Final Exam

Answer four of the following seven essay questions. Essay answers should be in paragraph form using complete sentences. (No bullet points) Use PAPA style for citations as needed. Exams may be subject to student submission using Turning at the professor's discretion. Your answers should be submitted as a Word file attached to an email sent to me by the start of class on March 5th. While brevity Is the soul of wit, essay answers should err on the side of completeness versus brevity.That said, I don't want to see the answer to any question go beyond two single-spaced hypocrites pages using a font size of 10-12 points. 1. Congratulations! You have Just been elected ruler off small OLD. What steps will you take to manage the country's balance of trade, and Its currency? Name and use an actual country don't make one up. Sierra Leone is a country that is rich in agricultural and mining resources, yet the great majority (over 70%) of the country still lives in poverty. Economic growth is hin dered by disadvantageous exchange rates and government budget deficits.As the recently elected President of Sierra Leone, I will take any and all necessary steps o bring this beautiful country out of poverty (www. Henbane. Org, 2014). Sierra Leone Is currently working with the International Monetary Fund (MIFF) to implement changes and improvements in our country's economic system. Sierra Leone has made important strides in economic reconstruction and macroeconomic as well as political stability since the end of the civil conflict in 2002. Economic growth has strengthened in the last two years with a stream of iron ore production and increased Infrastructure Investment.As the new president, I will continue working with the MIFF to manage the balance of trade and stabilize our currency (www. MFC. Org, 2013). In regards to Sierra Lens's currency, the exchange rate system is classified as floating, with the value of the Leone (currency) determined by the market. Currently, the central banks interventions are limited and aimed at smoothing volatility in the market. In order to stabilize the currency, I will diligently work with the Bank of Sierra Leone (BOSS) and with the MIFF to Introduce a stringent stabilization policy and reduce our country's debt.This policy will be aimed at first and foremost at tightening monetary regulations and reducing government borrowing. I will encourage the BOSS o move from a wholesale foreign exchange auction system to a retail auction system available to importers. This will enhance the currency's stability in the market as well as improve competitiveness. I will also work with the BOSS to improve monetary policy signaling, address remaining gaps In banking supervision, monetary and foreign exchange operations. I initiatives to encourage the development of micromanage in rural areas.Lastly, and perhaps most importantly, I will continue to work with the MIFF and the BOSS to develop a financial literacy campaign that will help to spr ead knowledge and titivation to continue efforts to stabilize the currency (www. Miff. Org, 2013) As president, I have also been charged with stabilizing trade in Sierra Leone. One of the biggest challenges in trade in Sierra Leone is that of smuggling and illicit trading activities. Sierra Leone is known for mining, especially diamonds, but poor regulation and policy enforcement, and high levels of corruption that lead to considerable levels of money laundering activities.As president, I will establish stricter controls and taxes around the mining trade, and crack down on corrupt government officials. I will continue to work with the government-created mining community development fund (DACCA), created to raise local communities' stake in the legal diamond trade, which returns a portion of diamond export taxes to diamond mining communities (www. Heritage. Org, 2014). Throughout my term as president, I hope to create a great economic turnaround for Sierra Leone, not only through bal ancing the currency and trade in the country, but through many more positive changes.I hope that by reducing budget deficits and improving the fiscal position of the government, I will be able to rehabilitate our social and economic infrastructure, stabilize the economy and provide a better life for Sierra Lens's people. 2. Compare and contrast the different methods of hedging transaction exposure. Include both derivative and non-derivative solutions. Transaction exposure is one of three types of foreign currency exposure. It is a type of risk that companies involved in international trade will face when entering fixed-price financial contracts.The risk occurs after the financial contract is made, and the subsequent fluctuations in currency exchange rates occur randomly and unpredictably. Although transaction exposure is considered short-term economic exposure, these changes in exchange rates can still affect the contract negatively, resulting in significant losses for the firm. The refore, companies participate in various hedging activities to avoid losses from transaction exposure (Nun & Arsenic, 2012). In transaction hedging, there are both derivative as well as non-derivative solutions. Derivatives are simply a contract between two parties.One of the ways which firms hedge transaction exposure is through the use of derivatives such as options contacts. Options are contracts used to reduce the risk of transactions by sing calls (sell) or puts (buy) on a financial asset at an agreed-upon price at some time in the future, which is known as exercising the option. Options also have a maturity or expiration date. In Europe, options can only be exercised at their maturity date, whereas in the United States, options can be exercised any time during the contract (Nun & Arsenic, 2012). Another derivative solution is a futures contract.Futures contracts are an agreement to buy or sell an asset at an agreed-upon price in the future. Unlike options, futures contracts ar e standardized for an amount of the asset, and are usually transacted to exit the market. Hedgers avoid price variation in the market by and pass off risk to a speculator who will take a long or short position in the futures contract. The speculator is considered to be more willing to take on the price risk variation. Futures contracts are short-term and profits and losses are realized on a daily basis (Nun & Arsenic, 2012).Somewhat similar to a futures contract is a forward contract. Forwards are also a contract to buy or sell an asset at an agreed-upon price in the future, however, forward contracts have a specific maturity date unlike the daily settlements used in uterus contracts. Rather than being a standardized contract, forwards are tailor made to the needs of the participants. Also different than futures is that when trading forwards, forwards are often settled through the delivery of goods or cash (Nun & Arsenic, 2012).There are numerous other types of derivatives used to m itigate foreign exchange risk, but the most common are forward and futures contracts, futures options, and swaps which will be discussed later in this exam (Nun & Arsenic, 2012). Many Macs also participate in non-derivative methods for hedging transaction risk. These are often used if a firm has positions in less liquid currencies. In order to mitigate risk in these cases, cross-hedging is a common technique in which a firm will hedge a position in one asset by taking a position in another asset.Effectiveness of cross-hedging is highly dependable on the strength of the relationship between the commodity futures prices and the exchange rate (Nun & Arsenic, 2012). Another non-derivative method to avoid transaction exposure is hedging via lead and lag. A company can lead, to pay or collect on an invoice early, or lag, which means to pay or collect late. By timing the lead and lag strategy correctly, the firm can protect themselves against depreciation or appreciation of the foreign cur rency they are dealing in (Nun & Arsenic, 2012).Hedging through invoice currency can help firms diversify exchange exposure by using currency basket units. A currency basket is a selected group of currencies in which the weighted average is used as a measure of the value of a contract or obligation. It functions as a benchmark for regional currency movements. Because it is a portfolio of currencies, its value is more stable and can be useful as a hedging LOL, especially for long-term contracts where there are no forward or options contracts available (Nun & Arsenic, 2012).The last non-derivative form of transaction hedging that we will discuss is that of exposure netting. Exposure netting helps to centralize a firm's exchange exposure management function in one location, typically in a reinforce center. All invoices from nitrating transactions are sent here, where overall exposure is analyzed and determined. Foreign exchange experts can then determine the optimal hedging methods for the portfolio of transactions and move forward to implement them (Nun Arsenic, 2012). Overall, we have seen that there are numerous options to hedge transaction exposure.There are some similarities among them, but they differ from each other and are applicable to different needs. Derivative forms of hedging are typically contractual, relatively short term solutions to transaction exposure, whereas non- lifestyle. No matter what the case, however, it is prudent for any NC to determine a strategy for transaction hedging before going into significant overseas contracts. 3. Compare and contrast a plain vanilla currency swap with a plain vanilla interest rate swap. Describe and Justify a situation where a NC would use each type of swap.As discussed briefly above, swap transactions are a type of derivative used to mitigate currency exposure in forward trades. A swap is an agreement between two parties to exchange a sequence of cash flows over a period of time- a simultaneous sale of spot foreign exchange against a forward purchase of an equal amount of foreign currency (Nun & Arsenic, 2012). A plain vanilla interest rate swap is the most common and simplest type of swap. They are customized contracts that can be paid monthly, quarterly, yearly, or on a basis decided on by the firms involved.In a plain vanilla interest rate swap, one part agrees to pay the contract at a fixed interest rate, while the other party agrees to pay at a floating interest rate, and the two cash flows are paid in the same currency. The swap typically has a set date of maturity set at some point in the future (MacAfee, 2012). A plain vanilla currency swap, unlike the plain vanilla interest swap, interest and principal payments on a loan are exchanged in 2 currencies. In the plain vanilla currency swap, the two parties exchange payments at the beginning and end of the swap, which also differs from interest rate swaps (MacAfee, 2012).In the case of plain vanilla interest rate swaps, Macs or Mi ff would use these when they are paying a floating rate of interest on liabilities and earning a fixed rate of interest on assets. It can be highly risky for a firm to have such a mismatch between assets and liabilities. Therefore, the firm could use a plain vanilla interest rate swap to rectify the imbalance in their interest payments (MacAfee, 2012). For the case of the plain vanilla currency swap, a firm would be interested in conducting this type of swap when the firm wants to expand operations into another country, but has comparative advantage in its home country.The firm will likely have more favorable financing in its home country, and therefore could perform a currency swap with the country it is expanding into, and gain the necessary funds in the new currency to finance its startup and operations (MacAfee, 2012). 4. Discuss the issues and potential solutions for a NC contemplating foreign direct investment in a OLD. By definition, a NC or Multinational Corporation, is regi stered and/or has operations in more than one country. These types of firms engage in FED, or Foreign Direct Investment.FED is an investment made by a company based in one country onto a company or entity based in another country. Macs making direct investments typically have a significant degree of influence and control over the company into which the investment is made. Open economies with skilled workforces and good growth prospects tend to attract larger amounts of foreign direct investment than closed, highly regulated economies (www. Investigated. Com, 2014). FED can have numerous risks and obstacles for the NC involved. Olds, or Less Foreign direct investment can be an important source of employment opportunities for developing countries.However, anti-corporate advocates criticize Macs for entering Olds that have low human rights or environmental standards. They claim that multinationals give rise to large merged conglomerations that reduce competition and free enterprise, ra ise capital in host countries but export the profits, exploit countries for their natural resources, limit workers' wages, erode traditional cultures, and challenge national sovereignty. However, they remain attractive to investors due to low costs of labor, poorly enforced environmental and economic regulations, and inexpensive resources (www. Investigated. Com, 2014). Economic risk depends on the foreign country's financial state. A country with stable finances and a sound economy will be more attractive to foreign investors than one that has currency fluctuations and difficulty paying debt. Trade barriers and shareholder diversification issues can all be part of the economic risks taken on by a NC that is contemplating FED (Nun & Arsenic, 2012). Trade barriers can often be overcome by moving trade through other countries without trade restrictions.In the case of physical trade barriers, such as poor transportation, FED can be put into place to improve infrastructure and reduce tr ansportation costs (Nun & Arsenic, 2012). Political risk emerges when the political climate in a foreign country becomes unfriendly to investors. Political risk can be classified into three types: transfer risk, operational risk, and control risk. Transfer risk arises from uncertainty about cross border flows of capital and payments. Operational risk arises when the host country's policies affect the NC.Lastly, control risk is caused by uncertainty about the host country's policies regarding ownership and control of local operations (Nun & Arsenic, 2012). When contemplating investing in a OLD, the NC should take care to meticulously search and define the level of risk for doing business with the OLD they are considering, and also outline possible solutions in case of risk exposure. For example, those seeking more in-depth coverage of a particular country or region, two excellent sources of objective, comprehensive country information are the Economist Intelligence Unit and the Centr al Intelligence Agency World Fastback.Either of these resources provides an investor with a broad overview of the economic, political, demographic and social climate of a country. The Ell-J also provides ratings for most of the world's countries. These ratings can supplement those issued by Moody's, S and the other â€Å"traditional† ratings agencies (www. Investigated. Com, 2014). After completing the country analysis, the investing NC will have to decide on a sound investment approach. One of the recommended approaches is for the NC to invest in a broad international portfolio.Diversification is a fundamental principle of domestic investing, and is even more important when investing internationally. Even in a more concentrated portfolio, investments should be spread among several countries to maximize diversification and minimize risk (www. Investigated. Com, 2014). After deciding where to invest, an investor must decide which type of investment to enter. The choice of inve stment vehicle depends on each investor's individual knowledge, experience, risk profile and return objectives. When in doubt, it may make later.In addition to thoroughly researching prospective investments, an international investor also needs to monitor his or her portfolio and adjust holdings as conditions dictate. As in the U. S. , economic conditions overseas are constantly evolving, and political situations abroad can change quickly, particularly in emerging r frontier markets. Situations that once seemed promising may no longer be so, and countries that once seemed too risky might now be viable investment candidates (www. Investigated. Com, 2014). Final Exam Answer four of the following seven essay questions. Essay answers should be in paragraph form using complete sentences. (No bullet points) Use PAPA style for citations as needed. Exams may be subject to student submission using Turning at the professor's discretion. Your answers should be submitted as a Word file attached to an email sent to me by the start of class on March 5th. While brevity Is the soul of wit, essay answers should err on the side of completeness versus brevity.That said, I don't want to see the answer to any question go beyond two single-spaced hypocrites pages using a font size of 10-12 points. 1. Congratulations! You have Just been elected ruler off small OLD. What steps will you take to manage the country's balance of trade, and Its currency? Name and use an actual country don't make one up. Sierra Leone is a country that is rich in agricultural and mining resources, yet the great majority (over 70%) of the country still lives in poverty. Economic growth is hin dered by disadvantageous exchange rates and government budget deficits.As the recently elected President of Sierra Leone, I will take any and all necessary steps o bring this beautiful country out of poverty (www. Henbane. Org, 2014). Sierra Leone Is currently working with the International Monetary Fund (MIFF) to implement changes and improvements in our country's economic system. Sierra Leone has made important strides in economic reconstruction and macroeconomic as well as political stability since the end of the civil conflict in 2002. Economic growth has strengthened in the last two years with a stream of iron ore production and increased Infrastructure Investment.As the new president, I will continue working with the MIFF to manage the balance of trade and stabilize our currency (www. MFC. Org, 2013). In regards to Sierra Lens's currency, the exchange rate system is classified as floating, with the value of the Leone (currency) determined by the market. Currently, the central banks interventions are limited and aimed at smoothing volatility in the market. In order to stabilize the currency, I will diligently work with the Bank of Sierra Leone (BOSS) and with the MIFF to Introduce a stringent stabilization policy and reduce our country's debt.This policy will be aimed at first and foremost at tightening monetary regulations and reducing government borrowing. I will encourage the BOSS o move from a wholesale foreign exchange auction system to a retail auction system available to importers. This will enhance the currency's stability in the market as well as improve competitiveness. I will also work with the BOSS to improve monetary policy signaling, address remaining gaps In banking supervision, monetary and foreign exchange operations. I initiatives to encourage the development of micromanage in rural areas.Lastly, and perhaps most importantly, I will continue to work with the MIFF and the BOSS to develop a financial literacy campaign that will help to spr ead knowledge and titivation to continue efforts to stabilize the currency (www. Miff. Org, 2013) As president, I have also been charged with stabilizing trade in Sierra Leone. One of the biggest challenges in trade in Sierra Leone is that of smuggling and illicit trading activities. Sierra Leone is known for mining, especially diamonds, but poor regulation and policy enforcement, and high levels of corruption that lead to considerable levels of money laundering activities.As president, I will establish stricter controls and taxes around the mining trade, and crack down on corrupt government officials. I will continue to work with the government-created mining community development fund (DACCA), created to raise local communities' stake in the legal diamond trade, which returns a portion of diamond export taxes to diamond mining communities (www. Heritage. Org, 2014). Throughout my term as president, I hope to create a great economic turnaround for Sierra Leone, not only through bal ancing the currency and trade in the country, but through many more positive changes.I hope that by reducing budget deficits and improving the fiscal position of the government, I will be able to rehabilitate our social and economic infrastructure, stabilize the economy and provide a better life for Sierra Lens's people. 2. Compare and contrast the different methods of hedging transaction exposure. Include both derivative and non-derivative solutions. Transaction exposure is one of three types of foreign currency exposure. It is a type of risk that companies involved in international trade will face when entering fixed-price financial contracts.The risk occurs after the financial contract is made, and the subsequent fluctuations in currency exchange rates occur randomly and unpredictably. Although transaction exposure is considered short-term economic exposure, these changes in exchange rates can still affect the contract negatively, resulting in significant losses for the firm. The refore, companies participate in various hedging activities to avoid losses from transaction exposure (Nun & Arsenic, 2012). In transaction hedging, there are both derivative as well as non-derivative solutions. Derivatives are simply a contract between two parties.One of the ways which firms hedge transaction exposure is through the use of derivatives such as options contacts. Options are contracts used to reduce the risk of transactions by sing calls (sell) or puts (buy) on a financial asset at an agreed-upon price at some time in the future, which is known as exercising the option. Options also have a maturity or expiration date. In Europe, options can only be exercised at their maturity date, whereas in the United States, options can be exercised any time during the contract (Nun & Arsenic, 2012). Another derivative solution is a futures contract.Futures contracts are an agreement to buy or sell an asset at an agreed-upon price in the future. Unlike options, futures contracts ar e standardized for an amount of the asset, and are usually transacted to exit the market. Hedgers avoid price variation in the market by and pass off risk to a speculator who will take a long or short position in the futures contract. The speculator is considered to be more willing to take on the price risk variation. Futures contracts are short-term and profits and losses are realized on a daily basis (Nun & Arsenic, 2012).Somewhat similar to a futures contract is a forward contract. Forwards are also a contract to buy or sell an asset at an agreed-upon price in the future, however, forward contracts have a specific maturity date unlike the daily settlements used in uterus contracts. Rather than being a standardized contract, forwards are tailor made to the needs of the participants. Also different than futures is that when trading forwards, forwards are often settled through the delivery of goods or cash (Nun & Arsenic, 2012).There are numerous other types of derivatives used to m itigate foreign exchange risk, but the most common are forward and futures contracts, futures options, and swaps which will be discussed later in this exam (Nun & Arsenic, 2012). Many Macs also participate in non-derivative methods for hedging transaction risk. These are often used if a firm has positions in less liquid currencies. In order to mitigate risk in these cases, cross-hedging is a common technique in which a firm will hedge a position in one asset by taking a position in another asset.Effectiveness of cross-hedging is highly dependable on the strength of the relationship between the commodity futures prices and the exchange rate (Nun & Arsenic, 2012). Another non-derivative method to avoid transaction exposure is hedging via lead and lag. A company can lead, to pay or collect on an invoice early, or lag, which means to pay or collect late. By timing the lead and lag strategy correctly, the firm can protect themselves against depreciation or appreciation of the foreign cur rency they are dealing in (Nun & Arsenic, 2012).Hedging through invoice currency can help firms diversify exchange exposure by using currency basket units. A currency basket is a selected group of currencies in which the weighted average is used as a measure of the value of a contract or obligation. It functions as a benchmark for regional currency movements. Because it is a portfolio of currencies, its value is more stable and can be useful as a hedging LOL, especially for long-term contracts where there are no forward or options contracts available (Nun & Arsenic, 2012).The last non-derivative form of transaction hedging that we will discuss is that of exposure netting. Exposure netting helps to centralize a firm's exchange exposure management function in one location, typically in a reinforce center. All invoices from nitrating transactions are sent here, where overall exposure is analyzed and determined. Foreign exchange experts can then determine the optimal hedging methods for the portfolio of transactions and move forward to implement them (Nun Arsenic, 2012). Overall, we have seen that there are numerous options to hedge transaction exposure.There are some similarities among them, but they differ from each other and are applicable to different needs. Derivative forms of hedging are typically contractual, relatively short term solutions to transaction exposure, whereas non- lifestyle. No matter what the case, however, it is prudent for any NC to determine a strategy for transaction hedging before going into significant overseas contracts. 3. Compare and contrast a plain vanilla currency swap with a plain vanilla interest rate swap. Describe and Justify a situation where a NC would use each type of swap.As discussed briefly above, swap transactions are a type of derivative used to mitigate currency exposure in forward trades. A swap is an agreement between two parties to exchange a sequence of cash flows over a period of time- a simultaneous sale of spot foreign exchange against a forward purchase of an equal amount of foreign currency (Nun & Arsenic, 2012). A plain vanilla interest rate swap is the most common and simplest type of swap. They are customized contracts that can be paid monthly, quarterly, yearly, or on a basis decided on by the firms involved.In a plain vanilla interest rate swap, one part agrees to pay the contract at a fixed interest rate, while the other party agrees to pay at a floating interest rate, and the two cash flows are paid in the same currency. The swap typically has a set date of maturity set at some point in the future (MacAfee, 2012). A plain vanilla currency swap, unlike the plain vanilla interest swap, interest and principal payments on a loan are exchanged in 2 currencies. In the plain vanilla currency swap, the two parties exchange payments at the beginning and end of the swap, which also differs from interest rate swaps (MacAfee, 2012).In the case of plain vanilla interest rate swaps, Macs or Mi ff would use these when they are paying a floating rate of interest on liabilities and earning a fixed rate of interest on assets. It can be highly risky for a firm to have such a mismatch between assets and liabilities. Therefore, the firm could use a plain vanilla interest rate swap to rectify the imbalance in their interest payments (MacAfee, 2012). For the case of the plain vanilla currency swap, a firm would be interested in conducting this type of swap when the firm wants to expand operations into another country, but has comparative advantage in its home country.The firm will likely have more favorable financing in its home country, and therefore could perform a currency swap with the country it is expanding into, and gain the necessary funds in the new currency to finance its startup and operations (MacAfee, 2012). 4. Discuss the issues and potential solutions for a NC contemplating foreign direct investment in a OLD. By definition, a NC or Multinational Corporation, is regi stered and/or has operations in more than one country. These types of firms engage in FED, or Foreign Direct Investment.FED is an investment made by a company based in one country onto a company or entity based in another country. Macs making direct investments typically have a significant degree of influence and control over the company into which the investment is made. Open economies with skilled workforces and good growth prospects tend to attract larger amounts of foreign direct investment than closed, highly regulated economies (www. Investigated. Com, 2014). FED can have numerous risks and obstacles for the NC involved. Olds, or Less Foreign direct investment can be an important source of employment opportunities for developing countries.However, anti-corporate advocates criticize Macs for entering Olds that have low human rights or environmental standards. They claim that multinationals give rise to large merged conglomerations that reduce competition and free enterprise, ra ise capital in host countries but export the profits, exploit countries for their natural resources, limit workers' wages, erode traditional cultures, and challenge national sovereignty. However, they remain attractive to investors due to low costs of labor, poorly enforced environmental and economic regulations, and inexpensive resources (www. Investigated. Com, 2014). Economic risk depends on the foreign country's financial state. A country with stable finances and a sound economy will be more attractive to foreign investors than one that has currency fluctuations and difficulty paying debt. Trade barriers and shareholder diversification issues can all be part of the economic risks taken on by a NC that is contemplating FED (Nun & Arsenic, 2012). Trade barriers can often be overcome by moving trade through other countries without trade restrictions.In the case of physical trade barriers, such as poor transportation, FED can be put into place to improve infrastructure and reduce tr ansportation costs (Nun & Arsenic, 2012). Political risk emerges when the political climate in a foreign country becomes unfriendly to investors. Political risk can be classified into three types: transfer risk, operational risk, and control risk. Transfer risk arises from uncertainty about cross border flows of capital and payments. Operational risk arises when the host country's policies affect the NC.Lastly, control risk is caused by uncertainty about the host country's policies regarding ownership and control of local operations (Nun & Arsenic, 2012). When contemplating investing in a OLD, the NC should take care to meticulously search and define the level of risk for doing business with the OLD they are considering, and also outline possible solutions in case of risk exposure. For example, those seeking more in-depth coverage of a particular country or region, two excellent sources of objective, comprehensive country information are the Economist Intelligence Unit and the Centr al Intelligence Agency World Fastback.Either of these resources provides an investor with a broad overview of the economic, political, demographic and social climate of a country. The Ell-J also provides ratings for most of the world's countries. These ratings can supplement those issued by Moody's, S and the other â€Å"traditional† ratings agencies (www. Investigated. Com, 2014). After completing the country analysis, the investing NC will have to decide on a sound investment approach. One of the recommended approaches is for the NC to invest in a broad international portfolio.Diversification is a fundamental principle of domestic investing, and is even more important when investing internationally. Even in a more concentrated portfolio, investments should be spread among several countries to maximize diversification and minimize risk (www. Investigated. Com, 2014). After deciding where to invest, an investor must decide which type of investment to enter. The choice of inve stment vehicle depends on each investor's individual knowledge, experience, risk profile and return objectives. When in doubt, it may make later.In addition to thoroughly researching prospective investments, an international investor also needs to monitor his or her portfolio and adjust holdings as conditions dictate. As in the U. S. , economic conditions overseas are constantly evolving, and political situations abroad can change quickly, particularly in emerging r frontier markets. Situations that once seemed promising may no longer be so, and countries that once seemed too risky might now be viable investment candidates (www. Investigated. Com, 2014). Final Exam The response to each question or statement is either True or False. 1. A business organized as a separate legal entity owned by stockholders is a partnership. 2. External users of accounting information are managers who plan, organize, and run a business. 3. Two primary external users of accounting information are investors and creditors. 4. Financing activities for corporations include borrowing money and selling shares of their own stock. 5.Income will always be greater under the cash basis of accounting than under the accrual basis of accounting. 6. The difference between unearned revenue and accrued revenue is that accrued revenue has been recorded and needs adjusting and unearned revenue has never been recorded. 7. Cash is a temporary account. 8. Bonding means insuring a company against theft by employees. 9. The treasurer should prepare and sign a check only after authorization to issue a check has been provided. 10. Using borrowed money to increase the rate of return on common stockholders' equity is called â€Å"trading on the equity.The extent of internal control features adopted by a company must be evaluated in terms of cost-benefit. 11. A good system of internal control will safeguard its assets and enhance the accuracy and reliability of its accounting records. 12. All reconciling items in determining the adjusted cash balance per books require the depositor to make adjusting Journal entries to the Cash account. 13. Cash equivalents include money market accounts, commercial paper, and U. S. Treasury bills held for ninety days or less. 14. A basic principle of cash management is to increase the speed of paying liabilities. 5.A cash budget contributes to more effective cash management. 16. A change in accounting principle occurs when the principle used in the current year is different from the one used by competitors in the current year. 17. If a company has sales of $110 in 2007 and $154 in 2006, the percentage decrease in sales from 2006 to 2007 i s 140%. 18. In a common size income statement, each item is expressed as a percentage of net income. 19. Profitability ratios are frequently used as a basis for evaluating management's operating effectiveness 20. Inventory turnover is a measure of equity that focuses on efficient use of inventory. 1 . The current ratio is a measure of all the ratios calculated for the current year. 22. From a creditor's point of view, the higher the total debt to total assets ratio, the lower the risk that the company may be unable to pay its obligations. 23. Alternative accounting methods affect the quality of earnings 24. Because pro formal earnings are based on specific rules, these amounts are highly reliable. Section II: Multiple Choice Choose your response from one of the possible answers provided. 26. A business organized as a corporation ). Is not a separate legal entity in most states. ). Requires that stockholders be personally liable for the debts of the business. C). Is owned by its stoc kholders. D). Has tax advantages over a proprietorship or partnership. 27. Which of the following is not one of the three forms of business organization? A). Corporations. B). Partnerships. C). Proprietorships. D). Investors. 28. An advantage of the corporate form of business is that a). It has limited life. B). Its owner's personal resources are at stake. C). Its ownership is easily transferable via the sale of shares of stock. ). It is simple to establish. 29.The group of users of accounting information charged with achieving the goals of the business is its a). Auditors. B). Investors. C). Managers. D). Creditors. 30. Which of the following is a primary user of accounting information with a direct financial interest in the business? A). Taxing authority b). Creditor c). Regulatory agency d). Labor union 31 . An income statement a). Summarizes the changes in retained earnings for a specific period of time. B). Reports the changes in assets, liabilities, and stockholders' equity ov er a period of time. C). Ports the assets, liabilities, and stockholders' equity at a specific date. ). Presents the revenues and expenses for a specific period of time. 32. Which financial statement is prepared first? A). Balance sheet b). Lonesome statement c). Retained earnings statement d). Statement of cash flows 33. Which one of the following is not a Justification for adjusting entries? A). AdJusting entries are necessary to ensure that revenue recognition principles are followed. B). AdJusting entries are necessary to ensure that the matching principle is followed. C). AdJusting entries are necessary to enable financial statements to be in conformity tit GAP. D).AdJusting entries are necessary to bring the general ledger accounts in line with the budget. 34. If a resource has been consumed but a bill has not been received at the end of the accounting period, then a). An expense should be recorded when the bill is received. B). An expense should be recorded when the cash is p aid out. C). An adjusting entry should be made recognizing the expense. D). It is optional whether to record the expense before the bill is received. 35. An adjusting entry would not include which of the following accounts? A). Cash b). Lintiest Receivable ).Property Tax Payable d). Unearned Revenue 36. At December 31, 2007, before any year-end adjustments, Boils Company's Prepaid Insurance account had a balance of $2,700. It was determined that $1,500 of the Prepaid Insurance had expired. The adjusted balance for Insurance Expense for the year would be a). $l ,500. 0. $2,700. D). $1,900. 37. Which one of the following is not an objective of a system of internal controls? A). Safeguard company assets b). Overstate liabilities in order to be conservative c). Enhance the accuracy and reliability of accounting records d).Reduce the risks of errors 38. Which one of the following would be considered a long-term solvency ratio? A). Receivables turnover b). Return on total assets c). Curre nt cash debt coverage ratio.