Entrepreneurship and Small Business Management, 2e (Mariotti)
Chapter 14 Cash Flow and Taxes
1) ________ is the amount an investment is worth discounted back to the present.
A) Present value of money
B) Time value of money
C) Future value of money
D) Upcoming value of money
E) None of the above
Learning Obj.: LO 4
AACSB: Analytical thinking
2) Orders are not entered onto the cash flow statement as cash receipts because you ________.
A) Don’t get the cash until the customer actually pays for the order
B) Will have a more accurate cash flow statement if you enter them once a month
C) Might get them confused with revenue on the income statement
D) All of the above
E) None of the above
Learning Obj.: LO 1
AACSB: Analytical thinking
3) A (n)________ statement summarizes the cash coming into and going out of the business over
a specified period of time.
A) Business plan
B) Balance sheet
C) Income
D) Cash flow
E) pitch
Learning Obj.: LO 1
AACSB: Analytical thinking
4) A burn rate is ________.
A) The amount of cash per month that a business can spend before it runs out of cash
B) The number of months that a business can survive without making sales
C) The amount of cash that a business burns on rent per month
D) Cash saved by a business
E) None of the above
Learning Obj.: LO 4
AACSB: Analytical thinking
1
5) As a sole proprietorship, you sell tangible products to the public at retail. You will need to pay
________.
A) Sales tax
B) Services tax
C) Self-employment tax
D) Improvement tax
E) Both A and C
Learning Obj.: LO 5
AACSB: Analytical thinking
6) Which statement best describes how the cash flow statement differs from the income
statement?
A) The income statement records sales and expenses when they happen, not when cash is
actually exchanged. The cash flow statement records cash inflows and outflows when they
actually occur.
B) The income statement records income, as it comes in, while the cash flow statement records
cash from sales.
C) The income statement keeps track of cash when sales are made; the cash flow statement keeps
track of cash after sales are made.
D) All of the above
E) None of the above
Learning Obj.: LO 1
AACSB: Analytical thinking
7) Credit is ________.
A) The ability to buy something without spending actual cash
B) Exemplified by purchasing a product to sell, and you don’t have to pay until after you have
sold it
C) Both A and B
D) Getting money for free and buying the things you want
E) None of the above
Learning Obj.: LO 4
AACSB: Analytical thinking
2
8) Receipts minus disbursements = the money you take in minus the money that you spend =
________.
A) Cash flow
B) Profit
C) Revenue
D) Gross profit
E) COGS
Learning Obj.: LO 2
AACSB: Analytical thinking
9) Failure to file and pay income tax is a criminal offense called tax ________.
A) Evasion
B) Fraud
C) Avoidance
D) Shirking
E) Elusion
Learning Obj.: LO 5
AACSB: Analytical thinking
10) The legal structure you decide on will affect the taxes you pay. However, certain
administrative tasks will be the same for all legal structures and include ________.
A) Obtaining a federal identification number for the company that you can use in all interactions
with the federal government
B) Obtaining a sales and use tax registration number from the state
C) Both A and B
D) Filing articles of incorporation
E) None of the above
Learning Obj.: LO 5
AACSB: Application of knowledge
11) Make your life easier at tax time by keeping ________.
A) Complete financial records
B) High net income
C) Operating ratios
D) A good working capital figure
E) High long-term liabilities
Learning Obj.: LO 5
AACSB: Analytical thinking
3
12) Entrepreneurs should always ________.
A) Keep records, file returns, and pay taxes on time
B) Ask to be audited by the IRS
C) Pay self-employment tax
D) Avoid expenses
Learning Obj.: LO 5
AACSB: Analytical thinking
13) On your cash flow statement, you will need to ________ the amount you deducted from the
income statement as a depreciation expense.
A) Add back
B) Amortize
C) Subtract
D) Multiply
E) Divide
Learning Obj.: LO 2
AACSB: Analytical thinking
14) Which of the following is not a key rule for managing cash flow?
A) Pay bills as soon as possible.
B) Collect cash as soon as possible.
C) Check cash balance every day.
D) Pay bills as late as possible but on time.
E) All of the above are key rules.
Learning Obj.: LO 2
AACSB: Analytical thinking
15) Because entrepreneurs do not have Social Security tax taken out of their income by their
employer, they must pay a(n) ________.
A) Self-employment tax
B) Capital assets tax
C) Operating tax
D) Sales tax
E) All of the above
Learning Obj.: LO 5
AACSB: Analytical thinking
4
16) Once a business begins to grow, an entrepreneur needs to keep an eye on ________, which is
defined as “Current Assets minus Current Liabilities.”
A) Working capital
B) The operating ratio
C) Capital assets
D) All of the above
E) None of the above
Learning Obj.: LO 2
AACSB: Analytical thinking
17) A ________ legal structure for your business offers a tax shelter to some partners and can
offer a more creative allocation of profit and loss.
A) Limited liability corporation
B) Sole proprietorship
C) Limited partnership
D) Partnership
E) All of the above
Learning Obj.: LO 5
AACSB: Application of knowledge
18) A(n) ________ rate of return means that interest is earned on the base amount plus any
interest previously earned.
A) Accrued
B) Compound
C) Annual
D) Quarterly
E) Monthly
Learning Obj.: LO 4
AACSB: Analytical thinking
19) Why is it not a good idea to rely on your income statement to run your business?
A) The income statement deducts noncash expenses, such as depreciation, even when no cash is
actually flowing out of the business.
B) The income statement records cash when it comes into the business.
C) The income statement adds noncash expenses back to the business’s earnings.
D) All of the above
E) None of the above
Learning Obj.: LO 1
AACSB: Analytical thinking
5
20) Every time an entrepreneur spends cash, she or he takes a risk. If the entrepreneur buys
________, then he or she faces the risk of storage costs and pilfering.
A) Inventory
B) Capital assets
C) A computer for your chief financial officer
D) Gum
E) None of the above
Learning Obj.: LO 4
AACSB: Analytical thinking
21) If the amount of cash that flows in and out of your business changes significantly during
certain times of the year, include the following in your business plan: ________.
A) A seasonality scenario
B) A projected cash flow statement
C) A cash flow statement
D) An income statement
E) A fiscal scenario
Learning Obj.: LO 2
AACSB: Analytical thinking
22) Which of the following is the bottom line on a cash flow statement?
A) Ending cash balance
B) Cost of goods sold
C) Net profit
D) Taxes
E) None of the above
Learning Obj.: LO 2
AACSB: Analytical thinking
23) If Jacques invests $20,000 at 10% interest for 3 years, what will the future value of the
money be?
A) $26,620.00
B) $6,620.00
C) $20,606.02
D) $28,606.02
E) $22,620.00
Learning Obj.: LO 4
AACSB: Application of knowledge
6