each approved loans to the other of tens of millions of dollars of corporate funds b. They both took salaries but did no actual work at the firm c. They sold Tyco shares to each other d. The both acted as auditors of their own firm Ans.: A L5 the bullet point of no executives only loans is on the slide about Sarbox.

ugba-10 Spring 2011 Module 3 Acct/Fin INSTRUCTOR VERSION

20. One of the following decreases cash in the Statement of Cash Flowswhich one? a. Reducing inventory so you have less inventory at the end of the quarter than at the beginning b. Selling goods and receiving Revenue c. Allowing more people to pay on credit so Accounts Receivable goes up d. Selling off production equipment that is no longer needed Ans.: C L5 somewhat counter-intuitive because credit is non-cash; the way to figure it out is that when the credit customers get the goods the Sale is recorded as Revenue, and some of that has to be COGS. So as Acct-Rec goes up, cash goes down. 21. Which of the following statements is most true? a. Most investors should invest in common stocks b. There is a wide variety of financial instruments to meet the needs of many different types of investors c. Most investors in the generation of people currently taking ugba-10 will undoubtedly choose mutual funds as their primary investment vehicle d. The market invariably gives superior total return to bonds Ans.: B L6 easy, on the slide 22. Shares listed on the New York Stock Exchange can legally be sold elsewhere (other exchanges, private transaction, ECNs). In recent months, roughly what percentage of NYSE-listed shares has actually been traded through the NYSE? a. 34 percent b. 50 percent c. 54 percent d. 90 percent Ans.: A L6 should be easy from recognition memory as this remarkable figure is on the slide 23. One of the following is not legal by the board of directors of a public companywhich one? a. Issue more shares and sell them to the public b. Issue more shares and use them to buy (take over) another company) c. Buy back its own shares d. Pay a special dividend only on shares owned by people who work for the firm Ans.: D L6 (the others are on the slide, so this is a bit of a conclusion to be drawn)

ugba-10 Spring 2011 Module 3 Acct/Fin INSTRUCTOR VERSION

24. Which is the broadest index of US stocks that is a good benchmark for assessing total market performance? a. Russell 2000 b. Russell 3000 c. Nasdaq Composite d. Standard & Poors 500 Stock Index Ans.: B L6 on slide 25. An in-class demonstration showed all except which one of the following about investors: a. Investors prefer more money rather than less moneythey want a greater return b. Investors have a preference for near moneyto receive a payoff sooner rather than later c. Sophisticated investors prefer instruments for which the payoff is unknown d. Investors will take on more risk if there is a possibility of a much higher return Ans.: C L6 is the odd one outin fact, investors want a reasonable idea of what the likely payoff will be. 26. In general, what is true about current interest rates for bonds traded in the US: a. They are at historic lows b. They have been steadily rising since 2001 c. Interest rates are wildly fluctuating d. They are near all time highs as investors prefer the safety of bonds to the risks of stocks Ans.: A L7 27. Last November, Berkeley voters approved a bond measure for $210 million of new bonds for High School science lab construction. Whats the problem with the bonds, according to lecture? a. They will raise much more money than the labs will actually cost b. It is impossible for Berkeley property owners to be able to afford the interest c. The interest rate chosen was too low, so no one will buy the bonds d. The duration of the bonds is much longer than the life of the labs Ans.: D L7 on slide

ugba-10 Spring 2011 Module 3 Acct/Fin INSTRUCTOR VERSION

28. On a Monday you buy a 10-year bond directly from the US Treasury. When can you sell it? a. Once a year on its anniversary date b. At any time c. At the end of its duration, on the due date d. Only if it is worth more than what you paid for it Ans.: B L7 discussed (Toyota Corolla example) 29. Which of the following describes the inflation rate in the US during the last 10 years, as compared to the last half of the 20th Century? a. Its been stable and rather low b. Inflation is high and increasing c. Inflation is high and remains so d. There is every evidence that were entering a period of hyperinflation Ans.: A L7 30. Late 2008 through 2009 saw what phenomenon in US equity markets (common stocks)? a. A Bull Market b. A classic Bear Market c. A period of unusual stability d. A last call rally of false hope Ans.: B L8 easy 31. Which of the following factors is most influential in determining the long-run price of a stock? a. The daily battle between greed and fear b. The book value of the firm c. Sophisticated investors discounting the future cash flows of the firm to present value d. What the assets would fetch if auctioned off Ans.: C L8 on slide 32. Many investors pay attention to the Price/Earnings ratio when comparing stocks, but they forget that the typical published P/E ratio (e.g. in a newspaper) from this problem: a. Is just the dividends, not the earnings b. Is usually backwards-looking trailing twelve months (ttm) c. Is just an estimate of previous stock prices d. Is calculated by the marked to market (mtm) method Ans.: B L8 other answers are bogus; exam taking technique suggests it has to be b or d.

ugba-10 Spring 2011 Module 3 Acct/Fin INSTRUCTOR VERSION

33. A portfolio protects an investor from unique risk and can be achieved with shares in as few as 8 to 9 companies as long as: a. The companies are in unrelated industries b. The share prices are not similar c. The shares are bought over a long period of time d. The companies are in solid, stable industries like energy and banking Ans.: A L8 34. In addition to the problems caused by the financial crisis, in 2008 many New York investors had to deal with the problems caused by Bernie Madoff. A NEW YORKER article notes that while the size of his fraud was massive, it was a very typical: a. Paretto scheme b. FX scheme c. Ponzi scheme d. Florida land scheme Ans.: C 49 35. The financial crisis of 2008-9 destroyed about $11 trillion (about 1 years GDP) of wealth in the US. Who were the beneficiaries, that is, when US investors lost money, who gained? According to an article in the NEW YORK TIMES by Uwe Reinhardt, the answer was: a. Hedge funds b. No one, the wealth disappeared c. The Europeans as the Euro gained ascendancy over the dollar as a reserve currency d. The Saudis because oil is traded in dollars Ans.: B 68 36. For several years the US Social Security System has been taking in more money in taxes than have been paid out to beneficiaries. An article from FORTUNE explains that this surplus has been invested in: a. A diversified portfolio of US stocks b. A well diversified portfolio that includes emerging market shares c. Corporate bonds d. US Treasuries Ans.: D 69

ugba-10 Spring 2011 Module 3 Acct/Fin INSTRUCTOR VERSION

37. We have discussed in class how the accounting scandals of the late 1990s led to a complete destruction of investor confidencethere was a large sell-off of US stocks. The SarbanesOxley Act was designed to deal with this problem. According to an article by Andy Serwer in FORTUNE, did it work? a. No, firms simply refused to list on the NYSE b. Nomany firms sought to be delisted from the NYSE c. Yes, the total market capitalization of US stocks went up more than 50 percent over a few years d. Yes, after the act was passed investors continued to purchase shares in spite of the fact that share prices continued to slide lower Ans.: C 41 38. Weve heard a lot recently about the pressures on several European countries (Greece, Ireland and Portugal, for example) concerning their sovereign debt. Countries want to retain their AAA (triple-A) bond rating as that means they can fund their debt with a lower interest rate as investors see the debt as rock-solid secure. An article in The Economist quoted the chief economist of Moodys (one of the bond rating agencies) and he said that when considering a downgrade from AAA for a country, the main statistic that he looks at is: a. The ratio of interest payments to government revenues b. The Unemployment Rate c. The Misery Index = Unemployment Rate + Inflation Rate d. The Employment Rate (the percent of people in the workforce who have jobs) Ans.: A 71 39. I have carefully checked my Scantron; my Section number is correctly shown, and I have checked that my name is written in Registrars form, last name first. a. Yes b. No Ans.: A Student loses point if they answer A but have not followed instructions. 40. This is version <N>; fill in the <N> bubble for this question and write the letter <N> up in the identification block of your Scantron. Ans.: VERSION NUMBER: Student loses point if this is not filled inno questions or argument.

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