1. Which of the following statements is CORRECT? A. One advantage of forming a corporation is that equity investors are usually exposed to less liability than they would be in a partnership. B. Corporations face fewer regulations than sole proprietorships. C. One disadvantage of operating a business as a sole proprietor is that the firm is subject to double taxation, because taxes are levied at both the firm level and the owner level. D. It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required. E. If a partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business.

2. Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and managers? A. Pay managers large cash salaries and give them no stock options. B. Change the corporation's formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover. C. Beef up the restrictive covenants in the firm's debt agreements. D. Eliminate a requirement that members of the board of directors must hold a high percentage of their personal wealth in the firm's stock. E. For a firm that compensates managers with stock options, reduce the time before options are vested, i.e., the time before options can be exercised and the shares that are received can be sold.

3. Which of the following items cannot be found on a firms balance sheet under current liabilities? A. Accounts payable. B. Short-term notes payable to the bank. C. Accrued wages. D. Cost of goods sold. E. Accrued payroll taxes.

4. Analysts who follow Howe Industries recently noted that, relative to the previous year, the companys net cash provided from operations increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation? A. The company cut its dividend. B. The company made large investments in fixed assets. C. The company sold a division and received cash in return. D. The company issued new common stock. E. The company issued new long-term debt.

5. Which of the following statements is CORRECT? A. Since companies can deduct dividends paid but not interest paid, our tax system favors the use of equity financing over debt financing, and this causes companies debt ratios to be lower than they would be if interest and dividends were both deductible. B. Interest paid to an individual is counted as income for federal tax purposes and taxed at the

individuals regular tax rate, which in 2008 could go up to 35%, but dividends received were taxed at a maximum rate of 15%. C. The maximum federal tax rate on corporate income in 2008 was 50%. D. Corporations obtain capital for use in their operations by borrowing and by raising equity capital, either by selling new common stock or by retaining earnings. The cost of debt capital is the interest paid on the debt, and the cost of the equity is the dividends paid on the stock. Both of these costs are deductible from income when calculating income for tax purposes. E. The maximum federal tax rate on personal income in 2008 was 50%.

6. Assume that Besley Golf Equipment commenced operations on January 1, 2008, and it was granted permission to use the same depreciation calculations for shareholder reporting and income tax purposes. The company planned to depreciate its fixed assets over 15 years, but in December 2008 management realized that the assets would last for only 10 years. The firm's accountants plan to report the 2008 financial statements based on this new information. How would the new depreciation assumption affect the companys financial statements? A. The firms reported net fixed assets would increase. B. The firms EBIT would increase. C. The firm's reported 2008 earnings per share would increase. D. The firm's cash position in 2008 and 2009 would increase. E. The provision will increase the company's tax payments.

7. Which of the following statements is CORRECT? A. Dividends paid reduce the net income that is reported on a companys income statement. B. If a company uses some of its bank deposits to buy short-term, highly liquid marketable securities, this will cause a decline in its current assets as shown on the balance sheet. C. If a company issues new long-term bonds to purchase fixed assets during the current year, this will increase both its reported current assets and current liabilities at the end of the year. D. Accounts receivable are reported as a current liability on the balance sheet. E. If a company pays more in dividends than it generates in net income, its retained earnings as reported on the balance sheet will decline from the previous year's balance.

8. Last year Almazan Software reported $10.50 million of sales, $6.25 million of operating costs other than depreciation, and $1.30 million of depreciation. The company had $5.00 million of bonds that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 35%. This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $1.00 million. By how much will net income change as a result of the change in depreciation? The company uses the same depreciation calculations for tax and stockholder reporting purposes. A. -$0.663 B. -$0.709 C. -$0.631 D. -$0.65 E. -$0.598