93) A low inventory turnover ratio demonstrates that the firm’s inventory is liquid and its pricing
policies are accurate.
Topic: Twelve Key Ratios; Operating Ratio
AACSB: Analytic Skills
94) The company’s average collection period ratio indicates the length of time the firm’s cash is
tied up in credit sales.
Topic: Twelve Key Ratios; Operating Ratio
AACSB: Analytic Skills
95) Generally, the higher the small firm’s average collection period ratio, the lower the chance of
bad debt losses.
Topic: Twelve Key Ratios; Operating Ratio
AACSB: Analytic Skills
96) The average payable period tells the owner the average number of days it takes to pay its
accounts payable.
Topic: Twelve Key Ratios; Operating Ratio
AACSB: Analytic Skills
97) Ideally, the average payable period should match or exceed the time it takes to convert
inventory into sales and sales into cash.
Topic: Twelve Key Ratios; Operating Ratio
AACSB: Analytic Skills
98) The small firm‘s net sales to total assets ratio measures how many dollars in sales the
business makes for every dollar of working capital.
Topic: Twelve Key Ratios; Operating Ratio
AACSB: Analytic Skills
21
99) The net profit on sales ratio measures the owners’ rate of return on the investment in the
business.
Topic: Twelve Key Ratios; Operating Ratio
AACSB: Analytic Skills
100) When a firm‘s ratios vary from the average ratios of similar firms in the industry, this
indicates that the small business is in financial jeopardy.
Topic: Interpreting Business Ratios
AACSB: Analytic Skills
101) The first step in preparing a break-even analysis is to break business expenses down into
“fixed” and “variable” categories.
Topic: Break-Even Analysis
AACSB: Analytic Skills
102) To calculate break-even sales, use the equation: break-even sales (in dollars) = total variable
costs divided by contribution margin as a percentage of sales revenue.
Topic: Break-Even Analysis
AACSB: Analytic Skills
103) The break-even analysis provides an opportunity for integrated analysis of sales volume,
expenses, income, and other relevant factors.
Topic: Break-Even Analysis
AACSB: Analytic Skills
104) Most small businesses prefer to express their break-even point in dollars rather than units
produced or sold, unless they are retailing.
Topic: Break-Even Analysis
AACSB: Analytic Skills
22
105) On a break-even chart, the break-even point occurs at the intersection of the fixed expense
line and the total revenue line.
Topic: Break-Even Analysis
AACSB: Analytic Skills
106) Break-even analysis is somewhat complex to use, but it is a final screening device.
Topic: Break-Even Analysis
AACSB: Analytic Skills
107) A break-even analysis has several drawbacks including the fact that it ignores the
importance of cash flows and that its accuracy is dependent on the accuracy of revenue and
expense estimates.
Topic: Break-Even Analysis
AACSB: Analytic Skills
108) Many business owners whose companies are losing money mistakenly believe that the
problem is inadequate sales volume; therefore, they focus on pumping sales at any cost.
Topic: Basic Financial Reports: The Income Statement
AACSB: Analytic Skills
109) Total profits minus total expenses gives the company’s net income.
Topic: Basic Financial Reports: The Income Statement
AACSB: Analytic Skills
110) Since conditions and markets change so rapidly, entrepreneurs developing financial
forecasts for start-ups should focus on creating projections for 6 months into the future.
Topic: Creating Projected Financial Statements
AACSB: Analytic Skills
111) To get the best results, an entrepreneur should track as many ratios as possible.
Topic: Ratio Analysis
AACSB: Analytic Skills
23
112) The quick ratio is sometimes called the working capital ratio.
Topic: Twelve Key Ratios, Liquidity
AACSB: Analytic Skills
113) Calculating ratios is not enough to insure proper financial control.
Topic: Interpreting Business Ratios
AACSB: Analytic Skills
114) The net profit on sales ratio (also called the profit margin on sales) measures the firm’s
profit per dollar of sales.
Topic: Twelve Key Ratios; Profitability Ratio
AACSB: Analytic Skills
115) The net profit to equity ratio (or the return on net worth ratio) measures the owners’ rate of
return on investment.
Topic: Twelve Key Ratios; Profitability Ratio
AACSB: Analytic Skills
116) Net profit on sales ratio = Net sales / Net income.
Topic: Twelve Key Ratios; Profitability Ratio
AACSB: Analytic Skills
117) A total assets turnover ratio below the industry average may indicate that the small firm is
not generating an adequate sales volume for its asset size.
Topic: Twelve Key Ratios; Operating Ratio
AACSB: Analytic Skills
118) Sales turnover ratio = Credit sales (or net sales)/Accounts receivable.
Topic: Twelve Key Ratios; Operating Ratio
AACSB: Analytic Skills
24
119) Typically, slow payers represent great risk to many small businesses.
Topic: Twelve Key Ratios; Operating Ratio
AACSB: Analytic Skills
120) The current ratio can sometimes be misleading, because it does not show the quality of a
company’s current assets.
Topic: Twelve Key Ratios, Liquidity Ratios
AACSB: Analytic Skills
121) To prepare the cash flow statement, the owner must assemble the balance sheets and the
income statements summarizing the present year’s operations.
Topic: Basic Financial Reports: Statement of Cash Flow
AACSB: Analytic Skills
122) The gross profit margin is calculated by dividing net income by net sales revenue.
Topic: Basic Financial Reports: The Income Statement
AACSB: Analytic Skills
123) The balance sheet takes a “snapshot” of a business, providing owners with an estimate of
the firm’s worth on a given date.
Topic: Basic Financial Reports: The Balance Sheet
AACSB: Analytic Skills
124) Fixed assets consist of cash and items to be converted into cash within one year or within
the normal operating cycle of the company, whichever is longer.
Topic: Basic Financial Reports: The Balance Sheet
AACSB: Analytic Skills
25
125) Explain the three basic financial reports that a business uses in building a financial
statement: the balance sheet, the income statement, and the statement of cash flows. What
information is contained in each, what is their value to the small business owner, and how are
they used to build financial statements?
Topic: Basic Financial Reports
AACSB: Analytic Skills
126) Describe a pro forma statement, identifying the types of pro forma statements a small
business owner could use, and how the small business owner would create each.
Topic: Creating Projected Financial Statements
AACSB: Reflective Thinking
127) What is the value of ratio analysis to the small business owner and what are the four
categories of ratios he/she can use?
Topic: Ratio Analysis
AACSB: Analytic Skills
26
128) What are liquidity ratios and how are they used by the small business owner? Name and
briefly explain the current and quick ratios.
Topic: Ratio Analysis
AACSB: Analytic Skills
129) What do leverage ratios measure? Name and explain three of them.
Topic: Ratio Analysis
AACSB: Analytic Skills
27
130) Describe what operating ratios are. Identify the five operating ratios covered in your text,
explaining how each of the five helps the small business owner manage his/her business.
Topic: Ratio Analysis
AACSB: Analytic Skills
131) Identify and explain the two profitability ratios a small business owner can use to measure
how effectively he/she is managing the business.
Topic: Ratio Analysis
AACSB: Analytic Skills
132) How can the entrepreneur interpret and use the various business ratios available to him/her?
Topic: Interpreting Business Ratios
AACSB: Reflective Thinking
28
133) What does a break-even analysis tell the small business owner?
Topic: Break-Even Analysis
AACSB: Analytic Skills
29