Entrepreneurship and Effective Small Business Management, 11e (Scarborough)
Chapter 14 Creating a Solid Financial Plan
1) A pro forma financial statement means:
A) looking at the current financial statement.
B) looking at the past financial statement.
C) preparing the current financial statement.
D) preparing a projected financial statement.
Topic: Introduction
AACSB: Analytic Skills
2) The ________ shows what assets the business owns and what claims creditors and owners
have against those assets.
A) balance sheet
B) income statement
C) sources and uses of funds statement
D) pro forma
Topic: Basic Financial Reports: The Balance Sheet
AACSB: Analytic Skills
3) The ________ is built on the basic accounting equation: Assets = Liabilities + Owner’s Equity.
A) income statement
B) sources and uses of funds statement
C) balance sheet
D) cash budget
Topic: Basic Financial Reports: The Balance Sheet
AACSB: Analytic Skills
4) The balance sheet is usually prepared on the ________ day of the month.
A) first
B) last
C) 15th
D) None of the above
Topic: Basic Financial Reports: The Balance Sheet
AACSB: Analytic Skills
1
5) John is reviewing the company’s costs and expenses against revenue for the last year. John is
reviewing the firm’s:
A) balance sheet.
B) income statement.
C) sources and uses of funds statement.
D) pro forma.
Topic: Basic Financial Reports: The Income Statement
AACSB: Reflective Thinking
6) The first section of a balance sheet lists:
A) current and intangible assets.
B) current liabilities.
C) claims creditors have against the firm’s assets payable within one year.
D) the owner’s equity in terms of initial capital invested and retained earnings.
Topic: Basic Financial Reports: The Balance Sheet
AACSB: Analytic Skills
7) ________ are those items of value the business owns; ________ are those things the business
owes.
A) Assets; liabilities
B) Liabilities; assets
C) Ratios; equities
D) Equities; liabilities
Topic: Basic Financial Reports: The Balance Sheet
AACSB: Analytic Skills
8) Bill is studying those expenses that contribute directly to manufacturing and distribution of
goods. He’s reviewing:
A) cost of goods.
B) general expenses.
C) operating expenses.
D) current liabilities.
Topic: Basic Financial Reports: The Income Statement
AACSB: Reflective Thinking
2
9) The profit and loss statement is also referred as the ________.
A) balance sheet
B) statement of cash flows
C) revenue statement
D) income statement
Topic: Basic Financial Reports: The Income Statement
AACSB: Analytic Skills
10) Dividing gross profit by net sales produces:
A) operating expenses.
B) gross profit margin.
C) long-term profitability.
D) gross profit flow.
Topic: Basic Financial Reports: The Income Statement
AACSB: Analytic Skills
11) The statement of cash flow:
A) compares costs and expenses against a firm’s sales.
B) is built on the basic accounting equation: Assets = Liabilities + Capital.
C) shows what assets the business owns and what claims creditors and owners have against those
assets.
D) shows changes in working capital by listing sources and uses of funds.
Topic: Basic Financial Reports: Statement of Cash Flow
AACSB: Analytic Skills
12) The ________ shows the change in the firm’s working capital since the beginning of the year.
A) balance sheet
B) income statement
C) pro forma
D) statement of cash flows
Topic: Basic Financial Reports: Statement of Cash Flow
AACSB: Analytic Skills
3
13) Depreciation is:
A) the difference between the total sources available to the owner and the total uses of those
assets.
B) listed as a source of funds because it is a noncash expense, deducted as a cost of doing
business.
C) the owner’s total investment at the company’s inception plus retained earnings.
D) creditors’ total claims against the firm’s assets.
Topic: Basic Financial Reports: Statement of Cash Flow
AACSB: Analytic Skills
14) Projecting financial statements helps the small business owner to:
A) track and monitor current expenses.
B) transform business goals into reality.
C) calculate his/her return on the amount invested in the company.
D) measure liquidity of the firm.
Topic: Creating Projected Financial Statements
AACSB: Analytic Skills
15) One of the most important tasks facing an entrepreneur is:
A) establishing a large enough reserve of capital.
B) earning enough the first year to provide an adequate return on investment.
C) the deferment of taxes.
D) determining the funds needed for a company start-up.
Topic: Creating Projected Financial Statements
AACSB: Analytic Skills
16) When creating the pro forma income statement, the owner needs to translate the target profit
into a net sales figure. To do this, the owner needs:
A) to operate the business for one to two years to build a record.
B) published statistics for his/her specific type of business.
C) to divide actual net sales by the net profit projected.
D) a sales forecast, the amount of retained earnings, and current depreciation on assets.
Topic: Creating Projected Financial Statements
AACSB: Analytic Skills
4
17) The first step in creating the pro forma income statement is to:
A) create a sales forecast.
B) determine a reasonable salary and return on investment in the company.
C) find published figures on the specific type of business in order to forecast sales.
D) figure out operating costs and make a realistic sales estimate.
Topic: Creating Projected Financial Statements: Projected Income Statements
AACSB: Reflective Thinking
18) ________ are those things that a business owns which have value.
A) Assets
B) Liabilities
C) Owners’ equities
D) Liquidities
Topic: Basic Financial Reports: The Balance Sheet
AACSB: Analytic Skills
19) ________ are those things that a business owes; they represent creditors’ claims against the
business.
A) Assets
B) Liabilities
C) Owners’ equities
D) Liquidities
Topic: Basic Financial Reports: The Balance Sheet
AACSB: Analytic Skills
20) A technique that allows the small business owner to perform financial analysis by
understanding the relationship between two accounting elements is called:
A) creating the pro forma.
B) budgeting.
C) break-even analysis.
D) ratio analysis.
Topic: Ratio Analysis
AACSB: Analytic Skills
5
21) What are the options for repairing a poor gross profit margin?
A) Raise prices
B) Cut manufacturing or purchasing costs
C) Refuse orders with low profit margins
D) All of the above
Topic: The Income Statement
AACSB: Analytic Skills
22) ________ ratios tell whether or not the small company will be able to meet its maturing
obligations as they come due.
A) Leverage
B) Profitability
C) Liquidity
D) Operating
Topic: Twelve Key Ratios; Liquidity Ratios
AACSB: Analytic Skills
23) The ________ ratio is a measure of the small company’s ability to pay current debts from
current assets.
A) debt-to-net worth
B) current
C) quick
D) debt-to-assets
Topic: Twelve Key Ratios; Current Ratio
AACSB: Reflective Thinking
24) The ________ ratio is the liquidity ratio most commonly used as a measure of short-term
solvency.
A) working capital ratio
B) quick
C) debt-to-net worth
D) turnover
Topic: Twelve Key Ratios; Current Ratio
AACSB: Analytic Skills
6
25) As a general rule, financial analysts suggest that a small business maintain a(n) ________
ratio of at least 2:1.
A) debt-to-net worth
B) current
C) inventory turnover
D) quick
Topic: Twelve Key Ratios; Current Ratio
AACSB: Analytic Skills
26) When a company is forced into liquidation, owners are most likely to incur a loss when
selling:
A) accounts receivable.
B) inventory.
C) marketable securities.
D) real estate.
Topic: Twelve Key Ratios; Quick Ratio
AACSB: Analytic Skills
27) The ________ ratio is a conservative measure of a firm’s liquidity and shows the extent to
which a firm’s most liquid assets cover its current liabilities.
A) current
B) quick
C) turnover
D) net profit
Topic: Twelve Key Ratios; Quick Ratio
AACSB: Analytic Skills
28) ________ ratios measure the financing supplied by business owners and that supplied by the
firm’s creditors.
A) Leverage
B) Profitability
C) Liquidity
D) Operating
Topic: Twelve Key Ratios; Leverage Ratio
AACSB: Analytic Skills
7
29) Joe is examining the percentage of total funds in a business provided by its creditors. He is
working with the ________ ratio.
A) current
B) quick
C) debt
D) turnover
Topic: Twelve Key Ratios; Debt Ratio
AACSB: Reflective Thinking
30) A high debt ratio:
A) means that creditors provide a large percentage of the company’s total financing.
B) gives a small business more borrowing capacity.
C) decreases the chances that creditors will lose money if the business is liquidated.
D) decreases the creditor’s interest in the business.
Topic: Twelve Key Ratios; Debt Ratio
AACSB: Analytic Skills
31) ________ is one indication that a small business may be undercapitalized.
A) A current ratio below 1:1
B) A quick ratio above 2:1
C) A debt-to-net worth ratio above 1:1
D) A net-sales-to-working capital ratio equal to 3:1
Topic: Twelve Key Ratios; Debt-to-Net Worth Ratio
AACSB: Analytic Skills
32) If Mary wants to compare what her small business owes to what it owns in order to assess
her ability to meet obligations in case of liquidation, she needs to look at the ________ ratio.
A) quick
B) total debt turnover
C) asset turnover
D) debt-to-net worth
Topic: Twelve Key Ratios; Debt-to-Net Worth Ratio
AACSB: Reflective Thinking
8
33) The higher the ________ ratio, the lower the degree of protection afforded creditors and the
closer creditors’ interest approaches the owner’s interest.
A) debt-to-net worth
B) quick
C) asset turnover
D) current
Topic: Twelve Key Ratios; Debt-to-Net Worth Ratio
AACSB: Analytic Skills
34) The ________ ratio is a measure of a company’s ability to make the interest payments on its
debt.
A) debt-to-net worth
B) times-interest-earned
C) net sales-to-working capital
D) net profit-to-equity
Topic: Twelve Key Ratios; Times Interest Earned Ratio
AACSB: Analytic Skills
35) Which of the following would be a sign that a company is overextended in its debt?
A) A low debt ratio compared to the industry average
B) A debt-to-net worth ratio of 0.12 to 1
C) A times-interest-earned ratio that is far below the industry average
D) A high inventory turnover ratio
Topic: Twelve Key Ratios; Times Interest Earned Ratio
AACSB: Analytic Skills
36) ________ ratios help a business owner evaluate the company’s performance and indicate
how effectively the business employs its resources.
A) Liquidity
B) Leverage
C) Operating
D) Profitability
Topic: Twelve Key Ratios; Operating Ratio
AACSB: Analytic Skills
9
37) An above-average inventory turnover indicates that the business:
A) has an illiquid inventory.
B) is healthy, with a salable inventory.
C) needs to review its pricing policies.
D) has below-average performance and is facing bankruptcy if not corrected quickly.
Topic: Twelve Key Ratios; Average Inventory Turnover Ratio
AACSB: Analytic Skills
38) The ________ ratio measures the small company’s ability to generate sales in relation to its
assets.
A) net sales-to-working capital
B) net sales-to-total assets
C) average collection period
D) average inventory turnover
Topic: Twelve Key Ratios; Net Sales-to-Total Assets Ratio
AACSB: Analytic Skills
39) ________ ratios indicate how efficiently the small firm is being managed.
A) Liquidity
B) Profitability
C) Leverage
D) Operating
Topic: Twelve Key Ratios; Profitability Ratio
AACSB: Analytic Skills
40) The ________ ratio measures the owner’s rate of return on the investment in the business.
A) net profit-to-equity
B) net profit on sales
C) quick profit
D) net sales-to-working capital
Topic: Twelve Key Ratios; Net Profit-to-Equity Ratio
AACSB: Analytic Skills
10