Chapter 1
The Role and Environment
of Managerial Finance
n Learning Goals
1. Define finance, its major areas and opportunities available in this field, and the legal forms of
business organization.
2. Describe the managerial finance function and its relationship to economics and accounting.
3. Identify the primary activities of the financial manager.
4. Explain the goal of the firm, corporate governance, the role of ethics, and the agency issue.
5. Understand financial institutions and markets, and the role they play in managerial finance.
6. Discuss business taxes and their importance in financial decisions.
n True/False
1. A financial analyst is responsible for maintaining and controlling the firm’s daily cash balances.
Frequently manages the firm’s short-term investments and coordinates short-term borrowing and
banking relationships.
Answer: FALSE
Level of Difficulty: 1
Learning Goal: 1
Topic: Career Opportunities
2. Finance is concerned with the process institutions, markets, and instruments involved in the transfer
of money among and between individuals, businesses and government.
Answer: TRUE
Level of Difficulty: 1
Learning Goal: 1
Topic: Finance Defined
3. Financial services are concerned with the duties of the financial manager.
Answer: FALSE
Level of Difficulty: 1
Learning Goal: 1
Topic: Role of Financial Manager
4. Financial managers actively manage the financial affairs of many types of business—financial and
non-financial, private and public, for-profit and not-for-profit.
Answer: TRUE
Level of Difficulty: 1
Learning Goal: 1
Topic: Role of Financial Manager
5. In partnerships, owners have unlimited liability and may have to cover debts of other less
financially sound partners.
Answer: TRUE
Level of Difficulty: 1
Learning Goal: 1
Topic: Legal Form of Organization
6. In partnerships, a partner can readily transfer his/her wealth to other partners.
Answer: FALSE
Level of Difficulty: 1
Learning Goal: 1
Topic: Legal Form of Organization
7. The board of directors is responsible for managing day-to-day operations and carrying out the
policies established by the chief executive officer.
Answer: FALSE
Level of Difficulty: 1
Learning Goal: 1
Topic: Corporate Governance
8. The sole proprietor has unlimited liability; his or her total investment in the business can be taken
to satisfy creditors.
Answer: FALSE
Level of Difficulty: 1
Learning Goal: 1
Topic: Legal Form of Organization
9. In limited partnerships, only one partner may assume limited liability. All other partners have to
have unlimited liability.
Answer: FALSE
Level of Difficulty: 2
Learning Goal: 1
Topic: Legal Form of Organization
10. The president or chief executive officer is elected by the firm’s stockholders and has ultimate
authority to guide corporate affairs and make general policy.
Answer: FALSE
Level of Difficulty: 2
Learning Goal: 1
Topic: Corporate Governance
11. In limited partnerships, partners’ liabilities are limited to their investment in the partnership.
Answer: FALSE
Level of Difficulty: 2
Learning Goal: 1
Topic: Legal Form of Organization
12. In limited liability partnerships, the liability protection does not protect partners from their
individual acts of malpractice.
Answer: TRUE
Level of Difficulty: 3
Learning Goal: 1
Topic: Legal Form of Organization
13. The capital expenditures analyst/manager is responsible for the evaluation and recommendation of
proposed asset investments and may be involved in the financial aspects of implementation of
approved investments.
Answer: TRUE
Level of Difficulty: 3
Learning Goal: 1
Topic: Managerial Finance Functions
14. The financial analyst administers the firm’s credit policy by analyzing or managing the evaluation
of credit applications, extending credit, and monitoring and collecting accounts receivable.
Answer: FALSE
Level of Difficulty: 3
Learning Goal: 1
Topic: Managerial Finance Functions
15. In large companies, the project finance manager is responsible for coordinating the assets and
liabilities of the employees’ pension fund.
Answer: FALSE
Level of Difficulty: 4
Learning Goal: 1
Topic: Managerial Finance Functions
16. In S corporations, stockholders receive all of the organizational benefits of a corporation and the tax
advantages of a partnership, but lose certain tax advantages related to pension plans that are
available to traditional corporations.
Answer: TRUE
Level of Difficulty: 4
Learning Goal: 1
Topic: Legal Form of Organization
17. Unlike an S corporation, the limited liability corporation (LLC) can own more than 80 percent of
another corporation, and corporations, partnerships, or non-U.S. residents can own limited liability
corporation shares.
Answer: TRUE
Level of Difficulty: 4
Learning Goal: 1
Topic: Legal Form of Organization
18. In limited liability partnership, all partners have limited liability with regard to the business—they
are not personally liable for other partners’ malpractice—and the limited liability partnership is
taxed as partnership.
Answer: TRUE
Level of Difficulty: 4
Learning Goal: 1
Topic: Legal Form of Organization
19. Marginal analysis states that financial decisions should be made and actions taken only when added
benefits exceeds added costs.
Answer: TRUE
Level of Difficulty: 1
Learning Goal: 2
Topic: Fundamental Concepts
20. The corporate controller typically handles the accounting activities, such as tax management, data
processing, and cost and financial accounting.
Answer: TRUE
Level of Difficulty: 1
Learning Goal: 2
Topic: Managerial Finance Functions
21. The financial manager places primary emphasis on cash flows, the inflow and outflow of cash.
Answer: TRUE
Level of Difficulty: 1
Learning Goal: 2
Topic: Fundamental Concepts
22. Managerial finance is concerned with design and delivery of advice and financial products to
individuals, business, and government.
Answer: FALSE
Level of Difficulty: 1
Learning Goal: 2
Topic: Managerial Finance Functions
23. The corporate treasurer typically handles the both cost accounting and financial accounting.
Answer: FALSE
Level of Difficulty: 1
Learning Goal: 2
Topic: Managerial Finance Functions
24. The accrual method recognizes revenue at the point of sale and recognizes expenses when incurred.
Answer: TRUE
Level of Difficulty: 1
Learning Goal: 2
Topic: Accounting Concepts
25. The accountant evaluates financial statements, develops additional data, and makes decisions based
on his or her assessment of the associated returns and risks.
Answer: FALSE
Level of Difficulty: 1
Learning Goal: 2
Topic: Accounting Concepts
26. The corporate treasurer is the officer responsible for the firm’s accounting activities, such as
corporate accounting, tax management, financial accounting, and cost accounting.
Answer: FALSE
Level of Difficulty: 2
Learning Goal: 2
Topic: Managerial Finance Functions
27. The corporate controller is the officer responsible for the firm’s financial activities such as financial
planning and fund raising, making capital expenditure decisions, and managing cash, credit, the
pension fund, and foreign exchange.
Answer: FALSE
Level of Difficulty: 2
Learning Goal: 2
Topic: Managerial Finance Functions
28. High cash flow is generally associated with a higher share price whereas higher risk tends to result
in a lower share price.
Answer: TRUE
Level of Difficulty: 2
Learning Goal: 2
Topic: Fundamental Concepts
29. The corporate treasurer’s focus tends to be more external, while the controller’s focus is more
internal.
Answer: TRUE
Level of Difficulty: 2
Learning Goal: 2
Topic: Managerial Finance Functions
30. The financial manager prepares financial statements that recognize revenue at the point of sale and
expenses when incurred.
Answer: FALSE
Level of Difficulty: 2
Learning Goal: 2
Topic: Role of Financial Manager
