Deck 7: Creating a Solid Financial Plan

Question 1

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.

Answer 1

C

Question 2

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.

Answer 2

D

Question 3

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.

Answer 3

D

Question 4

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

Question 5

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.

Question 6

Dividing gross profit by net sales produces:

A)operating expenses.
B)gross profit margin.
C)long-term profitability.
D)gross profit flow.

Question 7

________ are those things that a business owns which have value.

A)Assets
B)Liabilities
C)Owners' equities
D)Liquidities

Question 8

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

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

Question 9

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

Question 10

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.

Question 11

The balance sheet is usually prepared on the ________ day of the month.

A)first
B)last
C)15th
D)None of the above

Question 12

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

Question 13

________ 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

Question 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.

Question 15

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.

Question 16

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.

Question 17

________ are those things that a business owes;they represent creditors' claims against the business.

A)Assets
B)Liabilities
C)Owners' equities
D)Liquidities

Question 18

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.

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:

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

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.

Question 21

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

Question 22

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

Question 23

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

Question 24

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.

Question 25

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

Question 26

________ 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

Question 27

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

Question 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

Question 29

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

Question 30

________ 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

Question 31

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

Question 32

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

Question 33

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

Question 34

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.

Question 35

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.

Question 36

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

Question 37

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

Question 38

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

Question 39

________ 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

Question 40

________ ratios indicate how efficiently the small firm is being managed.

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

Question 41

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

Question 42

________ 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.

Question 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.

Question 44

In the balance sheet,intangible assets include items such as:

A)goodwill.
B)copyrights and patents.
C)Both A and B
D)accounts receivable.

Question 45

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

Question 46

________ is/are the value of the owner's investment in the business.

A)Asset
B)Liabilities
C)Owner's Equity
D)Profit

Question 47

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

Question 48

________ 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

Question 49

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.

Question 50

________ 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

Question 51

________ 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.

Question 52

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

A)rent
B)electric utilities
C)wages
D)sales commissions

Question 53

A ratio greater than ________ days would indicate poor collection procedures.

A)29
B)40
C)60
D)90

Question 54

In the balance sheet,the current assets consist of:

A)accounts payable.
B)inventory.
C)revenue.
D)All of the above

Question 55

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

Question 56

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

Question 57

________ 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

Question 58

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

Question 59

Which of the following expenses would be considered "fixed"?

A)wages
B)raw materials
C)utilities
D)rent

Question 60

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

Question 61

In which statement,the account balances are reversed to zero on a monthly basis?

A)Balance Sheet
B)Cash Flow Statement
C)Income Statement
D)All of the above

Question 62

A new business owner must operate for at least six months in order to collect sufficient information to calculate net sales from a profit target.

Question 63

Proper financial management requires more than gathering financial data and organizing it into financial statements;the small business manager must analyze those statements and use that information to make better business decisions.

Question 64

Concerning how much cash to have at start-up,a rule of thumb is to have enough to cover operating expenses (less depreciation)for two inventory turnover periods.

Question 65

The formula for calculating net profit margin is net profit/net sales (annual).

Question 66

The most common method of creating a projected income statement is to develop a sales forecast and then "work down" to the bottom line.

Question 67

Which of the following is correct?

A)Assets - Liabilities = Equity
B)Assets - Equity = Liabilities
C)Assets = Liabilities + Equity
D)All of the above

Question 68

Performing financial ratio analyses enables a business owner to identify problems early-before they become crises.

Question 69

The statement of cash flows shows the change in a firm's working capital.

Question 70

To determine sales revenue,the owner records sales revenue for the year and subtracts liabilities.

Question 71

Most small businesses start out strong financially because of the care generally given in determining the total asset requirements for running the business.

Question 72

The pro forma shows the company's current overall financial condition.

Question 73

When determining the owner's target income,you must consider a reasonable salary for the time spent running the business,less the depreciation of assets.

Question 74

The small firm's income statement presents a picture of the firm's profitability at a particular point in time.

Question 75

The difference between the total sources of funds and the total uses of funds represents the increase or decrease in a firm's working capital.

Question 76

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

Question 77

The balance sheet represents: Assets = Liabilities + Depreciation + Equity.

Question 78

An adequate profit in a small business must include a reasonable return on the owner's total investment in the business.

Question 79

The cost of goods sold represents the total cost,including distribution,of the goods sold during the year.

Question 80

All costs directly related to the manufacture and distribution of goods is covered under general expenses.