Question

Which statement is true?

• A. Financial statements reflect economic costs.
• B. Year-over-year decreases in liabilities are sources of cash.
• C. A stock with a beta of 1.00 has the total risk of the market portfolio.
• D. Shareholders have the prior claim to the cash flows of a corporation.
• E. None of the above are true
  .

Answer 1

Financial statement do not reflect the economic cost, they are based on historical costs and book value and are not updated as per market condition. Year over year decrease in liabilities represents use of cash and not sources of cash. Stock with Beta of 1 would indicate systematic risk of market but does not cover the total risk of market portfolio as total risk is indicated based on standard deviation. Shareholders do not have prior claim on cash flow of corporation as prior claim is first of debt holders and at last of shareholders.

Thus, option (a), (b), (c) and (D) are all incorrect statement and thus option (E) is correct.