The Two Cardinal Rules Which Financial Analysts Follow to Avoid

question 8

True/False

The two cardinal rules which financial analysts follow to avoid capital budgeting errors are: (1) capital budgeting decisions must be based on accounting income, and (2) only incremental cash flows are relevant to accept/reject decisions.

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Definitions:

Shares

Units of ownership interest in a corporation or financial asset, giving holders a proportion of the company's profits and a vote in company matters.

Limited Liability

A legal structure that restricts the financial responsibility of an entity's owners to their investment, protecting personal assets from business debts.

Investment

The allocation of resources, usually money, in the expectation of generating an income or profit.

Bankruptcy

A legal proceeding involving a person or business that is unable to repay outstanding debts. The process begins with a petition filed by the debtor, or on behalf of creditors.