24) A suggested allowance for contingencies and emergencies at start-up is ________ percent of
estimated start-up costs, although more is better.
A) 5
B) 10
C) 25
D) 40
Learning Obj.: LO 1
AACSB: Analytical thinking
25) You should keep reserves of at least ________ and ________.
A) 6 months of fixed operating costs, one half of the start-up investment
B) 3 months of fixed operating costs, 3/4 of the start-up investment
C) One year of fixed operating costs, one half the start-up investment
D) 3 months of fixed operating costs, one half of the start-up investment
Learning Obj.: LO 2
AACSB: Analytical thinking
26) ________ will tell you how long it will take you to earn enough profit to cover your start-up
investment.
A) Payback
B) ROI
C) Return on sales
D) Return on assets
Learning Obj.: LO 2
AACSB: Analytical thinking
27) One of the most important things an entrepreneur learns is keeping accurate records of the
money flowing in and out of a business. Keeping numerical records is called ________.
A) Cost analysis
B) Cash flow analysis
C) Accounting
D) Reconciliation
Learning Obj.: LO 4
AACSB: Analytical thinking
7
28) The current value of a proposed investment may be calculated as its ________.
A) Internal rate of return (IRR)
B) Present value (PV)
C) Net present value (NPV)
D) Return on investment (ROI)
Learning Obj.: LO 2
AACSB: Analytical thinking
29) The NPV of an initial investment of $1,500,000 with a 10% required rate of return over 10
years is calculated at $120,000. What should the company do?
A) Invest — the NPV is greater than $0.
B) Not invest — the NPV is less than the 10% stated.
C) Find a way to reduce the initial investment to $1,200,000 and still yield the same amount.
D) None of the above
Learning Obj.: LO 2
AACSB: Application of knowledge
30) What is the estimated time required to earn sufficient net cash flow to cover the start-up
investment?
A) Repayment estimate
B) Payback period
C) Net cash flow period
D) Recovery period
Learning Obj.: LO 2
AACSB: Analytical thinking
31) Jarvis is starting a business requiring initial start-up of $5.5 million. The business is
projecting a net cash flow per month of $100,000. How many months will it take to make back
his start-up investment?
A) 5.5
B) 55
C) 20
D) None of the above
Learning Obj.: LO 2
AACSB: Application of knowledge
8
32) A prototype ________.
A) Is a model or pattern
B) Serves as an example of how a product would look if it were produced
C) Serves as an example of how a product would operate if it were produced
D) All of the above
Learning Obj.: LO 2
AACSB: Analytical thinking
33) Which of the following would be a start-up cost for an internet business?
A) Computers
B) A URL
C) Licenses
D) All of the above
Learning Obj.: LO 2
AACSB: Application of knowledge
34) A cash reserve is also known as a(n) ________.
A) Emergency fund
B) Pool of cash resources
C) Contingency fund
D) All of the above
Learning Obj.: LO 2
AACSB: Analytical thinking
35) Uses for a cash reserve include ________.
A) Planned leasehold improvements
B) Taking advantage of unforeseen opportunities
C) Routine expenses
D) Seed capital
Learning Obj.: LO 2
AACSB: Analytical thinking
36) Seed capital is the start- up investment or one-time expense of opening a business.
Learning Obj.: LO 2
AACSB: Analytical thinking
9
37) Leasehold improvements are a start-up expense.
Learning Obj.: LO 2
AACSB: Analytical thinking
38) Maintaining a cash reserve at start-up is considered to be a poor management practice.
Learning Obj.: LO 2
AACSB: Analytical thinking
39) The estimated time required to earn sufficient net cash flow to cover the start-up investment
is called the repayment period.
Learning Obj.: LO 2
AACSB: Analytical thinking
40) Expenses associated with materials and direct labor for production until the products are sold
are called fixed operating costs.
Learning Obj.: LO 2
AACSB: Analytical thinking
41) Fixed operating costs can change over time.
Learning Obj.: LO 2
AACSB: Analytical thinking
42) Net profit is calculated before taxes are taken into consideration.
Learning Obj.: LO 2
AACSB: Analytical thinking
43) Inflation has no effect on small business.
Learning Obj.: LO 2
AACSB: Analytical thinking
10
44) Paying cash for business purchases is highly recommended over paying via check or
electronic transfer.
Learning Obj.: LO 4
AACSB: Analytical thinking
45) Under the accrual method of accounting transactions are recorded at the time of occurrence.
Learning Obj.: LO 4
AACSB: Analytical thinking
46) Describe how an entrepreneur should protect his/her financial records.
Learning Obj.: LO 4
AACSB: Analytical thinking
47) Give three reasons to keep good records every day
Learning Obj.: LO 4
AACSB: Analytical thinking
48) What is the difference between cash accounting and the accrual method?
Learning Obj.: LO 4
AACSB: Analytical thinking
11
49) What is the reason to calculate the payback period and the net present value (NPV) for a
business investment?
Learning Obj.: LO 2
AACSB: Analytical thinking
50) List 10 categories of start-up costs that are common to many businesses.
Learning Obj.: LO 2
AACSB: Analytical thinking
12