41) The real benefit of barter for the entrepreneur is that:
A) it is essentially without cost to the business owner.
B) it is considered a depreciable item for tax purposes rather than as income.
C) it saves the small business owner between $50,000 and $150,000 a year on average.
D) it is “paid” for at the wholesale cost of doing business, yet it is credited at the retail price.
Topic: Avoiding the Cash Crunch; Bartering
AACSB: Analytic Skills
42) Which of the following is an effective way to trim overhead?
A) Leasing inventory
B) Accelerating accounts receivable
C) Establishing lockboxes or zero balance accounts
D) Negotiating fixed loan payments to coincide with company cash flow
Topic: Avoiding the Cash Crunch; Trim Overhead Costs
AACSB: Analytic Skills
43) The budgeting strategy that evaluates the necessity of every item on the budget each year by
starting with a zero in each budget category is called:
A) accrual budgeting.
B) cash budgeting.
C) zero-based budgeting.
D) cash flow budgeting.
Topic: Avoiding the Cash Crunch; Switch to Zero-Based Budgeting
AACSB: Analytic Skills
44) When investing surplus cash, the small business owner’s key objectives should be:
A) high yields.
B) current income.
C) liquidity and safety.
D) long-term yield.
Topic: Investing Surplus Cash
AACSB: Analytic Skills
11
45) Many successful, growing, and profitable businesses fail because they:
A) become insolvent.
B) don’t have adequate cash to meet the sales.
C) don’t have management expertise.
D) Both A and B
Topic: Cash Management
AACSB: Analytic Skills
46) A firm whose sales fluctuate widely over a relatively short time might require a ________
cash budget.
A) weekly
B) monthly
C) quarterly
D) biweekly
Topic: Preparing a Cash Budget
AACSB: Analytic Skills
47) ________ is not one of the three estimates a financial analyst suggests.
A) Optimistic
B) Pessimistic
C) Standard
D) Most likely
Topic: Forecasting Sales
AACSB: Analytic Skills
48) The purchases for inventory and production lead sales. This statement means that:
A) purchases for inventory and production provide sales leads.
B) the bills for inventory typically must be paid before sales are generated.
C) cash must be available in order to pay for the purchases.
D) Both B and C
Topic: Cash and Profits are not the Same
AACSB: Analytic Skills
12
49) Some businesses use ________, in which a company bills a portion of its credit customers
each day of the month, to smooth out uneven cash receipts.
A) process billing
B) a zero balance account
C) alternate billing
D) cycle billing
Topic: Accounts Receivable
AACSB: Analytic Skills
50) The statement, “collection of accounts receivable lags behind sales,” means that:
A) the collection of funds in the accounts receivable is always late.
B) customers always are late in paying their bills.
C) the customers who purchased goods on credit may not pay until a month or more later.
D) None of the above
Topic: Cash and Profits are not the Same
AACSB: Analytic Skills
51) By planning cash needs ahead of time, an entrepreneur is able to:
A) reduce the amount of cash flowing out of the company.
B) develop a sound borrowing and repayment plan.
C) Both A and B
D) increase borrowing costs by borrowing only when necessary.
Topic: Estimating the End-of-Month Cash Balance
AACSB: Analytic Skills
52) Marking down inventory items that don’t sell will result in:
A) keeping the inventory lean.
B) reduction in inventory turn over ratio.
C) paying expenses on time.
D) All of the above
Topic: Inventory
AACSB: Analytic Skills
13
53) At the end of a(n) ________, a business turns the equipment back over to the leasing
company with no further obligation.
A) capital lease
B) operating lease
C) open-ended lease to return
D) None of the above
Topic: Bootstrapping Overhead
AACSB: Analytic Skills
54) At the end of a(n) ________, a business may exercise an option to purchase the equipment,
usually for a nominal sum.
A) capital lease
B) operating lease
C) open-ended lease to return
D) None of the above
Topic: Bootstrapping Overhead
AACSB: Analytic Skills
55) Entrepreneurs can trim costs by:
A) avoiding nonessential outlay.
B) looking for simple ways to cut costs.
C) establishing an internal security and control system.
D) All of the above
Topic: Bootstrapping Overhead
AACSB: Analytic Skills
56) Cash management involves:
A) forecasting.
B) collecting.
C) disbursing and investing.
D) All of the above
Topic: Cash Management
AACSB: Analytic Skills
14
57) ________ measures a company’s liquidity and its ability to pay its bills and other financial
obligations on time by tracking the flow of cash into and out of the business over a period of
time.
A) Forecasting
B) Cash flow
C) Cash on hand
D) None of the above
Topic: Cash and Profits are not the Same
AACSB: Analytic Skills
58) A ________ is nothing more than a “cash map,” showing the amount and timing of the cash
receipts and the cash disbursements day by day, week by week, or month by month.
A) cash budget
B) cash on hand
C) cash disbursement
D) Both A and C
Topic: Cash Management
AACSB: Analytic Skills
59) What are the steps to creating a cash budget (not necessarily in order)?
A) Determining an adequate minimum cash balance
B) Forecasting sales & forecasting cash receipts
C) Forecasting cash disbursements & estimating the end-of-month cash balance
D) All of the above
Topic: Preparing a Cash Budget
AACSB: Analytic Skills
60) Lockbox refers to:
A) customers send payments to a post office box the bank maintains.
B) customers send payments to company’s mail box that has a lock.
C) customers send payments to collection company’s mail box.
D) None of the above
Topic: Techniques for Accelerating Accounts Receivable
AACSB: Analytic Skills
15
61) A ________ is a checking account that technically never has funds in it but is tied to another
master account like payroll.
A) cash account
B) money market account
C) zero balance account
D) sweep account
Topic: Investing Surplus Cash
AACSB: Analytic Skills
62) Sweep account refers to:
A) an account that sweeps cash from checking to personal savings.
B) an account that sweeps zero balance account to an interest bearing account.
C) an account that allows the small business owner to sweep funds between personal and
business accounts.
D) All of the above
Topic: Investing Surplus Cash
AACSB: Analytic Skills
63) ________ refers to buying much needed materials, equipment, and supplies—without using
cash.
A) Sweeping
B) Bartering
C) Purchase on an account
D) Net terms
Topic: Barter
AACSB: Analytic Skills
64) One important characteristic of bartering is that:
A) the value of the products must be identical and the difference can be paid in cash.
B) the value of exchange of products or services could vary.
C) the exchange is in cash only.
D) no cash is being exchanged when bartering.
Topic: Barter
AACSB: Analytic Skills
16
65) Ways to cut overhead cost are:
A) when possible buy instead of lease.
B) avoid non-essential outlays.
C) hire consultants and full time employees.
D) None of the above
Topic: Bootstrapping Overhead
AACSB: Analytic Skills
66) The lack of cash has driven a number of small businesses, even those with solid profits, into
bankruptcy.
Topic: Introduction
AACSB: Analytic Skills
67) It is possible for a business to make a profit and go out of business due to cash flow
problems.
Topic: Introduction
AACSB: Analytic Skills
68) The objectives of cash management are to adequately meet the cash demands of the business
and to avoid retaining unnecessarily large cash balances.
Topic: Cash Management
AACSB: Analytic Skills
69) The cash management role of “cash conserver,” controlling the cash needed to pay bills, and
prioritizing and timing those payments, is the entrepreneur’s first and foremost responsibility.
Topic: Cash Management
AACSB: Analytic Skills
70) The cash flow cycle is the time lag between paying suppliers and receiving payment from
customers.
Topic: Cash Management
AACSB: Analytic Skills
17
71) The longer a company’s cash flow cycle, the more likely it is to encounter a cash crisis.
Topic: Cash Management
AACSB: Analytic Skills
72) For a small business, cash planning is relatively simple since cash and profits are the same.
Topic: Cash and Profits are not the Same
AACSB: Analytic Skills
73) Profit is the difference between a company’s total revenue and its total expenses.
Topic: Cash and Profits are not the Same
AACSB: Analytic Skills
74) Cash is money that flows through the business and is not tied up in any asset.
Topic: Cash and Profits are not the Same
AACSB: Analytic Skills
75) A firm whose sales volume is expanding rapidly need not be concerned about managing its
cash flow.
Topic: Cash Management
AACSB: Analytic Skills
76) A cash budget is based on the accrual method of accounting.
Topic: The Cash Budget
AACSB: Analytic Skills
77) A cash budget is the document that shows a company the margin between its profit and its
costs of goods and how to manage it.
Topic: The Cash Budget
AACSB: Analytic Skills
18
78) Typically, a small firm should prepare a monthly cash budget for at least one year into the
future.
Topic: Preparing a Cash Budget
AACSB: Analytic Skills
79) The cash budget is based on the residual method of accounting.
Topic: Preparing a Cash Budget
AACSB: Analytic Skills
80) A cash budget is a forecast of the firm’s cash inflows and outflows over a specific time
period.
Topic: Preparing a Cash Budget
AACSB: Analytic Skills
81) The first step in preparing a cash budget is to forecast cash receipts.
Topic: Preparing a Cash Budget
AACSB: Analytic Skills
82) Ideally, a small firm’s cash balance should be two times its average weekly sales.
Topic: Determining an Adequate Minimum Cash Balance
AACSB: Analytic Skills
83) Some experts suggest that a small business should maintain a supply of cash on hand equal
to one-fourth its current debts.
Topic: Determining an Adequate Minimum Cash Balance
AACSB: Analytic Skills
84) One of the most reliable methods of determining an adequate minimum cash balance is using
past experience.
Topic: Determining an Adequate Minimum Cash Balance
AACSB: Analytic Skills
19
85) Since even the best sales forecast can be wrong, the small business owner should prepare
three forecasts—optimistic, pessimistic, and most likely.
Topic: Forecasting Sales
AACSB: Analytic Skills
86) In a cash budget, credit sales to customers are recorded as soon as the sale is made.
Topic: Forecasting Cash Receipts
AACSB: Analytic Skills
87) The key factor in forecasting cash disbursements for a cash budget is to record them in the
month when they are incurred, not when they are paid.
Topic: Forecasting Cash Disbursements
AACSB: Analytic Skills
88) For cash planning purposes, it is better to underestimate cash disbursements than to
overestimate them.
Topic: Forecasting Cash Disbursements
AACSB: Analytic Skills
89) To avoid cash crises, many owners add a “cushion” to each cash disbursement account since
many expenses run higher than expected.
Topic: Forecasting Cash Disbursements
AACSB: Analytic Skills
90) To estimate a firm’s cash balance for each month, the owner must first wait until the end of
the month.
Topic: Estimating the End-of-Month Cash Balance
AACSB: Analytic Skills
91) If a small firm’s profits are climbing, the owner can be sure its cash balance also is rising.
Topic: Estimating the End-of-Month Cash Balance
AACSB: Analytic Skills
20