Entrepreneurship, 3e (Bamford)
Chapter 7 Financing and Accounting
1) Extra expenses, not counted on in the planning stage of a new business, can quickly eat up cash
intended to grow the business.
2) Funding for a small business starts with the founders and their personal resources.
3) Dan asks Mike to invest in his sporting goods store. Mike invests $10,000 in return for 25
percent of the ownership of the business. This is a form of equity investment.
4) A grant, a form of non-equity funding, is expected to be repaid at a predetermined interest rate
once a beneficiary firm begins to profit from its operations.
5) Debt is a generic term that describes any type of non-equity funding tied to a business.
6) Debt, a source of non-equity funding, allows a new business to handle the disparity between
when goods must be purchased and when money will be received from a customer to pay for those
goods.
7) A loan involves a contractual agreement where a business receives some amount of money that
must be repaid over a specified period of time at a specified interest rate.
8) In the case of business failure, debt does not need to be repaid.
9) John takes out a loan for a necessary machine in his business. This type of loan would be called
asset-based lending.
10) Banks will lend money for the establishment and maintenance of inventory by arranging a
revolving line of credit.
11) A problem with having a line of credit to purchase inventory is that a business tends to carry
old and outdated inventory on the books.
12) Founders cannot lend money to their own firm.
13) Debt is typically a secured investment; if the business fails, the business’s assets would be sold
in order to repay the debt.
14) A credit card has a set repayment schedule.
15) Supplier credit is typically offered on both physical assets and actual supplies of inventory
purchased by a business.
16) Accepting supplier credit limits a company’s ability to shop around for a cheaper source of
goods.
17) One form of funding for new small businesses is grants from governmental and private
foundation sources.
18) The founders of an entrepreneurial business must avoid personally lending money to the
business, as such debts are considered to be unsecured investments that need not be paid back,
should the business fail.
19) Accepting an equity stake from an investor makes the owner accountable to that investor when
founding and managing a business.
20) Equity investment does not involve selling a percentage of the business to an outside investor.
21) Many large and established businesses are willing to make equity investments in start-up
companies.
22) In the context of funding a business, crowdfunding refers to funds received by a business by
soliciting a large number of very small investors, usually via the Internet.
23) A cash-based accounting system recognizes expenses as they are paid and recognizes revenue
when it is generated.
24) Accrual-based accounting is a system where expenses and revenues are recorded when they
occur.
25) A chart of accounts is a listing of each type of activity (such as expense items) and each type of
asset within the company.
26) A petty cash fund operates like a bank savings account.
27) Shrinkage is the difference between inventory that has been sold and inventory that was
purchased by the business.
28) A profit and loss statement represents your business performance over time.
29) Which of the following activities is directly related to the establishment of the financial
structure and record keeping of a new company?
A) The funds and the level of funding required for the new business
B) Maintenance of accounting records
C) Management of the paper/data flow of the new company
D) All of these
30) New businesses need to be aware of what issue(s) related to start-up?
A) Funding
B) Accounting system
C) Flow of information
D) All of these
31) ________ funds are received by a business in exchange for a percentage ownership of the
company.
A) Asset-based
B) Venture capital
C) Equity
D) Tangible
32) Debt is a form of ________ funding.
A) equity
B) non-equity
C) asset
D) venture
33) A common form of debt for a small business can be classified as ________.
A) loans
B) credit cards
C) supplier credit
D) all of these
34) A ________ is a contractual agreement where a business receives money that must be repaid
over a period of time.
A) credit card
B) loan
C) compact
D) lease
35) ________ have traditionally been a major source of funds for established firms but are quite
restrictive in their lending to start-up firms, as the risk is perceived to be too high.
A) Investors
B) Families
C) Banks
D) Suppliers
36) A bank provides John money for the necessary hamburger maker for his business. This is
called ________.
A) debt-asset lending
B) contractual assets
C) necessary funding
D) asset-based lending
37) Credit cards have all the following EXCEPT
A) no set repayment schedule.
B) not being tied to a particular asset.
C) equity investment.
D) high interest rate.
38) In the context of non-equity funding, identify a true statement about loans.
A) Debt holders have a right to a firm’s assets if the firm fails to pay off their loans.
B) Banks take a controlling percentage of ownership of any small business they give a loan to.
C) Equity investors receive proceeds from a filed firm before all other loans are paid off.
D) Banks have traditionally been eager to fund entrepreneurial firms.
39) Borealis Computing is a small start-up firm that needs to purchase essential equipment and
supplies to begin operations. Gencent LLC, a larger firm, offers to finance Borealis Computing’s
purchases. Under their agreement, Borealis Computing will repay Gencent LLC overtime at a
specified interest rate. In the context of non-equity funding, Gencent LLC’s financing of Borealis
Computing’s purchases is an example of ________.
A) supplier credit
B) crowdfunding
C) equity investment
D) factoring
40) ________ are special funds that are neither equity nor debt, that do not require repayment, and
are designed to aid businesses in specific areas.
A) Grants
B) No-pay loans
C) Small business loans
D) Incubator equity
41) Accepting ________ ties a firm to the supplier and usually stops the firm from shopping
around for a lower price.
A) non-equity credit
B) funding grants
C) supplier credit
D) equity funding
42) Investors can be
A) active.
B) passive.
C) a minority.
D) all of these.
43) Covore Inc., a start-up firm, receives the majority of the funds it requires to begin its operations
from five individuals. In exchange for these funds, each individual receives a share of ownership in
the firm. The funds provided to Covore Inc. by the individuals are an example of ________.
A) debt
B) crowdfunding
C) equity investment
D) asset-based lending
44) Several successful businesspeople establish a partnership with each other. They combine their
financial resources and use the resultant pool of resources to make equity investments in various
high-growth new ventures. In the context of equity funding, the partnership and the pooled
resources of the businesspeople are best described as
A) an angel investment scheme.
B) a venture capital fund.
C) a crowdfunding initiative.
D) an asset lease arrangement.