Finance plays a pivotal role in the world of economics and business. It encompasses a wide range of topics, from managing personal finances to steering the financial strategies of large corporations. In this compilation of the top 20 finance questions and answers, we will delve into key concepts and principles that are essential for understanding and navigating the complex realm of finance. These questions cover various aspects of finance, including investments, budgeting, risk management, and financial planning. Whether you’re a seasoned investor, a business owner, or someone looking to enhance your financial literacy, these questions and answers will provide valuable insights and practical knowledge to help you make informed financial decisions and achieve your monetary goals.
Now, let’s move on to the Top 20 Finance Questions and Answers
Q1. Assume you deposit $100 in an account today and that a friend of yours deposits $100 in an account of another bank, also today. In one year, you have $110 in your account and your friend has $108 in his/her account. We can conclude that
a. Your friend earned a higher rate of interest than you.
b. Your friend earned a lower rate of interest than you.
c. Your friend is getting a compound interest while you are getting a simple interest.
d. One of the two banks made a mistake in calculating the interest payment.
Q2. The cash paid in capital expenditures to improve fixed assets, listed on the cash flow statement, can best be computed as
a. Gross fixed assets from this year minus net fixed assets from this year.
b. Net fixed assets from this year minus Net fixed assets from last year.
c. Gross fixed assets from this year minus gross fixed assets from last year.
d. Net fixed assets from last year plus depreciation from this year.
Q3. The simple form of an annualized interest rate is called the annual percentage rate (APR). The effective annual rate (EAR) is a:
a. concept that is only used because the law requires it, and is of no use to a borrower.
b. less accurate measure of the interest rate paid for monthly compounding.
c. measure that only applies to mortgages.
d. more accurate measure of the interest rate paid for monthly compounding.
Q4. Which of these statements is true?
a. A low inventory turnover ratio or a high days’ sales in inventory is a sign of good inventory management.
b. A high inventory turnover ratio or a low days’ sales in inventory is a sign of good inventory management.
c. A high inventory turnover ratio or a high days’ sales in inventory is a sign of good inventory management.
d. A low inventory turnover ratio or a low days’ sales in inventory is a sign of good inventory management.
Q5. The agency relationship in corporate finance refers to ___________.
a. when the board of directors are elected to staggered terms
b. when the shareholders hire a manager to run their company
c. when the board of directors oversee the CEO
d. when the corporate hires an advertising agency to market their new product/service
Q6. You are deciding among several different bank accounts. Which of the following will generate the highest effective annual rate (EAR)?
a. A 5.98 percent rate with annual compounding
b. A 6 percent rate with annual compounding
c. A 6 percent rate with quarterly compounding
d. A 6 percent rate with monthly compounding
Q7. Which of the activities below is the most likely to result in a series of depreciation expenses over time?
a. Steel used in production of an automobile.
b. Electricity used to power machines.
c. Wages paid to workers.
d. Acquisition of an office computer.
Q8. Level sets of frequent, consistent cash flows are called:
Q9. A firm had EBIT of $1,000, paid taxes of $225, expensed depreciation at $13, and its gross fixed assets increased by $25. What was the firm’s operating cash flow?
Q10. How are future values affected by changes in interest rates?
a. Future values are not affected by changes in interest rates.
b. One would need to know the present value in order to determine the impact.
c. The higher the interest rate, the larger the future value will be.
d. The lower the interest rate, the larger the future value will be.
Q11. Assume the present value of a series of cash flows is equal to $100,000. Which of the below would be a possible interpretation of this result?
a. $100,000 is the sum of the cash flows adjusted for inflation.
b. The sum of the cash flows is equal to $100,000.
c. $100,000 is the maximum we should be willing to pay for this series of cash flows.
d. If you keep depositing the cash flows in a bank they will grow to $100,000 over time.
Q12. Which type of ratio measures the dollars of current assets available to pay each dollar of current liabilities?
c. Quick or acid test
Q13. Which of the following is NOT true when developing a timeline?
a. Cash outflows are designated with a positive number.
b. Cash inflows are designated with a positive number.
c. The cost is known as the interest rate.
d. The time line shows the magnitude of cash flows at different points in time.
Q14. All of the following are advantages to organizing as a corporation except __.
a. Limited liability
b. Easy to transfer ownership
c. Easy access to capital
d. Double taxation
Q15. All of the following are cash flows associated with financing activities EXCEPT:
a. Increase in accounts payable
b. Stock Repurchases
c. Paying dividends
d. Issuing stock
Q16. Which of the below would be the LEAST LIKELY to lead to a higher times interest earned ratio?
a. More operating income.
b. A lower interest rate charged by company’s creditors.
c. A lower amount of interest paid by the company.
d. A lower tax rate.
Q17. The overall goal of the financial manager is to _____.
a. Maximize earnings per share
b. Maximize the company’s stock market price
c. Minimize total costs
d. Maximize net income
Q18. Assume a company’s total asset turnover is equal to 4.75. What is the correct interpretation of this ratio?
a. Total assets are kept on average for 47.5 years.
b. Total assets are kept on average for 4.75 days.
c. Total assets are kept on average for 4.75 years.
d. Each dollar of total assets generates $4.75 of sales.
Q19. Compounding interest means the following:
a. Interest is earned not only on the initial balance, but also on previously received interest payments.
b. Two different interest rates are used for the same loan.
c. The interest rate is determined by the borrower, not the lender.
d. Dividing the interest into components.
Q20. Which of the following personal decisions is NOT impacted by finance?
a. All of these are impacted by finance.
b. Making retirement decisions
c. Making credit card payments
d. Borrowing money to purchase cars or homes