Deck 11: Creating a Successful Financial Plan

Question 1

Which of the following is not true regarding the components of the income statement?

A) Cost of goods sold represents the total cost, excluding shipping, of the merchandise sold during the accounting period.
B) Gross profit margin is calculated by dividing gross profit by net sales revenue.
C) Operating expenses include those costs that contribute directly to the manufacture and distribution of goods.
D) A and B above

Answer 1

A

Question 2

Creating projected (pro forma) financial statements would allow a business owner to answer which of the following questions?

A) What profit can my business expect to achieve?
B) What sales level must my business reach if our targeted profit is × dollars?
C) What fixed and variable expenses can my business expect to incur at our targeted sales level?
D) All of the above

Answer 2

D

Question 3

The statement of cash flows:

A) compares costs and expenses against a firm's net profits.
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.

Answer 3

D

Question 4

Which of the following associations is correct?

A) Balance sheet - cost of goods sold
B) Income statement - owner's equity
C) Current assets - inventory
D) Long-term liabilities - accounts payable

Question 5

On a company's statement of cash flows, 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, already 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 6

You are to prepare a projected income statement for a proposed business venture. Your desired income is $28,000 and you have the following published statistics: Costs of goods sold = 56.9 percent of net sales
Operating expenses = 37.1 percent of net sales
Gross profit margin = 43.1 percent of net sales
This information indicates the net sales on your pro forma "P & L" (income statement) would be:

A) $466,667.
B) $491,228.
C) $500,000.
D) None of the above

Question 7

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.

Question 8

Refer to the following information to answer the question(s) regarding Anita Lupino's toy and game shop:
Anita Lupino is planning to open her own toy and game shop. She has conducted a great deal of research at the local library, contacted the industry trade association, and has set up a meeting with a consultant at the SBDC next week. Before she goes to the SBDC, she wants to sketch out an estimated income statement. She reviews the following data from RMA's Annual Statement Studies:
Costs of goods sold 57.3 percent of net sales
Operating expenses 32.9 percent of net sales
Gross profit 42.7 percent of net sales
If Anita's research suggests that she can expect net sales of $475,000, what net profit could she expect?

A) $202,825
B) $46,550
C) $69,350
D) $156,275

Question 9

Gaither Mack is preparing projected financial statements to include in the business plan he is preparing for the launch of a specialty retail store. Using published financial statistics, Mack finds that the typical net profit margin for a store like his is 7.3 percent. If Mack's target income for his first year of operation is $32,000, what level of sales must he achieve to reach it?

A) $233,600
B) $438,356
C) $2,966,400
D) Cannot be determined from the information provided

Question 10

________ 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 11

The first section of a balance sheet lists:

A) assets.
B) 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 12

The ________ represents a "snapshot" of a business, showing an estimate of its value on a given date, while the ________ is a "moving picture" of the firm's profitability over time.

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

Question 13

In order to reach profit objectives, entrepreneurs must be aware of their firms':

A) current ratio and liabilities.
B) fixed assets and owner's equity.
C) assets and liabilities.
D) overall financial position and any changes in the financial status.

Question 14

The ________ shows what assets the business owns and what claims creditors and owners have against those assets, and 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 15

Refer to the following information to answer the question(s) regarding Anita Lupino's toy and game shop:
Anita Lupino is planning to open her own toy and game shop. She has conducted a great deal of research at the local library, contacted the industry trade association, and has set up a meeting with a consultant at the SBDC next week. Before she goes to the SBDC, she wants to sketch out an estimated income statement. She reviews the following data from RMA's Annual Statement Studies:
Costs of goods sold 57.3 percent of net sales
Operating expenses 32.9 percent of net sales
Gross profit 42.7 percent of net sales
If Anita's net profit target is $32,000, what level of net sales must she achieve?

A) $74,941
B) $97,264
C) $326,531
D) $219,178

Question 16

On a projected income statement, a business owner's target income is:

A) the sum of a reasonable salary for the time spent running the business and a normal return on the amount invested in it.
B) the income at which the company's total revenues and its total expenses are equal.
C) the income that will produce a 10 percent return on the owner's financial investment in the business.
D) the income that the owner could earn working for someone else.

Question 17

Cash requirements can be determined by dividing cash expenses by:

A) liabilities.
B) accounts receivables.
C) total assets.
D) the average inventory turnover.

Question 18

Cost of goods sold is located on which financial statement?

A) Income statement
B) Balance sheet
C) Statement of cash flows
D) All of the above

Question 19

Which of the following items would not be listed as a current asset in a company's financial reports?

A) Cash
B) Accounts receivable
C) Fixtures
D) Inventory

Question 20

Michelle Becker's target income in her business for the upcoming year is $78,500. The company's gross profit margin averages 32.6 percent of sales, and its total operating expenses run 24.7 percent of sales. To achieve her target income, sales of Michelle's company should be:

A) $148,773.
B) $993,671.
C) $317,814.
D) $1,271,348.

Question 21

Bettina has just calculated her company's current ratio. To calculate the quick ratio, she should:

A) subtract current liabilities from current assets before dividing by total liabilities.
B) subtract total liabilities from current assets before dividing by current liabilities.
C) subtract inventory from current assets before dividing by current liabilities.
D) subtract depreciation expense from current assets before dividing by current liabilities.

Question 22

The ________ ratio measures the percentage of total assets financed by a small company's creditors compared to its owners.

A) debt
B) times-interest-earned
C) net sales to total assets
D) total asset turnover

Question 23

________ 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 24

Which of the following is not a liquidity ratio?

A) Current ratio
B) Total asset turnover ratio
C) Quick ratio
D) None of the above

Question 25

A business that turns over its receivables 5.9 times a year would have an average collection period of about:

A) 30 days.
B) 2/10, net 30.
C) 71 days.
D) 62 days.

Question 26

Which of the following combinations of ratios would indicate that a company is financially mismanaged and is not a good credit risk?

A) High liquidity; high leverage
B) Low liquidity; high leverage
C) High liquidity; low leverage
D) Low liquidity; low leverage

Question 27

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 28

________ ratios measure the extent to which an entrepreneur relies on debt capital rather than equity capital to finance a business.

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

Question 29

Which ratio would best give an owner an indication that the business is undercapitalized?

A) Debt-to-net worth
B) Net sales to total assets
C) Average inventory turnover
D) Quick

Question 30

Analyzing financial ratios could alert a business owner to which of these problems?

A) Excessive inventory
B) Overextending credit
C) Too much debt
D) All of the above

Question 31

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 32

The ________ ratio tells how many times the company's earnings cover the interest payments on the debt it is carrying.

A) debt
B) debt-to-net worth
C) times-interest-earned
D) net sales-to-working capital

Question 33

Financial analysts suggest that a small business should maintain a current ratio of at least:

A) 1:1.
B) 2:1.
C) 3:1.
D) 4:1.

Question 34

________ ratios tell whether or not the small company will be able to meet its short-term obligations.

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

Question 35

Sarah's Smart Shop has an inventory turnover ratio of 3 times per year and an average inventory of $156,000. If Sarah could manage her inventory better and increase the number of turnovers to the industry average of 6 times per year, what average inventory would she need to generate the same level of sales?

A) $78,000
B) $52,000
C) $468,000
D) $312,000

Question 36

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) represents a lower risk to potential lenders and creditors.

Question 37

The ________ ratio is a measure of the small company's ability to pay current debts from current assets and is the liquidity ratio most commonly used as a measure of short-term solvency.

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

Question 38

________ 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 39

The average inventory turnover ratio:

A) measures the number of times a company's inventory is sold out during the accounting period.
B) tells a business owner whether she is managing the company's inventory properly.
C) tells a business owner how fast the merchandise is moving through the business.
D) All of the above

Question 40

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 41

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

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

Question 42

Refer to the following information to answer the question(s) regarding Port Royal:
Net sales $927,641
Gross profit $301,483
Net profit $48,457
Total assets $203,869
Total liabilities $74,325
Port Royal's debt-to-net worth ratio is:

A) 0.36:1.
B) 0.08:1.
C) 1.57:1.
D) 0.57:1.

Question 43

A business with a payables turnover ratio of 10.4 times a year would have an average payable period of about:

A) 3 days.
B) 30 days.
C) 35 days.
D) 62 days.

Question 44

If the accounting period is one year with credit sales totaling $2,500,000 and accounts receivable totaling $200,000, what is the average collection period ratio?

A) 29.2 days
B) 365 days
C) 119.3 days
D) Cannot be determined from the information provided

Question 45

Which ratio would be most helpful to a business owner to measure the profit per dollar of sales?

A) Net sales to total assets
B) Net sales to working capital
C) Net profit on sales
D) Net profit to equity

Question 46

Ideally, a company reaches a point where increases in operating efficiency mean that expenses as a percentage of sales revenue flatten or even decline. This is referred to as:

A) net profit to assets ratio.
B) profitability ratio.
C) net profit to equity.
D) operating leverage.

Question 47

For the most meaningful interpretation, the small business owner should compare his firm's average collection period to:

A) other businesses in the same geographic area.
B) a direct competitor.
C) the universal standard of 25 days.
D) the average for the industry and the firm's credit terms.

Question 48

The net profit to asset ratio measures:

A) the owner's rate of return on investment.
B) how much profit a company generates for each dollar of assets that it owns.
C) a company's profit per dollar of sales.
D) a company's ability to generate sales in relation to its asset base.

Question 49

The break-even point:

A) occurs where a company's total revenue equals its total expenses.
B) is the point at which a company neither earns a profit nor incurs a loss.
C) tells a business owner the minimum level of activity needed to keep her company in operation.
D) All of the above

Question 50

For Meters, Inc., refer to the following information to answer the question(s) below:
Meters, Inc., reported net sales of $874,916 and a net profit of $74,563 on its most recent income statement. The company's balance sheet shows total assets of $342,742 and total liabilities of $88,367.
What is the net profit margin for Meters, Inc.?

A) 8.5 percent
B) 1.91:1
C) 21.8 percent
D) 29.3 percent

Question 51

Refer to the following information to answer the question(s) regarding Port Royal:
Net sales $927,641
Gross profit $301,483
Net profit $48,457
Total assets $203,869
Total liabilities $74,325
Port Royal's profit margin on sales is:

A) 5.2 percent.
B) 32.5 percent.
C) 16.1 percent.
D) 8.0 percent.

Question 52

Using break-even analysis, what is Gunther's contribution margin?

A) 4 percent
B) 32 percent
C) 24 percent
D) 12 percent

Question 53

For Meters, Inc., refer to the following information to answer the question(s) below:
Meters, Inc., reported net sales of $874,916 and a net profit of $74,563 on its most recent income statement. The company's balance sheet shows total assets of $342,742 and total liabilities of $88,367.
What is the return on net worth ratio for Meters, Inc.?

A) 8.5 percent
B) 1.91:1
C) 21.8 percent
D) 29.3 percent

Question 54

An excessively high average payable period ratio:

A) suggests that the company is making the best use of its available cash balance.
B) indicates that the company is doing a poor job of collecting its accounts receivable.
C) indicates the presence of a significant amount of past-due accounts payable.
D) suggests that the company is highly liquid.

Question 55

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 56

The ________ ratio measures a 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 57

The ________ ratio shows the portion of each sales dollar remaining after deducting all expenses.

A) net profit on sales
B) net profit to equity
C) net sales to total assets
D) net sales to working capital

Question 58

Which of the following is an assumption of break-even analysis?

A) Fixed expenses remain constant for all levels of sales volume.
B) Variable expenses change in direct proportion to changes in sales volume.
C) Changes in sales volume have no effect on unit sales price.
D) All of the above

Question 59

Refer to the following information to answer the question(s) regarding Port Royal:
Net sales $927,641
Gross profit $301,483
Net profit $48,457
Total assets $203,869
Total liabilities $74,325
Port Royal's net profit-to-equity ratio is:

A) 23.8 percent.
B) 37.4 percent.
C) 16.1 percent.
D) 232.7 percent.

Question 60

A business should provide the owner with a reasonable rate of return based upon:

A) the time and money invested in the business.
B) industry averages.
C) the capital borrowed from the bank.
D) an acceptable annual salary.

Question 61

Pro forma financial statements show a company's most recent financial position.

Question 62

According to one study, 23 percent of small business owners lack financial literacy to identify the cost that has the greatest impact on their companies.

Question 63

The most common mistake entrepreneurs make when preparing pro forma (projected) financial statements for their companies is being overly pessimistic in their financial plans.

Question 64

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 65

In start-up firms, one guideline is for the owner to draw a salary 25-30 percent below the market rate for a similar position.

Question 66

Comparing a company's current income statement to those of prior accounting periods rarely reveals valuable information about key trends.

Question 67

The area labeled ________ is the "loss area."

A) W
B) X
C) Y
D) Z

Question 68

Line T is the ________ line, while Line S is the ________ line.

A) total revenue; total expense
B) total expense; total revenue
C) fixed cost; variable cost
D) variable cost; fixed cost

Question 69

Assets represent what a business owns, while liabilities represent the claims creditors have against a company's assets.

Question 70

The area labeled ________ is the "profit area."

A) W
B) X
C) Y
D) Z

Question 71

The income statement is based on the fundamental accounting equation:
Assets = Liabilities + Owner's Equity.

Question 72

On the income statement, the cost of goods sold represents the total cost, excluding shipping, of the merchandise sold during the year.

Question 73

On a projected income statement, a business owner's target income is the sum of a reasonable salary for the time spent running the business and a normal return on the amount the owner has invested in it.

Question 74

Service companies spend the greatest percentage of their sales revenue on cost of goods sold.

Question 75

If Gunther's net profit target for the year is $190,000, what sales level must he achieve?

A) $2,473,796
B) $1,876,324
C) $5,667,009
D) None of the above

Question 76

The area labeled ________ represents the firm's fixed expenses, while ________ represents its variable expenses.

A) Z; W
B) X; Y
C) Y; X
D) W; Z

Question 77

The balance sheet provides owners with an estimate of the firm's worth for a specific moment in time, while the income statement presents a "moving picture" of its profitability over a period of time.

Question 78

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

Question 79

Gunther's Emporium expects net sales of $2,396,919 for the upcoming year, with variable expenses totaling $1,813,443 and fixed expenses of $412,190. What is Gunther's break-even point?

A) $1,876,324
B) $1,693,276
C) $5,667,009
D) Insufficient information given to determine

Question 80

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