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Indicate whether the statement is true or false.
1. Operating income, or earnings before interest and taxes, reflects the firm’s profit after all operating expenses, excluding
financing costs, have been deducted from net sales.
a. True
b. False
2. Contribution profit margin is the portion of the sale of a product that contributes to covering the cash variable costs.
a. True
b. False
3. Gross earnings are net sales minus net income.
a. True
b. False
4. The statement of cash flows is a financial statement that shows how cash, as reflected in accrual accounting, flowed
into and out of a company during a specific period of operation.
a. True
b. False
5. Net income, or profit, is the bottom-line measure of what’s left from the firm’s net sales after operating expenses,
financing costs, and taxes have been deducted.
a. True
b. False
6. Economic value added (EVA) is a measure of a firm’s economic profit over a specified time period.
a. True
b. False
7. Making sales usually begins during the development stage in a venture’s life cycle.
a. True
b. False
8. During the development stage in a new venture’s life cycle, the income statement typically shows no sales and shows
expenses such as rent, utilities, and a subsistence salary for the entrepreneur.
a. True
b. False
9. The practice of recording economic activity when realized is known as accrual accounting.
a. True
b. False
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10. Startup financing (e.g., financing from business angels and venture capitalists) usually occurs during the development
stage in a new venture’s life cycle.
a. True
b. False
11. Cost of goods sold is the cost of materials, labor, and advertising incurred to produce the products that were sold.
a. True
b. False
12. The production and inventories schedules are two internal operating schedules needed to prepare a venture’s financial
statements.
a. True
b. False
13. Cash or other assets that are expected to be converted into cash in less than one year are known as current liabilities.
a. True
b. False
14. During the startup stage in a venture’s life cycle, financing may be obtained from business angels and venture
capitalists in addition to seed financing sources.
a. True
b. False
15. Seed financing (e.g., financing from the entrepreneur’s assets, family, and friends) usually occurs during the
development stage in a new venture’s life cycle.
a. True
b. False
16. Amounts owed to another for purchases made on credit which come due in less than one year are known as
receivables.
a. True
b. False
17. During the startup stage in a new venture’s life cycle, the income statement typically shows no sales and shows
expenses for the production and marketing of products or services.
a. True
b. False
18. EBDAT is “earnings before depreciation, assets, and taxes.“
a. True
b. False
19. Accrual accounting is the practice of recording economic activity when recognized rather than waiting until realized.
a. True
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20. Survival revenues is the amount of revenues just offsetting variable and cash fixed costs.
a. True
b. False
21. NOPAT equals net sales multiplied by one minus the tax rate.
a. True
b. False
22. When EBIT is zero, a firm’s net operating profit after taxes (NOPAT) is also zero because no taxes are payable.
a. True
b. False
23. Assets are financial and physical items controlled or owned by the business.
a. True
b. False
24. The income statement is a financial statement that reports the revenues generated and expenses incurred over an
accounting period.
a. True
b. False
25. Variable expenses are costs or expenses that vary directly with revenues.
a. True
b. False
26. Fixed expenses are costs that are expected to remain constant over a range of revenues for a specific time period.
a. True
b. False
27. On the balance sheet, total liabilities equals total assets minus owners’ equity.
a. True
b. False
28. Net cash burn occurs when the sum of cash flows from operations and investing is positive.
a. True
b. False
29. EBIT is “equity before interest and taxes.“
a. True
b. False
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30. The reduction in value of a fixed asset over its expected life intended to reflect the usage or wearing out of the asset is
called depreciation.
a. True
b. False
31. GAAP stands for “generally accepted accounting principles.”
a. True
b. False
32. GAAP stands for “general American accounting principles.”
a. True
b. False
33. Long-term, noncancelable leases whereby the owner receives payments that cover the cost of the equipment plus a
return on investment in the equipment are known as capital leases.
a. True
b. False
34. During the development stage in a new venture’s life cycle, the balance sheet reflects the acquisition of initial assets
and the obtaining of seed financing.
a. True
b. False
35. The acquisition of production assets (e.g., inventories and equipment to produce products and give credit to
customers) usually occurs during the development stage in a new venture’s life cycle.
a. True
b. False
36. Net cash build occurs when the sum of cash flows from operations and investing is positive.
a. True
b. False
37. Cash fixed costs equals survival revenues minus variable cost revenue ratio multiplied by survival revenues.
a. True
b. False
38. The balance sheet equation is: Total Assets = Total Liabilities + Net Income.
a. True
b. False
39. Variable expenses are costs that are expected to remain constant over a range of revenues for a specific time period.
a. True
b. False
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40. How quickly an asset can be converted into cash is called liability.
a. True
b. False
41. Economic value added (EVA) measures a firm’s market value added over a specified time period.
a. True
b. False
42. EBITDA is “earnings before interest, taxes, depreciation, and amortization.”
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
43. Which of the following is not a category on the statement of cash flows?
a. cash flow from operating activities
b. cash flow from equity activities
c. cash flow from investing activities
d. cash flow from financing activities
44. Acme Pest Control has sales of $13,500, cost of goods sold of $4,000, selling expenses of $3,500, depreciation of
$2,000, interest expense of $2,000, and a tax rate of 34%. What is Acme’s operating income?
a. $4,000
b. $2,000
c. $9,500
d. $6,000
45. Use the following information to compute the survival revenues breakeven: cash fixed costs = $400,000 and a variable
cost revenue ratio = 0.65.
a. $460,500
b. $615,385
c. $1,142,857
d. $2,000,334
46. Internal operating schedules include all of the following except:
a. cost of production schedules
b. inventories schedules
c. balance sheets
d. cost of goods sold schedules
47. Which of the following is not a characteristic of marketable securities?
a. short term
b. illiquid
c. high quality
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48. Which of the following is the computation for gross earnings?
a. Gross Earnings = Revenue – After-Tax Cost of Financial Capital Used
b. Gross Earnings = Net Income ÷ Sales
c. Gross Earnings = (Net Sales – Cost of Production) × Tax Rate
d. Gross Earnings = Net Sales – Cost of Production
49. In its first year, Joe’s Startup Company had revenues of $125,000 and cost of goods sold of $81,250, which was the
only variable cost. Depreciation was $20,000. Cash fixed costs were $100,000, consisting of $5,000 in financing costs,
$50,000 in administrative expenses, and $45,000 in marketing expenses. What is the survival breakeven revenues?
a. $342,857
b. $285,714
c. $271,429
d. $184,615
50. Use the following information to determine the cash fixed costs: administrative expenses = $200,000; marketing
expenses = $180,000; depreciation expenses = $100,000; and interest expenses = $20,000.
a. $380,000
b. $400,000
c. $480,000
d. $500,000
51. Which of the following is the equation for EBDAT?
a. EBDAT = Revenues – Variable Costs – Cash Fixed Costs
b. EBDAT = Revenues + Variable Costs + Cash Fixed Costs
c. EBDAT = Revenues – Variable Costs – Total Fixed Costs
d. EBDAT = Revenues + Variable Costs – Cash Fixed Costs
52. A financial statement that provides a snapshot of a business’s financial position as of a specific date is called the:
a. income statement
b. balance sheet
c. statement of retained earnings
d. statement of cash flows
53. Acme Pest Control has sales of $13,500, cost of goods sold of $4,000, selling expenses of $3,500, depreciation of
$2,000, interest expense of $2,000, and a tax rate of 34%. What is Acme’s taxable income and tax expense?
a. $6,000; $2,040
b. $2,000; $1,320
c. $4,000; $1,360
d. $2,000; $680
54. What is the survival revenues breakeven based on the following information: administrative expenses = $200,000;
marketing expenses = $180,000; depreciation expenses = $100,000; interest expenses = $20,000; and a variable cost
revenue ratio = 0.50?
a. $600,000
b. $800,000
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c. $1,000,000
d. $1,200,000
55. A lease that provides maintenance in addition to financing and is also usually cancelable is called a(n):
a. capital lease
b. operating lease
c. asset lease
d. equity lease
56. A financial statement that reports the revenues generated and expenses incurred over an accounting period is called
the:
a. income statement
b. balance sheet
c. statement of retained earnings
d. statement of cash flows
Multiple-Choice Questions for Appendix A
57. Determine the total operating fixed costs (TOFC) based on the following: administrative expenses = $200,000;
marketing expenses = $180,000; depreciation expenses = $100,000; and interest expenses = $20,000.
a. $380,000
b. $400,000
c. $480,000
d. $500,000
58. Find the contribution profit margin based on the following information: cash fixed costs = $60,000; variable costs =
$70,000; and sales = $100,000.
a. 70%
b. 60%
c. 30%
d. 40%
Multiple-Choice Questions for Appendix A
59. Find the NOPAT breakeven revenues (NR) given the following information: total operating fixed costs = $75,000;
variable costs = $150,000; and sales = $200,000.
a. $100,000
b. $240,000
c. $300,000
d. $400,000
60. Expenses or costs that vary directly with revenues are said to be:
a. fixed expenses
b. semifixed expenses
c. semivariable expenses
d. variable expenses
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61. Which of the following is not considered to be an internal operating schedule?
a. income statement
b. cost of production schedule
c. cost of goods sold schedule
d. inventories schedule
62. A financial statement that shows how cash, as reflected in accrual accounting, flows into and out of a company during
a specific period of operation is called the:
a. income statement
b. balance sheet
c. statement of retained earnings
d. statement of cash flows
Multiple-Choice Questions for Appendix A
63. Which of the following is the correct formula for computing NOPAT?
a. NOPAT = Revenues × (1 + Tax Rate)
b. NOPAT = Revenues × (1 – Tax Rate)
c. NOPAT = EBITDA × (1 – Tax Rate)
d. NOPAT = EBIT × (1 – Tax Rate)
64. Net cash burn occurs when the sum of which of the following items is negative?
a. cash flows from operations and financing
b. cash flows from investing and financing
c. cash flows from operations and investing
d. cash flows from net income and depreciation
65. The balance sheet equation states that total assets equals:
a. total liabilities plus depreciation
b. total liabilities plus owners’ equity
c. owners’ equity plus net income
d. owners’ equity plus current liabilities
66. Which of the following is not a characteristic of inventories?
a. raw materials
b. finished products
c. goods sold but not yet shipped
d. work-in-process
67. In breakeven analysis, solving for when EBITDA is equal to zero gives breakeven in terms of:
a. economic revenues
b. variable costs
c. survival revenues
d. fixed costs
68. Cash includes all of the following except:
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b. currency
c. checking accounts
d. certificates of deposit
Multiple-Choice Questions for Appendix A
69. Last year, a firm had sales of $200,000. Its cost of goods sold was $75,000; administrative expenses were $25,000;
marketing expenses were $25,000; depreciation expense was $10,000; and interest expense was $15,000. If the tax rate is
30%, what was the firm’s NOPAT last year?
a. $19,500
b. $35,000
c. $45,500
d. $52,500
70. Retained earnings is:
a. a corporate asset
b. part of owners’ equity
c. a corporate asset minus current liabilities
d. long-term debts plus current assets
71. Your venture has total assets of $690, net fixed assets of $500, long term debt of $80, and stockholders’ equity of
$400. What is the amount of your venture’s current liabilities?
a. –$120
b. $100
c. $210
d. $290
72. A firm with constant variable costs has a survival revenues breakeven of $375,000. This year, it had $250,000 in sales,
$100,000 of which was a fixed cost. What are the firm’s cash fixed costs?
a. $150,000
b. $225,000
c. $625,000
d. $937,500
Multiple-Choice Questions for Appendix A
73. Which of the following shows the calculation for economic value added (EVA)?
a. EVA = NOPAT + After-Tax Dollar Cost of Financial Capital Used
b. EVA = ROE – Percentage Cost of Financial Capital
c. EVA = NOPAT – After-Tax Dollar Cost of Financial Capital Used
d. EVA = ROE + Percentage Cost of Financial Capital
74. Which of the following is a use of cash?
a. a decrease in inventory
b. an increase in accrued liabilities
c. the sale of an asset for a gain
d. a decrease in the amount owed on a bond
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75. The practice of recording economic activity when it is recognized rather than waiting until it is realized is called:
a. GAAP accounting
b. accrual accounting
c. forward-looking accounting
d. management accounting
76. Which of the following is a source of cash?
a. an increase in accounts receivable
b. the acquisition of land
c. an increase in the amount owed on a note payable
d. the repurchase of outstanding shares of stock
77. Find the survival revenues (SR), also known as the EBDAT breakeven, based on the following information: cash fixed
costs = $60,000; variable costs = $70,000; and sales = $100,000.
a. $100,000
b. $116,667
c. $200,000
d. $300,000
Multiple-Choice Questions for Appendix A
78. How is a firm’s net operating profit after taxes (NOPAT) calculated?
a. NOPAT = Net Profit × EBIT
b. NOPAT = EBIT × (1 – Tax Rate)
c. NOPAT = EBT – Interest Paid
d. NOPAT = EBIT × Tax Rate
79. Find the NOPAT given the following information: sales = $520,000; earnings before interest = $100,000; interest =
$20,000; and the tax rate = 30%.
a. $70,000
b. $56,000
c. $30,000
d. $24,000
80. Which of the following is depreciated?
a. inventory
b. machinery
c. land
d. cash
81. Which of the following is not a likely source of financing available during a venture’s startup stage?
a. the entrepreneur’s assets, family, and friends
b. business angels
c. bank loans
d. venture capitalists
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82. Last year, Beth’s Baked Goods exactly broke even with cash fixed costs of $63,000. If its breakeven survival revenues
level was $94,000, what was its variable cost revenue ratio (VCRR)?
a. 0.27
b. 0.30
c. 0.33
d. 0.67
83. Acme Pest Control has sales of $13,500, cost of goods sold of $4,000, selling expenses of $3,500, depreciation of
$2,000, interest expense of $2,000, and a tax rate of 34%. What is Acme’s net income?
a. $2,920
b. $680
c. $2,000
d. $1,320
84. Which of the following is not considered to be a current asset?
a. cash
b. receivables
c. inventories
d. fixed assets
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Answer Key
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