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Entrepreneurship: Successfully Launching New Ventures, 4e (Barringer/Ireland)

Chapter 8 Assessing a New Venture's Financial Strength and Viability


1) Klymit, the company profiled in the opening feature in Chapter 8, makes cold weather apparel
products and related accessories. According to the feature, one of the prominent challenges
Klymit has faced is:
A) cash flow management
B) constructing realistic pro forma financial statements
C) defining its core strategy
D) hiring qualified personnel
E) finding reliable partners
Answer: A
Diff: 1
Page Ref: 253
Topic: Introduction to Financial Management
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
2) Financial management deals with two thingsmanaging a company's finances and:
A) operations management
B) inventory control
C) raising money
D) production management
E) supply chain management
Answer: C
Diff: 1
Page Ref: 255
Topic: Introduction to Financial Management
AACSB: Analytic Skills
Objective: Describe the importance of international markets to entrepreneurial/small business
ventures
3) Which of the following was not identified as one of the four main financial objectives of a
firm?
A) stability
B) efficiency
C) timeliness
D) liquidity
E) profitability
Answer: C
Diff: 1
Page Ref: 256
Topic: Introduction to Financial Management
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business

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Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

4) The four main financial objectives of a firm are:


A) efficiency, effectiveness, strength, and flexibility
B) power, success, efficiency, and effectiveness
C) control, effectiveness, liquidity, and power
D) success, strength, liquidity, and profitability
E) profitability, liquidity, efficiency, and stability
Answer: E
Diff: 1
Page Ref: 256
Topic: Introduction to Financial Management
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
5) Match the financial objective with its correct definition.
A) stability/the overall health of the financial structure of the firm, particularly as it relates to its
debt-to-equity ratio
B) profitability/how productively a firm utilizes its assets
C) liquidity/a company's ability to make a profit
D) efficiency/a company's ability to meet its short-term obligations
E) profitability/the overall health of the financial structure of the firm, particularly as it relates to
its debt-to-equity ratio
Answer: A
Diff: 2
Page Ref: 256
Topic: Introduction to Financial Management
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
6) ________ is a company's ability to meet its short-term financial obligations.
A) Liquidity
B) Profitability
C) Effectiveness
D) Stability
E) Efficiency
Answer: A
Diff: 1
Page Ref: 256
Topic: Introduction to Financial Management
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business

2
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

7) A company's ability to productively utilize its assets relative to its revenue and its profits is
referred to as:
A) efficiency
B) effectiveness
C) stability
D) liquidity
E) profitability
Answer: A
Diff: 2
Page Ref: 256
Topic: Introduction to Financial Management
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
8) Money owed to a company by its customers is referred to as:
A) accounts obtainable
B) accounts payable
C) accounts receivable
D) inventory
E) accounts collectable
Answer: C
Diff: 2
Page Ref: 256
Topic: Introduction to Financial Management
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
9) Amanda Still owns a seafood restaurant in Clearwater, Florida. She is currently owed $19,000
by a corporation that she catered a meeting for and $2,000 on an overdue account. Amanda has
$21,000 in:
A) accounts receivable
B) inventory
C) accounts collectable
D) accounts obtainable
E) accounts payable
Answer: A
Diff: 2
Page Ref: 256
Topic: Introduction to Financial Management
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business

3
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

10) A company's merchandise, raw materials, and products waiting to be sold is called its:
A) set aside
B) accumulation
C) reserve
D) inventory
E) stock
Answer: D
Diff: 2
Page Ref: 256
Topic: Introduction to Financial Management
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
11) Peggy Owens owns a store that sells exercise equipment. Each January 1, she makes a very
accurate account of all her merchandise and products waiting to be sold that are in her store. On
January 1, Peggy is taking account of her store's:
A) long-term assets
B) owners' equity
C) accounts payable
D) accounts receivable
E) inventory
Answer: E
Diff: 2
Page Ref: 256
Topic: Introduction to Financial Management
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
12) Southwest Airlines uses its assets very productively. Its turnaround time, or the time that its
airplanes sit on the ground while they are being loaded and unloaded, is the lowest in the airline
industry. In terms of the primary financial objectives of a firm, this attribute is a measure of
Southwest's:
A) efficiency
B) effectiveness
C) stability
D) liquidity
E) profitability
Answer: A
Diff: 2
Page Ref: 256
Topic: Introduction to Financial Management
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business

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Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

13) The strength and vigor of a firm's overall financial posture is referred to as:
A) liquidity
B) effectiveness
C) stability
D) profitability
E) efficiency
Answer: C
Diff: 2
Page Ref: 256
Topic: Introduction to Financial Management
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
14) A financial statement is a(n):
A) set of ratios which depict relationships between a firm's financial items
B) estimate of a firm's future income and expenses
C) hybrid statement of cash flows
D) itemized forecast of a company's income, expenses, and capital needs
E) written report that quantitatively describes a firm's financial health
Answer: E
Diff: 2
Page Ref: 257
Topic: Introduction to Financial Management
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
15) ________ are an estimate of a firm's future income and expenses, based on its past
performance, its current circumstances, and its future plans.
A) Calculation statements
B) Forecasts
C) Statements of cash flow
D) Financial statements
E) Prediction statements
Answer: B
Diff: 2
Page Ref: 257
Topic: Introduction to Financial Management
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business

5
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

16) ________ are itemized forecasts of a company's income, expenses, and capital needs and are
also an important tool for financial planning and control.
A) Profitability statements
B) Financial statements
C) Owners' equity statements
D) Budgets
E) Statements of cash flows
Answer: D
Diff: 2
Page Ref: 257
Topic: Introduction to Financial Management
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
17) Match the financial term with its proper definition.
A) forecasts/depict relationships between items on a firm's financial statements
B) forecasts/written report that quantitatively describes a firm's financial health
C) budgets/itemized forecasts of a company's income, expenses, and capital needs
D) financial ratios/written report that quantitatively describes a firm's financial health
E) financial statements/an estimate of a firm's future income and expenses
Answer: C
Diff: 2
Page Ref: 257
Topic: Introduction to Financial Management
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
18) In regard to budgets, which of the following statements is not true?
A) Budgets include an itemized forecast of a company's expenses.
B) Budgets are a poor tool for financial control.
C) Budgets are an important tool for financial planning.
D) Budgets include an itemized forecast of a company's capital needs.
E) Budgets include an itemized forecast of a company's income.
Answer: B
Diff: 3
Page Ref: 257
Topic: Introduction to Financial Management
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business

6
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

19) ________ depict relationships between items on a firm's financial statements.


A) Financial proportions
B) Fiscal relations
C) Fiscal projections
D) Monetary balances
E) Financial ratios
Answer: E
Diff: 2
Page Ref: 257
Topic: Introduction to Financial Management
AACSB: Reflective Thinking
Objective: Describe the role of entrepreneurs and small business
20) The Partnering for Success feature in Chapter 8 focuses on buying groups, and recommends
that small businesses seek out buying groups to participate in. What is a "buying group" in the
context of the feature?
A) a partnership that bands small businesses together to attain volume discounts on common
products and services that they buy
B) a partnership that bands small businesses together to collectively make the commitment to
"buy local" at every available opportunity
C) a partnership that bands small businesses together to get the best prices possible from foreign
importers and manufacturers
D) a partnership that bands small businesses together to get the best possible terms from finance
companies
E) a partnership that bands small businesses together to get the best possible rates on property
and liability insurance
Answer: A
Diff: 2
Page Ref: 258
Topic: Financial Statements and Forecasts
AACSB: Reflective Thinking
Objective: Describe the role of entrepreneurs and small business
21) ________ reflect past performance and are usually prepared on a quarterly and annual basis.
A) Chronological financial statements
B) Ad-hoc financial statements
C) Historical financial statements
D) Concurrent financial statements
E) Pro forma financial statements
Answer: C
Diff: 2
Page Ref: 259
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business

7
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

22) ________ are projections for future periods based on forecasts and are typically completed
for two to three years into the future.
A) Chronological financial statements
B) Pro forma financial statements
C) Ad-hoc financial statements
D) Concurrent financial statements
E) Historical financial statements
Answer: B
Diff: 2
Page Ref: 259
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
23) Which of the following statements about pro forma financial statements is incorrect?
A) Pro forma financial statements are projections for future periods based on forecasts.
B) Pro forma financial statements are typically completed for two to three years into the future.
C) Pro forma financial statements are required by the SEC.
D) Most companies consider their pro forma financial statements to be confidential and reveal
them to outsiders only on a "need to know basis."
E) Pro forma financial statements are strictly planning tools.
Answer: C
Diff: 3
Page Ref: 259
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
24) Which of the following selections correctly matches the financial statement with its
description?
A) income statement/tells how much a firm is making or losing
B) income statement/depicts the structure of a firm's assets and liabilities
C) balance sheet/shows where a firm's cash is coming from
D) balance sheet/tells how much a firm is making or losing
E) statement of cash flows/depicts the structure of a firm's assets and liabilities
Answer: A
Diff: 3
Page Ref: 260
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business

8
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

25) A firm's ________ reflects the results of its operations over a specified period and shows
whether it is making a profit or is experiencing a loss.
A) statement of cash flows
B) income statement
C) forecast
D) balance sheet
E) operating budget
Answer: B
Diff: 2
Page Ref: 260
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
26) Which financial statement records all of a firms revenues and expenses for a given period
and shows whether the firm is making a profit or experiencing a loss?
A) balance sheet
B) owner's equity statement
C) statement of cash flows
D) forecast
E) income statement
Answer: E
Diff: 2
Page Ref: 260
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
27) On a firm's income statement, net sales consists of:
A) operating expenses minus cost of sales
B) total sales minus allowances for returned goods and discounts
C) cost of sales minus allowances for returned goods and discounts
D) cost of sales minus operating expenses
E) total sales minus operating expenses
Answer: B
Diff: 2
Page Ref: 261
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business

9
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

28) According to the textbook, the three numbers that receive the most attention when evaluating
an income statement are:
A) depreciation, interest income, and income tax expense
B) cost of sales, gross profit, and operating expenses
C) net sales, cost of sales, and operating expenses
D) gross profit, net sales, and incomes tax expense
E) gross profit, other income, and net income
Answer: C
Diff: 3
Page Ref: 261
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
29) A firm's profit margin, or return on sales, is computed by dividing:
A) net income by net sales
B) gross profit by net sales
C) net income by gross profit
D) net income by cost of sales
E) operating income by gross profit
Answer: A
Diff: 3
Page Ref: 261
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
30) A(n) ________ is a snapshot of a company's assets, liabilities, and owners' equity at a
specific point in time.
A) income statement
B) statement of cash flows
C) effectiveness statement
D) balance sheet
E) efficiency statement
Answer: D
Diff: 2
Page Ref: 261
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business

10
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

31) Which of the following statement is incorrect regarding how balance sheets are prepared?
A) The left hand side of a balance sheet shows a firm's assets.
B) The assets on a balance sheet are shown in order of liquidity.
C) Assets are recorded at fair market value rather than cost.
D) The right hand side of a balance sheet shows a firm's liabilities and its owners' equity.
E) Intellectual property receives value in some cases and in some cases it does not.
Answer: C
Diff: 2
Page Ref: 261
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
32) The Savvy Entrepreneurial Firm feature in Chapter 8 focuses on a scenario involving the
selection of a new CEO for New Venture Fitness Drinks. The lesson learned from the feature
was:
A) compare a firm's financial ratios against its primary competitors and industry norms to fairly
assess how well a firm is performing financially
B) income statements are more effective in assessing how well a firm is performing financially
than are balance sheets and statements of cash flow
C) the most powerful instrument for understanding how well a firm is performing financially is
the statement of cash flows
D) ratio analysis is ineffective
E) look at multiple years of an income statement rather than a single year to fairly assess how
well a firm is performing financially
Answer: E
Diff: 3
Page Ref: 262
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
33) Real estate, buildings, equipment and furniture are classified as ________ on a company's
balance sheet.
A) intermediate term assets
B) fixed assets
C) other assets
D) permanent assets
E) current assets
Answer: B
Diff: 2
Page Ref: 263
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business

11
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

34) Cash plus items that are readily convertible to cash, such as accounts receivable, marketable
securities, and inventories are classified as ________ on a firm's balance sheet.
A) other assets
B) intermediate term assets
C) temporary assets
D) current assets
E) fixed assets
Answer: D
Diff: 2
Page Ref: 263
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
35) Which of the following is an example of a long-term liability?
A) accounts payable
B) real estate mortgage
C) accrued expenses
D) current portion of real estate mortgage
E) owners' equity
Answer: B
Diff: 2
Page Ref: 263
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
36) When evaluating a balance sheet, the two primary questions are:
A) whether a firm has sufficient short-term assets to cover its short-term debts and whether it is
profitable
B) whether a firm is profitable and whether a firm is financially sound
C) whether its costs of sales is going up and whether it is generating excess cash that could be
used to pay down debt or pay dividends
D) whether a firm has sufficient short-term assets to cover its short-term debts and whether it is
financially sound
E) whether a firm is profitable and whether it is generating excess cash that could be used to pay
down debt or pay dividends
Answer: D
Diff: 3
Page Ref: 263
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business

12
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

37) A firm's working capital is its:


A) inventory and accounts receivable minus its current liabilities
B) current assets minus its current liabilities
C) total assets minus its total liabilities
D) cash and cash equivalents minus its current liabilities
E) accounts receivable minus its total accounts payable
Answer: B
Diff: 2
Page Ref: 263
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
38) A firm's ________ is its current assets divided by its current debt.
A) working share
B) present share
C) working capital
D) owners' equity
E) current ratio
Answer: E
Diff: 2
Page Ref: 263
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
39) Which of the financial statements used by businesses to keep track of their financial affairs is
the most similar to an ordinary person's end-of-the month bank statement?
A) income statement
B) balance sheet
C) statement of cash flows
D) statement of ratio analysis
E) statement of owners' equity
Answer: C
Diff: 2
Page Ref: 265
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business

13
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

40) The statement of cash flows is divided into three separate activities:
A) profitability activities, stability activities, and investing activities
B) stability activities, earning activities, and financing activities
C) operating activities, capital activities, and liquidity activities
D) spending activities, earning activities, and capital activities
E) operating activities, investing activities, and financing activities
Answer: E
Diff: 2
Page Ref: 265
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
41) In the context of a firm's statement of cash flows, ________ include the purchase, sale, or
investment in fixed assets, such as real estate, equipment, and buildings.
A) operating activities
B) investing activities
C) capital activities
D) financing activities
E) liquidity activities
Answer: B
Diff: 2
Page Ref: 265
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
42) In the context of a firm's statement of cash flows, ________ include cash raised during the
period by borrowing money or selling stock and/or cash used during the period by paying
dividends, buying back outstanding stock, or buying back outstanding bonds.
A) investing activities
B) financing activities
C) operating activities
D) liquidity activities
E) capital activities
Answer: B
Diff: 2
Page Ref: 265
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business

14
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

43) According to the textbook, the most practical way to interpret or make sense of a firm's
historical financial statements is through:
A) profit analysis
B) regression analysis
C) the preparation of pro forma financial statements
D) ratio analysis
E) percentage analysis
Answer: D
Diff: 2
Page Ref: 266
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
44) Kevin Pierce was reading the business plan of New Venture Fitness Drinks, and noticed that
prior to its financial forecasts, New Venture Fitness Drinks placed an explanation of the sources
of the numbers for the forecast and the assumptions used to generate them. This explanation is
called a(n):
A) forecast sheet
B) forecast hypothesis
C) estimate statement
D) assumption sheet
E) hypothesis sheet
Answer: D
Diff: 2
Page Ref: 267
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
45) In the context of computing the cost of sales, the common way to do this is to use the
percent-of-sales method, which is a method for expressing:
A) each expense item as a percentage of net sales
B) each expense item as a percentage of gross profit
C) each expense item as a percentage of net income
D) each expense item as a percentage of operating income
E) each expense item as a percentage of cost of sales
Answer: A
Diff: 2
Page Ref: 269
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business

15
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

46) If a firm determines it can use the percentage-of-sales method and it follows the procedure
described in the textbook, then the net result is that each expense item on its income statement
(with the exception of those items that can be individually forecast) will grow at the same rate as
sales. This approach is called the:
A) continuous percentage method of forecasting
B) stable fraction method of forecasting
C) regular proportion method of forecasting
D) constant ratio method of forecasting
E) steady percentage method of forecasting
Answer: D
Diff: 3
Page Ref: 269
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
47) A firm's pro forma financial statements are similar to its historical financial statements except
that:
A) they do not include the income statement
B) they are required by the SEC in all cases
C) they look back rather than forward
D) they look forward rather than back
E) they do not include the statement of cash flows
Answer: D
Diff: 1
Page Ref: 271
Topic: Pro Forma Financial Statements
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
48) The Savvy Entrepreneurial Firm feature for Chapter 8 focuses on Wise Acre Frozen Treats, a
company that made organic popsicles from unrefined sweeteners. According to the feature, Wise
Acre Frozen Treats failed largely because:
A) it grew too quickly, which overwhelmed its cash flow
B) it was not careful enough in preparing its pro forma financial statements
C) it was not efficient in the way it utilized its assets
D) it spent too much money on marketing
E) it did not compare its financial ratios to industry peers
Answer: A
Diff: 1
Page Ref: 272
Topic: Pro Forma Financial Statements
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business

16
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

49) The ________ provides a firm a sense of how its activities will affect its ability to meet its
short-term liabilities and how its finances will evolve over time.
A) pro forma balance sheet
B) pro forma statement of cash flows
C) pro forma income statement
D) pro forms expense statement
E) pro forma statement of owners' equity
Answer: A
Diff: 2
Page Ref: 273
Topic: Pro Forma Financial Statements
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
50) According to the textbook, the most important function of the pro forma statement of cash
flows is to project whether the firm will have sufficient:
A) income to meet its payroll on a weekly or monthly basis
B) income to exceed industry norms
C) cash to meet its needs
D) inventory to meet its sales and production forecasts
E) short-term assets to cover its short-term liabilities
Answer: C
Diff: 2
Page Ref: 277
Topic: Pro Forma Financial Statements
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
51) Financial management deals with two things: raising money and managing a company's
finances in a way that achieves the highest rate of return.
Answer: TRUE
Diff: 1
Page Ref: 255
Topic: Introduction to Financial Management
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
52) Efficiency is the ability to earn a profit.
Answer: FALSE
Diff: 2
Page Ref: 256
Topic: Introduction to Financial Management
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
53) Stability is a company's ability to meet its short-term financial obligations.
Answer: FALSE
Diff: 2
Page Ref: 256
Topic: Introduction to Financial Management
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
17
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

54) A company's accounts receivable is money owed to it by its customers.


Answer: TRUE
Diff: 1
Page Ref: 256
Topic: Introduction to Financial Management
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
55) If a firm's debt-to-equity ratio gets too high, it may have trouble meeting its obligations and
securing the level of financing needed to fuel its growth.
Answer: TRUE
Diff: 2
Page Ref: 256
Topic: Introduction to Financial Management
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
56) Budgets are itemized forecasts of a company's income, expenses, and capital needs and are
also an important tool for financial planning and control.
Answer: TRUE
Diff: 2
Page Ref: 257
Topic: Introduction to Financial Management
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
57) Historical financial statements reflect past performance and are usually prepared on a
quarterly and annual basis.
Answer: TRUE
Diff: 1
Page Ref: 259
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
58) Pro forma financial statements are projections for future periods based on forecasts and are
typically completed for 2 to 3 years into the future.
Answer: TRUE
Diff: 2
Page Ref: 259
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
59) The balance sheet reflects the results of the operations of a firm over a specified period of
time.
Answer: FALSE
Diff: 2
Page Ref: 260
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
18
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

60) The income statement records all the revenues and expenses for a given period and shows
whether the firm is making a profit or is experiencing a loss.
Answer: TRUE
Diff: 1
Page Ref: 260
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
61) A firm's profit margin, or return on sales, is computed by dividing net income by net sales.
Answer: TRUE
Diff: 3
Page Ref: 261
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
62) A statement of cash flows is a snapshot of a company's assets, liabilities, and owners' equity
at a specific point in time.
Answer: FALSE
Diff: 2
Page Ref: 261
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
63) The major categories of assets listed on a balance sheet include current assets, fixed assets,
and other assets.
Answer: TRUE
Diff: 3
Page Ref: 263
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
64) A firm's working capital is defined as its fixed assets minus its long-term liabilities.
Answer: FALSE
Diff: 2
Page Ref: 263
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
65) The statement of cash flows summarizes the changes in a firm's cash position for a specified
period of time and details why the change occurred.
Answer: TRUE
Diff: 2
Page Ref: 265
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business

19
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

66) In the context of a firm's statement of cash flows, operating activities include the purchase,
sale, or investment in fixed assets, such as real estate, equipment, and buildings.
Answer: FALSE
Diff: 2
Page Ref: 265
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
67) The break-even point for a new restaurant or product is the point where the total revenue
received equals total costs associated with the output of the restaurant or the sale of the product.
Answer: TRUE
Diff: 2
Page Ref: 269
Topic: Financial Statements and Forecasts
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
68) The pro forma balance sheet provides a firm a sense of how its activities will affect its ability
to meet its short-term liabilities and how its finances will evolve over time.
Answer: TRUE
Diff: 2
Page Ref: 273
Topic: Pro Forma Financial Statements
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
69) The pro forma income statement shows the projected flow of cash into and out of the
company during a specified period.
Answer: FALSE
Diff: 2
Page Ref: 273
Topic: Pro Forma Financial Statements
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
70) The same financial ratios used to evaluate a firm's historical financial statement should be
used to evaluate the pro forma financial statements.
Answer: TRUE
Diff: 2
Page Ref: 277
Topic: Pro Forma Financial Statements
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business

20
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

71) Describe each of the four primary financial objectives of firms.


Answer: The four primary financial objectives of most firms are: profitability, liquidity,
efficiency, and stability.
Profitability is the ability to earn a profit. Liquidity is a company's ability to meet its short-term
financial obligations. Efficiency is how productively a firm utilizes its assets relative to its
revenue and its profits. Stability is the strength and vigor of the firm's overall financial posture.
Diff: 2
Page Ref: 256
Topic: Introduction to Financial Management
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
72) Describe the difference between historical and pro forma financial statements.
Answer: Historical financial statements reflect past performance and are usually prepared on a
quarterly and annual basis. Pro forma financial statements are projections for future periods
based on forecasts and are typically completed for two to three years into the future. Pro forma
financial statements are strictly planning tools, while historical financial statements reflect actual
information.
Diff: 1
Page Ref: 259
Topic: Introduction to Financial Management
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
73) Describe the purpose of the income statement, the balance sheet, and the statement of cash
flows.
Answer: The income statement reflects the results of the operations of a firm over a specified
period of time. It records all the revenues and expenses for the given period and shows whether
the firm is making a profit or is experiencing a loss. Unlike the income statement, which covers a
specified period of time, a balance sheet is a snapshot of a company's assets, liabilities, and
owners' equity at a specific point in time. The statement of cash flows summarizes the changes in
a firm's cash position for a specified period of time and details why the change occurred. The
statement of cash flows is similar to a month-end bank statement. It reveals how much cash is on
hand at the end of the month as well as how the cash was acquired and spent during the month.
Diff: 2
Page Ref: 260
Topic: Introduction to Financial Management
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
74) What is ratio analysis? Why is it important?
Answer: The most practical way to interpret or make sense of a firm's historical and pro forma
financial statements is through ratio analysis. The ratios described in the textbook are divided
into profitability ratios, liquidity ratios, and overall financially stability ratios. These ratios
provide a means of interpreting the historical and pro forma financial ratios for a firm.
Diff: 2
Page Ref: 266
Topic: Introduction to Financial Management
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business
21
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

75) What are forecasts? What role do they play in the preparation of pro forma financial
statements?
Answer: Forecasts are projections of a firm's future sales, expenses, income, and capital
expenditures. A firm's forecasts provide the basis for its pro forma financial statements. A welldeveloped set of pro forma financial statements helps a firm create accurate budgets, build
financial plans, and manage its finances in a proactive rather than a reactive manner.
Diff: 2
Page Ref: 267
Topic: Introduction to Financial Management
AACSB: Analytic Skills
Objective: Describe the role of entrepreneurs and small business

22
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall