Entrepreneurship: Successfully Launching New Ventures, 5e, Global Edition
(Barringer/Ireland)
Chapter 8 Assessing a New Venture’s Financial Strength and Viability
1) GymFlow, the company profiled in the opening feature in Chapter 8, created a mobile app that
shows how busy a gym is at any given point in time. According to the case, in regard to financial
management, the cofounders of GymFlow found that ________ was one of their most difficult
challenges.
A) managing accounts payable
B) managing accounts receivable
C) projecting future income
D) projecting future expenses
E) completing financial statements
2) Financial management deals with two things-managing a company’s finances and ________.
A) operations management
B) inventory control
C) raising money
D) production management
E) supply chain management
3) Financial management deals with raising money and managing a company’s finances in a way
that achieves the highest rate of return.
4) Which of the following was not identified as one of the four main financial objectives of a
firm?
A) Stability
B) Efficiency
C) Timeliness
D) Liquidity
E) Profitability
5) The four main financial objectives of a firm are _________.
A) efficiency, effectiveness, strength, and flexibility
B) power, success, efficiency, and effectiveness
C) control, effectiveness, liquidity, and power
D) success, strength, liquidity, and profitability
E) profitability, liquidity, efficiency, and stability
6) Match the financial objective with its correct definition.
A) stability — the overall health of the financial structure of the firm, particularly as it relates to
its debt-to-equity ratio
B) profitability — how productively a firm utilizes its assets
C) liquidity — a company’s ability to make a profit
D) efficiency — a company’s ability to meet its short-term obligations
E) profitability — the overall health of the financial structure of the firm, particularly as it relates
to its debt-to-equity ratio
7) ________ is a company’s ability to meet its short-term financial obligations.
A) Liquidity
B) Profitability
C) Effectiveness
D) Stability
E) Efficiency
8) A company’s ability to productively utilize its assets relative to its revenue and its profits is
referred to as ________.
A) efficiency
B) effectiveness
C) stability
D) liquidity
E) profitability
9) Money owed to a company by its customers is referred to as ________.
A) accounts obtainable
B) accounts payable
C) accounts receivable
D) inventory
E) accounts collectable
10) Susan Howard owns a seafood restaurant in Naples, Florida. She is currently owed $21,000
by a corporation that she catered a series of meetings for and $3,000 on an overdue account.
Amanda has $24,000 in ________.
A) accounts receivable
B) inventory
C) accounts collectable
D) accounts obtainable
E) accounts payable
11) A company’s merchandise, raw materials, and products waiting to be sold are called its
________.
A) set aside
B) accumulation
C) reserve
D) inventory
E) stock
12) Peggy Owens owns a store that sells exercise equipment. Each January 1, she makes a very
accurate account of all her merchandise and products waiting to be sold that are in her store. On
January 1, Peggy is taking account of her store’s ________.
A) long-term assets
B) owners’ equity
C) accounts payable
D) accounts receivable
E) inventory
13) Southwest Airlines uses its assets very productively. Its turnaround time, or the time that its
airplanes sit on the ground while they are being loaded and unloaded, is the lowest in the airline
industry. In terms of the primary financial objectives of a firm, this attribute is a measure of
Southwest’s ________.
A) efficiency
B) effectiveness
C) stability
D) liquidity
E) profitability
14) The strength and vigor of a firm’s overall financial posture is referred to as ________.
A) liquidity
B) effectiveness
C) stability
D) profitability
E) efficiency
15) Efficiency is the ability to earn a profit.
16) Stability is a company’s ability to meet its short-term financial obligations.
17) A company’s accounts receivable is money owed to it by its customers.
18) If a firm’s debt-to-equity ratio gets too high, it may have trouble meeting its obligations and
securing the level of financing needed to fuel its growth.
19) A financial statement is a(n) ________.
A) set of ratios which depict relationships between a firm’s financial items
B) estimate of a firm’s future income and expenses
C) hybrid statement of cash flows
D) itemized forecast of a company’s income, expenses, and capital needs
E) written report that quantitatively describes a firm’s financial health
20) ________ are an estimate of a firm’s future income and expenses, based on its past
performance, its current circumstances, and its future plans.
A) Calculation statements
B) Forecasts
C) Statements of cash flow
D) Financial statements
E) Prediction statements
21) ________ are itemized forecasts of a company’s income, expenses, and capital needs and are
also an important tool for financial planning and control.
A) Profitability statements
B) Financial statements
C) Owners’ equity statements
D) Budgets
E) Statements of cash flows
22) Match the financial term with its proper definition.
A) Forecasts — depict relationships between items on a firm’s financial statements
B) Forecasts — written reports that quantitatively describe a firm’s financial health
C) Budget — itemized forecasts of a company’s income, expenses, and capital needs
D) Financial ratios — written report that quantitatively describes a firm’s financial health
E) Financial statements — an estimate of a firm’s future income and expenses
23) In regard to budgets, which of the following statements is not true?
A) Budgets include an itemized forecast of a company’s expenses.
B) Budgets are a poor tool for financial control.
C) Budgets are an important tool for financial planning.
D) Budgets include an itemized forecast of a company’s capital needs.
E) Budgets include an itemized forecast of a company’s income.
24) The Partnering for Success feature in Chapter 8 focuses on buying groups, and recommends
that small businesses seek out buying groups to participate in. What is a “buying group” in the
context of the feature?
A) A partnership that bands small businesses together to attain volume discounts on common
products and services that they buy
B) A partnership that bands small businesses together to collectively make the commitment to
“buy local” at every available opportunity
C) A partnership that bands small businesses together to get the best prices possible from foreign
importers and manufacturers
D) A partnership that bands small businesses together to get the best possible terms from finance
companies
E) A partnership that bands small businesses together to get the best possible rates on property
and liability insurance
25) ________ depict relationships between items on a firm’s financial statements.
A) Financial proportions
B) Fiscal relations
C) Fiscal projections
D) Monetary balances
E) Financial ratios
26) Budgets are itemized forecasts of a company’s income, expenses, and capital needs and are
also an important tool for financial planning and control.
27) ________ financial statements reflect past performance and are usually prepared on a
quarterly and annual basis.
A) Chronological
B) Ad-hoc
C) Historical
D) Concurrent
E) Pro forma
28) ________ financial statements are projections for future periods based on forecasts and are
typically completed for two to three years into the future.
A) Chronological
B) Pro forma
C) Ad-hoc
D) Concurrent
E) Historical
29) Which of the following statements about pro forma financial statements is incorrect?
A) Pro forma financial statements are projections for future periods based on forecasts.
B) Pro forma financial statements are typically completed for two to three years into the future.
C) Pro forma financial statements are required by the SEC.
D) Most companies consider their pro forma financial statements to be confidential and reveal
them to outsiders only on a “need to know basis.”
E) Pro forma financial statements are strictly planning tools.
30) Historical financial statements reflect past performance and are usually prepared on a
quarterly and annual basis.
31) Pro forma financial statements are projections for future periods based on forecasts and are
typically completed for 2 to 3 years into the future.
32) Describe the difference between historical and pro forma financial statements.
33) Which of the following selections correctly matches the financial statement with its
description?
A) Income statement — tells how much a firm is making or losing
B) Income statement — depicts the structure of a firm’s assets and liabilities
C) Balance sheet — shows where a firm’s cash is coming from
D) Balance sheet — tells how much a firm is making or losing
E) Statement of cash flows — depicts the structure of a firm’s assets and liabilities
34) A firm’s ________ reflects the results of its operations over a specified period and shows
whether it is making a profit or is experiencing a loss.
A) statement of cash flows
B) income statement
C) forecast
D) balance sheet
E) operating budget
35) Which financial statement records all of a firm’s revenues and expenses for a given period
and shows whether the firm is making a profit or experiencing a loss?
A) Balance sheet
B) Owner’s equity statement
C) Statement of cash flows
D) Forecast
E) Income statement
36) On a firm’s income statement, net sales consists of ________.
A) operating expenses minus cost of sales
B) total sales minus allowances for returned goods and discounts
C) cost of sales minus allowances for returned goods and discounts
D) cost of sales minus operating expenses
E) total sales minus operating expenses
37) According to the textbook, the three numbers that receive the most attention when evaluating
an income statement are ________.
A) depreciation, interest income, and income tax expense
B) cost of sales, gross profit, and operating expenses
C) net sales, cost of sales, and operating expenses
D) gross profit, net sales, and incomes tax expense
E) gross profit, other income, and net income
38) A firm’s profit margin, or return on sales, is computed by dividing ________.
A) net income by net sales
B) gross profit by net sales
C) net income by gross profit
D) net income by cost of sales
E) operating income by gross profit
39) A(n) ________ is a snapshot of a company’s assets, liabilities, and owners’ equity at a
specific point in time.
A) income statement
B) statement of cash flows
C) effectiveness statement
D) balance sheet
E) efficiency statement
40) Which of the following statement is incorrect regarding how balance sheets are prepared?
A) The left-hand side of a balance sheet shows a firm’s assets.
B) The assets on a balance sheet are shown in order of liquidity.
C) Assets are recorded at fair market value rather than cost.
D) The right-hand side of a balance sheet shows a firm’s liabilities and its owners’ equity.
E) Intellectual property receives value in some cases and in some cases it does not.
41) Real estate, buildings, equipment and furniture are classified as ________ assets on a
company’s balance sheet.
A) intermediate term
B) fixed
C) other
D) permanent
E) current
42) The Savvy Entrepreneurial Firm feature in Chapter 8 focuses on a scenario involving the
selection of a new CEO for New Venture Fitness Drinks. The lesson learned from the feature
was ________.
A) compare a firm’s financial ratios against its primary competitors and industry norms to fairly
assess how well a firm is performing financially
B) income statements are more effective in assessing how well a firm is performing financially
than are balance sheets and statements of cash flow
C) the most powerful instrument for understanding how well a firm is performing financially is
the statement of cash flows
D) ratio analysis is ineffective
E) look at multiple years of an income statement rather than a single year to fairly assess how
well a firm is performing financially
43) Cash plus items that are readily convertible to cash, such as accounts receivable, marketable
securities, and inventories are classified as ________ assets on a firm’s balance sheet.
A) other
B) intermediate term
C) temporary
D) current
E) fixed
44) Which of the following is an example of a long-term liability?
A) Accounts payable
B) Real estate mortgage
C) Accrued expenses
D) Current portion of real estate mortgage
E) Owners’ equity
45) When evaluating a balance sheet, the two primary questions are ________.
A) whether a firm has sufficient short-term assets to cover its short-term debts and whether it is
profitable
B) whether a firm is profitable and whether a firm is financially sound
C) whether a firm’s cost of sales is going up and whether it is generating excess cash that could
be used to pay down debt or pay dividends
D) whether a firm has sufficient short-term assets to cover its short-term debts and whether it is
financially sound
E) whether a firm is profitable and whether it is generating excess cash that could be used to pay
down debt or pay dividends
46) A firm’s working capital is its ________.
A) inventory and accounts receivable minus its current liabilities
B) current assets minus its current liabilities
C) total assets minus its total liabilities
D) cash and cash equivalents minus its current liabilities
E) accounts receivable minus its total accounts payable
47) A firm’s ________ is its current assets divided by its current debt.
A) working share
B) present share
C) working capital
D) owners’ equity
E) current ratio
48) Which of the financial statements used by businesses to keep track of their financial affairs is
the most similar to an ordinary person’s end-of-the month bank statement?
A) Income statement
B) Balance sheet
C) Statement of cash flows
D) Statement of ratio analysis
E) Statement of owners’ equity
49) The statement of cash flows is divided into three separate activities ________.
A) profitability activities, stability activities, and investing activities
B) stability activities, earning activities, and financing activities
C) operating activities, capital activities, and liquidity activities
D) spending activities, earning activities, and capital activities
E) operating activities, investing activities, and financing activities
50) In the context of a firm’s statement of cash flows, ________ activities include the purchase,
sale, or investment in fixed assets (e.g., real estate, equipment, and buildings).
A) operating
B) investing
C) capital
D) financing
E) liquidity
51) In the context of a firm’s statement of cash flows, ________ activities include cash raised
during the period by borrowing money or selling stock and/or cash used during the period by
paying dividends, buying back outstanding stock, or buying back outstanding bonds.
A) investing
B) financing
C) operating
D) liquidity
E) capital
52) According to the textbook, the most practical way to interpret or make sense of a firm’s
historical financial statements is through ________.
A) profit analysis
B) regression analysis
C) the preparation of pro forma financial statements
D) ratio analysis
E) percentage analysis
53) The income statement records all the revenues and expenses for a given period and shows
whether the firm is making a profit or is experiencing a loss.
54) The balance sheet reflects the results of the operations of a firm over a specified period of
time.
55) A firm’s profit margin, or return on sales, is computed by dividing net income by net sales.
56) The major categories of assets listed on a balance sheet include current, fixed, and other
assets.
57) A statement of cash flows is a snapshot of a company’s assets, liabilities, and owners’ equity
at a specific point in time.
58) A firm’s working capital is defined as its fixed assets minus its long-term liabilities.
59) The statement of cash flows summarizes the changes in a firm’s cash position for a specified
period of time and details why the change occurred.
60) In the context of a firm’s statement of cash flows, operating activities include the purchase,
sale, or investment in fixed assets (e.g., real estate, equipment, and buildings).
61) Describe the purpose of the income statement, the balance sheet, and the statement of cash
flows.
62) What is ratio analysis? Why is it important?
63) Shawn Jones was reading the business plan of New Venture Fitness Drinks, and noticed that
prior to its financial forecasts, New Venture Fitness Drinks placed an explanation of the sources
of the numbers for the forecast and the assumptions used to generate them. This explanation is
called a(n) ________.
A) forecast sheet
B) forecast hypothesis
C) estimate statement
D) assumption sheet
E) hypothesis sheet
64) In the context of computing the cost of sales, the common way to do this is to use the
percent-of-sales method, which is a method for expressing each expense item as a percentage of
________.
A) net sales
B) gross profit
C) net income
D) operating income
E) cost of sales
65) If a firm determines it can use the percentage-of-sales method and it follows the procedure
described in the textbook, then the net result is that each expense item on its income statement
(with the exception of those items that can be individually forecast) will grow at the same rate as
sales. This approach is called the ________.
A) continuous percentage method of forecasting
B) stable fraction method of forecasting
C) regular proportion method of forecasting
D) constant ratio method of forecasting
E) steady percentage method of forecasting
66) The break-even point for a new restaurant or product is the point where the total revenue
received equals total costs associated with the output of the restaurant or the sale of the product.
67) What are forecasts? What role do they play in the preparation of pro forma financial
statements?
68) A firm’s pro forma financial statements are similar to its historical financial statements
except that they ________.
A) do not include the income statement
B) are required by the SEC in all cases
C) look back rather than forward
D) look forward rather than back
E) do not include the statement of cash flows
69) The What Went Wrong? feature for Chapter 8 focuses on Wise Acre Frozen Treats, a
company that made organic popsicles from unrefined sweeteners. According to the feature, Wise
Acre Frozen Treats failed largely because it ________.
A) grew too quickly, which overwhelmed its cash flow
B) was not careful enough in preparing its pro forma financial statements
C) was not efficient in the way it utilized its assets
D) spent too much money on marketing
E) did not compare its financial ratios to industry peers
70) The pro forma ________ provides a firm a sense of how its activities will affect its ability to
meet its short-term liabilities and how its finances will evolve over time.
A) balance sheet
B) statement of cash flows
C) income statement
D) expense statement
E) statement of owners’ equity
71) According to the textbook, the most important function of the pro forma statement of cash
flows is to project whether the firm will have sufficient ________.
A) income to meet its payroll on a weekly or monthly basis
B) income to exceed industry norms
C) cash to meet its needs
D) inventory to meet its sales and production forecasts
E) short-term assets to cover its short-term liabilities
72) The pro forma balance sheet provides a firm a sense of how its activities will affect its ability
to meet its short-term liabilities and how its finances will evolve over time.
73) The pro forma income statement shows the projected flow of cash into and out of the
company during a specified period.
74) The same financial ratios used to evaluate a firm’s historical financial statement should be
used to evaluate the pro forma financial statements.
75) Describe each of the four primary financial objectives of firms.