Entrepreneurship The Art Science and Process for Success Charles Bamford 3e - Test Bank Instant Download - Complete Test Bank With Answers Sample Questions Are Posted Below Entrepreneurship, 3e (Bamford) Chapter 6 Analyzing Cash Flow and Other Financial Information 1) In a business, the actual cash that flows into the …
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Entrepreneurship The Art Science and Process for Success Charles Bamford 3e – Test Bank
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Sample Questions Are Posted Below
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.
Answer: TRUE
Explanation: Cash flow is the actual cash that flows into a firm minus the cash that goes out of the firm. It is important to understand that cash flow in a business is not the same as profit.
Difficulty: 1 Easy
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
2) Cash flow in a business is the same as profit.
Answer: FALSE
Explanation: Cash flow in a business is not the same as profit.
Difficulty: 1 Easy
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
3) A firm obtains profits when its sales revenue is higher than its expenses.
Answer: TRUE
Explanation: A firm obtains profits when its sales revenue is higher than its expenses.
Difficulty: 2 Medium
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
4) It is possible to sell products and have no cash coming into a company.
Answer: TRUE
Explanation: It is quite common to have high levels of products or services “sold” with no cash coming into a firm.
Difficulty: 2 Medium
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
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.
Answer: FALSE
Explanation: In theory, a doubling in orders for a new business’s products or services in a single month sounds desirable. However, it means that twice the inputs must be ordered and paid for while there is no cash coming into the firm to pay for the dramatic increase of inputs needed until those goods are paid for by the customer.
Difficulty: 2 Medium
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
6) If a small firm is making a profit, then the firm must have a positive cash flow.
Answer: FALSE
Explanation: While many new firms appear to be making a profit, they can be suffering from a negative cash flow.
Difficulty: 2 Medium
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
7) To prevent a cash crunch, a company must accurately forecast its actual cash flow.
Answer: TRUE
Explanation: To prevent a cash crunch, it is important for a new entrepreneurial business to carefully, thoughtfully, and accurately forecast its real cash flow.
Difficulty: 2 Medium
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
8) For a proposed new business, a financial analysis focuses exclusively on its ability to generate positive cash flow in the shortest time possible.
Answer: TRUE
Explanation: For a proposed business, the financial analysis focuses almost exclusively on its ability to generate positive cash flows in the shortest time possible.
Difficulty: 1 Easy
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
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.
Answer: TRUE
Explanation: When there is a separation between managers and ownership, profits are a useful measure as a means to evaluate a manager’s performance, inasmuch as such firms are typically larger and have numerous slack, or excess, resources.
Difficulty: 1 Easy
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
10) In a small business, profits will demonstrate to the owner if the business is viable over the long term.
Answer: FALSE
Explanation: Profits have little to do with whether the business will be viable over the long term.
Difficulty: 2 Medium
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
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.
Answer: FALSE
Explanation: A general rule of thumb when examining the initial equity needs of a new venture is to first calculate the cash flow projection without adding in any equity investment and to then look for the point where the ending balance is at its lowest point. The lowest point figure should be multiplied by 150 percent, which gives the recommended initial equity.
Difficulty: 2 Medium
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
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.
Answer: TRUE
Explanation: 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. High number of initial sales does not guarantee sustainable revenue for the company.
Difficulty: 2 Medium
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
13) A new small business must pay its vendors by using purchase orders.
Answer: FALSE
Explanation: A new entrepreneurial business will have to pay its vendors in cash.
Difficulty: 1 Easy
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
14) Float is the difference between the money going out and the money coming in.
Answer: TRUE
Explanation: Float is the difference between the money going out and the money coming in.
Difficulty: 1 Easy
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
15) A budget details all the expenses incurred by a company within a specified period.
Answer: FALSE
Explanation: A budget projects all the costs that will be incurred by an organization over some period of time.
Difficulty: 1 Easy
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
16) A cash flow statement is the same as a budget.
Answer: FALSE
Explanation: A cash flow statement is not a budget and should not be confused with a budget.
Difficulty: 1 Easy
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
17) A budget does the exact opposite of a cash flow statement.
Answer: TRUE
Explanation: A cash flow statement does the exact opposite of a budget.
Difficulty: 2 Medium
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
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.
Answer: TRUE
Explanation: An owner calculates the entire cash flow projection without adding in any equity investment and looks for the point where the ending balance is at its lowest point. Then, he or she takes that number and multiplies it by 150 percent.
Difficulty: 2 Medium
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
19) A deviation analysis is a review of the differences between the predicted and the actual performance of cash flows.
Answer: TRUE
Explanation: A deviation analysis is an analysis of the differences between the predicted and the actual performance of cash flows.
Difficulty: 2 Medium
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
20) Everything in cash flow in a small business is related to one activity: operations.
Answer: TRUE
Explanation: New entrepreneurial ventures typically have only one type of activity: operations. Everything that involves cash in or cash out is related to the operation of the business.
Difficulty: 2 Medium
Topic: Developing Cash Flow Statements and Budgets
Learning Objective: 06-02 Prepare a cash flow statement and a budget.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
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.
Answer: TRUE
Explanation: The cash flow statement is used to describe all of the activities that provide and use cash during the period being examined. Used effectively, this statement helps owners to accurately keep track of the overall cash position of a business and provides a well-respected and accepted means of displaying the ability of the company to meet its obligations.
Difficulty: 2 Medium
Topic: Developing Cash Flow Statements and Budgets
Learning Objective: 06-02 Prepare a cash flow statement and a budget.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
22) All the expenses of a firm need to be included in the cash flow statement.
Answer: TRUE
Explanation: All actual expenses must be accounted for in the cash flow statement of any business.
Difficulty: 1 Easy
Topic: Developing Cash Flow Statements and Budgets
Learning Objective: 06-02 Prepare a cash flow statement and a budget.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
23) Revenues should be separated into as few categories as possible to provide the maximum insight to the owner.
Answer: FALSE
Explanation: Revenues (cash inflows) should be separated into as many categories as possible in order to provide the maximum insight to a business owner.
Difficulty: 2 Medium
Topic: Developing Cash Flow Statements and Budgets
Learning Objective: 06-02 Prepare a cash flow statement and a budget.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
24) A sensitivity analysis of cash flows should show the best-case and the worst-case scenarios.
Answer: TRUE
Explanation: A sensitivity analysis is an examination of the best-case and the worst-case cash flow scenarios.
Difficulty: 1 Easy
Topic: Developing Cash Flow Statements and Budgets
Learning Objective: 06-02 Prepare a cash flow statement and a budget.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
25) A cash flow statement is used to describe all of the activities that generate cash and use cash during the period being examined.
Answer: TRUE
Explanation: A cash flow statement is used to describe all of the activities that provide and use cash during the period being examined.
Difficulty: 2 Medium
Topic: Developing Cash Flow Statements and Budgets
Learning Objective: 06-02 Prepare a cash flow statement and a budget.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
26) A cash flow statement should be tailored to the information needs of a new business.
Answer: TRUE
Explanation: Generating a cash flow statement should be tailored to the information needs of a new venture.
Difficulty: 2 Medium
Topic: Developing Cash Flow Statements and Budgets
Learning Objective: 06-02 Prepare a cash flow statement and a budget.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
27) In the context of business tools, a sensitivity analysis examines a new firm’s vulnerability to its competitors.
Answer: FALSE
Explanation: A sensitivity analysis is an examination of the best-case and the worst-case cash flow scenarios for a business. It is a judgment call by a new business owner about whether the business could survive the worst-case or successfully carry out the best-case scenario.
Difficulty: 1 Easy
Topic: Developing Cash Flow Statements and Budgets
Learning Objective: 06-02 Prepare a cash flow statement and a budget.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
28) In the context of financial activities, new firms typically have only investing activities and financial activities.
Answer: FALSE
Explanation: New businesses, unlike established companies, are unlikely to have either investing activities or financing activities. New entrepreneurial ventures typically have only one type of activity: operations.
Difficulty: 1 Easy
Topic: Developing Cash Flow Statements and Budgets
Learning Objective: 06-02 Prepare a cash flow statement and a budget.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
29) In the context of financial tools, a commonly held view is that cash is king in an entrepreneurial business.
Answer: TRUE
Explanation: Cash is king in an entrepreneurial business.
Difficulty: 1 Easy
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
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.
Answer: TRUE
Explanation: The term pro forma simply means that the entrepreneur estimates what the balance sheets and income statements will look like in the future, in order to plan well.
Difficulty: 1 Easy
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
31) A pro forma is a summary of assets and liabilities.
Answer: FALSE
Explanation: A balance sheet is a summary of assets and liabilities.
Difficulty: 1 Easy
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
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.
Answer: FALSE
Explanation: The estimate of a new firm’s fixed assets and liabilities can be exact and should be estimated with some care. This is because the cost of items can be reasonably estimated and issues such as debt should be well known.
Difficulty: 2 Medium
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
33) In the context of financial tools, a sensitivity analysis is a summary of the assets and liabilities of an entrepreneurial business.
Answer: FALSE
Explanation: A sensitivity analysis is an examination of the best-case and the worst-case cash flow scenarios of an organization. The sensitivity analysis is a judgment call by the new business owner about whether the business could survive the worst-case or successfully carry out the best-case scenario.
Difficulty: 1 Easy
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
34) Fixed assets are assets that have a physical presence, such as buildings and office equipment.
Answer: TRUE
Explanation: Fixed assets have a physical presence, including land, buildings, office equipment, machinery, and vehicles. There are two basic types of assets that should be included as separate items in the balance sheet: current assets and fixed assets.
Difficulty: 1 Easy
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
35) Current liabilities are all those debts and liabilities that a firm must pay to its investors and shareholders over a long period.
Answer: FALSE
Explanation: Current liabilities are liabilities or debts that a business has to pay within a year. These include accounts payable, notes payable such as bank notes, and accrued payroll.
Difficulty: 1 Easy
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
36) Long-term liabilities are debts and liabilities owed by a business that are ultimately due more than a year from the current date.
Answer: TRUE
Explanation: Long-term liabilities are owed by a business and are ultimately due more than a year from the current date. These include mortgages payable, owners’ equity, and stockholders’ equity.
Difficulty: 1 Easy
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
37) Current liabilities that are owed by a company need to be paid in 18 months.
Answer: FALSE
Explanation: Current liabilities are liabilities or debts that the business has to pay within a year. These include accounts payable, notes payable such as bank notes, and accrued payroll.
Difficulty: 1 Easy
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
38) On a balance sheet, the assets minus the liabilities of a company reflected in the balance sheet should total zero.
Answer: TRUE
Explanation: The assets minus the liabilities of a firm reflected in the balance sheet should total to zero.
Difficulty: 2 Medium
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
39) A cash flow statement measures cash flow on
Answer: A
Explanation: A cash flow statement measures cash flow on an annual basis.
Difficulty: 1 Easy
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
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.
Answer: C
Explanation: When there is a separation between management and ownership, profits are a useful measure to evaluate performance. This generally applies to firms that are typically large and have numerous slack, or excess, resources.
Difficulty: 2 Medium
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
41) An investment in a firm by the owner is called ________.
Answer: A
Explanation: Equity is investment into an entrepreneurial business by the owners of the firm.
Difficulty: 1 Easy
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
42) ________ is the difference between when the money goes out and when it comes in.
Answer: D
Explanation: Float is the difference between when the money goes out and when it comes in.
Difficulty: 2 Medium
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
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?
Answer: A
Explanation: Rapid growth by a new entrepreneurial business is actually one of the most dangerous times for that business. It means that twice the inputs must be ordered and paid for while there is no cash coming into the firm to pay for the dramatic increase of inputs needed until those goods are paid for by the customer.
Difficulty: 2 Medium
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
44) A ________ projects all the expenses incurred by a business over a specified period of time.
Answer: D
Explanation: A budget projects all the expenses incurred by a business over a period of time.
Difficulty: 1 Easy
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
45) A cash flow statement is the exact opposite of a ________.
Answer: B
Explanation: A cash flow statement is the exact opposite of a budget.
Difficulty: 2 Medium
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
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.
Answer: A
Explanation: In this scenario, Sarah is determining the budget for her business. A budget projects all the costs that will be incurred by the organization over some period of time (a year, for instance) and allocates that expense evenly over the relevant time period.
Difficulty: 3 Hard
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
47) When the owner of a new firm is developing a ________, the individual should contact vendors and suppliers to ask about payment terms.
Answer: A
Explanation: In developing a cash flow projection, the new business owner should contact vendors and suppliers to ask about payment terms.
Difficulty: 2 Medium
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
48) A ________ is the analysis of the differences between the predicted and the actual performance of a business.
Answer: A
Explanation: A deviation analysis is the analysis of the differences between the predicted and the actual performance of a business.
Difficulty: 1 Easy
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
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
Answer: A
Explanation: In this scenario, Mariana develops a pro forma income statement. The focus of the income statement is profit rather than cash flow.
Difficulty: 3 Hard
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
50) For a new business owner, what are the benefits of using a deviation analysis?
Answer: D
Explanation: A deviation analysis assists an entrepreneur in developing realistic forecasts for the business in the future. It also points out the differences between the actual performance and predicted performance at a point in time.
Difficulty: 2 Medium
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
51) In the Numi Organic Tea case study, Numi Organic Tea was founded based on the principles of
Answer: B
Explanation: Numi sought to differentiate their teas by using super-premium inputs that are organic and Fair Trade Certified.
Difficulty: 2 Medium
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
52) In the Friend’s Home Health case study, the cash flow statement reflected receipts from
Answer: C
Explanation: The founders tried to include every actual expense that would be incurred in the first six months of operation. The receipts were estimated by observing their competitors.
Difficulty: 2 Medium
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
53) In the context of developing cash flow statements and budgets, what company activities are typically categorized as operations?
Answer: A
Explanation: Everything that involves cash in or cash out is related to the operation of a business. This includes various expenses, such as salaries, cost of goods sold, and office supplies.
Difficulty: 2 Medium
Topic: Developing Cash Flow Statements and Budgets
Learning Objective: 06-02 Prepare a cash flow statement and a budget.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
54) Identify a long-term benefit of developing accurate cash flow statements.
Answer: D
Explanation: A well-developed, accurate long-term track record of cash flow statements and the comparison of the planned cash flows to reality will go a long way toward assisting a company with loans and credit lines. Further, accurate long-term cash flow statements will aid in infusions of equity capital to a company and even improve its valuation, should the businessperson want to sell the company.
Difficulty: 2 Medium
Topic: Developing Cash Flow Statements and Budgets
Learning Objective: 06-02 Prepare a cash flow statement and a budget.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
55) In the context of cash flow statements and budgets, for a new entrepreneurial firm, what is a benefit of separating cash inflows on a cash flow statement into as many categories as possible?
Answer: A
Explanation: Separating out revenue lines aids a new firm in predicting where the firm’s revenues will come from. It also aids in analyzing the actual revenue sources for the new entrepreneurial firm.
Difficulty: 2 Medium
Topic: Developing Cash Flow Statements and Budgets
Learning Objective: 06-02 Prepare a cash flow statement and a budget.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
56) A ________ is an analysis by a small business owner of the best-case and the worst-case financial scenarios.
Answer: C
Explanation: A sensitivity analysis is an analysis of the best-case and the worst-case cash flow scenarios.
Difficulty: 1 Easy
Topic: Developing Cash Flow Statements and Budgets
Learning Objective: 06-02 Prepare a cash flow statement and a budget.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
57) Mark, a new business owner, creates two cash flow statements for his firm. The first increases the monthly revenue of his firm by 40 percent, while the other reduces the monthly revenue by 40 percent. He compares the effect of each scenario on his firm’s business to understand its financial situation. In this scenario, Mark is developing a ________.
Answer: C
Explanation: In this scenario, Mark is developing a sensitivity analysis. A sensitivity analysis is an examination of the best-case and the worst-case cash flow scenarios for a firm and the sensitivity of the potential cash flow to dramatic changes in the revenue or cost stream.
Difficulty: 3 Hard
Topic: Developing Cash Flow Statements and Budgets
Learning Objective: 06-02 Prepare a cash flow statement and a budget.
Bloom’s: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
58) In the context of financial tools, identify a difference between how traditional Fortune 500 firms and entrepreneurial ventures approach break-even analysis.
Answer: A
Explanation: A difference between how traditional Fortune 500 firms and entrepreneurial ventures approach break-even analysis is that traditional Fortune 500 firms calculate breakeven using profit, whereas entrepreneurial ventures calculate breakeven using cash flow.
Difficulty: 2 Medium
Topic: Developing Cash Flow Statements and Budgets
Learning Objective: 06-02 Prepare a cash flow statement and a budget.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
59) A ________ describes estimates by a small business owner of what the balance sheets and income statements will look like in the future.
Answer: A
Explanation: A pro forma describes estimates by a small business owner of what the balance sheets and income statements will look like in the future.
Difficulty: 1 Easy
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
60) A ________ is a summary of the assets and liabilities of a small business.
Answer: B
Explanation: A balance sheet is a summary of the assets and liabilities of an entrepreneurial business.
Difficulty: 1 Easy
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
61) A ________ can easily be converted to cash, such as accounts receivable and notes receivable.
Answer: C
Explanation: Current assets can easily be converted to cash, such as accounts receivable and notes receivable.
Difficulty: 1 Easy
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
62) Marcus performs an analysis of his new business to anticipate its future requirements. He makes a list of the various assets the firm must account for. He categorizes each asset in two lists: one for assets that can be easily converted into cash and the other for assets that have a physical presence. In this scenario, Marcus is analyzing his new business by
Answer: A
Explanation: In this scenario, Marcus is creating a balance sheet. A balance sheet is a summary of the assets and liabilities of the entrepreneurial business, and it is useful for the new business to analyze and understand the types of assets and liabilities the business can expect.
Difficulty: 3 Hard
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
63) In the context of balance sheets, the current assets of a firm minus its current liabilities are referred to as the ________.
Answer: C
Explanation: In the context of balance sheets, the current assets of a firm minus its current liabilities are referred to as the working capital. The working capital is, in effect, the liquid assets a firm can call upon quickly to meet needs that arise.
Difficulty: 1 Easy
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
64) ________ are owed by a business and are ultimately due more than a year from the current date.
Answer: B
Explanation: Long-term liabilities are owed by a business and are ultimately due more than a year from the current date.
Difficulty: 1 Easy
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
65) The assets minus the liabilities of a firm reflected on the balance sheet should total
Answer: C
Explanation: The assets minus the liabilities of a firm reflected on the balance sheet should total to zero.
Difficulty: 1 Easy
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
66) Ingrid is the owner of an entrepreneurial firm. She makes an estimate of the assets and liabilities of the firm. She then uses these estimates to plan the future activities of the firm. In this scenario, Ingrid creates a
Answer: D
Explanation: In this scenario, Ingrid creates a pro forma balance sheet. The term pro forma simply means that the entrepreneur estimates what the balance sheets and income statements will look like in the future, in order to plan well.
Difficulty: 3 Hard
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
67) The focus of an income statement is on
Answer: A
Explanation: The focus of an income statement is on profit rather than cash flow.
Difficulty: 1 Easy
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
68) An income statement provides both the ________ and the ________ profit figures for a firm.
Answer: B
Explanation: An income statement provides both the gross and the net profit figures for a firm.
Difficulty: 1 Easy
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
69) In the context of financial tools, identify a true statement about income statements.
Answer: B
Explanation: For an entrepreneurial firm, predicting sales is key to developing income statements. The firms should initially look to similar enterprises and attempt to estimate or research their sales levels.
Difficulty: 2 Medium
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
70) The ________ of money is calculated on the value of an investment in time and money, if the owner did not do the proposed venture.
Answer: D
Explanation: The time value of money is the value of money over time at a given rate of inflation or other type of return. It is calculated as the value of your investment in time and money, if you did not do the proposed venture.
Difficulty: 1 Easy
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
71) ________ is a tool for the estimation of when a business’s income exceeds its expenses.
Answer: D
Explanation: Break-even analysis is a tool for the estimation of when a business’s income exceeds its expenses.
Difficulty: 1 Easy
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
72) ________ costs must be paid regardless of how many products or services are sold.
Answer: C
Explanation: Fixed costs must be paid regardless of the sales level.
Difficulty: 1 Easy
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
73) ________ costs change according to how many goods are produced.
Answer: D
Explanation: Variable costs fluctuate according to how many goods are produced.
Difficulty: 1 Easy
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
74) In the context of financial tools, when a new venture’s net cash flow exceeds the initial investment plus the time value of the money invested, the venture is said to have achieved ________.
Answer: B
Explanation: When a new venture’s net cash flow exceeds the initial investment plus the time value of the money invested, the venture is said to have achieved entrepreneurial breakeven. This is the point a successful business turns the corner and begins producing positive cash flows.
Difficulty: 1 Easy
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
75) Which of the following terms is used to describe assets that can be easily converted to cash?
Answer: C
Explanation: Current assets can be easily converted to cash.
Difficulty: 1 Easy
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
76) An investment into a small business by owners is called ________.
Answer: equity
Explanation: An investment into a small business by owners is called equity.
Difficulty: 1 Easy
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Remember
AACSB: Analytical Thinking
77) A ________ projects all the costs that will be incurred by an organization over a specified period of time.
Answer: budget
Explanation: A budget is a statement that projects all the costs that will be incurred by an organization over a period of time.
Difficulty: 1 Easy
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Remember
AACSB: Analytical Thinking
78) ________ is the situation where there is a difference between when the money goes out to pay business expenses and when it comes in from sales.
Answer: Float
Explanation: Float is the difference between when the money goes out and when it comes in.
Difficulty: 1 Easy
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Remember
AACSB: Analytical Thinking
79) A ________ is an examination of the best-case and the worst-case cash flow scenarios.
Answer: sensitivity analysis
Explanation: A sensitivity analysis is an examination of the best-case and the worst-case cash flow scenarios.
Difficulty: 1 Easy
Topic: Developing Cash Flow Statements and Budgets
Learning Objective: 06-02 Prepare a cash flow statement and a budget.
Bloom’s: Remember
AACSB: Analytical Thinking
80) A ________ analysis is an analytic tool that identifies the differences between the predicted and the actual performance of a company over time.
Answer: deviation
Explanation: A deviation analysis is an analysis of the predicted and actual performance of a business at a point in time.
Difficulty: 1 Easy
Topic: Developing Cash Flow Statements and Budgets
Learning Objective: 06-02 Prepare a cash flow statement and a budget.
Bloom’s: Remember
AACSB: Analytical Thinking
81) An example of a(n) ________ asset is a delivery truck used by a florist to deliver flowers to customers.
Answer: fixed
Explanation: Fixed assets have a physical presence such as land, buildings, office equipment, machinery, and vehicles.
Difficulty: 1 Easy
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Remember
AACSB: Analytical Thinking
82) The focus of an income statement is on ________ rather than on cash.
Answer: profit
Explanation: The focus of an income statement is on profit rather than on cash.
Difficulty: 1 Easy
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Remember
AACSB: Analytical Thinking
83) Rent is an example of a(n) ________.
Answer: fixed cost
Explanation: Rent is an example of a fixed cost.
Difficulty: 1 Easy
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Remember
AACSB: Analytical Thinking
84) The term ________ simply mean that an entrepreneur estimates what the balance sheets and income statements will look like in the future.
Answer: pro forma
Explanation: The term pro forma simply mean that an entrepreneur estimates what the balance sheets and income statements will look like in the future.
Difficulty: 1 Easy
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Remember
AACSB: Analytical Thinking
85) Explain why cash flow is important to a new business owner.
Answer: It is an actionable financial plan for a business. It determines whether there is an actual financial opportunity for the business. In its simplest form, a cash flow statement is a comparison of cash inflow and cash outflow.
Difficulty: 2 Medium
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Understand
AACSB: Analytical Thinking
86) How is an income statement used by a new business?
Answer: An income statement projects the future income of an organization. It focuses on profit rather than cash flow. It predicts sales for the organization.
Difficulty: 2 Medium
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Understand
AACSB: Analytical Thinking
87) Why is a break-even analysis important to a new business?
Answer: A break-even analysis is important to a new business because it projects the position of a company to determine not only the viability of the new venture but also a realistic assessment of whether this is the best path for the entrepreneur to take.
Difficulty: 2 Medium
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom’s: Understand
AACSB: Analytical Thinking
88) Explain the purpose of a cash flow statement, and list five of the basic elements.
Answer: A cash flow statement is used to describe all of the activities that provide and use cash during the period being examined. This includes salaries, basic benefits, taxes and fees, cost of goods sold, tools and machinery, and travel expenses.
Difficulty: 2 Medium
Topic: Developing Cash Flow Statements and Budgets
Learning Objective: 06-02 Prepare a cash flow statement and a budget.
Bloom’s: Understand
AACSB: Analytical Thinking
89) In the context of cash flow statements and budgets, what is a sensitivity analysis? Why is it important when developing a new business idea?
Answer: A sensitivity analysis is examination of the best-case and the worst-case cash flow scenarios. It is quite prudent to look at a worst-case and a best-case scenario to examine the sensitivity of the potential cash flow to dramatic changes in the revenue or cost stream when conducting due diligence on a business idea.
Difficulty: 2 Medium
Topic: Developing Cash Flow Statements and Budgets
Learning Objective: 06-02 Prepare a cash flow statement and a budget.
Bloom’s: Understand
AACSB: Analytical Thinking
90) What is a balance sheet? How can it be used by businesses?
Answer: A balance sheet is a summary of the assets and liabilities of an entrepreneurial business. It is useful for the new business to analyze and understand the types of assets and liabilities the business can expect. Once the firm is up and running, a pro forma balance sheet is also useful as a comparison in order to understand how assets are being used.
Difficulty: 2 Medium
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Understand
AACSB: Analytical Thinking
91) Name the two liabilities a balance sheet must account for and give examples of both.
Answer: Two forms of liabilities are as follows: current liabilities, which include accounts payable, notes payable, bank notes, and accrued payroll, and long-term liabilities, which include mortgage payable, owners’ equity, and stockholders’ equity.
Difficulty: 2 Medium
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Understand
AACSB: Analytical Thinking
92) Describe fixed costs and variable costs. Give one example of each type of cost.
Answer: Fixed costs must be paid no matter how many goods are sold. An example of fixed costs is rent. Variable costs vary according to how many goods are produced. An example of variable costs is inventory.
Difficulty: 2 Medium
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Understand
AACSB: Analytical Thinking
93) What is a balance sheet? Why is it called a snapshot of a firm?
Answer: A balance sheet is the summary of a firm’s assets and liabilities. It is called a snapshot because it lists the financial condition of the firm as of a specific date.
Difficulty: 2 Medium
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom’s: Understand
AACSB: Analytical Thinking
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
