Moral Hazard

question 42

Multiple Choice

Moral hazard

• A) occurs when managers pursue maximization of profit without regard to the interests of society in general.
• B) exists when either party to a contract has an incentive to cancel the contract.
• C) occurs only rarely in modern corporations.
• D) is the cause of principle-agent problems.

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Definitions:

Indirect Method

A way of preparing the cash flow statement where net income is adjusted for changes in balance sheet accounts to calculate cash flow from operating activities.

Depreciation Expense

The allocated portion of the cost of a tangible fixed asset written off each year, reflecting its usage and wear and tear.

Patent Amortization

The gradual expensing of the cost of a patent (an intangible asset) over its useful life.

Quality Of Income Ratio

A metric assessing the proportion of income that has been realized or converted into cash, providing insight into the company's cash flow quality.