Questions for Chapter 9
True/False
1. It is better to let your accountant articulate the numbers of your business idea to potential
investors. (pg. 276)
2. Entrepreneurs who claim their estimates are “conservative” are usually overly optimistic about
their ventures’ future. (pg. 276)
3. When we graph costs over time, we see them decreasing exponentially. (pg. 276)
4. An optimistic attitude about your business’s future helps achieve positive cash flow sooner.
(pg. 276)
5. Typically, a business begins to generate revenue within the first two months after it launches.
(pg. 277)
6. Investors often predict the market share of startups as 3% after Year 3, because of the ease with
which 3% can be captured. (pg. 277)
7. The income statement shows the standing of a company at any given point of time. (pg. 277)
8. The expenses that a business incurred appear on a different financial document than the amount of
cash that it spent. (pg. 278)
9. Many noncash transactions are represented in the balance sheet. (pg. 278)
10. It is possible to have positive earnings on the income statement and a negative statement of cash
flows. (pg. 278)
11. For an asset to appear on the balance sheet it must generate revenue. (pg. 278)
12. In the build-up method, you look at the revenue you might generate and the cost you might incur
13. Scientific findings suggest that people make better decisions by decomposing problems into
smaller decisions. (pg. 279)
14. The first step in Revenue Projections is to calculate the median revenue of your products in the
product mix. (pg. 280)
15. Revenue projections help you to understand the company’s revenue drivers. (pgs. 280–281)
16. For a bookstore, COGS is the cost of employee wages that is incurred in that period. (pg. 281)
17. Most pro-forma projections for new companies show monthly income figures for the first two
years. (pg. 281)
18. Gross profit margin can be calculated by dividing the Cost of Goods Sold by Total Revenues.
(pg. 282)
19. In addition to direct expenses, businesses incur operating expenses, such as marketing, salaries
20. You should attempt to calculate your operating costs before you start a business. (pg. 282)
21. Financial analysis is simply the mathematical expression of an overall business strategy.
(pg. 283)
22. The process of examining and reexamining your assumptions over and over is a waste of time
(pg. 283)
23. In financial analysis, the step that follows forecasting revenues and expenses is formulating a
cash flow statement from those forecasts. (pg. 284)
24. In the comparable method, you look at how your company compares to industry averages and
benchmark companies. (pg. 284)
25. Different companies may calculate COGS differently, even if their actual costs are identical.
(pg. 285)
26. Pro-forma financials often project sales occurring 5 years in the future. (pg. 287)
27. Businesses should expect to build their sales and start operating efficiently within a five-year
period. (pg. 287)
28. Seldom are revenues in retail spread evenly across the calendar year. (pg. 288)
29. It is critical to show the first two years of pro-forma projections on a monthly basis because this
is when a company is most vulnerable to failure. (pg. 288)
30. By closing your sales for credit, you can increase your company’s cash flow. (pg. 290)
31. The expense of acquiring land should appear in full on your annual income statement. (pg. 290)
32. If, after all calculations, your balance sheet does not balance, you should adjust retained earnings
accordingly. (pg. 290)
(False)
Multiple Choice
1. Which of the following represent the most common mistake(s) in an entrepreneur’s business
proposal, according to the professional equity investors?” (pgs. 276-277)
2. Which of these describes how well a company conducted its business over a recent period of
time—typically, a quarter (three months) or a year? (pg. 277)
E) Accounts payable
3. Which of these enumerates all the company’s assets, liabilities, and shareholder equity? (pg. 278)
D) Liability statement
E) Accounts payable
4. An income statement will never include a line for: (pg. 278)
5. The bottom line of the income statement states the company’s _______. (pg. 278)
6. The statement of cash flows starts with which of the following? (pg. 278)
E) Net Liabilities
7. Which of the following equations is true about the Balance Sheet under GAAP? (pg. 278)
8. Under the Build-Up Method, you should start with the: (pg. 279)
E) None of the above
9. The build-up method drills down revenue projections to a typical ______. (pg. 279)
10. Which of the following columns is not included in the revenue worksheet? (pg. 280)
A) Product/Service Description
B) Price
11. Which of the following can be used to strengthen your assumptions? (pgs. 280 – 281)
12. In the build-up method, after you identify all your revenue sources, what is the next step?
(pgs. 280)
13. The chapter recommends that you should construct monthly income and cash flow statements
for the first: (pg. 281)
14. Gross margin is calculated with the formula (pg. 282)
15. The following are examples of operating expenses, except: (pg. 282)
D) Salaries
E) Administrative expenses
16. A financial statement that displays each item as a percentage of a common-base figure is called:
(pg. 284)
17. What does the Comparable Method help an entrepreneur to do? (pg. 284)
18. Under the Comparable Method, you can see how the model changes overall when you: (pg. 285)
19. What is the best way to validate costs? (pgs. 285-286)
20. An entrepreneur must be able to ___________, if his income statement does not match the
industry average? (pg. 286)
21. The standard term for most business plans is: (pg. 287)
22. If a business is profitable and growing, which of the following is most likely to be a reason for
failure? (pg. 287)
23. According to the chapter, it takes time to: (pgs. 287-288)
A) Build up your clientele
24. It is critical to show the pro-forma projections on a monthly basis when a company is: (pg. 288)
25. Seasonality is important because it affects which of the following: (pg. 288)
26. What effect can selling on credit have on your business? (pg. 290)
27. An accumulated depreciation line item on your balance sheet shows how much of the asset has
been: (pg. 290)
E) All of the above
28. How long should the explanation of the financial statements be? (pg. 292)
29. Approximately how many subsections in the section of the planning process should your
explanation of the financial statements have, if you follow the model in the chapter?
(pg. 292)
A) 1
E) 8
Open ended
1. Explain why it is important to construct pro forma financial statements for new ventures.
(pgs. 276 – 277)
2. What is a “hockey stick” projection and what is so unrealistic about it? (pg. 276)
3. What is the difference between the respective purposes of the balance sheet and the
income statement? (pgs. 277 – 278)
4. Briefly describe the principle of the build-up method and its advantages. (pgs. 279 – 280)
5. What are examples of revenue drivers? (pg. 280)
a. How many customers you will serve
b. How much product they will buy
c. How much they will pay for each product
d. How often they will buy
6. When building a revenue worksheet, an entrepreneur has to begin with certain
assumptions. What are three ways for an entrepreneur to later strengthen those initial
assumptions? (pgs. 280 – 281)
7. What is the purpose of creating a headcount table? (pg. 283)
8. Explain the comparable method. (pgs. 284 – 285)
9. What is the importance of building integrated financial statements? (pgs. 287 – 288)
10. Explain what a “brief description of your financial spreadsheets” should include.
(pg. 292)
11. The chapter says financial statements are obsolete immediately after they come off the
printer. Why? (pg. 292)
a. Once the business is operating, the nature of your financial statements changes.
