Finance — Additional Practice — Part 2: 18 MCQs with Explanations

Retained earnings are the part of profit kept in the business instead of distributed, and they fund expansion without raising new capital.

Finance touches every activity listed, because marketing research, pricing decisions and channel design all require funds and are judged on their financial return.

Agency theory contrasts the objectives of managers, the agents, with those of the shareholders, the principals, whose wealth the managers are engaged to maximise.

Period costs are charged to the period in which they are incurred rather than to the product, so selling expense qualifies while raw material, direct labour and manufacturing overhead are product costs.

Product costs are those incurred to make the goods, namely raw material, direct labour and manufacturing overhead. Selling, general and administrative expenses are period costs.

The debt-to-equity ratio describes how the firm finances itself and therefore measures financial policy, whereas profit margin measures operating efficiency and assets turnover measures asset use.

Cash flow from assets equals operating cash flow less capital spending and less the change in net working capital, so all three components are involved.

Operating cash flow is the cash generated by the routine business of producing and selling, before spending on fixed assets and before transactions with investors.

Stakeholders is the term for every group with a stake in the company's fortunes, including shareholders, employees, creditors, customers and the community.

Corporate governance is the system by which companies are directed and controlled, defining the allocation of rights and responsibilities among the board and managers.

Corporate governance spans all three relationships at once, that is, between shareholders and the board, between the board and management, and consequently between shareholders and senior management.

The board sets policy and advises the chief executive, while management runs the day-to-day activities of the company within that framework.

Financial management must provide financing for the assets the firm holds, since every asset on the balance sheet is funded by either debt or equity.

Financial management is defined by exactly these three decisions, the acquisition, financing and management of assets, pursued toward an overall objective.

The three interlocking concerns of financial management are acquiring assets, financing them and managing them, all directed at the firm's overall goal.

Profit maximisation is normally stated in after-tax terms, because it is the residual available to owners that determines their return, not the pre-tax figure.

An agent is a person authorised by the principal to act on the principal's behalf, which is the relationship that agency theory analyses.

Stakeholders include creditors, employees, suppliers and customers as well as shareholders, so all of the listed groups are covered.