41) ________ publishes key business ratios for over 800 business categories.
A) Robert Morris Associates
B) Boston Consulting Group
C) Bank of America
D) Dun and Bradstreet, Inc.
Topic: Interpreting Business Ratios
AACSB: Analytic Skills
42) ________ publishes Annual Statement Studies, showing ratios and other financial data for
over 750 different industrial, retail, and wholesale categories.
A) Robert Morris Associates
B) Boston Consulting Group
C) Bank of America
D) Dun and Bradstreet, Inc.
Topic: Interpreting Business Ratios
AACSB: Analytic Skills
43) The break-even point occurs where:
A) the firm’s fixed expenses equal its variable expenses.
B) the creditors’ interest equals the owner’s interest in the business.
C) total revenue equals total expenses.
D) assets and liabilities are equal on the balance sheet.
Topic: Break-Even Analysis
AACSB: Analytic Skills
44) Which of the following expenses would likely be classified “semi-variable”?
A) Rent
B) Electric utilities
C) Wages
D) Sales commissions
Topic: Break-Even Analysis
AACSB: Analytic Skills
11
45) Which of the following expenses would be considered “fixed”?
A) Wages
B) Raw materials
C) Utilities
D) Rent
Topic: Break-Even Analysis
AACSB: Analytic Skills
46) The rule for the balance sheet is:
A) Assets = Liabilities + Owner’s Equity
B) Assets – Liabilities = Owner’s Equity
C) Liabilities = Assets – Owner’s Equity
D) All of the above
Topic: The Balance Sheet
AACSB: Analytic Skills
47) In the balance sheet, the current assets consist of:
A) accounts payable.
B) inventory.
C) revenue.
D) All of the above
Topic: The Balance Sheet
AACSB: Analytic Skills
48) In the balance sheet, intangible assets include items such as:
A) goodwill.
C) Both A and B
D) accounts receivable.
Topic: The Balance Sheet
AACSB: Analytic Skills
12
49) ________ is (are) the value of the owner’s investment in the business.
A) Assets
B) Liabilities
C) Owner’s Equity
D) Profit
Topic: The Balance Sheet
AACSB: Analytic Skills
50) Investors mainly want to see that entrepreneurs:
A) have inflated the projections.
B) have realistic expectations about income and expenses.
C) will make profit immediately.
D) All of the above
Topic: Creating Projected Financial Statements
AACSB: Analytic Skills
51) The most meaningful basis for comparing operating ratios is:
A) other companies of similar size in the same industry.
B) companies within the neighborhood.
C) major corporations in the same industry.
D) all publicly traded companies.
Topic: Interpreting Business Ratios
AACSB: Analytic Skills
52) A ratio greater than ________ days would indicate poor collection procedures.
A) 29
B) 40
C) 60
D) 90
Topic: Average Collection Period Ratio
AACSB: Analytic Skills
13
53) When comparing a company’s ratios to industry standards, entrepreneurs should ask
questions such as:
A) Are the differences significant?
B) Do I need to conduct ratio analysis?
C) How do these ratios benefit me?
D) All of the above
Topic: Interpreting Business Ratios
AACSB: Analytic Skills
54) Evaluates the firm’s overall performance and show how effectively it is putting its resources
to work. This is called:
A) operating ratios.
B) debt to equity ratio.
C) accounts receivable turnover ratio.
D) All of the above
Topic: Ratio Analysis
AACSB: Analytic Skills
55) ________ measure how efficiently the firm is operating and offer information about its
bottom line.
A) Operating ratios
B) Profitability ratios
C) Balance Sheet ratios
D) All of the above
Topic: Ratio Analysis
AACSB: Analytic Skills
56) ________ measure the financing supplied by the company’s owners against that supplied by
its creditors and serve as a gauge of the depth of a company’s debt.
A) Operating ratios
B) Profitability ratios
C) Leverage ratios
D) Liquidity ratios
Topic: Ratio Analysis
AACSB: Analytic Skills
14
57) ________ tell whether or not the small business will be able to meet its maturing obligations
as they come due.
A) Operating ratios
B) Profitability ratios
C) Leverage ratios
D) Liquidity ratios
Topic: Ratio Analysis
AACSB: Analytic Skills
58) In reviewing the company’s balance sheet, Andy noticed that the total asset is stated as
$5,500,000 and the total liability is $3,250,000. There is no paid-in capital or value for common
stock. What are the company’s retained earnings?
A) Can’t determine with the information given
B) $8,750,000
C) $2,250,000
D) There are no retained earnings
Topic: The Balance Sheet
AACSB: Reflective Thinking
59) When comparing a company’s ratios to industry standards, entrepreneurs should ask the
which of the following questions:
A) Is there a significant difference in my company’s ratio and the industry average?
B) Is the difference good or bad?
C) What are the possible causes of this difference? What is the most likely cause?
D) All of the above
Topic: Interpreting Business Ratios
AACSB: Analytic Skills
60) What is the difference between price per unit and variable cost per unit?
A) Contribution margin
B) Contribution margin ratio
C) Net operating income
D) Contribution cost
Topic: Break-Even Point in Units
AACSB: Analytic Skills
15
61) Which of the following is correct?
A) Assets – Liabilities = Equity
B) Assets – Equity = Liabilities
C) Assets = Liabilities + Equity
D) All of the above
Topic: Balance Sheet
AACSB: Analytic Skills
62) In which statement are the account balances reversed to zero on a monthly basis?
A) Balance sheet
B) Cash flow statement
C) Income statement
D) All of the above
Topic: Income Statement
AACSB: Analytic Skills
63) Proper financial management requires more than gathering financial data and organizing it
into financial statements; the small business manager must analyze those statements and use that
information to make better business decisions.
Topic: Basic Financial Reports
AACSB: Analytic Skills
64) The balance sheet provides owners with an estimate of the firm’s worth for a specific
moment in time.
Topic: Basic Financial Reports: The Balance Sheet
AACSB: Analytic Skills
65) The balance sheet represents: Assets = Liabilities + Depreciation + Equity.
Topic: Basic Financial Reports: The Balance Sheet
AACSB: Analytic Skills
66) The small firm‘s income statement presents a picture of the firm’s profitability at a particular
point in time.
Topic: Basic Financial Reports: The Balance Sheet
AACSB: Analytic Skills
16
67) To determine sales revenue, the owner records sales revenue for the year and subtracts
liabilities.
Topic: Basic Financial Reports: The Income Statement
AACSB: Analytic Skills
68) The cost of goods sold represents the total cost, including distribution, of the goods sold
during the year.
Topic: Basic Financial Reports: The Income Statement
AACSB: Analytic Skills
69) All costs directly related to the manufacture and distribution of goods are covered under
general expenses.
Topic: Basic Financial Reports: The Income Statement
AACSB: Analytic Skills
70) The statement of cash flows shows the change in a firm’s working capital.
Topic: Basic Financial Reports: Statement of Cash Flow
AACSB: Analytic Skills
71) The difference between the total sources of funds and the total uses of funds represents the
increase or decrease in a firm’s working capital.
Topic: Basic Financial Reports: Statement of Cash Flow
AACSB: Analytic Skills
72) The pro forma shows the company’s current overall financial condition.
Topic: Creating Projected Financial Statements
AACSB: Analytic Skills
73) The most common method of creating a projected income statement is to develop a sales
forecast and then “work down” to the bottom line.
Topic: Creating Projected Financial Statements: The Projected Income Statement
AACSB: Analytic Skills
17
74) An adequate profit in a small business must include a reasonable return on the owner’s total
investment in the business.
Topic: Creating Projected Financial Statements: The Projected Income Statement
AACSB: Analytic Skills
75) When determining the owner’s target income, you must consider a reasonable salary for the
time spent running the business, less the depreciation of assets.
Topic: Creating Projected Financial Statements: The Projected Income Statement
AACSB: Analytic Skills
76) The formula for calculating net profit margin is net profit/net sales (annual).
Topic: Creating Projected Financial Statements: The Projected Income Statement
AACSB: Analytic Skills
77) A new business owner must operate for at least six months in order to collect sufficient
information to calculate net sales from a profit target.
Topic: Creating Projected Financial Statements: The Projected Income Statement
AACSB: Analytic Skills
78) Most small businesses start out strong financially because of the care generally given in
determining the total asset requirements for running the business.
Topic: Creating Projected Financial Statements: The Projected Balance Sheet
AACSB: Analytic Skills
79) Concerning how much cash to have at start-up, a rule of thumb is to have enough to cover
operating expenses (less depreciation) for two inventory turnover periods.
Topic: Creating Projected Financial Statements: The Projected Balance Sheet
AACSB: Analytic Skills
18
80) Performing financial ratio analyses enables a business owner to identify problems early—
before they become crises.
Topic: Ratio Analysis
AACSB: Analytic Skills
81) Financial ratios are a common tool used by over 50% of small business owners in the daily
management of their businesses.
Topic: Ratio Analysis
AACSB: Analytic Skills
82) Liquidity ratios measure the financing supplied by the firm’s owners against that provided by
its creditors.
Topic: Twelve Key Ratios
AACSB: Analytic Skills
83) A quick ratio greater than 1:1 indicates that a small firm is overly dependent on inventory
and on future sales to satisfy short-term debt.
Topic: Twelve Key Ratios
AACSB: Analytic Skills
84) The higher the current ratio, the stronger the small firm’s financial position.
Topic: Twelve Key Ratios
AACSB: Analytic Skills
85) The quick ratio is the most commonly used measure for a small firm’s short-term solvency.
Topic: Twelve Key Ratios
AACSB: Analytic Skills
86) Leverage ratios are a gauge of the depth of a company’s debt.
Topic: Twelve Key Ratios
AACSB: Analytic Skills
19
87) Small businesses with high leverage ratios are less vulnerable to economic downturns, but
they have a lower potential for large profits.
Topic: Twelve Key Ratios
AACSB: Analytic Skills
88) The higher the debt-to-net worth ratio, the lower the degree of protection afforded creditors
should the business fail.
Topic: Twelve Key Ratios
AACSB: Analytic Skills
89) As a company’s debt-to-net worth ratio approaches 1:1, its creditors’ interest in that business
approaches that of the owners’.
Topic: Twelve Key Ratios
AACSB: Analytic Skills
90) The times-interest-earned ratio expresses the relationship between the capital contributions of
creditors and those of the owners.
Topic: Twelve Key Ratios
AACSB: Analytic Skills
91) The average inventory turnover ratio tells the owner how fast merchandise is moving through
the business.
Topic: Twelve Key Ratios; Operating Ratio
AACSB: Analytic Skills
92) There is a direct 1:1 relationship between a company’s expected average inventory turnover
ratio and the amount of cash required to launch it.
Topic: Twelve Key Ratios; Operating Ratio
AACSB: Analytic Skills
20