D775 Introduction to Business Finance - Set 3 - Part 1

Correct Answer: Only historical performance

Option a is correct because the analogy highlights how accounting focuses on historical data from past transactions while finance looks forward to future planning and strategic decisions. Option b is incorrect because while both fields have regulatory aspects, the sports analogy specifically emphasizes the difference in time orientation rather than compliance requirements between the disciplines. Option c is incorrect because stakeholder management is not the primary focus of the analogy, which specifically contrasts looking backward at past results versus forward at future decisions. Option d is incorrect because revenue generation is a business goal common to both disciplines, not the distinguishing characteristic illustrated by the scorekeeping versus drafting analogy.

Correct Answer: Narrower versus broader focus

Option c is correct because accounting has a narrower scope focused on compliance, accuracy, and reporting while finance has a broader scope encompassing planning, management, and strategic decision-making. Option a is incorrect because both accountants and finance professionals require regulatory knowledge, though in different areas, making this an incomplete distinction between the two roles. Option b is incorrect because both fields require strong mathematical abilities, and this characteristic does not effectively distinguish the fundamental scope difference between accounting and finance. Option d is incorrect because technology requirements exist in both professions and do not capture the essential distinction between accounting's narrow compliance focus and finance's broader strategic scope.

Correct Answer: Predictions and projections

Option d is correct because finance decision-making is based on predictions, trends, and projections about future performance rather than historical records of what already happened. Option a is incorrect because historical transaction records are the foundation of accounting work, not the primary basis for finance decision-making which focuses on forward-looking analysis. Option b is incorrect because compliance requirements guide accounting practices primarily, while finance decisions are driven by strategic forecasts and anticipated future conditions. Option c is incorrect because tax return calculations fall within accounting responsibilities, while finance professionals focus on projecting future scenarios and making forward-looking strategic decisions.

Correct Answer: Detail orientation and standards knowledge

Option a is correct because accountants require detail-oriented skills and strong technical knowledge of accounting standards like generally accepted accounting principles to ensure accuracy and compliance. Option b is incorrect because marketing and sales expertise falls outside core accounting competencies, which focus on accurate recording and reporting according to established accounting standards. Option c is incorrect because software development is a technology field separate from accounting, which primarily requires mastery of accounting standards and attention to transactional detail. Option d is incorrect because human resources management is a distinct business function unrelated to the core accounting skills of technical standards knowledge and detailed transaction recording.

Correct Answer: Personal finance

Option c is correct because personal finance involves managing individual or household financial activities including budgeting, saving, investing, debt management, and retirement planning for families. Option a is incorrect because business finance deals with company money management including raising funds, investing in projects, and handling corporate risks rather than household financial activities. Option b is incorrect because public finance involves government budget management, taxation, and public spending rather than the individual and family financial planning described in this scenario. Option d is incorrect because corporate finance is another term for business finance focusing on company financial decisions, not the personal and household money management activities described here.

Correct Answer: Public finance

Option d is correct because public finance involves managing government budgets, collecting taxes, deciding spending priorities on infrastructure, and managing public debt through fiscal policy decisions. Option a is incorrect because personal finance focuses on individual and household financial management rather than government taxation, public spending, and national debt management activities. Option b is incorrect because business finance involves corporate money management and investment decisions rather than government budget allocation, taxation, and public infrastructure funding. Option c is incorrect because corporate finance deals with company financial strategies rather than the governmental fiscal activities of tax collection, public spending, and debt management.

Correct Answer: Investment decisions

Option c is correct because investment decisions involve using concepts like time value of money to determine which projects to fund and whether investments will generate adequate returns. Option a is incorrect because compliance reporting falls under accounting responsibilities focused on accurate financial statement preparation rather than evaluating potential project profitability and returns. Option b is incorrect because tax preparation is an accounting function dealing with regulatory filings rather than the strategic evaluation of whether new projects merit investment funding. Option d is incorrect because audit management involves reviewing financial records for accuracy and compliance rather than evaluating whether new investments will generate sufficient profitability.

Correct Answer: Controlling risk through capital

Option a is correct because controlling risk involves using cost of capital analysis to decide between funding with debt from loans or equity from selling stock ownership. Option b is incorrect because historical record keeping is an accounting function focused on documenting past transactions rather than making forward-looking decisions about funding source selection. Option c is incorrect because regulatory compliance involves meeting legal requirements in financial reporting rather than strategically choosing between debt and equity financing options. Option d is incorrect because financial statement preparation is an accounting responsibility rather than the finance function of evaluating and selecting optimal funding sources for projects.

Correct Answer: Project success evaluation

Option c is correct because tracking results allows financial managers to evaluate whether investment projects achieved their intended objectives and generated the expected returns for the company. Option a is incorrect because past accounting accuracy is verified through audits and accounting reviews rather than through the financial management process of tracking project outcomes. Option b is incorrect because regulatory compliance status involves meeting legal requirements rather than assessing whether projects delivered the anticipated business results and returns. Option d is incorrect because tax liability calculations fall under accounting responsibilities rather than the financial management function of evaluating whether projects achieved their goals.

Correct Answer: Common stock

Option d is correct because common stock represents ownership in a company that comes with voting rights on corporate decisions and potential dividends, though with higher risk but more upside. Option a is incorrect because preferred stock provides fixed dividends without voting rights, making it a hybrid between stocks and bonds rather than full ownership with voting privileges. Option b is incorrect because corporate bonds represent debt that companies must repay with interest rather than ownership shares with voting rights and dividend potential. Option c is incorrect because treasury bonds are government debt securities rather than corporate ownership shares that provide voting rights and potential dividend payments to investors.

Correct Answer: Preferred stock

Option c is correct because preferred stock is a hybrid of stock and bond characteristics, providing investors with fixed dividends that are safer than common stock but without voting rights. Option a is incorrect because common stock provides voting rights and variable dividends rather than the fixed payments without voting privileges that characterize preferred stock investments. Option b is incorrect because municipal bonds are debt securities issued by local governments rather than equity securities offering fixed dividends from corporate issuers. Option d is incorrect because treasury bonds are government debt obligations rather than corporate equity securities that provide fixed dividend payments to shareholders.

Correct Answer: Bond

Option d is correct because a bond is a loan investors give to a company or government in exchange for interest payments, with the principal amount repaid at maturity. Option a is incorrect because common stock represents ownership in a company rather than a debt obligation requiring interest payments and principal repayment to investors. Option b is incorrect because preferred stock is an equity security providing ownership with fixed dividends rather than a debt instrument requiring principal repayment. Option c is incorrect because a mutual fund is an investment vehicle pooling money from multiple investors rather than a debt security issued by a company seeking capital.

Correct Answer: Municipal bond

Option d is correct because municipal bonds are issued by local governments to finance public projects like roads and schools, typically offering tax-exempt interest income to attract investors. Option a is incorrect because corporate bonds are issued by businesses to fund company operations and growth rather than government infrastructure projects like roads and schools. Option b is incorrect because treasury bonds are issued by the federal government rather than local governments seeking to fund community infrastructure and public projects. Option c is incorrect because junk bonds are high-risk corporate securities with low credit ratings rather than government-issued debt for funding public infrastructure projects.

Correct Answer: Treasury bond

Option a is correct because treasury bonds are issued by the federal government and considered the safest investments due to backing by the full faith and credit of the government. Option b is incorrect because corporate bonds carry default risk depending on the issuing company's financial health, making them less safe than government-backed treasury securities. Option c is incorrect because municipal bonds have some default risk based on the issuing local government's financial condition, though less than corporate bonds. Option d is incorrect because junk bonds are specifically high-risk securities issued by companies with poor credit ratings, representing the opposite of safe investment options.

Correct Answer: Junk bonds

Option c is correct because junk bonds are high-risk securities rated below investment grade that offer higher yields to compensate investors for the elevated risk of issuer default. Option a is incorrect because treasury bonds are government securities considered among the safest investments available, representing the opposite of high-risk junk bond characteristics. Option b is incorrect because municipal bonds are issued by local governments for public projects and are generally considered safer than high-risk corporate junk bonds. Option d is incorrect because premium bonds is not the standard term for high-risk securities with below-investment-grade ratings that characterize junk bond investments.

Correct Answer: Option

Option b is correct because options are financial contracts giving holders the right but not obligation to buy or sell assets at specified prices, used for hedging risk or speculation. Option a is incorrect because futures contracts require mandatory buying or selling at predetermined prices and dates, unlike options which provide choice without obligation to act. Option c is incorrect because bonds are debt securities requiring interest payments and principal repayment rather than derivative contracts providing rights to buy or sell assets. Option d is incorrect because mutual funds are pooled investment vehicles rather than derivative contracts providing rights to purchase or sell underlying assets at specified prices.

Correct Answer: Futures contract

Option c is correct because futures contracts require buying or selling assets at predetermined prices and dates, allowing farmers to guarantee selling prices and protect against unfavorable market swings. Option a is incorrect because option contracts provide rights without obligations, while the farmer needs a binding agreement that guarantees the selling price will be honored at harvest. Option b is incorrect because common stock represents company ownership rather than a derivative contract that locks in guaranteed prices for commodities like agricultural products. Option d is incorrect because municipal bonds are government debt securities rather than derivative instruments used to protect against commodity price fluctuations in agricultural markets.

Correct Answer: Investment funds

Option a is correct because investment funds pool money from multiple investors and are professionally managed to create diversified portfolios, lowering risk while potentially increasing returns. Option b is incorrect because individual stocks represent single company ownership rather than diversified pooled investments managed by professional fund managers. Option c is incorrect because corporate bonds are individual debt securities issued by companies rather than diversified investment pools managed by professional portfolio managers. Option d is incorrect because derivatives are contracts based on underlying asset values rather than diversified pooled investment vehicles offering professional management benefits.

Correct Answer: Exchange-traded fund

Option c is correct because exchange-traded funds combine diversification benefits of mutual funds with the ability to trade throughout the day on stock exchanges like individual stocks. Option a is incorrect because pension funds are retirement savings vehicles for employees rather than exchange-traded investment products accessible for daily trading on stock markets. Option b is incorrect because hedge funds are private investment vehicles for wealthy investors using complex strategies rather than publicly traded diversified funds available to all investors. Option d is incorrect because mutual funds are priced only once daily at market close rather than trading continuously throughout the day on exchanges like exchange-traded funds.

Correct Answer: Hedge funds

Option d is correct because hedge funds are private investment vehicles using various aggressive strategies with less regulation, typically available only to wealthy investors seeking potentially higher returns. Option a is incorrect because mutual funds are publicly available diversified investments with more regulation and lower risk profiles compared to hedge funds restricted to wealthy investors. Option b is incorrect because pension funds are retirement vehicles managed conservatively for employee retirement security rather than aggressive private funds for wealthy investors. Option c is incorrect because treasury bonds are safe government debt securities rather than aggressive private investment funds employing complex strategies for wealthy investors.