The Principal-Agent Problem

question 78

Multiple Choice

The principal-agent problem

• A)occurs when managers have more incentive to maximize profits than the stockholders-owners do.
• B)in financial markets helps to explain why equity is a relatively important source of finance for American business.
• C)would not arise if the owners of the firm had complete information about the activities of the managers.
• D)explains why direct finance is more important than indirect finance as a source of business finance.

---

Definitions:

Merchandise Inventory

The total cost of all goods that are available for sale during a certain period, including purchases and adjustments for returns or damages.

Inventory On Hand

Refers to the total amount of items or products available in stock by a business at any given time.

Debit Memo

A document issued by a buyer to a seller indicating a reduction of the amount due to the seller, often due to returned goods or discrepancy in billing.

Price Allowance

A reduction in the selling price, often used as a promotional strategy or to compensate for minor defects.