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Entrepreneurship: Starting & Operating a Small Business, 4e (Mariotti)
Chapter 9 Cash Flow and Taxes
1) 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) The cash flow statement also includes the current market value of assets.
Learning Object.: 9.1 Understand the importance of cash flow management.
AACSB Category: Analytical thinking
2) Cash flow is the lifeblood of a business.
Learning Object.: 9.1 Understand the importance of cash flow management.
AACSB Category: Reflective thinking
3) How could the income statement potentially confuse a business owner?
Learning Object.: 9.1 Understand the importance of cash flow management.
AACSB Category: Reflective thinking
4) Which of the three financial statements an entrepreneur prepares is used to guide the day-to-
day operations of the business?
A) the cash flow statement
B) the income statement
C) the balance sheet
D) tax returns
Learning Object.: 9.2 Know the difference between cash and profits.
AACSB Category: Reflective thinking
2
5) Why is it not a good idea to rely on your income statement to run your business?
A) The income statement records cash when it comes into the business.
B) The income statement adds non-cash expenses back to the business's earnings.
C) The income statement deducts non-cash expenses, such as depreciation, even when no
cash is actually flowing out of the business.
D) The income statement usually contains errors that other statements don't have.
Learning Object.: 9.2 Know the difference between cash and profits.
AACSB Category: Analytical thinking
6) Which business below is most likely to have cash flow that is cyclical?
A) gas station
B) pet food business
C) tax return preparation business
D) grocery store
Learning Object.: 9.2 Know the difference between cash and profits.
AACSB Category: Analytical thinking
7) 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 cash flow statement
B) a projected cash flow statement
C) expectations for seasonal variations
D) flow chart
Learning Object.: 9.2 Know the difference between cash and profits.
AACSB Category: Analytical thinking
8) Which of the following is not a key rule for managing cash flow?
A) Check cash balance every day.
B) Pay bills as late as possible but on time.
C) Pay bills as soon as possible.
D) Collect cash as soon as possible.
Learning Object.: 9.2 Know the difference between cash and profits.
AACSB Category: Reflective thinking
3
9) On your cash flow statement, you will need to ________ the amount you deducted from the
income statement as a depreciation expense.
A) subtract
B) amortize
C) double
D) add back
Learning Object.: 9.2 Know the difference between cash and profits.
AACSB Category: Analytical thinking
10) Once a business is operational, 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) None of the above.
Learning Object.: 9.2 Know the difference between cash and profits.
AACSB Category: Analytical thinking
11) What are the rules to keep cash flowing so that you always have enough cash to pay your
bills?
Learning Object.: 9.2 Know the difference between cash and profits.
AACSB Category: Analytical thinking
12) ________ = Cash on Hand + Cash Receipts - Cash Disbursement.
A) Profit
B) Revenue
C) Cash flow
D) Gross profit
Learning Object.: 9.3 Read a cash flow statement.
AACSB Category: Analytical thinking
4
13) The cash flow statement is: cash flow = cash on hand + credit and cash sales - cash
disbursements.
Learning Object.: 9.3 Read a cash flow statement.
AACSB Category: Analytical thinking
14) If Tara invests $10,000 at 5% interest for 5 years, what will her earnings be at the end?
A) $607.75
B) $2,762.82
C) $12,500
D) $12,763
Learning Object.: 9.4 Create a cash budget.
AACSB Category: Application of knowledge
15) A burn rate is ________.
A) the number of months a business can survive without making sales
B) the amount of cash per month a business can spend before it runs out of cash
C) the amount of cash a business burns on rent per month
D) the number of days a business can survive without making sales
Learning Object.: 9.4 Create a cash budget.
AACSB Category: Analytical thinking
16) A(n) ________ rate of return means that interest is earned on the base amount plus any
interest
previously earned.
A) compound
B) accrued
C) annual
D) fixed
Learning Object.: 9.4 Create a cash budget.
AACSB Category: Analytical thinking
5
17) Which of the following is the bottom line on a cash flow statement?
A) net profit
B) cost of goods sold
C) taxes
D) ending cash balance
Learning Object.: 9.4 Create a cash budget.
AACSB Category: Analytical thinking
18) What are the two steps in making a cash flow projection?
A) projecting receipts and paying bills before they are due
B) projecting expected cash expenses and subtracting inventory cost
C) projecting cash receipts and subtracting expected cash expenses
D) projecting receipts and capital expenditures for a quarter
Learning Object.: 9.4 Create a cash budget.
AACSB Category: Analytical thinking
19) 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) might get them confused with revenue on the income statement
C) will have a more accurate cash flow statement if you enter them once a month
D) might get a cancellation
Learning Object.: 9.4 Create a cash budget.
AACSB Category: Analytical thinking
20) If Jacques invests $20,000 at 10% interest for 3 years, what will the future value of the
money be?
A) $26,000.00
B) $20,606.02
C) $23,606.02
D) $26,620.00
Learning Object.: 9.4 Create a cash budget.
AACSB Category: Application of knowledge
6
21) The ________ value of money is the amount it will be worth a number of periods from the
present.
A) present
B) future
C) cash
D) investment
Learning Object.: 9.4 Create a cash budget.
AACSB Category: Reflective thinking
22) ________ is the amount an investment is worth discounted back to the present.
A) Present value of money
B) Future value of money
C) Time value of money
D) Prediscounted value of money
Learning Object.: 9.4 Create a cash budget.
AACSB Category: Analytical thinking
23) The present value of money is based upon the value of your "next-best" opportunity for
investment at a particular ROI. If this value is 10%, it is better to get $10,000 at the end of the
first year than ________ today.
A) $10,000
B) $9,500
C) $9,090
D) $8,000
Learning Object.: 9.4 Create a cash budget.
AACSB Category: Application of knowledge
24) Every time an entrepreneur spends cash, she or he takes a risk. If one buys ________, then
the entrepreneur faces the risk of storage costs and pilfering.
A) a computer for your chief financial officer
B) capital assets
C) inventory
D) None of the above.
Learning Object.: 9.4 Create a cash budget.
AACSB Category: Analytical thinking
7
25) Credit is ________.
A) exemplified by purchasing a product to sell, and you don't have to pay until after you have
sold it
B) the ability to buy something without spending actual cash
C) both of the above
D) essentially using someone else's money for gain
Learning Object.: 9.4 Create a cash budget.
AACSB Category: Reflective thinking
26) To manage cash flow, you should ________ and then subtract expenses you expect to incur.
A) project gross receipts
B) project gross sales
C) project cash receipts
D) project net income
Learning Object.: 9.4 Create a cash budget.
AACSB Category: Analytical thinking
27) ________ is the amount an investment is worth discounted back to the present.
A) Earnings value
B) Future value
C) Present value
D) Tangible value
Learning Object.: 9.4 Create a cash budget.
AACSB Category: Analytical thinking
28) Both cash inflows and outflows can be managed to control overall cash flow.
Learning Object.: 9.4 Create a cash budget.
AACSB Category: Analytical thinking
29) Factoring is the selling of a business' accounts receivables at a discount to a finance company
called a factor in exchange for immediate cash.
Learning Object.: 9.4 Create a cash budget.
AACSB Category: Analytical thinking
8
30) Future value is a component of the time value of money; however, present value is not.
Learning Object.: 9.4 Create a cash budget.
AACSB Category: Reflective thinking
31) What is the burn rate? Why is it important?
Learning Object.: 9.4 Create a cash budget.
AACSB Category: Analytical thinking
32) Which of the following would be the most or least seasonal businesses and therefore have the
least or most cyclical cash flow: a. snow plowing; b. high school senior photography; c. cleaning
and repairing lawn mowers, d. evening and weekend babysitting? Why?
Learning Object.: 9.4 Create a cash budget.
AACSB Category: Application of knowledge
33) ________ tax is federal tax that business owners are assessed on wages paid to themselves.
A) Sales
B) Corporate
C) Self-employment
D) Unemployment
Learning Object.: 9.5 Recognize appropriate tax filing information.
AACSB Category: Analytical thinking
9
34) Corporate, partnership, individual income tax, and ________ tax returns must be filed on
time with the U.S. Internal Revenue Service.
A) state
B) local - city or county
C) self-employment
D) township
Learning Object.: 9.5 Recognize appropriate tax filing information.
AACSB Category: Analytical thinking
35) 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) sales tax
C) operating tax
D) capital assets tax
Learning Object.: 9.5 Recognize appropriate tax filing information.
AACSB Category: Analytical thinking
36) As a sole proprietorship, you sell tangible products to the public at retail. You will need to
pay ________.
A) sales tax
B) self-employment tax
C) services tax
D) Both A and B.
Learning Object.: 9.5 Recognize appropriate tax filing information.
AACSB Category: Analytical thinking
37) One of the penalties for failure to file proper wage taxes is sweeping your company bank
account. What action will the federal government take?
A) cleaning out your inventory of saleable items
B) charge interest and penalties
C) taking out any available funds
D) confiscate your state business license
Learning Object.: 9.5 Recognize appropriate tax filing information.
AACSB Category: Analytical thinking
10
38) A ________ is a legal structure for your business which separates the owners/partners from
personal liability and provides a more flexible allocation of profit and loss.
A) limited liability company (LLC)
B) sole proprietorship
C) partnership
D) limited partnership
Learning Object.: 9.5 Recognize appropriate tax filing information.
AACSB Category: Analytical thinking
39) Make your life easier at tax time by keeping ________.
A) complete financial records
B) operating ratios
C) a good working capital figure
D) high net income
Learning Object.: 9.5 Recognize appropriate tax filing information.
AACSB Category: Reflective thinking
40) What are the tax issues for the various legal structures your business can have?
Answer:
1) Sole proprietorship - All profit earned by the sole proprietor is his or hers, and affects his or
2) Partnership - Tax issues are essentially the same as with a proprietorship, except that the tax is
3) Limited partnership - Treated the same as with a partnership, except that losses can be used as
a tax shelter without being exposed to personal liability. This can be an incentive for family and
4) Corporation (Subchapter C) - A corporation's profits are taxed whether or not any share of the
profit is distributed to the owners. Owners must also pay tax on any profit they receive. This is
5) S Corporation - Small companies can use this to avoid double taxation. The S- Corporation is
6) Limited Liability Company - This structure separates the owners/partners from liability and
provides a more flexible allocation of profits and losses.
Learning Object.: 9.5 Recognize appropriate tax filing information.
