Entrepreneurship, 3e (Bamford)
Chapter 6 Analyzing Cash Flow and Other Financial Information
1) In a business, the actual cash that flows into the firm minus the cash that goes out of it is known
as cash flow.
2) Cash flow in a business is the same as profit.
3) A firm obtains profits when its sales revenue is higher than its expenses.
4) It is possible to sell products and have no cash coming into a company.
5) When there is a doubling in orders for a new business’s products or services in a single month, it
leads to an immediate increase in the cash flowing into the business.
6) If a small firm is making a profit, then the firm must have a positive cash flow.
7) To prevent a cash crunch, a company must accurately forecast its actual cash flow.
8) For a proposed new business, a financial analysis focuses exclusively on its ability to generate
positive cash flow in the shortest time possible.
9) In a large firm, when there is a separation between managers and ownership, profits are a useful
measure to evaluate a manager’s performance.
10) In a small business, profits will demonstrate to the owner if the business is viable over the long
term.
11) A general rule of thumb when examining the initial equity needs of a new venture is to base it
on equity investments competitors have made into their businesses.
12) One of the fundamental realities of starting a new business is that it takes a period of time for
the new venture to ramp up sales and then to obtain cash from those sales.
13) A new small business must pay its vendors by using purchase orders.
14) Float is the difference between the money going out and the money coming in.
15) A budget details all the expenses incurred by a company within a specified period.
16) A cash flow statement is the same as a budget.
17) A budget does the exact opposite of a cash flow statement.
18) In order to determine a firm’s cash flow, the firm’s owner must calculate the entire cash flow
projection and multiply that by 150 percent to determine if the firm can meet its financial
obligations.
19) A deviation analysis is a review of the differences between the predicted and the actual
performance of cash flows.
20) Everything in cash flow in a small business is related to one activity: operations.
21) When used effectively, a cash flow statement provides a small business owner with a
well-respected and accepted means of displaying the ability of the company to meet its financial
obligations.
22) All the expenses of a firm need to be included in the cash flow statement.
23) Revenues should be separated into as few categories as possible to provide the maximum
insight to the owner.
24) A sensitivity analysis of cash flows should show the best-case and the worst-case scenarios.
25) A cash flow statement is used to describe all of the activities that generate cash and use cash
during the period being examined.
26) A cash flow statement should be tailored to the information needs of a new business.
27) In the context of business tools, a sensitivity analysis examines a new firm’s vulnerability to its
competitors.
28) In the context of financial activities, new firms typically have only investing activities and
financial activities.
29) In the context of financial tools, a commonly held view is that cash is king in an
entrepreneurial business.
30) Pro forma is a term that describes estimates of what a firm’s balance sheets and income
statements will look like in the future.
31) A pro forma is a summary of assets and liabilities.
32) In the context of financial tools, the values of fixed assets of new firms tend to be quite vague
and ballpark estimates of their values are acceptable when calculating balance sheets.
33) In the context of financial tools, a sensitivity analysis is a summary of the assets and liabilities
of an entrepreneurial business.
34) Fixed assets are assets that have a physical presence, such as buildings and office equipment.
35) Current liabilities are all those debts and liabilities that a firm must pay to its investors and
shareholders over a long period.
36) Long-term liabilities are debts and liabilities owed by a business that are ultimately due more
than a year from the current date.
37) Current liabilities that are owed by a company need to be paid in 18 months.
38) On a balance sheet, the assets minus the liabilities of a company reflected in the balance sheet
should total zero.
39) A cash flow statement measures cash flow on
A) an annual basis.
B) an accrual basis.
C) a cash basis.
D) a normalized basis.
40) In the context of cash flow analysis, ________ are a useful measure as a means to evaluate
performance when there is a separation between managers and owners.
A) contracts
B) fixed assets
C) profits
D) balance sheets
41) An investment in a firm by the owner is called ________.
A) equity
B) intervention
C) severance
D) variability
42) ________ is the difference between when the money goes out and when it comes in.
A) Accounts payable
B) Difference gap
C) Equity
D) Float
43) In the context of cash flow analysis, why is a period of rapid growth considered to be one of the
most dangerous times for an entrepreneurial business?
A) Because it can result in the business ordering and paying for additional orders while there is no
cash coming into the firm
B) Because it is difficult to accurately forecast the cash flow of the firm in this situation
C) Because a rapid slump in sales almost always comes after a rapid and unexpected growth
D) Because the employees of small firms are rarely equipped to cope with a rise in their workload
44) A ________ projects all the expenses incurred by a business over a specified period of time.
A) cash flow statement
B) float
C) financial map
D) budget
45) A cash flow statement is the exact opposite of a ________.
A) float
B) budget
C) cash plan
D) cash flow
46) Sarah is the founder of a small business. At the start of the business year, she makes a list of all
the possible expenses that the business might incur over the following year. She totals the expenses
and spreads out the expenses evenly across the following 12 months. In this context of cash flow
analysis, Sarah is determining the ________ for her business.
A) budget
B) cash flow statement
C) profit margins
D) equity
47) When the owner of a new firm is developing a ________, the individual should contact
vendors and suppliers to ask about payment terms.
A) cash flow projection
B) cash flow statement
C) margin profit analysis
D) gap deficiency analysis
48) A ________ is the analysis of the differences between the predicted and the actual
performance of a business.
A) deviation analysis
B) gap analysis
C) margin analysis
D) profit analysis
49) Mariana wants to analyze the potential viability of a new business idea. She does this by
researching the sales levels of existing businesses similar to her projected business. She analyzes
the information to predict sales levels that can be expected for her business at various stages of its
growth. In this scenario, Mariana develops a
A) pro forma income statement.
B) break-even analysis.
C) sensitivity analysis.
D) pro forma balance sheet.
50) For a new business owner, what are the benefits of using a deviation analysis?
A) It helps develop realistic forecasts.
B) It identifies the differences between actual performances and predicted performances.
C) It allows the maximum flexibility in making changes to a new business.
D) All of these