D775 Introduction to Business Finance - Set 4 - Part 1

Correct Answer: Increases purchasing power

Option a is correct because accounting focuses on recording and reporting past financial transactions with goals of accuracy and compliance with standards like generally accepted accounting principles. Option b is incorrect because marketing focuses on promoting products and services to customers rather than preparing financial statements and ensuring regulatory compliance with accounting standards. Option c is incorrect because operations focuses on producing goods and delivering services rather than the financial reporting and regulatory compliance activities described in the scenario. Option d is incorrect because finance focuses on managing resources for future growth and strategic planning rather than the accuracy and compliance emphasis of accounting activities.

Correct Answer: Financial statements

Option d is correct because accounting produces financial statements including balance sheets, income statements, and cash flow statements that document past financial transactions and company position. Option a is incorrect because growth strategies are forward-looking outputs produced by finance professionals rather than the historical documentation that accounting provides through financial statements. Option b is incorrect because investment portfolios are finance outputs related to managing assets for future returns rather than the transaction documentation that accounting produces. Option c is incorrect because financial forecasts are forward-looking finance outputs rather than the historical financial statements that accounting prepares to document past transactions.

Correct Answer: Generally accepted accounting principles

Option c is correct because generally accepted accounting principles guide accounting practices in the United States, ensuring accuracy, transparency, and compliance with financial reporting laws and regulations. Option a is incorrect because marketing principles guide promotional activities rather than financial reporting compliance and the accurate documentation of company transactions. Option b is incorrect because operational guidelines govern production processes rather than the financial reporting standards that ensure regulatory compliance in accounting. Option d is incorrect because investment theories guide finance decisions rather than the accounting standards that ensure legal compliance in financial statement preparation.

Correct Answer: Finance function

Option a is correct because finance ensures the best use of resources to achieve growth, stability, and profitability through strategic planning, investment decisions, and risk management. Option b is incorrect because accounting ensures accuracy, transparency, and compliance with regulations rather than optimizing resource utilization for future growth and profitability goals. Option c is incorrect because auditing verifies the accuracy of financial records rather than making strategic decisions about optimizing resource use for company growth. Option d is incorrect because compliance ensures adherence to regulations rather than the strategic resource optimization for growth and profitability that finance provides.

Correct Answer: Analysts and investors

Option d is correct because finance information serves managers, investors, and analysts who make forward-looking decisions about investments, strategies, and future company growth opportunities. Option a is incorrect because tax auditors primarily use historical accounting information for compliance verification rather than forward-looking finance information for strategic decisions. Option b is incorrect because historical record keepers work with past transaction documentation rather than the forward-looking finance information used for investment decisions. Option c is incorrect because compliance officers focus on regulatory adherence using accounting information rather than strategic decision-making using finance projections and forecasts.

Correct Answer: Finance

Option b is correct because finance requires analytical skills, forecasting, risk assessment, and strategic thinking to make forward-looking decisions about investments, growth, and resource management. Option a is incorrect because accounting primarily requires detail orientation and strong technical knowledge of accounting standards rather than the forecasting and strategic skills finance demands. Option c is incorrect because auditing requires verification and compliance skills rather than the forward-looking analytical and forecasting abilities that finance professionals need. Option d is incorrect because tax preparation requires knowledge of tax codes and regulations rather than the strategic forecasting and risk assessment skills essential to finance.

Correct Answer: Personal finance

Option a is correct because personal finance involves managing individual or household financial activities including budgeting, saving, investing, insurance, and retirement planning for personal goals. Option b is incorrect because public finance involves government budget management, taxation, and public spending rather than individual household budgeting and retirement planning activities. Option c is incorrect because business finance involves company money management including capital investments and corporate risk management rather than personal household financial planning. Option d is incorrect because corporate finance is another term for business finance focusing on company decisions rather than individual household financial management activities.

Correct Answer: Public finance

Option c is correct because public finance involves managing government budgets, collecting taxes, deciding spending priorities on infrastructure and services, and managing public debt obligations. Option a is incorrect because personal finance involves individual and household financial management rather than government taxation, public spending, and infrastructure investment decisions. Option b is incorrect because corporate finance involves company financial decisions rather than government budget allocation, taxation, and public infrastructure funding activities. Option d is incorrect because investment finance is not a standard classification, and the government activities described fall under public finance focused on fiscal policy.

Correct Answer: Business finance

Option d is correct because business finance involves company money management including capital investment decisions, choosing between debt and equity financing methods, and managing corporate risks. Option a is incorrect because personal finance involves individual household financial decisions rather than corporate choices between debt and equity financing for business projects. Option b is incorrect because public finance involves government fiscal decisions rather than corporate financing choices between borrowing money and selling ownership shares. Option c is incorrect because individual finance relates to personal financial management rather than the corporate financing decisions that business finance encompasses.

Correct Answer: Shareholders

Option a is correct because business finance aims to maximize shareholder value while ensuring stability, making decisions about investments, financing, and risk management that benefit company owners. Option b is incorrect because government agencies are served by public finance rather than business finance, which focuses on maximizing returns for company shareholders and owners. Option c is incorrect because nonprofit organizations have different objectives than profit maximization, while business finance specifically aims to create value for shareholders. Option d is incorrect because foreign governments are not the primary beneficiaries of business finance, which focuses on maximizing value for the shareholders who own the company.

Correct Answer: Public need and policy

Option c is correct because public finance decisions are based on public need, economic policies, and political factors rather than the profitability and market forecasts driving business finance decisions. Option a is incorrect because shareholder returns drive business finance decisions rather than public finance, which focuses on serving citizens and maintaining economic stability. Option b is incorrect because corporate profit margins guide business decisions rather than public finance decisions, which consider public welfare and political considerations. Option d is incorrect because individual risk tolerance guides personal finance decisions rather than public finance, which responds to collective public needs and policy goals.

Correct Answer: Investment decisions

Option d is correct because investment decisions involve using financial concepts to select which projects to fund, evaluating whether proposed investments will generate adequate returns for the company. Option a is incorrect because tax preparation is an accounting function focused on regulatory filings rather than the strategic selection of investment projects that finance managers perform. Option b is incorrect because compliance reporting involves meeting regulatory requirements rather than strategically evaluating and selecting projects for company investment. Option c is incorrect because audit management involves reviewing financial records for accuracy rather than making strategic decisions about which investment projects to pursue.

Correct Answer: Using financial ratios

Option a is correct because using ratios involves analyzing company performance through numerical measures like profitability and liquidity ratios to assess operational effectiveness and financial health. Option b is incorrect because tax preparation is an accounting function focused on regulatory filings rather than analyzing company performance through financial ratio calculations. Option c is incorrect because regulatory compliance involves meeting legal requirements rather than analyzing performance through profitability and liquidity ratio calculations. Option d is incorrect because historical record keeping documents past transactions rather than analyzing current performance through financial ratio calculations and interpretations.

Correct Answer: Controlling risk

Option d is correct because controlling risk involves using cost of capital analysis to decide between debt financing through loans and equity financing through selling ownership stakes. Option a is incorrect because preparing tax returns is an accounting function focused on regulatory filings rather than the strategic financing decisions about debt versus equity sources. Option b is incorrect because conducting audits involves verifying financial record accuracy rather than making strategic decisions about funding sources and capital structure. Option c is incorrect because recording transactions is an accounting function documenting past events rather than making forward-looking decisions about financing methods.

Correct Answer: Common stock

Option c is correct because common stock represents ownership in a company that comes with voting rights on corporate decisions and potential dividends that vary based on profitability. Option a is incorrect because corporate bonds are debt instruments requiring interest payments rather than equity securities providing ownership, voting rights, and variable dividends. Option b is incorrect because treasury bonds are government debt securities rather than corporate ownership shares that provide voting rights and variable dividend potential. Option d is incorrect because municipal bonds are local government debt instruments rather than corporate ownership securities with voting rights and dividend participation.

Correct Answer: Preferred stock

Option d is correct because preferred stock is a hybrid security providing fixed dividend payments like bonds while representing ownership, though typically without the voting rights common stock offers. Option a is incorrect because treasury bonds are government debt instruments rather than corporate equity securities that combine ownership with fixed dividend characteristics. Option b is incorrect because municipal bonds are local government debt securities rather than hybrid corporate securities offering fixed dividends with ownership stakes. Option c is incorrect because common stock provides variable dividends and voting rights rather than the fixed payments and limited rights that characterize preferred stock.

Correct Answer: Corporate bond

Option a is correct because corporate bonds are debt securities that allow companies to borrow money while making periodic interest payments without diluting existing shareholder ownership stakes. Option b is incorrect because common stock represents ownership and would dilute existing shareholders rather than allowing the company to borrow without giving up ownership. Option c is incorrect because preferred stock also represents ownership and would dilute existing shareholders rather than providing borrowing without ownership dilution. Option d is incorrect because mutual fund shares are investment vehicle units rather than corporate securities that allow companies to borrow capital from investors.

Correct Answer: Lowest risk level

Option c is correct because triple-A ratings indicate the safest bonds with the lowest risk of default, though these securities typically offer lower returns due to their high credit quality. Option a is incorrect because highest risk bonds receive lower ratings like double-B or below, while triple-A ratings specifically indicate minimal default risk and maximum safety. Option b is incorrect because moderate risk bonds receive intermediate ratings, while triple-A specifically indicates the highest credit quality with minimal risk of payment failure. Option d is incorrect because triple-A is a specific high-quality rating indicating excellent creditworthiness rather than an unrated status with unknown risk characteristics.

Correct Answer: Option contract

Option b is correct because option contracts provide the right but not the obligation to buy or sell assets at predetermined prices, giving investors flexibility to choose whether to exercise. Option a is incorrect because futures contracts require mandatory completion of transactions at predetermined prices and dates rather than providing optional choice. Option c is incorrect because bond agreements are debt instruments requiring interest payments rather than derivative contracts offering the right to buy or sell. Option d is incorrect because stock certificates represent ownership rather than derivative contracts providing optional rights to purchase or sell assets.

Correct Answer: Futures contract

Option d is correct because futures contracts require mandatory buying or selling at predetermined prices and dates, protecting businesses against unfavorable price swings for needed materials. Option a is incorrect because option contracts provide rights without obligations rather than the mandatory transactions that futures contracts require at specified dates. Option b is incorrect because stock purchases involve buying ownership shares rather than locking in predetermined prices for future raw material acquisitions. Option c is incorrect because bond investments involve lending money for interest rather than establishing predetermined prices for future commodity purchases.