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Indicate whether the statement is true or false.
1. Financial forecasts are required by lenders since they will want to know how they will be paid back; investors will use
the forecasts to value the company.
a. True
b. False
2. High-tech businesses (such as computer manufacturers) generally require fewer assets than service businesses.
a. True
b. False
3. The cash budget is concerned only with dollars received and dollars paid out.
a. True
b. False
4. To project pro forma financial statements, speaking to others in the industry and researching industry averages are good
starting points.
a. True
b. False
5. A line of credit is a short-term loan used in a business to help with financing fixed assets.
a. True
b. False
6. The projection of profits, asset requirements, financing requirements and cash flows are essential in determining
whether a venture is economically viable.
a. True
b. False
7. Spontaneous debt financing results when accounts payable increase in proportion to a firm’s profits.
a. True
b. False
8. Financial projections should be limited to the income statement to prevent information overload on lenders and
investors.
a. True
b. False
9. The term net working capital equals current assets less total liabilities and is a measure of a company’s liquidity.
a. True
b. False
10. The percentage-of-sales technique is an effective method for a new company to estimate asset requirements because
asset–to-liabilities ratios tend to be relatively constant within an industry.
a. True
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b. False
11. Because Liam’s new restaurant had a high volume of sales, his inventory needs increased illustrating that a firm’s
asset needs are the primary force driving sales.
a. True
b. False
12. The conventional measure of liquidity is the current ratio, which compares the current assets to current liabilities on a
relative basis.
a. True
b. False
13. Pro forma financial statements are statements that have been prepared in the proper format by a CPA.
a. True
b. False
14. After pro forma statements are prepared, they should be checked against actual results every month so projections can
be modified.
a. True
b. False
15. Many small firms have a tendency to underestimate the amount of capital the business requires when beginning
operations.
a. True
b. False
16. Profits that are retained within the company rather than being distributed to the owners are referred to as retained
income.
a. True
b. False
17. Marcia like to use other people’s money when financing her business. In this way she “does more with less” by
controlling resources without actually owning them.
a. True
b. False
18. The cost of goods sold are always fixed.
a. True
b. False
19. To be realistic, an entrepreneur should project profits only one year into the future.
a. True
b. False
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20. Cash flow can be projected in two ways: using the income statement to project cash flows or preparing a cash budget.
a. True
b. False
21. Profits reward an owner for investing in a company and constitute a primary source of financing for future growth.
a. True
b. False
22. Mario has high hopes for his new business, anticipating a very large profit margin. For the preparation of his
forecasts, he should use industry averages regardless of his hopes.
a. True
b. False
23. An entrepreneur should always project at least two scenarios for financial forecasting and budgeting: best case and
worst case
a. True
b. False
24. Bettina plans to draw an income from her new business but her personal living expenses are not needed in the
financial plan unless these expenses are part of the capitalization of the business.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
25. A firm should finance its growth in such a way as to maintain adequate
a. liquidity.
b. inventory.
c. sales.
d. volume.
26. A golf club should break down its annual cash budget into shorter time units because
a. of the seasonality of its sales.
b. one year is too far into the future to predict.
c. the marketing plans may change during the year.
d. production breakdowns may alter the company’s situation.
27. Mark follows the cash budget like it was carved in stone. He has fallen prey to the one real danger in over-reliance on
a cash budget:
a. inflexibility.
b. pliability.
c. exaggeration.
d. errors.
28. For the typical small firm, the primary source of equity capital for financing growth is
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a. operating profits.
b. outside investors.
c. spontaneous debt financing.
d. retained earnings.
29. Liquid assets include
a. accounts payable.
b. equipment.
c. working capital.
d. office supplies.
30. Which action will be a concern for a prospective investor?
a. Having too much cash in a bank account
b. Searching for information with a trade association
c. Inadequate provision for personal expenses of the entrepreneur
d. Obtaining a line of credit before beginning operations
31. Entrepreneurs determine financial requirements based on ________.
a. predictions
b. suggestions
c. assumptions
d. projections
32. The method of forecasting asset requirements is called the ____________ technique.
a. percentage-of-inventory
b. percentage-of-equity
c. percentage-of-debt
d. percentage-of-sales
33. Where should Rhonda put the administrative expenses for her business when she prepares the financial forecasts?
a. Administrative costs are subtracted from amount of sales.
b. In the operating expenses section
c. Administrative costs are included in cost of goods sold
d. In the interest expense section
34. Investors would like to know if Arthur’s new business will have adequate cash flows. Arthur can provide this
information in
a. pro forma financial statements.
b. historical financial statements.
c. pro bono financial statements.
d. quid pro quo financial statements.
35. Maria is projecting sales for her company for the upcoming new year. To be financially effective, she
a. can over-project for sales if she has done research.
b. should develop realistic sales projections.
c. would be better served by under-projecting sales so she won’t be disappointed.
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d. ignore projections until after 1 year of operations when she can realistic project.
36. The assets-to-sales relationship tends to be relatively constant within an industry, allowing for a(n) _____ technique to
be utilized in projecting asset requirements.
a. percentage-of-sales
b. bootstrap forecasting
c. asset turnover ratio
d. discounted sales
37. D&R Products forecast a first year asset requirement of $143,500; therefore, the total debt requirement is
a. $143,500.
b. a set percentage of sales.
c. equal to the current ratio.
d. dependent on the owner’s equity amount.
38. Alex wants to make sure he has enough liquid assets to pay his current bills. To do this, he should calculate his firm’s:
a. debt ratio.
b. cash flow statement.
c. current ratio.
d. asset turnover ratio.
39. David has a company decorating houses for the holidays. He has secured a $25,000 line of credit from his bank. For
which purpose is David more likely to use this credit line?
a. a warehouse to store decorations until they are sold
b. labor to install the decorations in November
c. a truck with a ladder to put up lights
d. a full-time, year-round office person to answer phones and take orders
40. D&R Products forecasts that it will require $10,000 for equipment and depreciation will be over 5 years. The $10,000
will be reflected in the balance sheet as _____.
a. inventory
b. gross fixed assets
c. net fixed assets
d. accounts payable
41. As Willard’s business grows and propsers, his company’s total assets requirements will equal ___________.
a. total sources of financing less owner’s investment and retained earnings
b. spontaneous debt financing plus bank loans plus owner’s investment less retained earnings
c. total sources of financing less net assets and owner’s investment
d. spontaneous debt financing plus bank loans plus owner’s investment plus retained earnings
42. Marcia uses other people’s money whenever possible to finance her business. She prefers to minimize and control
rather than maximize and own. This practice is known as:
a. high-stepping.
b. bootstrapping.
c. unethical business practice.
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d. taking advantage of others.
43. James is preparing his forecasts for the coming year. What kind of scenarios should he prepare when forecasting and
budgeting?
a. best and worst case scenarios
b. most-likely and break-even case scenarios
c. break-even and worst case scenarios
d. most-likely and best case scenarios
44. Yvonne is planning a coffee shop. The cost of producing the coffee should be included in the ________ section of the
pro forma financial statement.
a. variable expense
b. amount of sales
c. cost of goods sold
d. operating expense
45. The greater a firm’s sales, the greater need for financing because of greater _____ requirements.
a. asset
b. employee
c. marketing
d. operational
46. As her accounts payable and accrued expenses rose along with her firm’s sales, Ariel noticed that ________ occurs.
a. spontaneous debt financing
b. trade credit financing
c. escalating debt
d. asset-based financing
47. Mark wants to make sure he does not run out of cash so he is preparing a monthly cash budget. After determining the
percentage of cash collections by month, he should
a. estimate the amount and timing of cash disbursements.
b. calculate cash flow from operations.
c. determine the end-of-month cash balance.
d. determine beginning-of-the-month cash balance.
48. Jill’s business has current assets of $50,000 and current liabilities of $25,000. Which statement is true about the
company’s current ratio?
a. The ratio is 50% and is acceptable for most industries.
b. The ratio is 2 and is acceptable for most industries.
c. The ratio is $25,000 and is not acceptable for most industries.
d. Current ratio can not be determined from the information given.
49. A simple listing of expected cash inflows and outflows provides the entrepreneur with a(n)
a. income statement.
b. cash budget.
c. pro forma balance sheet.
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d. net equity computation.
50. Zeno had a great idea but no cash so he asked the bank for a loan to finance the entire operation. It seems he forgot
that a bank would never provide _______ % of the firm’s financing.
a. 25
b. 50
c. 75
d. 100
51. Verlin wants to avoid a common mistake often made by new entrepreneurs. What advice would you give him?
a. Spend as little as possible.
b. Carry no inventory.
c. Make sure he has adequate financing.
d. Do without anything that is not absolutely essential.
52. Roland has already projected his company’s sales. The next step in forecasting his company’s income is to project:
a. operating expenses.
b. interest expense.
c. taxes.
d. cost of goods sold.
53. No single planning document is more important in the life of a company than the
a. income statement.
b. cash budget.
c. balance sheet.
d. corporate charter.
54. Even though Miriam projected an annual positive cash flow, she may run out of cash if:
a. customers use debit cards for their purchases.
b. her sales are seasonal.
c. sales exceed her projections.
d. she finds a less expensive supplier.
55. Tony operates a computer retail business. Based on the industry, how often should sales projections be for the
company in projecting sales?
a. monthly for Year 1; annual for Years 2 and 3
b. annual for Year 1; quarterly for Years 2 and 3
c. monthly for Year 1; quarterly for Years 2 and 3
d. annual for Year 1, monthly for Years 2 and 3
56. Projecting financials may present a challenge because in a startup business,
a. things seldom goes as planned.
b. things always go as planned.
c. expenses are too complex.
d. expenses are simple.
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57. Which source of information would be the most inclusive for an entrepreneur determining information to complete the
financial statements?
a. Attend trade shows
b. Contact the industry association
c. Examine RMA Annual Statement Studies
d. Talk to others in the industry
58. Willar expects his new business to support him and his family. This means his asset and financing requirements will:
a. increase.
b. decrease.
c. remain the same.
d. depend on the size of his family.
59. Jake has prepared pro forma financial statements for his landscaping business. At the minimum, how often should he
check results and make modifications as needed?
a. annually
b. quarterly
c. monthly
d. weekly
Match the term with its definition.
a. Cash budget
b. Current ratio
c. Line of credit
d. Net working capital
e. pro forma financial statements
f. percentage-of-sales technique
g. spontaneous debt financing
60. Statements that project a firm’s financial performance and condition, including projected profits, assets and financing
requirements, and cash flows
61. A short-term loan
62. Short-term debts, such as accounts payable, that automatically increase in proportion to a firm’s sales
63. A listing of cash receipts and cash disbursements, usually for a relatively short time period
64. A method of forecasting asset requirements
65. Current assets less current liabilities
66. Discuss factors that drive profits in the order that they appear on the income statement.
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67. Andrea is working on forecasting her financial statements for her consulting business. Discuss three suggestions for
Andrea to make her forecasting more effective.
68. What are sources of equity ownership in a business? Are these sources cash resources?
69. Natasha has been in business for a little over a year with her Sips and Munchies Coffee Shop where she sells an array
of coffees and pastries. She rents a building with a downtown location and manages the business and employees herself.
Discuss factors that drive the company’s profits.
70. Explain the percentage-of-sales technique. Will this technique differ by industry type?
71. Faye is developing a statement of cash flows for Yummy Gummies, a candy company that she owns. She has a net
profit of $15,000 and an increase in inventory of $7,500. She took out a line of credit with her bank to finance her
business and has decreased accounts receivable by $4,000. She has also invested in equipment for shaping her candy.
How will the above information be listed on the cash flow statement?
72. What are the categories that constitute working capital versus net working capital?
73. Briefly explain liquidity and its relationship to the current ratio.
74. Bowz 4 Kidz is a new business that Ellie has started out of her home utilizing an online business model. In developing
pro forma financials, what general questions do the statements need to answer and how will they be applied to Ellie’s
business?
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Answer Key
1. True
2. False
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26. a
27. a
28. d
29. c
30. c
31. c
32. d
33. b
34. a
35. b
36. a
37. d
38. c
39. b
40. b
41. d
42. b
43. b
44. c
45. a
46. a
47. a
48. b
49. b
50. d
51. c
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