CHAPTER 15

SPREADING THE MESSAGE: PROMOTIONAL STRATEGIES

MULTIPLE CHOICE QUESTIONS

What Is Promotion?

1. Of the four marketing mix components, _____ is perhaps the one component most often associated with marketing.a) placeb) pricec) productd) promotion

2. Of the following, promotion may take the form of _____.a) pricingb) productionc) inventory developmentd) direct communication

3. A(n) _____ is a statement or document that defines the direction and scope of the promotional activities that a company will use to meet its marketing objectives. a) advertising strategyb) marketing strategyc) promotional strategy d) marketing coverage strategy

4. Which of the following is the first promotional priority? a) to appeal b) to inform c) to persuaded) to remind

5. Sarita's confection store sells premium chocolate fudge. Because the confectionary market is saturated by competition, which promotional strategy should Sarita use to get people to try her fudge?a) appealingb) informingc) persuading d) reminding

6. Andrew has formulated a revolutionary, biodegradable laundry detergent using recycled materials for packaging. Which promotional strategy should Andrew use?a) informing b) persuadingc) remindingd) appealing

7. Keeping the product in the customer’s mind on a continual basis is the goal of _____.a) informative advertisingb) persuasive advertisingc) reminder advertising d) personal selling

8. A company’s _____ consists of a specific blend of personal selling, sales promotion, advertising, direct-marketing tools, and public relations that work best for the firm’s product variables, market, and desired objectives.a) promotional mix b) promotional strategyc) promotional goald) promotional objective

9. _____ allows for immediate interaction between buyer and seller, while _____ uses promotional materials aimed at target customers with the goal of having them respond by placing an order, visiting a website, or performing some other desired action. a) Advertising; personal sellingb) Direct marketing; advertisingc) Personal selling; direct marketing d) Personal selling; sales promotions

10. The primary role of _____ is to create product awareness and stimulate demand by bringing a consistent message to a large targeted consumer group economically. a) direct marketing b) advertising c) sales promotiond) public relations

11. Companies rely on _____ to build a favorable corporate image and foster positive relations with their many audiences. a) public relations b) advertising c) direct marketing d) telemarketing

12. Familiar items such as laundry detergent can be explained adequately through _____, while _____ is generally required to communicate the features of unfamiliar and sophisticated goods and services such as office-automation equipment or municipal waste-treatment facilities. a) advertising; sales promotionb) advertising; public relationsc) advertising; personal selling d) advertising; direct marketing

13. Which of the following is a factor to consider in selecting an appropriate promotional mix?a) product’s sizeb) product’s research costsc) the size and concentration of company warehouses d) product’s stage in the product life cycle

14. A _____ strategy uses the sales force and a number of trade promotions to motivate wholesalers and retailers to push products to end users, whereas a _____ strategy stimulates consumer demand via advertising and a number of consumer promotions.a) buy; sell b) sell; buyc) pull; push d) push; pull

Personal Selling

15. _____ can range from telemarketers selling home security systems and stockbrokers selling securities to engineers selling computers and nuclear physicists selling consulting services.a) Missionary salespeopleb) Order takers c) Order getters d) Technical salespeople

16. As a salesperson, Stephanie must invest a significant amount of time in determining what the customer needs, devising a strategy to explain how the product can meet those needs, and persuading the customer to buy. Stephanie is probably a(n) _____.a) order getter b) order takerc) missionary salesperson d) technical salesperson

17. Sarah does little creative selling and, instead, primarily processes orders. Sarah is probably a(n) ______.a) order getterb) order taker c) missionary salesperson d) technical salesperson

18. Stan’s sales job involves looking for new customers, educating potential customers, building goodwill, and providing service to customers after the sale. Stan probably works as _____.a) tech support personnel b) marketing support personnel c) customer service personnel d) sales support personnel

19. Randall calls on doctors and pharmacists. He leaves medical samples, answers questions, and persuades doctors to prescribe his products. What type of salesperson is Randall?a) missionary salesperson b) technical salespersonc) trade salespersond) order taker

20. Daniel is a sales representative for Sara Lee. He gives samples to customers, sets up displays, restocks shelves, and works with retailers to obtain more shelf space. Daniel is probably a(n) _____. a) missionary salespersonb) technical salespersonc) trade salesperson d) order taker

21. Which of the following is the proper ordering of the steps in the personal selling process?a) prospecting, preparing, presenting, approaching, closing, following up, handling

objectionsb) approaching, prospecting, following up, preparing, presenting, handling objections,

closingc) preparing, approaching, prospecting, following up, closing, handling objections,

presentingd) prospecting, preparing, approaching, presenting, handling objections, closing,

following up

22. Prospecting involves an activity that locates the names of individuals and organizations that might be likely prospects for the company’s product, known as :a) generating sales leads. b) advertising sales leads. c) qualifying prospects.d) making the presentation.

23. Gerry is creating a prospect profile, deciding how to approach the prospect, and establishing specific objectives to achieve during the sales call. At what step of the personal selling process is Gerry? a) prospectingb) preparing c) approaching the prospectd) closing

24. The _____ approach is a memorized presentation, while the _____ approach identifies the customer’s needs and creates a presentation to specifically address them. a) canned; need-satisfactionb) need-satisfaction; cannedc) adaptive; cannedd) canned; adaptive

25. Preston must persuade the customer to place an order. At what stage of the personal selling process is Preston?a) following up b) handing objections c) approaching the prospectd) closing

Advertising and Direct Marketing

26. _____ and _____ are promotional approaches that best reach mass audiences quickly at a relatively low per-person cost. a) Personal selling; advertisingb) Sales promotions; direct marketingc) Advertising; direct marketing d) Direct marketing; personal selling

27. What is the most common type of advertising? a) institutional advertising b) national and local advertisingc) product advertising d) word-of-mouth advertising

28. _____ advertising is a term applied to ads that specifically highlight how a product is better than its competitors, while _____ advertising is an advertising technique in which two or more products are explicitly compared.a) Competitive; comparative b) Comparative; competitivec) National advertising; cooperative advertisingd) Local advertising; cooperative advertising

29. Which type of advertising is designed to create goodwill and build a desired image for a company?a) cooperative advertisingb) institutional advertising c) competitive advertising d) national advertising

30. Institutional ads that address public issues are called _____ advertising.a) advocacy b) cooperative advertisingc) word-of-mouth advertising

d) corporate advertising 31. Samuel’s company is spending large sums of money trying to project their image as

corporate conservationists. Samuel’s company is engaging in _____.a) cooperative advertising b) institutional advertisingc) green marketing d) advocacy advertising

32. _____ advertising is sponsored by companies that sell products on a nationwide basis, whereas _____ advertising is sponsored by a local merchant.a) Word-of-mouth; localb) National; local c) Cooperative; locald) Product; local

33. Linda has an excellent dining experience at a new local restaurant. She tells about 20 of her friends about her positive experience at this particular eatery. This is known as _____ advertising.a) comparative b) competitivec) locald) word-of-mouth

34. A materials engineer for an auto company compares the attributes of various types of steel. In this case, the company should use a(n) _____ appeal in its ads. a) emotionalb) logical c) celebrity d) sex

35. When professional golfer Annika Sorenstam endorses a variety of products from companies like Callaway Golf, Mercedes-Benz, Oakley, Cutter & Buck, Rolex, Kraft, and ADT, these companies are using a(n) _____ appeal in their ads.a) emotionalb) sexc) celebrity d) logical

36. Calvin Klein ads have been viewed as arguably offensive because of their use of _____ appeals.a) emotionalb) celebrityc) logicald) sex

37. A(n) _____ is a written plan that outlines how a company will spend its media budget, including how the money will be divided among the various media and when the advertisements will appear. a) media plan b) advertising plan

c) marketing pland) tactical plan

38. When selecting the media mix, the first step is to _____. a) pick specific vehicles to be usedb) determine the characteristics of the target audience c) decide what the medium is supposed to dod) pick specific appeals to be used

39. Although it represents just a small fraction of the total advertising dollars spent every year, _____ advertising is the primary medium for many small companies and an increasingly important media choice for many midsize and large companies.a) localb) cooperativec) online d) advocacy

40. Which of the following is a benefit of TV advertising?a) timelinessb) low cost c) interactivity d) reach

41. _____ ads are related to either the results of an online search or the content being displayed on other webpages. a) Search engine b) Bannerc) Displayd) Blog

42. In the United States, the _____ has regulations regarding such areas as misleading claims, supporting evidence, fairness in comparative ads, the use of expert endorsements, and the manner in which products are demonstrated in ads. a) Federal Trade Commission b) Food and Drug Administration c) American Association of Advertising Agencies d) National Advertising Review Board

Sales Promotion

43. _____ promotion is aimed directly at the final users of the product, while _____ promotion is aimed at inducing distributors or retailers to sell a company’s product. a) Consumer; sales forceb) Sales force; tradec) Consumer; trade d) Trade; sales force

44. The biggest category of consumer promotion—and the most popular with consumers—is _____. a) premiumsb) coupons c) samples d) rebates

45. _____ help capture impulse purchases—unplanned purchases that can make up as much as 50 percent of sales in mass merchandise stores and supermarkets.a) Premiumsb) Point-of-purchase displays c) Samplesd) Rebates

46. When Revenge of the Sith, the sixth and final movie in the Star War series, hit the screen in 2005, Playskool offered kids a friendlier version of the arch-villain Darth Vader: a take-off on its classic Mr. Potato toy called Darth Tater. This is an example of a _____.a) premiumb) special-event sponsorshipc) rebated) cross-promotion

47. Every Christmas, High Country Real Estate gives each client a calendar that includes community events, the names of company agents, and their physical and e-mail addresses. This is an example of _____a) samplesb) premiumsc) rebatesd) specialty advertising

48. The most popular trade promotion is a _____.a) trade allowance b) forward buyingc) dealer loaderd) slotting fees

49. The producer of Bumble Bee tuna offers retailers a 20 percent discount for a period of 6 weeks. A retailer chooses to buy enough tuna to last 8 or 10 weeks. Purchasing the excessive amount at the lower prices is an example of _____.a) forward buying b) slotting allowance c) dealer loadersd) samples

Public Relations

50. Which of the following is a public relations activity?a) community relations

b) product advertising c) specialty advertising d) coupons

51. _____ is the process of communicating with print, broadcast, and online media. a) Personal sellingb) Advertisingc) Direct marketingd) Press relations

52. When companies have a newsworthy topic to announce, they often send a short memo called a _____ to the media and will often arrange to hold a(n) _____. a) news editorial; emergency board meetingb) news editorial; shareholder meetingc) news release; news conference d) news release; shareholder meeting

Integrated Marketing Communications

53. _____ is the strategy of coordinating and integrating communications and promotions efforts with customers to ensure greater efficiency and effectiveness. a) Institutional advertisingb) Corporate advertisingc) Public relationsd) Integrated marketing communications

54. Bane is developing a promotional strategy for her company in which all communications and promotions are coordinated and integrated to provide customers with a single, clear, and consistent message. Bane is employing a strategy known as _____.a) public relationsb) integrated marketing communications c) advocacy advertising d) strategic marketing planning

55. Maria is considering a strategy for her clothing company whereby all communications and promotions will be coordinated and integrated for the greatest communications impact. She will further communicate with one voice and one message to the marketplace. Maria is working toward developing a strategy known as _____.a) personal communications b) nonpersonal communications c) integrated marketing communications d) strategic marketing planning

TRUE/FALSE QUESTIONS

What Is Promotion?

56. Promotion may take the form of direct, face-to-face interaction or indirect communication through such media as television, radio, magazines, newspapers, direct mail, billboards, the Internet, and other vehicles.

57. You can use promotion to achieve three basic goals: to inform, to persuade, and to defend.

58. Reminding is the first promotional priority.

59. The promotional mix consists of a specific blend of personal selling, advertising, direct marketing, sales promotion, and public relations.

60. Personal selling enables the seller to adjust the message to specific needs, interests, and reactions of the individual customer.

61. Telemarketing has long been popular with marketers, generating sales anywhere from 2 to 20 percent of the time.

62. The primary role of advertising is to create product awareness and stimulate demand by bringing a consistent message to a large targeted consumer group economically.

63. Companies rely on direct marketing to build a favorable corporate image and foster positive relations with their many audiences.

64. When the product reaches maturity and competition is at its peak, the seller’s primary goal is to use advertising to reach a wider audience and drop other forms of promotion.

65. Soft drink companies use both a pull strategy to persuade wholesalers and retailers to carry their product lines and a push strategy to appeal directly to the ultimate customer.

Personal Selling

66. Personal selling is the least dominant form of promotional activity.

67. Order taking is sometimes referred to as creative selling, particularly if the salesperson must invest a significant amount of time in determining what the customer needs.

68. Manufacturers of pharmaceuticals and medical supplies use missionary salespeople to call on doctors and pharmacists.

69. Companies that manufacture computers, industrial equipment, and sophisticated medical equipment use technical salespeople to sell their products as well as to provide support services to existing customers.

70. The first step in the personal selling process is approaching the prospect.

71. Using the canned approach, Matthew identifies his customer’s needs and creates a sales presentation to specifically address them.

72. The absence of objections is often an indication that the prospect is not all that interested in the product being presented.

73. Assuming the prospect has decided to make a purchase, Chad uses the direct close when he simply proceeds with processing the order.

74. Because salespeople depend on repeat sales and referrals from satisfied customers, it is important that they follow up on all sales.

Advertising and Direct Marketing

75. Advertising and direct marketing are the promotional approaches that best reach mass audiences quickly and at a relatively low per-person cost.

76. When Kellogg’s advertises its cereals, the company is using product advertising.

77. When two or more products are directly contrasted in an ad, the technique being used is competitive advertising.

78. Advocacy advertising has recently expanded beyond issues in which the organization has a stake, such as ads that project opinions and attitudes supporting those of their target audiences.

79. Cooperative advertising is a cross between local and international advertising.

80. For the logical appeal to work in an advertising context, the ad needs to catch the audience’s attention and convince them to pay attention long enough to hear the reasoning behind the logical appeal.

81. Roughly 20 percent of all ads contain some element of celebrity involvement.

82. When selecting the media mix, the second step is to determine the characteristics of the target audience and the types of media that will reach the largest audience at the lowest cost per exposure.

83. The CAN-SPAM Act of 2003 attempted to address a deluge of spam campaigns by prohibiting e-mail with misleading subject lines or fake return addresses, with encouraging results.

84. Online display ads are often called banner ads.

Sales Promotions

85. Rebates are the biggest category of consumer promotion as well as the most popular with consumers.

86. A small-town, family-owned grocery store grants parents' requests by removing the candy racks, a common type of point-of-purchase display, at checkout counters, which is costing the store in impulse sales.

87. Trade promotion accounts for the largest share of promotional spending.

Public Relations

88. Smart businesspeople know that a good reputation is one of a business’s most important assets, and corporate advertising is the best method for building, maintaining, and repairing reputations as needed.

89. Two standard public relations tools are the news release and the news conference.

Integrated Marketing Communications

90. The concept of IMC is communicating with one voice and one message to the marketplace.

CHAPTER 16

GETTING TO THE BOTTOM LINE: BASIC ACCOUNTING CONCEPTS

MULTIPLE CHOICE QUESTIONS

Understanding Accounting

1. _____ is the system a business uses to identify, measure, and communicate financial information to others, inside and outside of the organization. a) Accounting b) Bookkeepingc) Financed) Banking

2. Financial information is important to businesses because a) It helps reduce taxes on businesses.b) It helps managers to plan and control operations. c) It helps competitors evaluate businesses.d) It helps supervisors streamline day-to-day production processes.

3. _____ accounting is concerned with preparing information for outsiders like stockholders and tax collectors, while _____ accounting is concerned with preparing information for insiders like management.a) Financial; forensicb) Financial; management c) Forensic; financiald) Management; financial

4. George has been hired by a startup to establish a system to identify, measure, and communicate financial information to enable others, inside and outside the firm, to make informed decisions. George has been charged to set up a(n) _____.a) management information systemb) production control systemc) accounting system d) bookkeeping system

5. The clerical function of recording the economic activities of a business is called _____.a) accountingb) bookkeeping c) information managementd) production control

6. _____ accounting focuses on the calculation of manufacturing and storage costs of products for use or sale in business, while _____ accounting focuses on tax preparations and tax planning.a) Cost; tax b) Tax; costc) Accrual; technicald) Fund; technical

7. The functions performed by _____ include design of accounting systems, preparation of financial statements, interpretation of financial information, and preparation of financial forecasts.a) bookkeepers b) inventory managers c) financial planners d) accountants

8. If Theo evaluates the financial implications of his company's strategic decisions such as product pricing, employee benefits, and business acquisitions, then he is primarily concerned with _____.a) cost accountingb) accrual accountingc) financial analysis d) tax accounting

9. Esther supervises her company's team of accountants and reports to the chief financial officer (CFO). Esther is probably the company's _____.a) head bookkeeperb) chief economistc) controller d) vice president of finance

10. _____ are professionally licensed accountants who meet certain requirements for education and experience and who pass a comprehensive examination. a) Certified public accountants b) Private accountants c) Certified management accountants d) Public accountants

11. Which of the following was one of the “Big Eight” public accounting firms that collapsed as a result of government investigations involved in the Enron scandal?a) Deloitte & Touche

b) Ernst & Youngc) KPMGd) Arthur Andersen

12. A(n) _____ is a formal evaluation of the fairness and reliability of a client’s financial statements.a) annual report b) financial statementc) audit d) budget

13. _____ are professionally approved U.S. standards and practices used by accountants in the preparation of financial statements. a) Statements of standard accounting practiceb) Generally accepted accounting principles c) International accounting standards d) Financial accounting standards

14. Shawn is an employee who investigates and evaluates her company's internal operations and data to determine whether they comply with GAAP, federal laws, and industry regulations. Shawn is a(n) _____ for her company. a) external auditorb) internal auditor c) public accountantd) private accountant

15. In the United States, the _____ is responsible for overseeing GAAP.a) Financial Accounting Standards Board b) Federal Reserve Board c) Securities and Exchange Commissiond) Federal Trade Commission

16. _____ is the comprehensive legislation, passed in the wake of the Enron and other scandals, designed to improve integrity and accountability of financial information. a) Securities and Exchange Commissionb) Sarbanes-Oxley c) Civil Rights Actd) Federal Bankruptcy Code

17. Which of the following statements about Sarbanes-Oxley is correct? a) It allows most loans by corporations to their own directors and executives.b) It eliminates the requirement for corporate lawyers to report evidence of financial

wrongdoing. c) It allows investment bankers to influence stock analysts.d) It requires CEOs and CFOs to sign statements attesting to the accuracy of financial

statements.

Fundamental Accounting Concepts

18. The _____ serves as the framework for the entire accounting process. a) number equation b) cost accounting equationc) accounting equation d) parametric equation

19. Assets include _____.a) short-term loansb) long-term loans c) accounts payable d) accounts receivable

20. Kevin is selling his business, Tiles-R-Us. To determine what portion of assets belongs to his company, he must first calculate the size of his firm’s _____.a) liabilities b) assets c) owner’s equityd) accruals

21. Assets minus liabilities equal _____.a) capitalb) owners' equity c) profitd) income

22. Which of the following is the accounting equation?a) Assets = Owners' equity – Liabilityb) Assets = Owners' equity + Liability c) Assets = Owners' equity ÷ Liabilityd) Assets = Liability ÷ Owners' equity

23. To keep the accounting equation in balance, most companies use a(n) _____ that records every transaction affecting assets, liabilities, or owner's equity.a) cash basis methodb) accrual basis methodc) double-entry bookkeeping method d) matching principle

24. The _____ requires that expenses incurred in producing revenues be deducted from the revenue they generated during the same accounting period.a) cash basis methodb) accrual basis methodc) revenue recognition methodd) matching principle

25. As a CPA, Sue does tax accounting for small businesses. When Sue matches revenue to expenses, she is focusing on the economic substance of the event instead of the movement of cash. In this instance, Sue is adopting the _____ of accounting. a) cash basisb) accrual basis c) matching principled) revenue recognition

26. When a company records revenue only when money from the sale is actually received, the business is running on a(n) _____ basis.a) cash b) accrualc) ability-to-payd) credit

27. _____ is the allocation of the cost of a tangible long-term asset over a period of time.a) Amortizationb) Revenue recognition c) Depreciation d) Write-off

28. The act of transferring net revenue and expense account balances to retained earnings for the period is called _____.a) closing the books b) closing the ledgersc) double-entry bookkeeping d) revenue recognition

Using Financial Statements

29. Which of the following is a financial statement that shows owner’s equity? a) balance sheet b) income statementc) bank statement d) statement of cash flows

30. Dean is an accountant at Summerset Estates. In preparing Summerset’s financial statements, Dean will use these statements for which of the following purposes? a) to make it difficult to spot company problemsb) to make long-range strategic business decisionsc) to provide information about the company’s financial strength and ability to meet its

obligations d) to defer taxable income by any means possible

31. The _____ is a snapshot of a company’s financial position on a particular date. a) balance sheet b) income statementc) profit-and-loss statement

d) statement of cash flows

32. Which of the following is revealed by reading a company’s income statement? a) the size of the companyb) the major assets ownedc) the flow of cash into and out of the company d) how the company’s assets are financed

33. _____ assets include cash and inventory, while _____ assets include long-term investments in equipment and land.a) Current; fixed b) Current; intangiblec) Fixed; currentd) Tangible; intangible

34. Which of the following is a current liability?a) marketable securities b) accounts payable c) trade creditd) inventory

35. _____ is the portion of shareholders’ equity earned by the company but not distributed to its owners in the form of dividends. a) Treasury stock b) Retained earnings c) Common stock d) Paid-in capital

36. Rather than borrowing money to buy a piece of equipment, a firm may enter into a long-term _____, under which the owner of an item allows another party to use it in exchange for regular payments. a) lease b) bond c) royalty arrangementd) supply arrangement

37. Norman and Jeremy bought shares in IBM. On IBM’s balance sheet, Norman and Jeremy are owners of IBM’s ______.a) outstanding common stock b) retained earnings c) bonds d) paid-in capital

38. Bertold is preparing a(n) _____ that shows his company's profit performance over the past year.a) balance sheetb) financial reportc) income statement d) statement of cash flows

39. _____ are the amounts earned from sales of goods or services and inflow from miscellaneous sources, while _____ are costs created in the process of generating revenues. a) Expenses; revenues b) Cost of goods sold; liabilities c) Assets; liabilities d) Revenues; expenses

40. Vanessa is crunching numbers for an income statement. If she deducts the cost of goods sold from total sales, she will determine her company's _____.a) bottom lineb) gross profit c) net incomed) revenues

41. _____ is often a better indicator of a firm’s financial health because it gives the firm an idea of how much cash the firm is able to generate. a) Operating expensesb) Net operating income c) Cost of goods soldd) Gross profit

42. _____ expenses are operating expenses incurred through marketing and distributing the product, while _____ expenses are operating expenses incurred in the overall administration of a business.a) Selling; general b) General; sellingc) Accounting; legal d) Office; marketing

43. Which of the following is shown by reviewing a company's statement of cash flows?a) the owners’ equityb) the value of fixed or other assetsc) the company's ability to pay its short-term obligations d) the company’s inventory turnover rate

44. An important use of financial statements is a) to evaluate the organization’s financial health. b) the development of marketing plans. c) to create profits.d) to scan the environment for opportunities.

45. Jean is a manager at the Toy Box. She is comparing financial data from the last five years in order to see how the company has changed. Jean is engaged in _____.a) benchmarkingb) comparative analysisc) ratio analysis d) trend analysis

46. Dee is thinking about buying shares in Ford Motor Company. Where would Dee likely find out about Ford’s overall financial performance in order to make her decision to buy Ford stock?a) the company’s annual report b) the company’s cash flow statementc) the company’s income statementd) the company’s corporate advertising

47. _____ is the use of quantitative measures to evaluate a firm’s financial performance. a) Benchmarkingb) Comparative analysisc) Ratio analysis d) Trend analysis

48. Ratio analysis compares ______.a) three elements from the same year’s financial figuresb) two elements from the same year’s financial figures c) three elements from consecutive years’ financial figuresd) two elements from consecutive years’ financial figures

49. The income earned on the owner’s investment is known as _____.a) working capital b) earnings per share c) return on investment d) return on sales

50. Earnings per share is _____. a) profit earned for each share of stock outstanding b) net income a business makes per unit of sales c) the amount of cash created by daily operations d) profit earned for each share of sales

51. _____ ratios measure the ability of the firm to pay its short-term obligations. a) Activity b) Liquidity c) Profitability d) Debt

52. The most common activity ratio is the _____.a) inventory turnover ratio b) quick ratio c) current ratio d) liquidity ratio

53. An accountant can measure a company’s ability to pay its long-term debts by calculating its _____.a) current ratios b) inventory turnover ratios

c) debt ratios d) accounts receivable turnover ratios

54. Total liabilities divided by total equity calculates a firm’s _____. a) debt-to-equity ratio b) activity ratioc) profitability ratio d) liquidity ratio

55. As a rule of thumb, the amount of debt should not exceed _____ percent of the value of a company’s total assets. a) 30b) 40c) 50 d) 60

TRUE/FALSE QUESTIONS

Understanding Accounting

56. Accounting is the system businesses use to identify, measure, and communicate financial information to others, inside and outside organizations.

57. Accounting is the clerical function of recording the economic activities of a business.

58. Public accountants work for a business, a government agency, or a nonprofit corporation.

59. Financial analysis is the umbrella term used for cost accounting and tax accounting.

60. An organization’s controller is sometimes called its chief financial officer.

61. Many private accountants are licensed certified public accountants, meaning they have passed a rigorous state-certified licensing exam.

62. Companies whose stock is publicly traded in the United States are required to file audited financial statements with the Securities and Exchange Commission.

63. GAAP aims to give a fair and true picture of a company’s financial position.

64. In the United States, the Securities and Exchange Commission is responsible for overseeing GAAP.

65. The International Accounting Standards Board has been working for years to develop a uniform set of global accounting rules to help eliminate differences in accounting rules from country to country.

66. To repair investor confidence in the wake of high-profile scandals involving Enron, WorldCom, and other big corporations, Congress passed the Public Company Accounting Reform and Investor Protection Act, usually referred to as Sarbanes-Oxley.

67. Quality of investment is a general term for the degree of confidence that investors should have in the profits reported by public corporations.

Fundamental Accounting Concepts

68. The accounting equation suggests that either creditors or owners provide all the assets in a corporation.

69. The double-entry bookkeeping system serves as the framework for the entire accounting process.

70. If the assets for Jurgen's company equal $10,000 and the owner's equity equals $5,000, then the company's liabilities must equal $15,000.

71. According to the accrual basis method of accounting, companies recognize revenue as soon as they get paid for goods or services, and they recognize expenses as soon as they pay for them.

72. When a business owner buys a piece of real estate or equipment, instead of deducting the entire cost of the item at the time of purchase, he or she depreciates it, or spreads its cost over the asset’s useful life.

Using Financial Statements

73. The balance sheet is also known as the statement of cash flows.

74. Assets can be tangible, such as equipment and buildings, and intangible, such as cash, patents, skilled workers and managers, and strong brand names.

75. Current liabilities are obligations that must be met within one year of the date of the balance sheet, while long-term liabilities are obligations that are due one year or more after the date of the balance sheet.

76. Small partnerships list each partner’s share of the business separately, and large partnerships list the total of all partners’ shares.

77. Expenses, the costs of doing business, include both the direct costs associated with creating or purchasing product for sale and the variable costs associated with operating the business.

78. The computation for the cost of goods sold is beginning inventory plus net purchases minus ending inventory.

79. An analysis of a company's cash flow statement should provide information on its ability to pay its short-term obligations when they come due.

80. EBITDA stands for earnings before interest, taxes, depreciation, and assets.

81. The process of comparing financial data from year to year in order to see how they have changed is known as trend analysis.

82. Ratio analysis compares three elements from the same year’s financial figures.

83. Lenders and creditors are keenly interest in liquidity measures.

84. The current ratio is often a better indicator of a firm's ability to pay creditors than the quick ratio because the current ratio leaves out inventories.

85. Activity ratios measure the effectiveness of the firm’s use of its resources.

86. In general, the quicker the company’s inventory is turned into sales, the better for that company because holding excess inventory can be expensive.

87. If the accounts receivable turnover ratio is going down, the company is doing a better job of collecting or sales are rising.

88. From a lender's standpoint, the lower the debt-to-equity ratio, the safer the company.

89. A potential investor can measure a company’s ability to pay its long-term debts by calculating its leverage ratios.

90. One ratio by itself does not tell the whole story on how a company is doing.

CHAPTER 17

KEEPING THE ENGINE RUNNING: FINANCIAL MANAGEMENT AND BANKING

MULTIPLE CHOICE QUESTIONS

The Role of Financial Management

1. _____ is the effective acquisition and use of money. a) Financial planningb) Financial management c) Financial reportingd) Financial strategy

2. A forecast of financial requirements and the financing sources to be used is called a _____.a) business planb) tactical planc) strategic pland) financial plan

3. John oversees financial management at a large food manufacturer. He authorizes decisions on sources and uses of funds made by financial managers, mostly accountants, in the company’s finance department. John is most likely the company’s _____.a) chief executive officer b) chief information officer c) chief financial officer d) chief operations officer

4. Rosemary’s boss is training her to develop a financial plan for the company. When Rosemary prepares the company’s financial plan, her primary objective should be to _____.a) achieve a smooth cash flowb) make the company grow through investments c) establish a large inventoryd) maintain a very large cash reserve

5. _____ are amounts that are currently owed to a firm, whereas _____ are amounts that a firm currently owes to other parties. a) Accounts receivable; working capital b) Accounts payable; accounts receivable c) Working capital; accounts payable d) Accounts receivable; accounts payable

6. To maintain enough inventory to fill orders in a timely fashion at the lowest cost, financial managers work with operations managers and marketing managers to determine the _____, or quantity of materials that, when ordered regularly, results in the lowest ordering and storage costs.a) production and distribution decisions b) capital budgetc) economic order quantity d) supply decision

7. Markham is interested in making an investment in an asset whose value is not likely to fluctuate wildly and which is easy to sell when the time comes to make that decision. Markham will likely invest in _____. a) marketable securities b) bonds c) land d) property

8. A planning and control tool that reflects expected revenues, operating expenses, and cash outlays and receipts is called a _____.a) budget b) profit-and-loss statementc) statement of cash flows d) forecast

9. After Jamie Dimon, a banking executive, joined J.P. Morgan, he looked at everything from company-issued cell phones to executive aircrafts to charitable contributions as a way to reduce the company noncritical expenses. Dimon was involved in a process known as _____.a) financial control b) financial planning c) capital budgeting d) asset management

10. When a firm decides on which of the many possible capital investments to make, how to finance those that are undertaken, and even whether to make any capital investments at all, it is engaged in a process called _____.a) financial planning b) capital budgeting c) asset management d) cash management

11. _____ is any financing that will be repaid within one year, whereas _____ is any financing that will be repaid in a period longer than one year. a) Capital budgeting; capital requirements b) Capital requirements; capital budgeting c) Short-term financing; long-term financing d) Long-term financing; short-term financing

12. Emmanuel wants to build a floral shop. In addition, he plans to buy equipment and fixtures for the shop. Emmanuel will likely obtain _____ financing to acquire these assets. a) debtb) long-term c) short-termd) equity financing

13. Paul would like to expand Harvest, his small carpentry shop. He plans to take out a loan to fund the expansion. What factors will be used to determine the interest rate on Paul’s loan?a) the tax rateb) the capital fundc) the risk associated with Harvest d) the commercial paper

14. The lowest interest rate offered on short-term bank loans to preferred borrowers is known as the _____. a) federal funds rateb) discount ratec) prime interest rate d) fixed-interest rate

15. A company might be better off investing its excess cash in external opportunities, such as stock of other companies, and borrowing money to finance its own growth. By doing so, the company can earn a greater rate of return on those investments than the rate of interest paid on borrowed money. This concept is called _____.a) liquidity b) leverage c) capital costd) risk management

16. _____ is the financing mix of the firm. a) Capital budget b) Financial plan

c) Opportunity cost d) Capital structure

17. In _____ financing, a creditor agrees to lend money to a debtor in exchange for repayment, with accumulated interest at some future date, whereas _____ financing is achieved by selling shares of a company’s stock. a) asset-based; debt b) equity; debt c) estate; equity d) debt; equity

18. _____ is an IOU, backed by the corporation’s reputation, issued to raise short-term capital.a) Trade creditb) Secured loanc) Bond d) Commercial paper

19. Janice is trying to obtain a loan to expand her ceramics business. To qualify for the loan, Janice’s bank requires that she back the loan by something of value like Janice’s home. Janice is trying to qualify for a(n) _____.a) unsecured loanb) secured loan c) line of credit d) consolidation loan

20. A minimum amount of money kept on deposit at the lending institution to protect the lender and increase the lender’s return is known as a(n) _____.a) collateralb) trade creditc) compensating balance d) outstanding balance

21. An arrangement in which the financial institution makes an agreed-on maximum amount of money available for use as needed within a given period of time after the loan has been approved is referred to as a _____.a) line of credit b) trade credit c) collaterald) compensating balance

22. When a company needs to borrow a large sum of money, it may not be able to get the entire amount from a single source. Under such circumstances, it may borrow from many individual investors by issuing _____.a) commercial paperb) bonds c) trade creditd) revolving credit

The U.S. Financial System

23. Deposit institutions such as savings and loans and mutual savings banks are known as a) commercial banks. b) thrifts. c) credit unions. d) all of the above.

24. An institution that takes deposits only from members who usually belong to a union or work for the same employer is a(n) _____ .a) insurance companyb) pension fund c) credit union d) brokerage firm

25. Winston needed to do home improvements on his two-story dwelling. He explored a variety of deposit institutions and picked a nondeposit company that specializes in lending to consumers and businesses for home improvement, expansion, purchases, and other purposes. What kind of financial institution did Winston use? a) credit unionb) finance company c) insurance companyd) thrift

26. _____ are institutions that buy and sell stocks, bonds, and other investments for investors. Some offer checking accounts, high paying savings accounts, and loans to buy securities. a) Insurance companiesb) Brokerage firms c) Credit unionsd) Pension funds

27. For banking purposes, Betsy wants to earn the highest interest rate possible while still being able to access the funds whenever she needs them. Betsy should probably open a _____. a) certificate of deposit b) standard checking accountc) money-market deposit account d) statement savings account

28. Shelley is hooked on shopping and rarely uses her checking account to make her purchases. Instead, Shelley relies on “plastic,” notably, her American Express card. Shelley makes her purchases using a _____.a) smart cardb) prepaid cardc) debit cardd) credit card

29. Henry uses “plastic” whenever he buys gas at a service station. Henry uses a card that actually operates like instantaneous checks. Which type of “plastic” does Henry use at the pump? a) credit card b) smart card c) debit card d) prepaid card

30. Arthur uses a card that contains a tiny computer chip that can perform such functions as maintaining up-to-date information about account balances and providing additional levels of security. Arthur is using a _____.a) credit cardb) debit cardc) smart card d) charge card

31. When Richard buys and sells merchandise on eBay, he uses PayPal, which is now owned by eBay, to accomplish his transactions. PayPal is an example of a(n) _____.a) electronic funds transfer system b) online payment system c) smart voucher system d) mobile payment system

32. A form of electronic banking used to transfer wages directly to an employee’s bank account is a(n)_____ .a) automated teller machineb) direct deposit system c) electronic funds dispersal systemd) online payment systems

33. Robert is badly in need of cash for a night on the town. His bank is already closed, but it provides electronic terminals that permit its customers to withdraw money from their demand-deposit accounts at any hour. Robert is using his bank’s _____.a) automated teller machines b) online payment systemsc) electronic funds transfer systemsd) credit card systems

34. Which of the following is a key issue that bankers and their business and consumer clients will face in the coming years? a) the Glass-Steagall Act b) credit card issuance c) limitations on interstate banking d) the role of banks in the struggles against crime and terrorism

35. Reversing almost 70 years of legislation, the _____ allows customers to make deposits, cash checks, or handle any banking transaction in any branch of their bank, regardless of location.a) Financial Services Modernization Act

b) Glass-Steagall Actc) Riegle-Neal Interstate Banking and Branching Efficiency Act d) Federal Deposit Insurance Corporation

36. The _____ was established by government to protect money in customer accounts up to a maximum of $100,000.a) Federal Deposit Insurance Corporation b) Federal Reserve System c) Securities and Exchange Commission d) Federal Trade Commission

The Functions of the Federal Reserve System

37. In 1913 the _____ was created in response to fear, uncertainty, and doubt regarding banking in the United States. a) Federal Reserve System b) Federal Deposit Insurance Corporation c) Securities and Exchange Commissiond) Federal Trade Commission

38. Which of the following statements describes the Fed’s role in the nation’s economy? a) It supervises and regulates financial institutions in order to focus the stability of the

nation’s banking system and to protect the rights of borrowers. b) It maintains the overall stability of the economy. c) It has given up its role as a clearinghouse for checks. d) It conducts monetary policy by printing money.

39. Which of the following is a function of money that simplifies transactions for buyers and sellers?a) divisibility b) a way of accumulating wealthc) durabilityd) a measure of value

40. An important characteristic of money is that it must a) serve as a medium of exchange.b) serve as an electronic funds transfer system.c) be portable. d) serve as a temporary store of value.

41. The U.S. money supply consists of _____.a) currency, demand deposits, and time deposits b) stocks, bonds, and mutual funds.c) currency, certificates of deposit, and treasury bills d) treasury notes, treasury bonds, and currency

42. Karen has a savings account, holds certificates of deposit, and keeps a money-market account. Karen maintains accounts that are ______.

a) demand deposits b) time deposits c) are high risk d) checking accounts

43. A checking account is an example of a _____.a) demand deposit b) time depositc) certificate of depositd) cashier’s check

44. _____ is that portion of the money supply consisting of currency and demand deposits, while _____ is that portion of the money supply that adds savings deposits, money market funds, and small time deposits to M1. a) M2: M1 b) M1; M2 c) M1; M3 d) M2; M3

45. The broadest measure of the money supply is _____.a) M1b) M2c) M3 d) M4

46. When the money supply is increased, _____ money is available for loans, so banks can charge lower interest rates to borrowers. a) lessb) more c) nod) short term

47. Which of the following is a tool used by the Fed to influence the money supply by changing the rate it charges on loans to commercial banks and other depository institutions? a) changing the reserve requirementb) changing the discount rate c) conducting open-market operationsd) selling on the open market

48. The _____ is the percentage of a bank’s deposit that must be set aside. a) capital adequacy requirement b) federal funds rate c) discount rate d) reserve requirement

49. Increasing the reserve requirement will _____ the economy.a) speed upb) slow down

c) stabilized) support

50. The _____ is the interest rate that the Fed charges on loans to commercial banks and other depository institutions.a) treasury bill rate b) legal interest rate c) prime rated) discount rate

51. If the Fed is concerned about inflation, it can reduce the money supply by selling U.S. government bonds, a tool known as _____.a) discount ratesb) open-market operations c) selective credit controls d) reserve requirements

52. The Federal Reserve’s power to set credit terms on various types of loans is a tool known as _____.a) open-market operationsb) selective credit controls c) reserve requirementsd) discount rates

53. Which of the following tools should the Fed use to increase the nation’s money supply?a) decrease reserve requirements, raise discount rates, buy open-market operationsb) decrease reserve requirements, lower discount rates, buy open-market operations c) increase reserve requirements, raise discount rates, sell open-market operations d) increase reserve requirements, lower discount rates, buy open-market operations

54. In the past, anyone who wrote a check could probably count on a short delay, often called the _____, before the amount of the check would be deducted from his or her account.a) cash reserveb) float c) kited) hold

55. According to the _____, banks or companies that receive paper checks can convert them to electronic images, which can then zip around at the speed of e-mail.a) Check Clearing for the 21st Century Act b) Federal Reserve Boardc) Securities and Exchange Commission d) Interstate Banking and Branching Efficiency Act

TRUE/FALSE QUESTIONS

The Role of Financial Management

56. In larger organizations, financial planning is the responsibility of the finance department, which reports to the vice president of finance or the chief executive officer.

57. The finance department of an organization usually includes the accounting function.

58. Financial management involves making decisions about alternative sources and uses of funds with the goal of maximizing profits.

59. The two objectives of a financial plan are to achieve a positive cash flow and to efficiently invest excess cash flow to make the company grow.

60. A vital step in maintaining positive cash flow is monitoring working capital accounts, which include accounts receivable, accounts payable, cost of goods sold, and inventory.

61. Keeping an eye on accounts payable—the money owed to the firm by its customers—is one way to manage cash flow effectively.

62. For more than 400 years, buying and selling between global organizations has relied on a device known as a letter of credit, through which the respective banks of the buyer and seller arrange the transfer of funds.

63. Firms with seasonal business patterns, such as sports teams, retailers that depend heavily on holiday spending, and agricultural operations, generate temporary cash reserves that need to fund operations for the entire year.

64. The capital budget sets a standard for expenditures, provides guidelines for controlling costs, and offers an integrated and detailed plan for the future.

65. The process of analyzing actual results to find and correct variances in the budget is known as financial control.

66. Examples of capital investments are major expenditures in buildings or equipment.

67. Short-term financing is commonly used to acquire capital assets such as buildings and equipment or to fund expansion via any number of growth options.

68. A company’s cost of capital is the average rate of interest a firm pays on its combination of debt and equity.

69. The discount rate is the lowest rate of interest charged by banks for short-term loans to their most creditworthy customers.

70. Equity financing is achieved by selling shares of a company’s stock.

71. Common types of equity financing are trade credit, leases, loans, commercial paper, and bonds.

72. The most common type of secured loan is a mortgage, in which a piece of property such as a building is used as collateral.

73. Certificates that obligate the company to repay a certain sum, plus interest, to the certificate holder on a specific date are called stocks.

The U.S. Financial System

74. Deposit institutions include commercial banks, credit unions, and pension funds.

75. Nondeposit institutions include insurance companies, pension funds, finance companies, and brokerage firms.

76. Money held in a certificate of deposit earns less interest than money held in a savings account.

77. Card issuers collect money in a variety of ways, including a small percentage of the transaction value (which they collect from the retailer), as well as annual “membership fees,” interest on unpaid balances, and fees for paying late or going over the credit limit (which they collect from cardholders).

78. Prepaid credit cards work like smart cards until the prepaid amount is exhausted.

79. PayPal, an online payment system, is owned by Amazon.com.

80. By linking with regional, national, and international ATM networks, banks let customers withdraw cash far from home, make deposits, and handle other transactions such as check cashing, purchasing prepaid wireless phone cards or gift cards, and transferring funds between bank and brokerage firms.

81. More than half of all U.S. workers take advantage of EFTS when their employers use direct deposit to transfer wages directly into employees’ bank accounts.

82. Banking regulations have become more restrictive in the types of services that any type of financial institution is able to offer since the 1990s.

83. State-chartered banks come under the watchful eyes of each state’s banking commission, nationally chartered banks are under the federal Office of the Comptroller of the Currency, and thrifts are under the federal Office of Thrift Supervision.

The Functions of the Federal Reserve System

84. Currency is anything generally accepted as a means of paying for goods and services.

85. The components of M1 include currency, demand deposits, NOW accounts, and time deposits.

86. The Fed influences the money supply to make certain that enough money and credit are available to fuel a healthy economy.

87. Increasing the reserve requirement boosts the economy, as banks have more money to lend.

88. The tool the Fed uses most often to influence the money supply is the power to buy and sell U.S. government bonds through a tool known as selective credit controls.

89. If the Fed is concerned about inflation, it can reduce the money supply by selling U.S. government bonds, which takes cash out of circulation.

90. As specified in the Check Clearing for the 21st Century Act, commonly called Check 21, banks or companies that receive paper checks can convert them to electronic images, which can then zip around at the speed of e-mail.

CHAPTER 18

INVESTING IN THE FUTURE: SECURITIES AND INVESTMENT STRATEGIES

MULTIPLE CHOICE QUESTIONS

Types of Securities Investments

1. Investments such as stocks, bonds, options, futures, and commodities are known as _____.a) productsb) properties c) securities d) portfolios

2. Just as corporations sell _____ to finance operations, governments sell _____ to raise money for public expenses.a) bonds; stocksb) bonds; futuresc) futures; bondsd) stocks; bonds

3. The part of authorized stock that companies sell to shareholders is called _____ stock, while the unsold part is called ____ stock.a) authorized; issuedb) authorized; preferredc) issued; unissued d) unissued; issued

4. The price at which a share currently sells represents its _____, while the dollar value assigned to the stock primarily for bookkeeping purposes is called its _____.a) book value; par valueb) market value; par value c) par value; book valued) par value; market value

5. When a company announces a(n) _____, it increases the number of shares that each stock certificate represents while proportionately lowering the value of each share. a) stock split b) initial public offering c) Dutch trade d) stock trade

6. Which of the following is an advantage of owning common stock?a) Shareholders have no voting rights. b) Shareholders stand to make a profit if the stock price goes up. c) Shareholders have unlimited liability if the corporation gets into trouble. d) Shareholders have a say in the daily operations of the corporation.

7. Which of the following is an advantage of owning preferred stock? a) Shareholders can exchange common preferred stock for common stock. b) Shareholders are liable for debts and may receive a share of assets. c) Shareholders have a better claim on assets if the corporation fails. d) Shareholders receive lower dividends on preferred stock.

8. Barbara chooses to exchange some of her preferred stock for a certain number of common stock shares issued by Organic Solutions. Barbara most likely owns _____.a) municipal bondsb) corporate bondsc) cumulative preferred stock d) convertible preferred stock

9. A(n) _____ is a method of raising money in which the issuing organization borrows from an investor and issues a written pledge to make regular interest payments and then repay the borrowed amount later. a) bond b) stock c) option d) commodity

10. Which of the following is a service provided by Standard & Poor’s and Moody’s? a) matching buyers and sellers in auction exchangesb) offering online trading at a low cost per tradec) rating bonds on the basis of the issuers’ financial strength (page 584, Level 3,

Moderate)d) selling newly issued shares

11. _____ bonds are backed by specific assets that will be given to bondholders if the borrowed amount is not repaid. a) Unsecuredb) Secured c) Debentures d) Convertible

12. _____ are riskier than other types of bonds and are backed only by the reputation of the issuer.a) Convertible bonds b) Debentures c) Mortgage bondsd) Secured bonds

13. _____ bonds can be exchanged at the investor’s option for a certain number of shares of the corporation’s common stock,a) Convertible b) Municipalc) Mortgaged) Secured

14. _____ are short-term U.S. government bonds that are repaid in less than one year, while _____ are intermediate-term U.S. government bonds that are repaid from 1 to 10 years after they were initially issued. a) Treasury notes; treasury billsb) Treasury bills; treasury notes c) U.S. savings bonds; municipal bondsd) Municipal bonds; U.S. savings bonds

15. Vicky buys a bond issued by the U.S. government in the amount of $10,000. The bond will pay just 50 percent of the stated value and receive the full face amount in as little as 17 years. Once the bond’s face value equals its redemption value, the bond continues to earn interest but only until 30 years after the bonds were issued. What type of bond did Vicky purchase?a) treasury billb) treasury notec) municipal bondd) U.S. savings bond

16. A _____ bond is a municipal bond backed by the taxing power of the issuing government, whereas a _____ bond is a municipal bond backed by the money to be generated by the project being financed. a) general obligation; revenue b) revenue; general obligation c) treasury bill; treasury note d) treasury note; treasury bill

17. Which of the following is an advantage of buying U.S. government securities?a) Government bonds are considered very safe. b) Government bonds can easily be bought or sold through money markets funds. c) Investors can easily trade government bonds for higher-interest commercial

stock. d) Investors pay low state or local income tax on interest earned.

18. The return that investors receive when they sell a security for a higher price than the purchase price is known as _______. a) working capitalb) rate-of-return on equity c) capital gains d) rate-of-return on assets

19. To ease the cash flow burden of redeeming its bonds all at once, a company sometimes issues _____, which mature at various times.a) redeemable bondsb) callable bonds c) term bondsd) serial bonds

20. A _____ is an account into which a company makes annual payments for use in redeeming its bonds in the future. a) redeemable bond b) callable bond fundc) sinking fund d) serial bond fund

21. With most bond issues, a corporation retains the right to pay off the bonds before maturity. Bonds containing this provision are known as _____ bonds. a) callable b) serialc) municipald) savings

22. _____ are financial organizations that pool money from many investors to buy a diversified mix of stocks, bonds, or other securities. a) Pension markets b) Treasury notes c) Savings bondsd) Mutual funds

23. Among the most popular mutual funds are _____, which invest in short-term securities and other liquid investments. a) options b) financial futures c) commodities d) money-market funds

24. Margaret wants to spread a fixed amount of money over a variety of investments, yet she does not have the time nor experience to search out and manage her investments. At the same time, Margaret does not want to pay fees to buy or sell shares. In this case, Margaret should invest in _____.a) commodities b) financial futuresc) debentures d) no-load mutual funds

25. A(n) _____ is the purchased right—but not the obligation—to buy or sell a specified number of shares of a stock at a predetermined price during a specified period. a) option b) callable bondc) initial public officering d) mutual fund

26. Alfred trades stock options to protect against the risk of a sudden loss. In this case, Alfred is using options to _____ his position. a) hold b) call c) hedge d) put

27. _____ are legally binding agreements to buy or sell financial instruments at a future date. a) Callable bondsb) Serial bondsc) Optionsd) Financial futures

28. A manufacturer of breakfast cereals must buy wheat, rye, oats, and sugar from hundreds of farmers. These raw materials are called _____.a) optionsb) commodities c) futuresd) deliveries

29. Trading contracts for immediate delivery of a commodity is called _____.a) options tradingb) spot trading c) stock trading d) Dutch trading

Securities Markets

30. In the _____market, firms sell new securities issued publicly for the first time, whereas subsequent owners trade previously issued shares of stocks and bonds in the _____ market. a) auction; over-the-counterb) over-the-counter; primaryc) primary; secondary d) secondary; primary

31. _____ are financial institutions that raise capital for corporations and government bonds. a) Market makers b) Stock exchanges c) Dealer exchanges d) Investment banks

32. Organizations that facilitate the buying and selling of securities are known as _____.a) investment banksb) stock exchanges c) regulatorsd) auctions

33. The New York Stock Exchange (NYSE), also known as the “Big Board,” is an example of a(n) _____. a) auction exchange b) dealer exchange c) investment bank d) market maker

34. _____ are intermediaries who trade in a particular security on the floor of an auction exchange, whereas _____ are registered representatives who trade securities from their own inventories on dealer exchanges.a) Dealer exchanges; market makersb) Market makers; stock specialistsc) Stock investors; market makersd) Stock specialists; market makers

35. Sienna is a dealer who trades securities on a computerized linkup rather than on a trading floor. Sienna trades securities in the _____. a) over-the-counter market b) primary marketc) secondary marketd) futures market

36. In contrast to auction exchanges such as the NYSE, NASDAQ is a(n) _____ that has no physical marketplace for making transactions. a) stock specialist b) electronic communication networksc) dealer exchange d) brokerage

37. _____ are Internet-based networks that match up buy and sell orders without using an intermediary.a) Dealer exchange b) Auction exchange c) National Association of Securities Dealers Automated Quotations d) Electronic communications networks

38. Which of the following is a regulatory government body that monitors the trading in stocks and bonds? a) the Federal Trade Commission b) the Federal Deposit Insurance Corporation c) the Securities and Exchange Commission

d) the Federal Reserve System

39. The _____ prohibits investment bankers from influencing stock analysts and requires CEOs and CFOs to sign statements attesting to the accuracy of their financial statements.a) Sarbanes-Oxley Act b) Investment Promotion Lawc) Securities Actd) Glass-Steagal Act

40. _____ is the illegal use of nonpublic information to make an investment profit.a) Securities fraudb) Insider trading c) Check kitingd) Day trading

41. In a variation on the increasingly common technique of phishing, crooks can lure people to fake websites that appear to be legitimate stock brokerage sites. This is an example of _____. a) check kiting b) insider tradingc) Dutch tradingd) securities fraud

Investment Strategies and Techniques

42. Which of the following are factors to be considered in selecting a stock as an investment?a) income b) discretionary ordersc) interest rated) collateral

43. Investors who are entering retirement and need to generate regular income, or those who have large recurring expenses such as college tuition payments, usually emphasize income over growth. These investors are likely attracted to investments that provide high _____.a) marginsb) gains c) yield d) liquidity

44. _____ are equities issued by small companies with unproven products or services.a) Initial public offeringsb) Blue chip stocks c) Stock choicesd) Growth stocks

45. _____ are investors who purchase securities in anticipation of making large profits quickly.a) Speculators

b) Market makersc) Stock specialistsd) Day traders

46. An assortment of investment instruments owned by an investor is a(n) ______ . a) diversification of interestsb) investment portfolio c) business capital portfoliod) asset allocation budget

47. On the basis of prevailing economic and market conditions, Greg’s money manager has placed 75 percent of his portfolio into stocks and 25 percent into bonds. If Greg’s money manager believes that the stock market is heading for a sharp decline, he will likely shift a major portion of assets out of stock and into cash. This is an example of _____.a) diversificationb) portfolio analysis c) asset allocation d) speculation

48. Sean wishes to reduce the risk of overall loss by investing in several areas in the hope that a loss in one area will be balanced by gains or at least stability in others. This is an example of _____.a) financial structureb) portfolio analysis c) asset allocation d) diversification

49. A(n) _____ is an expert who has passed specific tests and is registered to trade securities for investors. a) investment bankerb) broker c) day trader d) financial planner

50. A(n) _____ order stipulates the highest or lowest price at which the customer is willing to trade securities, while a(n) _____ order tells the broker to sell if the price of that customer’s security drops to or below a particular point.a) limit; openb) limit; stop c) stop; limit d) open; limit

51. Investors sometimes borrow cash to buy stocks, a practice known as ___.a) discretionary orderb) stop orderc) margin trading d) short selling

52. Russ is expecting Company A's stock to fall in the near future. He will probably choose a trading procedure known as _____.a) margin tradingb) limit orderc) discretionary orderd) short selling

Analyzing Financial News

53. A _____ market is a rising stock market, whereas a _____ market is a falling stock market.a) secondary; primary b) primary; secondary c) bull; bear d) bear; bull

54. The most famous U.S. stock index is the _____, which tracks the prices of 30 blue-chip or well-established stocks, each representing a particular sector of the U. S. economy.a) Nikkei 225 Index b) Standard & Poor’s 500 Stock Averagec) Dow Jones Industrial Average d) FT-SE 100 Index

55. The _____ is calculated by dividing a stock’s market price by its prior year’s earnings per share. a) quick ratio b) earnings per share c) current ratiod) price-earnings ratio

TRUE/FALSE QUESTIONS

Types of Securities Investments

56. Corporations sell stocks or bonds to finance their operations or expansion, while governments and municipalities issue bonds to raise money for building or public expenses.

57. Companies generally use a stock split to make the stock less attractive to outsiders.

58. Securities are traded in organized markets.

59. When a stock is first issued, the company assigns a market value, or dollar value, to the stock primarily for bookkeeping purposes.

60. Most investors buy common stock, which represents an ownership interest in a publicly traded corporation.

61. Investors who own preferred stock enjoy higher dividends and a better claim on assets if the corporation fails.

62. Debentures can be exchanged at the investor’s option for a certain number of shares of the corporation’s common stock.

63. Treasury notes are short-term U.S. government bonds that are repaid in less than one year, and they are sold at a discount and redeemed at face value.

64. A traditional choice for many individual investors, revenue bonds are issued by states, cities, and special government agencies to raise money for public services such as building schools, highways, and airports.

65. Capital gains are taxed at both the federal and state levels.

66. When a corporation issues a bond payable by a sinking fund, it must set aside a certain sum of money each year to pay the debt.

67. Mutual funds are financial organizations that pool money from many investors to buy a diversified mix of stocks, bonds, or other securities.

68. Sector funds invest in stocks of rapidly growing companies.

69. All options fall into two broad categories: puts and calls.

70. Trading contracts for immediate delivery of a commodity is called short selling.

Securities Markets

71. Organizations that facilitate the buying and selling of securities are known as stock exchanges.

72. The NASDAQ is an example of an auction exchange.

73. Electronic communication networks use the Internet to link buyers and sellers, and they have no exchange floors, specialists, or market makers.

74. Trading in stocks and bonds is monitored by the Federal Trade Commission.

75. Filing requirements are part of the SEC’s mission to ensure full and fair disclosure, which means that all investors get all the relevant information they need—and they can get it at the same time.

76. Insider trading is the illegal use of public information to make an investment profit.

Investment Strategies and Techniques

77. Common investment choices for growth investors include certificates of deposit, government securities, corporate bonds, and preferred stocks.

78. Speculators are investors who purchase securities in anticipation of making large profits quickly.

79. The percentage of increase in the value of an investment is known as the P/E ratio.

80. Managing a portfolio to gain the highest rate of return while reducing risk as much as possible is known as asset allocation.

81. Asset allocation is assembling investment portions in such a way that loss in one investment will not cripple the value of the entire investment portfolio.

82. An investment banker is an expert who has passed specific tests and is registered to trade securities for investors.

83. A discount broker provides fewer or limited services and generally charges lower commissions than a full–service broker.

84. A market order tells the broker to buy or sell at the best price that can be negotiated at the moment.

85. An open order specifies the highest price an investor is willing to pay when buying or the lowest price at which an investor is willing to sell.

86. Investors sometimes borrow cash to buy stocks, a practice known as margin trading.

Analyzing Financial News

87. Bear markets are characterized by rising prices, while bull markets are characterized by falling prices.

88. Investors watch market indexes and averages to determine whether the market is bullish or bearish.

89. The Dow Jones Industrial Average tracks the prices of 30 blue-chip stocks, each representing a particular sector of the U.S. economy.

90. Newspapers and business publications include tables of price quotations for investments such as mutual funds, commodities, options, and government securities.