1
Entrepreneurship: Starting & Operating a Small Business, 4e (Mariotti)
Chapter 8 Using Financial Statements to Guide a Business
1) Which of the following is not a basic financial document that entrepreneurs use to track their
businesses?
A) income statement
B) cash flow statement
C) balance sheet
D) market share statement
Learning Object.: 8.1 Understand an income statement.
AACSB Category: Analytical thinking
2) The last line of an income statement shows a business’s ________.
A) gross profit or gross loss
B) profit or loss
C) net profit or net loss
D) gross margin
Learning Object.: 8.1 Understand an income statement.
AACSB Category: Analytical thinking
3) In the income statement, EBIT minus interest costs equals ________.
A) gross profit
B) pre-tax profit
C) net profit
D) COGS
Learning Object.: 8.1 Understand an income statement.
AACSB Category: Analytical thinking
4) Jared analyzed the income statement for his independent label and found that for every dollar
of sales, 30 cents were spent on cost of goods sold. The gross profit per dollar was 70 cents. If 20
cents were spent on operating costs and 10 cents on taxes, what is the net profit per dollar?
A) 60 cents
B) 40 cents
C) 30 cents
D) 20 cents
Learning Object.: 8.1 Understand an income statement.
AACSB Category: Application of knowledge
2
5) An income statement shows whether the difference between revenues (sales) and expenses
(costs) is a profit or a ________.
A) loss
B) net profit
C) breakeven
D) semi-loss
Learning Object.: 8.1 Understand an income statement.
AACSB Category: Reflective thinking
6) Ideally, you want to have a positive “double” bottom line. This means ________.
A) you are achieving twice the revenues you expected
B) you have twice the number of customers that you expected
C) you have twice the profit you expected
D) your profit allows you to stay in business and achieve your mission
Learning Object.: 8.1 Understand an income statement.
AACSB Category: Reflective thinking
7) The power of the income statement is that it will tell you whether you are fulfilling the
formula of buying low, selling high, and meeting customer needs.
Learning Object.: 8.1 Understand an income statement.
AACSB Category: Analytical thinking
3
8) Describe the parts of an income statement.
Answer:
1) Revenue. Income from sales of the company’s products or services. For companies using the
2) COGS (Cost of Goods Sold)/COSS (cost of services sold). These are the cost of the
materials to make the product (or deliver the service) plus the costs of the direct labor used to
5) Contribution margin. The result of revenues minus COGS and other variable costs, or gross
6) Fixed Operating costs. Costs that do not vary with sales. The most common are represented
7) Earnings before interest and taxes (EBIT). The result of gross profit minus other variable
8) Pre-Tax Profit. EBIT minus interest costs. This is a business’s profit after all costs have been
deducted, but before taxes have been paid. Pre-tax profit is used to calculate how much tax the
10) Net profit/loss: The business’s profit or loss before any taxes have been paid.
Learning Object.: 8.1 Understand an income statement.
AACSB Category: Analytical thinking
9) Owner’s equity is also called ________.
A) debt
B) assets
C) liabilities
D) net worth
5
15) Because different types of assets depreciate at different rates, and because they are purchased
at various points in time businesses keep a(n) ________ to track the valuation of each asset that
is being depreciated.
A) income statement
B) balance sheet
C) depreciation schedule
D) cash flow statement
Learning Object.: 8.3 Use the balance sheet equation for analysis.
AACSB Category: Analytical thinking
16) You can create ________ from your income statement that will help you analyze your
business further.
A) financial ratios
B) asset categories
C) comparisons
D) None of the above.
Learning Object.: 8.3 Use the balance sheet equation for analysis.
AACSB Category: Analytical thinking
17) The balance sheet equation tells us that assets – liabilities = net profit.
Learning Object.: 8.3 Use the balance sheet equation for analysis.
AACSB Category: Analytical thinking
18) What is the purpose of financial ratio analysis?
Learning Object.: 8.3 Use the balance sheet equation for analysis.
AACSB Category: Analytical thinking
6
19) To see how costs are affecting net profit, try analyzing the income statement by expressing
each ________.
A) as a percentage of costs
B) as a percentage of profit
C) as a percentage of sales
D) as a percentage of administrative expense
Learning Object.: 8.4 Perform a financial ratio analysis on an income statement.
AACSB Category: Analytical thinking
20) Which of the following is not something that can be invested?
A) energy
B) time
C) expertise
D) money
Learning Object.: 8.5 Calculate return on investment.
AACSB Category: Reflective thinking
21) In a business formula such as Return on Investment, “on” means ________.
A) “divided by”
B) “on top of”
C) “deducted from”
D) “subtracted from”
Learning Object.: 8.5 Calculate return on investment.
AACSB Category: Analytical thinking
22) ROI is always calculated for ________.
A) a month
B) a specific time period, such as month or a year
C) the length of a business’s fiscal year
D) a period of time
Learning Object.: 8.5 Calculate return on investment.
AACSB Category: Analytical thinking