1. Agency theory deals with the issue of A. when to hire an agent to represent the firm in negotiations. B. the legal liabilities of a firm if an employee, acting as the firm's agent, injures someone. C. the limitations placed on an employee acting as the firm's agent to obligate or bind the firm. D. the conflicts that can arise between the viewpoints and motivations of a firm's owners and managers

2. The major limitation of financial statements is A. in their complexity. B. in their lack of comparability. C. in their use of historical cost accounting. D. in their lack of detail.

3. Ratio analysis can be useful for A. historical trend analysis within a firm. B. comparison of ratios within a single industry. C. measuring the effects of financing. D. All of these are true.

4. The firm's price-earnings (P/E) ratio is influenced by its A. capital structure. B. earnings volatility. C. sales, profit margins, and earnings. D. all of these.

5. Disinflation may cause A. an increase in the value of gold, silver, and gems. B. a reduced required return demanded by investors on financial assets. C. additional profits through falling inventory costs. D. None of these.

6. An increasing average collection period indicates A. the firm is generating more income. B. accounts receivable are going down. C. the company is becoming more efficient in its collection policy. D. the company is becoming less efficient in its collection policy.

7. The most rigorous test of a firm's ability to pay its short-term obligations is its A. current ratio. B. Acid test ratio - C. debt-to-assets ratio. - D. times-interest-earned ratio.

8. In developing the pro forma income statement we follow four important steps: 1) compute other expenses, 2) determine a production schedule, 3) establish a sales projection, 4) determine profit by completing the actual pro forma statement.

9. Pro forma financial statements are A. the most comprehensive means of financial forecasting. B. often required by prospective creditors. C. projections of financial statements for a future period. - D. all of these.

10. When the cost of raw materials is increasing, FIFO accounting A. yields higher ending inventory values than LIFO. - B. produces higher unit sales than using LIFO. C. yields higher cost of goods sold than LIFO. - D. All of these.