Entrepreneurship and Effective Small Business Management, 11e, Global Edition
(Scarborough)
Chapter 14 Creating a Solid Financial Plan
1) A pro forma financial statement means:
A) looking at the current financial statement.
B) looking at the past financial statement.
C) preparing the current financial statement.
D) preparing a projected financial statement.
2) The ________ shows what assets the business owns and what claims creditors and owners
have against those assets.
A) balance sheet
B) income statement
C) sources and uses of funds statement
D) pro forma
Answer: A
Page Ref: 483
Topic: Basic Financial Reports: The Balance Sheet
AACSB: Analytic Skills
3) The ________ is built on the basic accounting equation: Assets = Liabilities + Owner’s
Equity.
A) income statement
B) sources and uses of funds statement
C) balance sheet
D) cash budget
4) The balance sheet is usually prepared on the ________ day of the month.
A) first
B) last
C) 15th
D) None of the above
5) John is reviewing the company’s costs and expenses against revenue for the last year. John is
reviewing the firm’s:
A) balance sheet.
B) income statement.
C) sources and uses of funds statement.
D) pro forma.
6) The first section of a balance sheet lists:
A) current and intangible assets.
B) current liabilities.
C) claims creditors have against the firm’s assets payable within one year.
D) the owner’s equity in terms of initial capital invested and retained earnings.
7) ________ are those items of value the business owns; ________ are those things the business
owes.
A) Assets; liabilities
B) Liabilities; assets
C) Ratios; equities
D) Equities; liabilities
8) Bill is studying those expenses that contribute directly to manufacturing and distribution of
goods. He’s reviewing:
A) cost of goods.
B) general expenses.
C) operating expenses.
D) current liabilities.
9) The profit and loss statement is also referred as the ________.
A) balance sheet
B) statement of cash flows
C) revenue statement
D) income statement
10) Dividing gross profit by net sales produces:
A) operating expenses.
B) gross profit margin.
C) long-term profitability.
D) gross profit flow.
11) The statement of cash flow:
A) compares costs and expenses against a firm’s sales.
B) is built on the basic accounting equation: Assets = Liabilities + Capital.
C) shows what assets the business owns and what claims creditors and owners have against those
assets.
D) shows changes in working capital by listing sources and uses of funds.
12) The ________ shows the change in the firm’s working capital since the beginning of the
year.
A) balance sheet
B) income statement
C) pro forma
D) statement of cash flows
13) Depreciation is:
A) the difference between the total sources available to the owner and the total uses of those
assets.
B) listed as a source of funds because it is a noncash expense, deducted as a cost of doing
business.
C) the owner’s total investment at the company’s inception plus retained earnings.
D) creditors’ total claims against the firm’s assets.
14) Projecting financial statements helps the small business owner to:
A) track and monitor current expenses.
B) transform business goals into reality.
C) calculate his/her return on the amount invested in the company.
D) measure liquidity of the firm.
15) One of the most important tasks facing an entrepreneur is:
A) establishing a large enough reserve of capital.
B) earning enough the first year to provide an adequate return on investment.
C) the deferment of taxes.
D) determining the funds needed for a company start-up.
16) When creating the pro forma income statement, the owner needs to translate the target profit
into a net sales figure. To do this, the owner needs:
A) to operate the business for one to two years to build a record.
B) published statistics for his/her specific type of business.
C) to divide actual net sales by the net profit projected.
D) a sales forecast, the amount of retained earnings, and current depreciation on assets.
17) The first step in creating the pro forma income statement is to:
A) create a sales forecast.
B) determine a reasonable salary and return on investment in the company.
C) find published figures on the specific type of business in order to forecast sales.
D) figure out operating costs and make a realistic sales estimate.
18) ________ are those things that a business owns which have value.
A) Assets
B) Liabilities
C) Owners’ equities
D) Liquidities
19) ________ are those things that a business owes; they represent creditors’ claims against the
business.
A) Assets
B) Liabilities
C) Owners’ equities
D) Liquidities
20) A technique that allows the small business owner to perform financial analysis by
understanding the relationship between two accounting elements is called:
A) creating the pro forma.
B) budgeting.
C) break-even analysis.
D) ratio analysis.
21) What are the options for repairing a poor gross profit margin?
A) Raise prices
B) Cut manufacturing or purchasing costs
C) Refuse orders with low profit margins
D) All of the above
22) ________ ratios tell whether or not the small company will be able to meet its maturing
obligations as they come due.
A) Leverage
B) Profitability
C) Liquidity
D) Operating
23) The ________ ratio is a measure of the small company’s ability to pay current debts from
current assets.
A) debt-to-net worth
B) current
C) quick
D) debt-to-assets
24) The ________ ratio is the liquidity ratio most commonly used as a measure of short-term
solvency.
A) working capital ratio
B) quick
C) debt-to-net worth
D) turnover
25) As a general rule, financial analysts suggest that a small business maintain a(n) ________
ratio of at least 2:1.
A) debt-to-net worth
B) current
C) inventory turnover
D) quick
26) When a company is forced into liquidation, owners are most likely to incur a loss when
selling:
A) accounts receivable.
B) inventory.
C) marketable securities.
D) real estate.
27) The ________ ratio is a conservative measure of a firm’s liquidity and shows the extent to
which a firm’s most liquid assets cover its current liabilities.
A) current
B) quick
C) turnover
D) net profit
28) ________ ratios measure the financing supplied by business owners and that supplied by the
firm’s creditors.
A) Leverage
B) Profitability
C) Liquidity
D) Operating
29) Joe is examining the percentage of total funds in a business provided by its creditors. He is
working with the ________ ratio.
A) current
B) quick
C) debt
D) turnover
30) A high debt ratio:
A) means that creditors provide a large percentage of the company’s total financing.
B) gives a small business more borrowing capacity.
C) decreases the chances that creditors will lose money if the business is liquidated.
D) decreases the creditor’s interest in the business.
31) ________ is one indication that a small business may be undercapitalized.
A) A current ratio below 1:1
B) A quick ratio above 2:1
C) A debt-to-net worth ratio above 1:1
D) A net-sales-to-working capital ratio equal to 3:1
32) If Mary wants to compare what her small business owes to what it owns in order to assess
her ability to meet obligations in case of liquidation, she needs to look at the ________ ratio.
A) quick
B) total debt turnover
C) asset turnover
D) debt-to-net worth
33) The higher the ________ ratio, the lower the degree of protection afforded creditors and the
closer creditors’ interest approaches the owner’s interest.
A) debt-to-net worth
B) quick
C) asset turnover
D) current
34) The ________ ratio is a measure of a company’s ability to make the interest payments on its
debt.
A) debt-to-net worth
B) times-interest-earned
C) net sales-to-working capital
D) net profit-to-equity
35) Which of the following would be a sign that a company is overextended in its debt?
A) A low debt ratio compared to the industry average
B) A debt-to-net worth ratio of 0.12 to 1
C) A times-interest-earned ratio that is far below the industry average
D) A high inventory turnover ratio
36) ________ ratios help a business owner evaluate the company’s performance and indicate
how effectively the business employs its resources.
A) Liquidity
B) Leverage
C) Operating
D) Profitability
37) An above-average inventory turnover indicates that the business:
A) has an illiquid inventory.
B) is healthy, with a salable inventory.
C) needs to review its pricing policies.
D) has below-average performance and is facing bankruptcy if not corrected quickly.
38) The ________ ratio measures the small company’s ability to generate sales in relation to its
assets.
A) net sales-to-working capital
B) net sales-to-total assets
C) average collection period
D) average inventory turnover
39) ________ ratios indicate how efficiently the small firm is being managed.
A) Liquidity
B) Profitability
C) Leverage
D) Operating
40) The ________ ratio measures the owner’s rate of return on the investment in the business.
A) net profit-to-equity
B) net profit on sales
C) quick profit
D) net sales-to-working capital
41) ________ publishes key business ratios for over 800 business categories.
A) Robert Morris Associates
B) Boston Consulting Group
C) Bank of America
D) Dun and Bradstreet, Inc.
42) ________ publishes Annual Statement Studies, showing ratios and other financial data for
over 750 different industrial, retail, and wholesale categories.
A) Robert Morris Associates
B) Boston Consulting Group
C) Bank of America
D) Dun and Bradstreet, Inc.
43) The break-even point occurs where:
A) the firm’s fixed expenses equal its variable expenses.
B) the creditors’ interest equals the owner’s interest in the business.
C) total revenue equals total expenses.
D) assets and liabilities are equal on the balance sheet.
44) Which of the following expenses would likely be classified “semi-variable”?
A) Rent
B) Electric utilities
C) Wages
D) Sales commissions
45) Which of the following expenses would be considered “fixed”?
A) Wages
B) Raw materials
C) Utilities
D) Rent
46) The rule for the balance sheet is:
A) Assets = Liabilities + Owner’s Equity
B) Assets – Liabilities = Owner’s Equity
C) Liabilities = Assets – Owner’s Equity
D) All of the above
47) In the balance sheet, the current assets consist of:
A) accounts payable.
B) inventory.
C) revenue.
D) All of the above
48) In the balance sheet, intangible assets include items such as:
A) goodwill.
B) copyrights and patents.
C) Both A and B
D) accounts receivable.
49) ________ is (are) the value of the owner’s investment in the business.
A) Assets
B) Liabilities
C) Owner’s Equity
D) Profit
50) Investors mainly want to see that entrepreneurs:
A) have inflated the projections.
B) have realistic expectations about income and expenses.
C) will make profit immediately.
D) All of the above
51) The most meaningful basis for comparing operating ratios is:
A) other companies of similar size in the same industry.
B) companies within the neighborhood.
C) major corporations in the same industry.
D) all publicly traded companies.
52) A ratio greater than ________ days would indicate poor collection procedures.
A) 29
B) 40
C) 60
D) 90
53) When comparing a company’s ratios to industry standards, entrepreneurs should ask
questions such as:
A) Are the differences significant?
B) Do I need to conduct ratio analysis?
C) How do these ratios benefit me?
D) All of the above
54) Evaluates the firm’s overall performance and show how effectively it is putting its resources
to work. This is called:
A) operating ratios.
B) debt to equity ratio.
C) accounts receivable turnover ratio.
D) All of the above
55) ________ measure how efficiently the firm is operating and offer information about its
bottom line.
A) Operating ratios
B) Profitability ratios
C) Balance Sheet ratios
D) All of the above
56) ________ measure the financing supplied by the company’s owners against that supplied by
its creditors and serve as a gauge of the depth of a company’s debt.
A) Operating ratios
B) Profitability ratios
C) Leverage ratios
D) Liquidity ratios
57) ________ tell whether or not the small business will be able to meet its maturing obligations
as they come due.
A) Operating ratios
B) Profitability ratios
C) Leverage ratios
D) Liquidity ratios
58) In reviewing the company’s balance sheet, Andy noticed that the total asset is stated as
$5,500,000 and the total liability is $3,250,000. There is no paid-in capital or value for common
stock. What are the company’s retained earnings?
A) Can’t determine with the information given
B) $8,750,000
C) $2,250,000
D) There are no retained earnings
59) When comparing a company’s ratios to industry standards, entrepreneurs should ask the
which of the following questions:
A) Is there a significant difference in my company’s ratio and the industry average?
B) Is the difference good or bad?
C) What are the possible causes of this difference? What is the most likely cause?
D) All of the above
60) What is the difference between price per unit and variable cost per unit?
A) Contribution margin
B) Contribution margin ratio
C) Net operating income
D) Contribution cost