Question 1

Identify and explain the two profitability ratios a small business owner can use to measure how effectively he/she is managing the business.

Accepted Answer

Profitability ratios indicate how efficiently a small company is being managed.They provide the owner with information about a company's ability to generate a profit.They focus on a company's "bottom line";in other words,they describe how successfully the firm is conducting business.The net profit on sales ratio (also called the profit margin on salesasures a company's profit per dollar of sales.This ratio (which is expressed as a percentage)shows the number of cents of each sales dollar remaining after deducting all expenses and income taxes.The net profit to assets ratio (also known as the return on assets ratio)tells how much profit a company generates for each dollar of assets that it owns.This ratio describes how efficiently a business is putting to work all of the assets it owns to generate a profit.It tells how much net income an entrepreneur is squeezing from each dollar's worth of the company's assets.

Question 2

The profit and loss statement is also referred as the ________.

Accepted Answer

A) balance sheet 
B) statement of cash flows 
C) revenue statement 
D) income statement 
A) balance sheet 
B) statement of cash flows 
C) revenue statement 
D) income statement D

Question 3

The statement of cash flow:

Accepted Answer

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. 
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. D

Question 4

The ________ ratio is a measure of the small company's ability to pay current debts from current assets.

Accepted Answer

A) debt-to-net worth 
B) current 
C) quick 
D) debt-to-assets 
A) debt-to-net worth 
B) current 
C) quick 
D) debt-to-assets

Question 5

The first section of a balance sheet lists:

Accepted Answer

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. 
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.

Question 6

________ ratios measure the financing supplied by business owners and that supplied by the firm's creditors.

Accepted Answer

A) Leverage 
B) Profitability 
C) Liquidity 
D) Operating 
A) Leverage 
B) Profitability 
C) Liquidity 
D) Operating

Question 7

________ ratios help a business owner evaluate the company's performance and indicate how effectively the business employs its resources.

Accepted Answer

A) Liquidity 
B) Leverage 
C) Operating 
D) Profitability 
A) Liquidity 
B) Leverage 
C) Operating 
D) Profitability

Question 8

The ________ ratio measures the small company's ability to generate sales in relation to its assets.

Accepted Answer

A) net sales-to-working capital 
B) net sales-to-total assets 
C) average collection period 
D) average inventory turnover 
A) net sales-to-working capital 
B) net sales-to-total assets 
C) average collection period 
D) average inventory turnover

Question 9

________ 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.

Accepted Answer

A) Operating ratios 
B) Profitability ratios 
C) Leverage ratios 
D) Liquidity ratios 
A) Operating ratios 
B) Profitability ratios 
C) Leverage ratios 
D) Liquidity ratios

Question 10

To calculate break-even sales,use the equation: break-even sales (in dollars)= total variable costs divided by contribution margin as a percentage of sales revenue.

Accepted Answer

A) True 
 B)False

Question 11

The higher the ________ ratio,the lower the degree of protection afforded creditors and the closer creditors' interest approaches the owner's interest.

Accepted Answer

A) debt-to-net worth 
B) quick 
C) asset turnover 
D) current 
A) debt-to-net worth 
B) quick 
C) asset turnover 
D) current

Question 12

A break-even analysis has several drawbacks including the fact that it ignores the importance of cash flows and that its accuracy is dependent on the accuracy of revenue and expense estimates.

Accepted Answer

A) True 
 B)False

Question 13

The average payable period tells the owner the average number of days it takes to pay its accounts payable.

Accepted Answer

A) True 
 B)False

Question 14

The ________ shows what assets the business owns and what claims creditors and owners have against those assets.

Accepted Answer

A) balance sheet 
B) income statement 
C) sources and uses of funds statement 
D) pro forma 
A) balance sheet 
B) income statement 
C) sources and uses of funds statement 
D) pro forma

Question 15

The first step in creating the pro forma income statement is to:

Accepted Answer

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. 
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.

Question 16

The balance sheet provides owners with an estimate of the firm's worth for a specific moment in time.

Accepted Answer

A) True 
 B)False

Question 17

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.

Accepted Answer

A) quick 
B) total debt turnover 
C) asset turnover 
D) debt-to-net worth 
A) quick 
B) total debt turnover 
C) asset turnover 
D) debt-to-net worth

Question 18

A total assets turnover ratio below the industry average may indicate that the small firm is not generating an adequate sales volume for its asset size.

Accepted Answer

A) True 
 B)False

Question 19

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:

Accepted Answer

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. 
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.

Question 20

Which of the following expenses would likely be classified "semi-variable"?

Accepted Answer

A) Rent 
B) Electric utilities 
C) Wages 
D) Sales commissions 
A) Rent 
B) Electric utilities 
C) Wages 
D) Sales commissions

Exam 14: Creating a Solid Financial Plan

Identify and explain the two profitability ratios a small business owner can use to measure how effectively he/she is managing the business.

The profit and loss statement is also referred as the ________.

The statement of cash flow:

The ________ ratio is a measure of the small company's ability to pay current debts from current assets.

The first section of a balance sheet lists:

________ ratios measure the financing supplied by business owners and that supplied by the firm's creditors.

________ ratios help a business owner evaluate the company's performance and indicate how effectively the business employs its resources.

The ________ ratio measures the small company's ability to generate sales in relation to its assets.

________ 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.

To calculate break-even sales,use the equation: break-even sales (in dollars)= total variable costs divided by contribution margin as a percentage of sales revenue.

The higher the ________ ratio,the lower the degree of protection afforded creditors and the closer creditors' interest approaches the owner's interest.

A break-even analysis has several drawbacks including the fact that it ignores the importance of cash flows and that its accuracy is dependent on the accuracy of revenue and expense estimates.

The average payable period tells the owner the average number of days it takes to pay its accounts payable.

The ________ shows what assets the business owns and what claims creditors and owners have against those assets.

The first step in creating the pro forma income statement is to:

The balance sheet provides owners with an estimate of the firm's worth for a specific moment in time.

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 total assets turnover ratio below the industry average may indicate that the small firm is not generating an adequate sales volume for its asset size.

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:

Which of the following expenses would likely be classified "semi-variable"?

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Managing Cash Flow

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