ETR401 Test Bank

Chapter 01 Small Business: Its Opportunities and Rewards Answer Key
True / False Questions
1. (p. 4) About half of the adults in the U.S. think about owning their own business, but only one
person in 50 who thinks about it actually starts a business.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Learning Objective: 01-1
2. (p. 4) When thinking about owning their own business, one hurdle people need to overcome is
taking the right action.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
3. (p. 5) The U.S. government agency that helps people start businesses is the U.S. Department of
Commerce.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
4. (p. 6) Imitative firms are defined as prepackaged businesses that are bought, rented, or leased
from another company.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
5. (p. 6) Truly entrepreneurial businesses are characterized by imitativeness in their products,

services or business models.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
6. (p. 7) Small businesses focus on effectiveness whereas high-growth ventures focus on

efficiency.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
7. (p. 7) People starting high-growth ventures need to know how to seek and obtain venture
capital.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
8. (p. 8) Nearly all entrepreneurs talk about three universally mentioned rewards: flexibility, fame,
and fortune.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
9. (p. 8) Growth rewards are what people get from facing and beating challenges.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
10. (p. 9) Flexibility rewards refer to the money made from owning your own business.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
11. (p. 9) More than 75 percent of the millionaires in the United States are entrepreneurs.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
12. (p. 10) Some of the problems faced by people who are thinking about starting small businesses
are: (1) there is not enough financing to start businesses, and (2) they must make something to
make money.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
13. (p. 12) In order to start a business, you need four elements to come together: boundary, reason,
idea, and exchange.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
14. (p. 13) The most frequently occurring element of the BRIE model is the intention.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
15. (p. 13) In the BRIE model, exchange refers to moving resources, products, or services to others
in exchange for money or other resources.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
16. (p. 14) The BRIE model can help individuals with one of the biggest hurdles of starting a
business, which are resources.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
17. (p. 15) Small business is the engine of job generation, but it is important for existing jobs, too.
TRUE
AACSB: Reflective Thinking

Bloom's: Comprehension
Difficulty: Medium
18. (p. 16) The high-growth ventures and big businesses would not succeed without small
businesses offering supporting services.
TRUE

Difficulty: Medium
19. (p. 19) The four forms of entrepreneurship are public, independent, corporate, and social.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
20. (p. 20) Public entrepreneurship is the form of entrepreneurship that involves revitalizing private
agencies.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Multiple Choice Questions
21. (p. 4) According to the text, small business involves _____ people and has its owner managing
the business on a day-to-day basis.
A. 100-200
B. 1-50
C. between 200 to 500
D. at least 500
Among SMEs, small enterprises have 1 to 50 people, while medium enterprises have 51 to 500
people.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
22. (p. 4) Identify the two hurdles that people need to overcome to move from thinking about
owning their own business to achieving it.
A. Moving from inaction to action and taking the right action.
B. Financing the business and government regulation.
C. Experience from large corporations for needed skill sets and organization abilities.
D. Family support and finding the right people for the organization.
There are two hurdles that people need to overcome to move from thinking to achieving. One of
these is moving from inaction to action. The second hurdle is taking the right actions.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
23. (p. 5) According to the Small Business Administration, about _____ of new firms with
employees survive four years, and for owner-only firms this rate is _____ percent surviving four
years.
A. one-fourth; 30
B. one-half; 75
C. two-thirds; 50
D. two-fifths; 60
The Small Business Administration reports that about two-thirds of new firms with employees
survive four years, and for owner-only firms the rate is 50 percent surviving four years.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
24. (p. 5) A facility which offers subsidized space and business advice to companies in their
earliest stages of operation is called a(n)
A. small business administration center.
B. franchise.
C. small business development center.
D. incubator.
More than 81 percent of the clients of Small Business Development Centers were still going after
five years, and 87 percent of firms getting help in incubators were still going at four years.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
still going at four years

constant or at least daily management
25. (p. 5) What percent of firms getting help in incubators were still going at four years?
A. 50
B. 81
C. 66
D. 87
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
26. (p. 5) _____ are the offices co-sponsored by states and the federal government, that offer free
or low-cost help to existing and potential small businesses.
A. Small Business Development Centers
B. Small Business Administration Offices
C. Research and Outreach Services
D. Occupational structures
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
27. (p. 5) The U.S. government agency that helps people start business is the
A. Small Business Administration.
B. U.S. Department of Business Development.
C. Department of Business Development.
D. U.S. Entrepreneurial Administration.
The Small Business Administration or SBA categorizes a business in the United States as small
if it has fewer than 500 employees.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
28. (p. 5) The Small Business Administration categorizes a business in the U.S. as small, if it has
fewer than _____ employees.
A. 50
B. 500
C. 300
D. 1,000
The Small Business Administration categorizes a business in the United States as small if it has
fewer than 500 employees. Among SMEs, small enterprises have 1 to 50 people, while medium
enterprises have 51 to 500 people.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
29. (p. 5) Among SMEs, medium enterprises have _____ people.
A. 51-500
B. 251-500
C. 1-50
D. 1-20
The Small Business Administration categorizes a business in the United States as small if it has
fewer than 500 employees. Among SMEs, small enterprises have 1 to 50 people, while medium
enterprises have 51 to 500 people.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
30. (p. 5) A business owned by an individual or small group is referred to as a(n)

A. franchise.
B. incubator.
C. team-dependent business.
D. independent small business.
Independent means that the business is owned by an individual or small group rather than
existing as part of a larger enterprise or a business whose stock can be bought on an exchange.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
31. (p. 5) _____ refers to constant or at least daily management of a business by its owner.
A. Franchise.
B. Licensing
C. Franchising
D. Owner-management
Owner-management refers to constant or at least daily management of a business by its owner.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
32. (p. 5) A(n) _____ is one who profits from a business but is not involved in its day-to-day
operations.
A. incubator
B. absentee owner
C. owner-manager
D. franchisor
It is possible to become an absentee owner, who profits from a business but is not involved in its
day-to-day operations.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
33. (p. 6) Truly entrepreneurial businesses are characterized by _____, in their products, services,
or business models.
A. novelty
B. imitation
C. experience
D. government subsidy
Novelty means something characterized by being different or new.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
34. (p. 6) Small businesses are

A. imitative in nature.
B. characterized by novelty.
C. described as being unique and distinctive.
D. prepackaged businesses you buy or lease from a franchisor.
Small businesses are imitative in nature, with most small firms doing what other firms do, with
only slight variations.

Difficulty: Easy
35. (p. 6) A prepackaged business bought, rented, or leased from a company is called a(n)
A. incubator.
B. imitative firm.
C. franchise.
D. novelty.
A franchise is a prepackaged business you buy or lease from a franchisor.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
36. (p. 6) A person who becomes an owner through inheriting or being given a stake in a family
business is called a(n)
A. founder.
B. manager.
C. heir.
D. buyer.
Within the population of entrepreneurs, it is sometimes useful to split out certain groups. One of
these consists of buyers, those who purchase an existing business, or of heirs, those who inherit
or are given a stake in the family business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
37. (p. 7) People starting high-growth ventures

A. require key market knowledge that focuses on their immediate marketplace and communities.
B. focus on how to start small, with resources from the owner, family, and friends.
C. need to know how to seek and obtain external financing.
D. require a key type of knowledge of how to grow on the schedule set by and for the purposes
of the owner.
The knowledge needed for a small business focuses on how to start small, with resources from
the owner, family, and friends. A key type of knowledge would be how to grow on the schedule
set by and for the purposes of the owner, not outside investors. The key market knowledge for a
small business focuses on its immediate marketplace and communities.

Difficulty: Medium
38. (p. 7) The key market knowledge for a small business
A. is to know how to seek and obtain external financing.
B. focuses on its immediate marketplace and communities.
C. is to know how to cash out through the sale of an initial public offering of stock or through the
sale of the company to a larger company.
D. focuses on the need to know how to dominate the market and grow dramatically and quickly.
People starting high-growth ventures need to know how to seek and obtain external financing,
particularly venture capital. They also need to know how to dominate the market and grow
dramatically and quickly, according to the schedule of investors or as the market will allow.
High-growth venture founders would ultimately want to know how to cash out through the sale
of an initial public offering of stock or through the sale of the company to a larger company or
set of investors.

Difficulty: Medium
39. (p. 7) Which of the following is a characteristic of a small business?

A. Preferred funding source is other people's money
B. Focus is on efficiency
C. Approach to human resource is to professionalize
D. Delegation is essential
Small businesses focus on efficiency whereas high-growth ventures focus on effectiveness.

Difficulty: Medium
40. (p. 7) Which of the following is an attribute of a high-growth venture?
A. When the firm is in trouble, it cuts costs
B. Metastrategy is novelty
C. High-growth ventures grow when necessary
D. Delegation is difficult
High-growth ventures sell more when the firm is in trouble, grow when possible, and delegation
is essential.

Difficulty: Hard
41. (p. 7) Identify the characteristic of a small business.

A. When the firm is in trouble, it focuses on selling more products/services
B. Approach to human resources is to professionalize
C. Focus is on effectiveness
D. Metastrategy is imitation
Small businesses cut costs when the firm is in trouble, their approach to human resources is to
personalize, and their focus is on efficiency.

Difficulty: Hard
42. (p. 7) Identify the characteristic of a high-tech venture.

A. Owner's own money is the preferred funding source
B. Focus is on efficiency
C. Delegation is essential
D. Sales are more important than marketing
High-growth ventures prefer other people's money as the funding source, their focus is on
effectiveness, and marketing is more important than sales.

Difficulty: Hard
43. (p. 7) Which of the following refers to the eventual size of the market, which can range from a
small, local, or niche market to something used by millions or even billions?
A. Innovativeness
B. Mindshare
C. Potential for growth
D. Occupational structure
Potential for growth refers to the potential market size.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
44. (p. 7) Rating firms high or low on innovativeness and potential for growth helps identify the
different types of businesses in what is called
A. Dynamic Capitalism Typology.
B. General Equilibrium Economics.
C. Creative destruction.
D. PICS Model of Entrepreneurship.
Dynamic Capitalism Typology is a model of an economy categorizing businesses based on their

innovativeness and growth rate.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
45. (p. 8) Identify the most numerous and widely available type of firm, ranging from low to
moderate levels of innovation and growth.
A. Resource constrained sector
B. Ambitious firm sector
C. Glamorous sector
D. Economic core sector
Small businesses form the economic core of our society because these are the most numerous
and most widely available type of firm.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
46. (p. 8) Why are small businesses considered the economic core of society?
A. They are high growth and high innovation firms.
B. They are made up of franchises and multisite firms, who are generally not very innovative,
but are designed for high levels of growth.
C. They have lots of innovative ideas but lack the funds to bring them to market.
D. They are the most numerous and most widely available type of firms.
Small businesses form the economic core of our society because these are the most numerous
and most widely available type of firm. Small businesses range from low to moderate levels of
innovation and growth.

Difficulty: Medium
47. (p. 8) According to the Dynamic Capitalism Typology, the glamorous sector
A. consists of firms with high growth and high innovation.
B. consists of the most numerous and most widely available type of firms.
C. consists of franchises and multisite firms, with low to moderate innovation and high levels of
growth.
D. consists of firms high in innovation but low in growth rate due to a lack of resources.
The glamorous sector consists of firms with high growth and high innovation. These are among
the most visible firms in the media.

Difficulty: Medium
48. (p. 8) Which of the following is an example of the glamorous sector?

A. Inventors
B. Fortune 500s
C. Small businesses
D. Franchises and multisite firms
The glamorous sector consists of high growth and high innovation firms, like firms in the
Fortune 500.
AACSB: Analytic
Bloom's: Application
Difficulty: Medium
49. (p. 8) All of the following relate to firms in the ambitious firm sector EXCEPT
A. they are mostly franchises and multisite firms.
B. they are characterized by low to moderate innovation.
C. they are made up of inventors and research and development firms.
D. they are designed for high levels of growth.
The resource constrained sector is made up of inventors and research and development firms
which have lots of innovative ideas but lack the funds to bring them to market.

Difficulty: Hard
50. (p. 8) The resource constrained sector

A. are firms that have low to moderate levels of innovation and growth.
B. are high growth and high innovation firms.
C. are firms that have lots of innovative ideas but lack the funds to bring them to market.
D. are generally not very innovative, but are designed for high levels of growth.
The resource constrained sector, made up of inventors and research and development firms (and
even universities) which have lots of innovative ideas but lack the funds to bring them to market.

Difficulty: Medium
51. (p. 8) All of the following are the popular reward types for small business owners EXCEPT
A. flexibility.
B. power.
C. income.
D. growth.
There are social rewards that entrepreneurs mention less often than working people in general,
which include the respect or admiration of others, or power over others, and family rewards, like
continuing a family tradition in business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
52. (p. 8) Which of the following is a reward that is rarely mentioned by entrepreneurs?
A. Building great wealth
B. Flexibility
C. Continuing a family tradition in business
D. Personal growth
There are social rewards that entrepreneurs mention less often than working people in general,
which include the respect or admiration of others, or power over others, and family rewards, like
continuing a family tradition in business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
53. (p. 8) _____ rewards are what people get from facing and beating or learning from challenges.
A. Recognition
B. Flexibility
C. Income
D. Growth
The three most popular types of rewards for small business owners are growth, flexibility, and
income. Growth rewards are what people get from facing and beating or learning from
challenges.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
54. (p. 9) These rewards refer to the money made from owning your own business.
A. Growth rewards
B. Flexibility rewards
C. Income rewards
D. Performance rewards
Income rewards refer to the money made from owning your own business. For more than three-
quarters of entrepreneurs, this means seeking to match or slightly better the income you had
before you started your own business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
55. (p. 9) For entrepreneurs, perhaps the most rapidly growing type of reward is _____ rewards.
A. recognition
B. flexibility
C. income
D. growth
Flexibility rewards refer to the ability of business owners to structure their lives in the way that
best suits their needs.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
56. (p. 9) The ability of business owners to structure life in the way that suits their needs best refers
to
A. flexibility rewards.
B. family rewards.
C. growth rewards.
D. wealth rewards.
Flexibility rewards are perhaps the most rapidly growing type of reward.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
57. (p. 10, 14) Which of the following is NOT a myth about small businesses?
A. There is not enough financing to start businesses.
B. You need to make something if you are going to make money.
C. You can never try again if you fail once.
D. There is no flexibility when you own your own business.
Small business is important for the individuals for whom income, growth, and flexibility were
among the most important rewards of ownership.

Difficulty: Medium
58. (p. 10) Funding invested for a share of a firm or given as loans or credit from family, friends,
and other businesses used to help start or grow a firm is known as
A. committed capital.
B. informal capital.
C. mezzanine capital.
D. formal social capital.
At the beginning of the recession, the 2007 U.S. national report of the Global Entrepreneurship
Monitor polled experts on entrepreneurship on the availability of funding for new ventures. The
greatest availability was where we usually expect to find it, from family, friends, and other folk,
collectively known as informal capital.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
59. (p. 11) According to Sageworks, in 2008, amid a recession, which of the following represented
the most profitable industries for small businesses?
A. Manufacturing industries
B. Financial services
C. Service industries
D. Software industries
To make profits, you need to make something: In 2008, amid a recession, Sageworks reported
that of the 10 most profitable industries for small businesses, 9 were services like dentists, tax
preparers, mining support services, credit counselors, insurance brokers, and legal and health
practitioners.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
60. (p. 12) According to the BRIE model, in order to start a business, you need all of these elements
to come together EXCEPT
A. boundary.
B. resources.
C. intention.
D. experience.
In order to start a business, you need four elements to come togetherboundary, resources,
intention, and exchange.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
61. (p. 12) Which factor distinguishes a firm from the process of buying or selling or bartering we
all do occasionally?
A. Resources
B. Boundary
C. Intention
D. Exchange
A boundary can be something as simple as a business name or government registration, a phone

or e-mail address dedicated to the business, or a specific location for the firm in a home,
commercial space, or even on the Internet.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
62. (p. 12) A business name or government registration, a phone or e-mail address dedicated to the
business, or a specific location for the firm in a home, commercial space, or on the Internet are
examples of a(n)
A. exchange.
B. resource.
C. boundary.
D. intention.
A business needs the benefits of a boundarysomething that sets it up as a firm, and sets it off
from the buying or selling or bartering we all do occasionally.
AACSB: Analytic
Difficulty: Medium
63. (p. 13) Resources
A. include a business name or government registration.
B. refer to moving goods or service to others in exchange for money.
C. are the most frequently occurring element of the BRIE model.
D. include the product or service to be offered.
Resources include the product or service to be offered, informational resources on markets and
running a business, financial resources, and human resources such as your own time to devote to
the business, or that of others working with you or for you.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
64. (p. 13) Which is the most frequently occurring element of the BRIE model?
A. Intention
B. Boundary
C. Exchange
D. Resources
Intention is the desire to start a business and is the most frequently occurring element of the
BRIE model. The 44 percent of Americans who think about starting their own business are
expressing their intentions.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
65. (p. 13) The desire to start a business represents which element of the BRIE model?
A. Intention
B. Boundary
C. Exchange
D. Resources
Intention is the desire to start a business and is the most frequently occurring element of the
BRIE model.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
66. (p. 14) The BRIE model can help an individual deal with one of the biggest hurdles in starting a
business, which is
A. getting resources.
B. being inactive.
C. setting boundaries.
D. making an exchange.
Even when people know taking action would be in their own best interests, most people tend to
procrastinate, sticking with inaction or doing familiar things that have not worked.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
67. (p. 15) According to the latest statistics, small businesses have created _____ percent of the
new jobs.
A. 75
B. 25
C. 50
D. 95
In the latest statistics, small businesses created 75 percent of the 3.4 million new jobs created.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
68. (p. 15) The sequence or organization of jobs and careers in the economy refers to
A. franchising.
B. creative destruction.
C. occupational structure.
D. incubators.
The occupational structure results in your becoming a small business owner.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
69. (p. 15) The way newly created goods, services, or firms can hurt existing goods, services, or
firms refers to
A. franchising.
B. creative destruction.
C. occupational structure.
D. incubators.
Small business is a key element of every nation's economy because it offers a very special
environment in which the new can come into being. Austrian economist Joseph Schumpeter
labeled this process creative destruction.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
70. (p. 15) Mandarin is a restaurant which has opened recently. People from all over town flock to
Mandarin to find out how good it is. This gives a big boost to the restaurant's initial business. But
it causes the other restaurants in the area to lose business temporarily. The way in which
Mandarin hurts existing restaurants is an example of
A. creative destruction.
B. efficiency.
C. innovative disruption.
D. market penetration.
Creative destruction refers to the way that newly created goods, services, or firms can hurt
existing goods, services, or firms.
AACSB: Analytic
Difficulty: Hard
71. (p. 15) According to the U.S. Small Business Administration, small businesses generate _____
the number of patents per employee than big businesses.
A. 13 to 14 times
B. about twice
C. 40 to 50 times
D. about half
The U.S. Small Business Administration reports that among firms that hold one or more patents,
small businesses generate 13 to 14 times the number of patents per employee than do big
businesses. The patents produced in those small businesses are twice as likely to be among the
top 1 percent of all patents cited by others.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
72. (p. 18) A nation where the major forces for jobs, revenues and taxes come from farming or
extractive industries like forestry, mining, or oil production is a(n)
A. factor-driven economy.
B. efficiency-driven economy.
C. innovation-driven economy.
D. competency-driven economy.
In factor-driven economies, entrepreneurship is essential to helping build personal wealth and

breaking the cycle of low-wage jobs, and entrepreneurship levels are very high.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
73. (p. 18) A nation where industrialization is becoming the major force providing jobs, revenues
and taxes, and where minimizing costs while maximizing productivity is a major goal is a(n)
A. factor-driven economy.
B. efficiency-driven economy.
C. innovation-driven economy.
D. dynamic-driven economy.
As economies develop and go beyond basic manufacturing to a more industrialized economy, it

is called an efficiency-driven economy.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
74. (p. 18) Innovation-driven economies

A. are those where entrepreneurship becomes a key way to build the middle class.
B. are nations where industrialization is becoming the major force providing jobs, revenues and
taxes.
C. are focused on high-value-added manufacturing but are marked by a very large service sector.
D. are those where entrepreneurship is essential to helping build personal wealth and break the
cycle of low-wage jobs.
Innovation-driven economies are focused on high-value-added manufacturing but are marked by

a very large service sector, providing high-end services to not only the resident population, but
also for export.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
75. (p. 18) Entrepreneurship levels in countries such as Germany, Israel, the Republic of Korea,
and the United States average the lowest of the
A. innovation-driven economies.
B. efficiency-driven economies.
C. factor-driven economies.
D. competency-driven economies.
Innovation-driven economies are focused on high-value-added manufacturing but are marked by

a very large service sector, providing high-end services to not only the resident population, but
also for export.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
76. (p. 19) Which of the following statements about virtual instant global entrepreneurship (VIGE)
is false?
A. VIGE depends on using Web sites like eBay for products to quickly establish a global
presence.
B. Many VIGE sites offer procedures, services, and Web page templates which incorporate best
practices for global trading.
C. The VIGE approach produces large numbers of smaller-scale exporters.
D. VIGE sites replace institutional procedures with personal contacts to help even the smallest
small businesses go global.
VIGE sites replace personal contacts with institutional procedures to help even the smallest small
businesses go global.
AACSB: Use Of Information Technology

Difficulty: Medium
77. (p. 19) Which aspect of entrepreneurship refers to being in-tune with one's market?
A. Efficiency
B. Creation
C. Customer-focus
D. Growth
Customer-focus is the entrepreneurial focus which refers to being in tune with one's market.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
78. (p. 19) The form of entrepreneurship in which a person or group own their own for-profit
business is
A. independent entrepreneurship.
B. social entrepreneurship.
C. public entrepreneurship.
D. corporate entrepreneurship.
In independent entrepreneurship, all four elements are essential, and that is what makes small
business so important as the role model for the other forms.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
79. (p. 19) The entrepreneurial focus which refers to doing the most work with the fewest resources
is
A. innovation.
B. creation.
C. efficiency.
D. customer-focus.
Efficiency refers to doing the most work with the fewest resources.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
80. (p. 19) The entrepreneurial focus which looks at a new thing or a new way of doing things is
A. customer-focus.
B. innovation.
C. creation.
D. efficiency.
Innovation looks at a new thing or a new way of doing things.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
81. (p. 20) Public entrepreneurship

A. focuses typically on customer-focus and innovation, bringing new products or services to
market, or opening up new markets to your firm.
B. involves creating new charitable and civic organizations which are financially self-sufficient.
C. requires all four elements, and that is what makes small business so important as the role
model for the other forms.
D. involves revitalizing government agencies, so it tends to focus on the customer-focus and
efficiency aspects of entrepreneurship.
Public entrepreneurship involves revitalizing government agencies, so it tends to focus on the

customer-focus and efficiency aspects of entrepreneurship.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
82. (p. 20) Identify the type of entrepreneurship which concentrates typically on innovation and
customer-focus.
A. Public entrepreneurship
B. Corporate entrepreneurship
C. Independent entrepreneurship
D. Social entrepreneurship
In corporate entrepreneurship, the focus is typically on customer-focus and innovation, bringing

new products or services to market, or opening up new markets to your firm.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
83. (p. 20) Which of the following best describes a corporate form of entrepreneurship?
A. It is a form of entrepreneurship involving the creation of self-sustaining charitable and civic
organizations.
B. It is a form of entrepreneurship that involves revitalizing government agencies.
C. It is a form of entrepreneurship in which a person or group owns their own for-profit business.
D. It is a form of entrepreneurship which takes place in existing businesses around new products,
services or markets.
In corporate entrepreneurship, the focus is typically on customer-focus and innovation, bringing

new products or services to market, or opening up new markets to your firm.

Difficulty: Medium
84. (p. 20) Social entrepreneurship
A. involves creating new charitable and civic organizations which are financially self-sufficient.
B. involves bringing new products or services to market.
C. involves a person or group who owns their own for-profit business.
D. involves revitalizing government agencies.
Social entrepreneurship on the other hand involves creating new charitable and civic
organizations which are financially self-sufficient, or for-profit companies that use much of their
profit to fund charities.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
85. (p. 20) This is the degree of attention your target market pays to your idea or organization.
A. Efficiency
B. Identity
C. Mindshare
D. Growth
Innovation-driven entrepreneurs are often as interested in having their idea used or known
called mindshare as making money.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Scenario: Jamie Johnson and "For Kidz"

Taking classes at a local university, Jamie heard a consistent theme from many professors,
students, and parents in the community: "There is nothing for children in this rural area." Jamie
always liked children and thought of starting a business "For Kidz" targeting children 12 and
under.
86. (p. 5) Where can Jamie go to get some help with his business idea?
A. Small Business Development Center
B. U.S. Department of Commerce office
C. Incubator
D. Small Business Administration Center
The Small Business Development Center includes offices co-sponsored by states and the federal
government that offer free or low-cost help to existing and potential small businesses.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
87. (p. 6) If Jamie gets "For Kidz" up and running, he could be described as all of the following
EXCEPT
A. founder.
B. owner-manager.
C. independent small business.
D. franchisor.
A franchise is a prepackaged business you buy or lease from a franchisor.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
88. (p. 7) Given that "For Kidz" will be a small business in a rural area, which of the following
characteristics would be true?
A. Its focus should be on effectiveness
B. The approach to human resources should be to professionalize
C. Metastrategy should be imitation
D. It should grow when possible
Options a, b, and d pertain to high-growth ventures.

Difficulty: Hard
89. (p. 10, 14) Jamie should be aware that all of the following are myths about a small business
EXCEPT
A. there is not enough financing to start businesses.
B. you need to make something if you are going to make money.
C. you can never try again if you fail.
D. the biggest hurdle facing an individual considering a business opportunity is inaction.
The BRIE model can help you deal with one of the biggest hurdles to starting a business.
According to the experts, the biggest problem is simply inaction.

Difficulty: Medium
90. (p. 12) In order to start "For Kidz" successfully, Jamie needs all of the following elements to
come together EXCEPT
A. boundary.
B. recruitment.
C. intention.
D. exchange.
In order to start a business, you need four elements to come togetherboundary, resources,
intention, and exchange.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Essay Questions
Chapter 02 Small Business Environment: Managing External Relations Answer
Key
1. (p. 28) The boundary is at the core of exchange in the BRIE model.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
2. (p. 29) Modeling is a set of shared beliefs, basic assumptions, or common, accepted ways of
dealing with problems and challenges within a company that demonstrate how things get done.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
3. (p. 29) The reason why small businesses have flexibility is because they have to deal with a lot
of first time' situations.
TRUE

Difficulty: Medium
4. (p. 30) The general environment is a part of the external environment made up of those
components that the firm deals with directly such as customers, suppliers, consultants, media,
interest groups, and the like.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
5. (p. 32) The trick with all forward-looking choices is to use a "financial options" approach.
FALSE

Difficulty: Easy
6. (p. 33) Two ways to build social capital are legitimacy and social networking.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
7. (p. 34) Wearing uniforms or business attire is a goodwill indicator of people-based legitimacy.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
8. (p. 36) Changing the legitimacy characteristics often does more to build your social capital than
repeating one legitimacy characteristic stressed by the firm in hopes of finding the perfect mix of
characteristics.
FALSE

Difficulty: Medium
9. (p. 37) One of the key parts of social networking is actually seeking the help or advice of others.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
10. (p. 38) Networking is the idea and action of each person helping the other.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
11. (p. 40) Electronic social networks are usually fast and easy to develop but cost a lot.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
12. (p. 41) One of the steps in handling a crisis is to admit you are in trouble.
TRUE

Difficulty: Medium
13. (p. 41) Only one business in ten has a disaster or crisis plan.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
14. (p. 42) Replacing paper copies with Web-based documents is one of the ways to create a more
sustainable enterprise.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
15. (p. 42) An ethical dilemma occurs when a person's values are in conflict, making it unclear
whether a decision we are thinking about making is right or not.
TRUE
AACSB: Ethical Understanding/Reasoning Abilities

Bloom's: Knowledge
Difficulty: Easy
16. (p. 43) One of the questions in the first step of making ethical decisions deals with "Who will
benefit, and how much? "
TRUE

Bloom's: Knowledge
Difficulty: Easy
17. (p. 44) Often ethical dilemmas crop up in business because the answer sought by the other
person would cost your business money.
TRUE

Bloom's: Knowledge
Difficulty: Easy
18. (p. 46) Universalism is an ethical model that supports seeking the greatest good for the greatest
number of people.
FALSE

Bloom's: Knowledge
Difficulty: Medium
19. (p. 47) Small businesses often do not try something innovative.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
20. (p. 49) When external relations lapses occur, if they are not so major that legal action is at
stake, try to use them as learning experiences for the rest of the firm by talking openly about the
issues.
TRUE
AACSB: Ethical/Legal Responsibilities

Bloom's: Knowledge
Difficulty: Medium
21. (p. 28) Following the BRIE model in starting a business, the entrepreneur creates a boundary
within the environment, setting his firm apart from the rest of the environment. In doing this, the
entrepreneur gives the firm a(n)
A. identity.
B. bootstrap.
C. organizational culture.
D. network.
Identity is not just the name of a firm, but its basic descriptionwhat it does and where it does
this. It can include formal elements like a registration with the state, or a Web site or e-mail
account with the firm's name on it, or a telephone number in the firm's name.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
22. (p. 28) Using low-cost or free techniques to minimize your cost of doing business is known as
A. caveat emptor.
B. sustainable entrepreneurship.
C. bootstrapping.
D. the billboard principle.
As entrepreneurs face resource constraints, they often learn to get by with less, or substitute a
more readily obtained resource, or ask to borrow, rent, or trade for the resource. These
techniques are called bootstrapping and are part of the culture of most successful start-ups.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
23. (p. 28) Which of the following is at the core of exchange in the BRIE model?
A. The boundary
B. The environment
C. Identity
D. Resources
The environment is at the core of exchange in the BRIE model, since exchange is literally the
firm or entrepreneur dealing with the environmentbuying, selling, or trading across the
boundary of the firm.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
24. (p. 29) The _____ of a firm consists of those people inside the boundarythe owner, any
employees, and any other owners or board members of the firm.
A. macroenvironment
B. external environment
C. operating environment
D. internal environment
The internal environment consists of everyone within the firm.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
25. (p. 29) Identify the set of shared beliefs, basic assumptions, or common accepted ways of
dealing with problems and challenges within a company that demonstrate how things get done.
A. Trust
B. Modeling
C. Organizational culture
D. Social networking
As every company matures, it adds to its organizational culture a set of shared beliefs or basic
assumptions that demonstrate how things get done.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
26. (p. 29) When a small business is first getting started, there is a lot of flexibility in terms of
A. ethics.
B. finances.
C. government regulations.
D. roles and expected behaviors.
Being a small business makes managing organizational culture easier than in larger businesses
because, in a small business, there is a lot of flexibility in terms of roles and expected behaviors,
especially when the business is first getting started.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
27. (p. 30) Those parts of the environment that directly and consistently touch on the firm are called
the
A. task environment.
B. internal environment.
C. macroenvironment.
D. general environment.
The task environment is made up of those people your firm deals with directly such as
customers, suppliers, consultants, media, interest groups, and the like.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
28. (p. 30) Which of the following statements about the task environment is true?
A. The economic sector includes the trends and current conditions of the overall market for
goods and services.
B. This part of the environment is made up of those people the firm deals with every day, as well
as important groups you may deal with directly less often, but that are always on your mind.
C. The technological sector includes innovation, invention, and modernization.
D. It is a part of the external environment made up of sectors of major forces that shape the
people and institutions, such as the economic sector or the demographic sector.
Options a, c, and d pertain to the general environment.

Difficulty: Medium
29. (p. 30) Which of the following would be a part of the task environment?
A. The owners
B. The political-legal sector
C. Environmental groups
D. Employees
Options a, b, and d pertain to the internal and general environments.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
30. (p. 30) A part of the external environment made up of sectors of major forces that shape the
people and institutions of the task and internal environments is the
A. general environment.
B. macroenvironment.
C. task environment.
D. internal environment.
The general environment represents the major forces on the lives of people and institutions like
businesses, and even nations.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
31. (p. 30) Which of the following is an example of the general environment?
A. The government
B. The board of directors
C. The economic sector
D. Unions
The general environment is a part of the external environment made up of sectors of major forces
that shape the people and institutions of the task and internal environments, such as the economic
sector or the demographic sector.
AACSB: Analytic
Difficulty: Medium
32. (p. 30) The economic sector includes
A. trends in the mix of ages, races, and gender in society.
B. innovation, invention, and modernization.
C. the availability of equity and credit.
D. cultures often based on things such as nationality or religion.
The economic sector includes the trends and current conditions of the overall market for goods
and services, the availability of equity and credit, and employment.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
33. (p. 33) The general description for the processes and skills used in the management of a firm's
interactions with people, organizations and institutions outside of its boundary is
A. external relations.
B. community planning partnerships.
C. organizational culture.
D. utilitarianism.
The goal of any small business owner is to manage external relations in order to create social
capital.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
34. (p. 33) According to the text, the goal of any small business owner is to
A. manage external relations in order to create social capital.
B. make sure the customer knows about the details of its products.
C. generate alternatives that could meet ethical, legal, and economic goals.
D. to keep track of social and business contacts.
The goal of any small business owner is to manage external relations in order to create social
capital.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
35. (p. 33) All of the following are true of social capital EXCEPT
A. it includes characteristics like trust, consistency, and networks.
B. it can be accumulated or spent.
C. it is not associated with the concept of "goodwill."
D. it is capital in the same sense that cash or land can be.
Social capital is the major component of what accountants call "goodwill," and you can find it on
a business's balance sheet.

Difficulty: Medium
36. (p. 33) Which of the following includes characteristics of a business, like trust, consistency, and
networks that help make business operations smooth and efficient?
A. Social capital
B. Universalism
C. Legitimacy
D. Utilitarianism
Social capital includes characteristics of a business, like trust, consistency, and networks, that
represent potential social obligations which are an asset of the firm or entrepreneur.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
37. (p. 33) Which of the following statements about small businesses that are high in social capital
is false?
A. They are not given the benefit of the doubt when problems occur
B. They are more trusted
C. They are treated more fairly by regulators
D. They are checked up on less
Small businesses high in social capital are more trusted, checked up on less, treated more fairly
by regulators, and given the benefit of the doubt when problems occur.

Difficulty: Medium
38. (p. 33) The two ways to build social capital are through
A. consistency and visibility.
B. legitimacy and social networking.
C. culture and personal ethics.
D. individuals and teams.
Five techniques for managing external relations and building social capital are building
legitimacy, developing a social network, handling a crisis, achieving sustainability, and making
ethical decisions.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
39. (p. 33) _____ is the major component of "goodwill," and can be found on a business's balance
sheet.
A. Economic capital
B. Social capital
C. Cultural capital
D. Financial capital
Social capital includes characteristics of a business, like trust, consistency, and networks, that
help make business operations smooth and efficient.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
40. (p. 33) _____ means that a firm is worthy of consideration or doing business with because of
the impressions or opinions of customers, suppliers, investors, or competitors.
A. Visibility
B. Flexibility
C. Legitimacy
D. Modeling
Gaining legitimacy is one of the top challenges facing new small businesses.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
41. (p. 33) Achieving _____ means building trust among customers and other key groups.
A. modeling
B. legitimacy
C. visibility
D. flexibility
Gaining legitimacy is one of the top challenges facing new small businesses.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
42. (p. 33) The three general forms of legitimacy that you can develop are based on
A. products, people, and organization.
B. individuals, teams, and industry views.
C. universalism, utilitarianism, and the Golden Rule.
D. integration, distribution, and universalism.
There are three general forms of legitimacy that you can developbased on your people, based
on your product, and based on your organization.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
43. (p. 34) Selling brand name merchandise or services is a people-based legitimate indicator of
A. attire.
B. product/service name recognition.
C. business network membership.
D. organizational size.
See Table 2.1 for the major examples of people-based legitimacy.
AACSB: Analytic
Difficulty: Medium
44. (p. 34) Having well-known or well-regarded owners, employees, supporters, or spokespeople is
a people-based legitimate indicator of
A. public recognition.
B. goodwill.
C. business network membership.
D. service name recognition.
See Table 2.1 for the major examples of people-based legitimacy.
AACSB: Analytic
Difficulty: Medium
45. (p. 34) _____ refers to certification for having met a standard of quality that is consistently
evaluated around the world.
A. ANSI
B. Six Sigma
C. ISO
D. TQM
ISO stands for the International Standards Organization.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
46. (p. 34) The _____ is given by the U.S. Government to businesses and nonprofit organizations
that have been judged outstanding in quality leadership; strategic planning; customer and market
focus; measurement, analysis, and knowledge management; human resource focus; process
management; and results.
A. Economic Times Award
B. Ron Brown Award
C. Malcolm Baldrige National Quality Award
D. Deming Prize
The Malcolm Baldrige National Quality Award is given by the U.S. Government to businesses
and nonprofit organizations that have been judged outstanding in seven measures.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
47. (p. 34) Documentation and demonstration offered for products are product-based legitimacy
indicators of
A. customer assurance.
B. experiential supports.
C. customer service.
D. quality standards.
See Table 2.2 which describes many forms of product-based legitimacy.
AACSB: Analytic
Difficulty: Medium
48. (p. 34) Which of the following is a product-based legitimacy indicator?
A. Organization size
B. Testimonials
C. Business network membership
D. Internet identity
AACSB: Analytic
Difficulty: Medium
49. (p. 34) Having trademarks, service marks, patents, or copyrights are product-based legitimacy
indicators of
A. certifications.
B. customer service.
C. intellectual property.
D. quality standards.
AACSB: Analytic
Difficulty: Medium
50. (p. 34) Setting technological or service standards adopted by competitors are product-based
legitimacy indicators of
A. quality standards.
B. certifications.
C. experiential supports.
D. industry leadership.
AACSB: Analytic
Difficulty: Medium
51. (p. 35) Which of the following is an organization-based legitimacy indicator?
A. Testimonials
B. Intellectual property
C. Legal form
D. Attire
See Table 2.3 indicating the key factors for organizational legitimacy.
AACSB: Analytic
Difficulty: Medium
52. (p. 35) Which of the following legal forms of organization-based legitimacy indicators would
be the least legitimate?
A. Corporation
B. LLC
C. Sole proprietorship
D. Partnership
See Table 2.3 indicating the key factors for organizational legitimacy.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
53. (p. 35) Following rules and orders, not swearing, and dressing appropriately would be examples
of which class of ethical standards?
A. Employees should be dependable organizational citizens
B. Employees should not do anything that will harm the organization
C. Employees should be good to customers
D. Employees should protect confidential information
Employees should be dependable organizational citizens (e.g., finish your work, follow rules and
orders, be on time, do not swear, dress appropriately, etc.)

Difficulty: Medium
54. (p. 36) Which of the following statements about legitimacy indicators is true?
A. Across the three types of legitimacy indicators, there are 15 characteristics.
B. Part of legitimacy and building trust comes from the consistency of a firm's actions over time.
C. Most small businesses incorporate all the elements of the different types of legitimacy
indicators.
D. Changing the legitimacy characteristics daily does more to build social capital than repeating
one legitimacy characteristic stressed by the firm.
Across the three types of legitimacy indicators, there are 30 characteristics, and few small
businesses incorporate all these elements. Repeating one legitimacy characteristic daily does
more to build your social capital than changing the legitimacy characteristics stressed by the firm
in hopes of finding the perfect mix of characteristics.

Difficulty: Medium
55. (p. 36) An entrepreneur's relationships and contacts with others is termed as
A. a social network.
B. visibility.
C. the Golden Rule.
D. mutuality.
Social networking is a way to work trust, reciprocity, and long-term relationships into your day-
to-day business operations.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
56. (p. 37) The number one type of help sought by entrepreneurs from the PSED is
A. introduction.
B. information.
C. financial resources.
D. physical resources.
The PSED provides some insight as to the type of help people starting their own business seek
out. Information is the number one type of help.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
57. (p. 38) According to the text, what is the most important part of social networking that would
make a difference in how you would conduct business every day?
A. Asking for help when you need it
B. Respecting the other person's time
C. Respecting the other person's expertise
D. Being willing to reciprocate if asked
Social networking means asking for help when you need it, respecting the other person's time
and expertise, and most importantly being willing to reciprocate if asked.
AACSB: Analytic
Difficulty: Hard
58. (p. 38) The idea and action of each person helping another refers to
A. networking.
B. flexibility.
C. mutuality.
D. consistency.
Through mutuality, social networking helps build long-lasting relationships.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
59. (p. 38) Interacting with others in order to build relationships useful to a business refers to
A. networking.
B. flexibility.
C. mutuality.
D. consistency.
Building social capital through social networking involves giving information, letting people
know they belong, and providing social support and approval. You have to take the time to build
and keep up your relationships with others in your network.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
60. (p. 40) Which of the following is the largest online social networking site?
A. Facebook.com
B. MySpace.com
C. LinkedIn.com
D. Twitter.com
See Table 2.4 for online social networking sites.

Bloom's: Knowledge
Difficulty: Medium
61. (p. 40) Which of the following is NOT a key to success in electronic networking?
A. Making it easy for people to contact you
B. Taking initiative to ask others on the network to link with you
C. Taking time to develop networks
D. Finding and linking up with network mavens
There are three best practices which can help any online social networking effort become more
successful: make it easy for people to contact you, take the initiative to ask others on the network
to link with you, and find and link up with network mavenspeople who like to gather and share
their enormous networks.

Difficulty: Medium
62. (p. 40) Electronic social networks

A. often have membership costs.
B. offer the all-important personal touch.
C. are usually fast and easy to develop.
D. offer the all-important local connections.
Options a, b, and d pertain to face-to-face social networks.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
63. (p. 41) When faced with a crisis, what is the first step that a small business owner should
follow?
A. Get to the scene as soon as possible
B. Communicate facts you know
C. Appoint one person as the spokesperson
D. Admit you are in trouble
Although originally given for large businesses, the six steps to follow can be readily adapted to
small ones. The first step is: Admit you're in troublequickly. It is better to say, "If there is a
problem, I will find it and fix it," than to delay an admission until fact finding is done.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
64. (p. 41) According to the gold standard for crisis leadership, all of the following are steps to
follow in a crisis EXCEPT
A. show caring and accountability.
B. have one person serve as the firm's spokesperson.
C. deal with the crisis quickly.
D. desegregate crisis management with the everyday management of the firm.
Separate crisis management from the everyday management of the firm.

Difficulty: Medium
65. (p. 41) To help small businesses with crisis planning, the federal government recommends all
of the following steps for preparing for disasters EXCEPT
A. plan to stay in business.
B. plan when the crisis arises.
C. talk to your people.
D. protect your investment.
The best way to manage a crisis is to plan ahead, but in the middle of a crisis, the key for a small
business owner is to keep calm, take care of the people involved, and keep people informed.

Difficulty: Medium
66. (p. 41) _____ is an approach to operating a firm or a line of business which identifies, creates
and exploits opportunities to make a profit in a way that can minimize the depletion of natural
resources, maximize the use of a recycled material, or improve the environment.
A. Business entrepreneurship
B. Economic entrepreneurship
C. Sustainable entrepreneurship
D. Intrapreneurship
Sustainable entrepreneurship is a method for managing external relations with customers,

governments, and the physical environment.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
67. (p. 42) _____ is a certification standard from the U.S. Green Building Council for buildings that
are more environmentally friendly.
A. LEED
B. Green audit
C. ISO
D. BATNA
LEED stands for "Leadership in Energy and Environmental Design" and is a certification
standard from the U.S. Green Building Council for buildings that are more environmentally
friendly.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
68. (p. 42) Green retailing is

A. is at the core of exchange in the BRIE model.
B. another term for sustainable entrepreneurship taken from the belief that green is the color of a
healthy environment.
C. minimizing waste and environmental degradation.
D. selling products that have a better environmental footprint.
Green retailing, selling products that have a better environmental footprint, is a growing
segment.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
69. (p. 42) A system of values that people consider in determining whether actions are right or
wrong is referred to as
A. organizational culture.
B. ethics.
C. trust.
D. modeling.
We consider ethics in determining whether a decision we are about to make is good or bad.

Bloom's: Knowledge
Difficulty: Easy
70. (p. 42) _____ occurs when a person's values are in conflict, making it unclear whether a
particular decision is the right thing to do.
A. Modeling
B. Social networking
C. Ethical dilemma
D. Mutuality
An ethical dilemma occurs when there are several different options for a decision we have to
make and the best choice is not clear.

Bloom's: Knowledge
Difficulty: Easy
71. (p. 42) Which of the following can occur when there are several different options for a decision
one has to make and the best choice is not clear?
A. Community impact
B. Lack of flexibility
C. Innovation
D. Ethical dilemma
An ethical dilemma occurs when a person's values are in conflict, making it unclear whether a
decision we're thinking about making is right or not.

Bloom's: Knowledge
Difficulty: Medium
72. (p. 42) Which of the following is a three-step process that helps people make better and more
ethical decisions?
A. First principles
B. Golden rules
C. Ethical decision-making
D. Mutuality development process
LaRue Hosmer came up with a model of making ethical decisions in business, widely used
today, but it is focused more on big business than small ones. Adapting his approach to small
business making ethical decisions involves three steps: define, generate, and implement.

Bloom's: Knowledge
Difficulty: Easy
73. (p. 42) The first step of ethical decision-making is
A. creating options for action.
B. defining the moral problem.
C. conducting ethical tests.
D. obtaining employee approval on planning.
Adapting LaRue Hosmer's approach to small business making ethical decisions involves three
steps, the first step being, defining the moral problem.

Bloom's: Knowledge
Difficulty: Medium
74. (p. 43) Which of the following is NOT a question in step one of ethical decision-making?
A. Who will be hurt, and how badly?
B. What do others owe you, if anything?
C. What regulations get broken, and how badly?
D. Who will benefit, and how much?
For small businesses, there are typically four questions: Who will be hurt (and how much)? Who
will benefit (and how much)? What do you (or your firm) owe others? What do others owe you
(or your firm)?

Bloom's: Knowledge
Difficulty: Hard
75. (p. 43) The question in step one of ethical decision-making, "What do you owe others?" focuses
on the _____ of people who make decisions.
A. mutuality
B. distributive view
C. integrative view
D. obligations
What do you (or your firm) owe others? When you make a decision, it should reflect your real or
presumed obligations to people and institutions in your firm and in its task environment.

Bloom's: Knowledge
Difficulty: Medium
76. (p. 44) _____ means "let the buyer beware" is a philosophy sometimes used by businesses to
put the burden for consumer protection onto the customer.
A. Caveat emptor
B. Habeas corpus
C. Quid pro quo
D. Respondeat superior
Caveat emptor is often the first line of defense by rip-off artists, frauds, and producers of shoddy
merchandise.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
77. (p. 44-45) Which of the following statements about caveat emptor is true?
A. Caveat emptor is often the first line of defense by producers of mediocre merchandise.
B. As a legal principle, the phrase "caveat emptor" has been routinely approved.
C. Using it as a defense puts the entrepreneur who uses it in a positive light.
D. If you find a business using caveat emptor as a principle, accept them.
As a legal principle, caveat emptor has been routinely discredited. Using it as a defense puts the
entrepreneur who uses it, and, usually by association, the whole small business community, in a
negative light. If you find a business using caveat emptor as a principle, avoid them.
AACSB: Reflective Thinking, Ethical/Legal Responsibilities

Difficulty: Medium
78. (p. 46) Which ethical model supports seeking the greatest good for the greatest number of
people?
A. Utilitarianism
B. The billboard principle
C. The Golden Rule
D. Universalism
"Is my solution the best thing for the most people over the long term?" This idea is called
utilitarianism.

Bloom's: Knowledge
Difficulty: Easy
79. (p. 46) An ethical model that suggests that there is a code of right and wrong that everyone can
see and follow refers to
A. the billboard principle.
B. universalism.
C. the Golden Rule.
D. utilitarianism.
"What if everyone did what I want to do? What kind of world would it be?" Those questions in a
nutshell are the idea of universalism.

Bloom's: Knowledge
Difficulty: Easy
80. (p. 46) Which of the following observations concerning the Golden Rule is NOT true?
A. It is an ethical model.
B. It suggests that you treat others in the same manner you wish to be treated.
C. Almost every major religious tradition in the world has some version of it.
D. It suggests that there is a code of right and wrong that everyone can see and follow.
Universalism is an ethical model that suggests that there is a code of right and wrong that
everyone can see and follow.

Difficulty: Hard
81. (p. 46) An ethical model which suggests you treat others in the manner you wish to be treated
refers to
A. the billboard principle.
B. universalism.
C. the Golden Rule.
D. utilitarianism.
Am I treating others the way I would want to be treated? This is the Golden Rule.

Bloom's: Knowledge
Difficulty: Easy
82. (p. 46) "Would others think worse of you if they knew what you had done to resolve your
ethical dilemma?" This question is fundamental to which ethical model?
A. The billboard principle
B. Universalism
C. The Golden Rule
D. Utilitarianism
The billboard principle is an ethical model that asks whether someone would be comfortable
having his/her decision and name advertised on a billboard for the public to see.

Bloom's: Knowledge
Difficulty: Medium
83. (p. 47) In a negotiation, _____ is the second-best outcome identified by the parties to help
clarify the value of achieving a successful negotiation.
A. caveat emptor
B. bootstrapping
C. LEED
D. BATNA
Starting from a small patch of common ground is not uncommon in negotiating sessions. If this
does not work, be ready to talk about your BATNA, or Best Alternative to a Negotiated
Settlement.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
84. (p. 47) Often, the alternative to negotiating together can be _____ if the amounts are small, or
undertaking legal action if the amounts warrant legal fees or the hassles of enforcing small
claims court decisions.
A. "holding a strike"
B. "lumping it"
C. seeking a new job
D. seeking results from higher authorities
Often, the alternative to negotiating together can be "lumping it" (suffering with what aggravated
you or the other party, possibly with loud complaints to others) if the amounts are small, or
undertaking legal action if the amounts warrant legal fees or the hassles of enforcing small
claims court decisions.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
85. (p. 48) The creation of something new or trying something for the first time refers to
A. personal ethics.
B. innovation.
C. universalism.
D. flexibility.
Innovation suggests that you are not sure how a new idea is going to turn out.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Scenario: Amanda Albertson and "Durable Doors"

Amanda is a small business owner of "Durable Doors", a manufacturer and installer of garage
doors, based in the northeast. Amanda has built the business working very hard in the
community. She has earned the reputation as a reliable, trustworthy business owner with solid
garage doors. However, given the soft economic conditions with higher gasoline and wood
prices, Amanda faces a tough situation. If she continues with her quality standard, she will lose
money, but if she inserts panels of mixed lower quality wood she can remain profitable.
86. (p. 42) The situation that Amanda faces can be described as a(n)
A. mutuality.
B. ethical dilemma.
C. decadence.
D. discourse ethic.
An ethical dilemma occurs when a person's values are in conflict, making it unclear whether a
decision we're thinking about making is right or not.

Bloom's: Knowledge
Difficulty: Easy
87. (p. 46) If Amanda has tried many ways to think the situation through and still cannot decide
whether what she plans to do is ethical, she should explore the ethical model of _____ by asking
herself whether she would be comfortable having her decision and name advertised for the public
to see.
A. the billboard principle
B. universalism
C. utilitarianism
D. the Golden Rule
As the name implies, the billboard principle asks whether you'd be comfortable having your
decision (with your name, of course) advertised on a billboard for everyone you know to see.

Bloom's: Knowledge
Difficulty: Easy
88. (p. 42-43) Which of the following might help Amanda with her situation of inserting a lower
quality panel in the garage doors to remain profitable?
A. Consistency and visibility
B. Social obligations
C. People-based legitimacy
D. Ethical decision-making
Adapting LaRue Hosmer's approach to small business is widely used today for making ethical
decisions in business.

Bloom's: Knowledge
Difficulty: Easy
89. (p. 46) If Amanda wants a solution that is the best thing for most people, she should explore the
ethical model of
A. universalism.
B. the Golden Rule.
C. utilitarianism.
D. the billboard principle.
Utilitarianism is an ethical model that supports seeking the greatest good for the greatest number
of people.

Bloom's: Knowledge
Difficulty: Medium
90. (p. 34) 'Durable Doors' is known for its high quality standards, exceptional personalized
customer service, and industry leadership. These are indicators of which type of legitimacy?
A. Product-based
B. Organization-based
C. People-based
D. Industry-based
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
Essay Questions
Chapter 03 Small Business Entrepreneurs: Characteristics and Competencies

Answer Key
1. (p. 58) The classic entrepreneur was a loner, often socially isolated, a hard worker, a fast learner,
and a risk taker seeking wealth.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
2. (p. 58) Idea people are hard working, driven by great wealth, socially isolated, and great risk
takers.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
3. (p. 58) Salesperson entrepreneurs are more concerned with personal wealth than their acceptance
of social standing.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
4. (p. 60) All entrepreneurial personality types include hard work.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
5. (p. 62) The competency suggested by exchange relates to the organizational and business
processes of a firm called basic business competency.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
6. (p. 62) Resources lead to specific determination competencies which deal with skills and
knowledge in a particular industry.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
7. (p. 63) The competencies that make exchange work are called resource competencies.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
8. (p. 63) Specialized firms tend to generate the highest level of trust among customers.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
9. (p. 63) At a minimalized level of professionalization, the entrepreneur does everything in the
simplest way possible.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
10. (p. 64) Habitual entrepreneurs are owners for a lifetime whose career goal is personal
satisfaction first, income second.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
11. (p. 64) Growth entrepreneurs are owners with an exit plan.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
12. (p. 65) Spiral or helical entrepreneurs are driven by a need to balance family and business,
being successful at each.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
13. (p. 66) Succession and role conflict are the two challenges typical to family businesses.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
14. (p. 67) According to research, CEOs of family firms had an average tenure of about half the
years as compared to CEOs in other businesses.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
15. (p. 68) One way to maximize communication in the succession process is to create a family
council.
TRUE
AACSB: Communication Abilities

Bloom's: Knowledge
Difficulty: Medium
16. (p. 69) In the PSED, 92 percent of all start-ups consisted of teams and only 8 percent were solo
entrepreneurs.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
17. (p. 70) One of the fastest growing sectors of all U.S. businesses is women-owned businesses.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
18. (p. 71) Access problems for women and minority-owned small businesses crop up most often as
discrimination in marketing.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
19. (p. 72) About a third of the retirees who return to work decide to become self-employed.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
20. (p. 72) For late career entrepreneurs, one problem is keeping personal finances out of the
business.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
21. (p. 58) A loner, often socially isolated, a hard worker, a fast learner, and a risk taker seeking
wealth represents the profile of a(n)
A. idea person.
B. classic entrepreneur.
C. managerial entrepreneur.
D. small business owner.
Today even the classic entrepreneur has seen some revision. Hard working, fast learning, and
wealth seeking still hold, but classic entrepreneurs do not see themselves as risk takers.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
22. (p. 58) Unlike _____, _____ are actually risk-averse.

A. idea persons; classic entrepreneurs
B. managerial entrepreneurs; classic entrepreneurs
C. sales entrepreneurs; idea persons
D. classic entrepreneurs; small business owners
Like classic entrepreneurs, small business owners typically are hard workers, often alone and
socially isolated. But unlike the classic entrepreneurs, small business owners are actually risk-
averse, which makes them slower to decide and learn than classic entrepreneurs.

Difficulty: Medium
23. (p. 58) Like classic entrepreneurs, small business owners are all of the following EXCEPT
A. risk takers.
B. socially isolated.
C. often alone.
D. hard workers.
Unlike classic entrepreneurs, small business owners are actually risk-averse, which makes them
slower to decide and learn than classic entrepreneurs.

Difficulty: Medium
24. (p. 58) Idea people are not particularly driven by _____, but they are driven by _____.
A. greatness; great wealth
B. hard work; risk taking
C. great wealth; having their idea achieve greatness
D. fame; socialization
Idea people are not particularly driven by great wealth, but they are driven by having their idea
achieve greatness, and they can be great risk takers and learners while trying to make that idea
come alive.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
25. (p. 58) Which of the following personality types is often very risk-averse, preferring to build
wealth through careful planning and action?
A. Idea person
B. Small business owner
C. Managerial entrepreneur
D. Classic entrepreneur
Often a refugee from big business, managerial entrepreneurs are socially very adept and
connected.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
26. (p. 58) All of the following observations are true of the salesperson type of entrepreneur
EXCEPT
A. they work hard.
B. they are very socially driven.
C. they use their networks to minimize risk.
D. they are most concerned with their wealth.
Sales types use their networks to minimize risk, and they may be more concerned with their
social standing and acceptance than their personal wealth.

Difficulty: Medium
27. (p. 58) Which of the following personality types is more concerned with their social standing
and acceptance than their personal wealth?
A. Salesperson entrepreneur
B. Managerial entrepreneur
C. Classic entrepreneur
D. Idea person
The salesperson entrepreneur works hard and is very socially driven.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
28. (p. 59) Identify the trait which all entrepreneurial personality types have in common.
A. Loneliness
B. Social isolation
C. Risk taking
D. Hard work
See Figure 3.1.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
29. (p. 60) The forms of business-related expertise are called

A. competencies.
B. core processes.
C. personalities.
D. ethics.
All the entrepreneurial personality types include hard work, but there are other specific types of
business-related expertisecalled competencies that appear repeatedly in successful
entrepreneurs around the world.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
30. (p. 62) The competency suggested by _____ relates to the organizational and business
processes of a firm.
A. intention
B. resource
C. exchange
D. boundary
This type of expertise can be called basic business competency.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
31. (p. 62) There are certain fundamental activities that all businesses must perform, which are
called
A. engineering business functions.
B. basic business functions.
C. business accreditations.
D. key business functions.
There are certain fundamental activities that all businesses must perform, which are called the
key business functions, and include sales, operations, accounting, finance, and human resources.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
32. (p. 62) Key business functions and industry-specific knowledge are parts of _____
competency.
A. resource
B. basic business
C. determination
D. opportunity
Key business functions include sales, operations, accounting, finance, and human resources.
Industry-specific knowledge includes activities, knowledge, and skills specific to businesses in a
particular industry.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
33. (p. 62) Getting organized and registeredwhich creates a boundaryis an example of a(n)
A. financial activity.
B. operations activity.
C. human resources activity.
D. management activity.
Getting organized and registeredwhich creates the boundaryis an example of an operations

activity.
AACSB: Analytic
Difficulty: Easy
34. (p. 62) The ability or skill of the entrepreneur at finding expendable components necessary to
the operation of the business such as time, information, location, financing, raw materials, and
expertise is called
A. basic business competencies.
B. opportunity competencies.
C. resource competencies.
D. determination competencies.
Resources lead to specific resource competencies.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
35. (p. 62) The intention component of the BRIE model reflects _____ competencies.
A. basic business
B. opportunity
C. resource
D. determination
Intention reflects your determination to start your business and make it a success.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
36. (p. 62) The energy and focus needed to bring a business into existence relates to which of the
following competencies?
A. Determination
B. Resource
C. Opportunity
D. Basic business
Determination competencies are demonstrated by your focusing on your business over other
choices and being ready to find out about and do what it takes to pursue opportunities that will
help get the business going.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
37. (p. 63) Which of the following deals with the actual process of exploring an opportunity for
profit?
A. Resource
B. Exchange
C. Intention
D. Boundary
Exchange deals with the actual process of exploiting the opportunity for profitwhich is a fancy
way of saying "making sales."
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
38. (p. 63) Which of the following relates to the skills necessary to identify and exploit elements of
the business environment that can lead to profitable and sustainable business?
A. Determination competencies
B. Basic business competencies
C. Resource competencies
D. Opportunity competencies
Opportunity competencies include identifying an opportunity, a product, or service idea that is

likely to lead you to a profit and is ideally distinctive to your firm and, you hope, hard for others
to copy.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
39. (p. 63) For those businesses that do get started, the amount of _____ is what distinguishes the
more successful from the less successful firms.
A. effort
B. opportunities
C. subordination
D. expertise
The presence and absence of certain skills makes a tremendous difference in distinguishing those
who start businesses from those who don't.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
40. (p. 63) _____ refers to the extent to which a firm meets or exceeds the standard business
practices of its industry.
A. Standard operating procedure
B. Organizational commitment
C. Professionalization
D. Intention
Professionalization comes in three levels: expert, specialized, and minimalized.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
41. (p. 63) Being asked if you want to supersize your order at a fast-food restaurant is an example
of
A. a key business function.
B. a resource competency.
C. a standard business practice.
D. industry-specific knowledge.
A standard business practice is one that has been widely adopted within an industry or
occupation.
AACSB: Analytic
Difficulty: Easy
42. (p. 63) According to the text, there are three levels of professionalization. These are
A. low, medium, and high.
B. company, industry, and global.
C. personal, team, and organizational.
D. expert, specialized, and minimalized.
Professionalization refers to the extent to which a firm meets or exceeds the standard business
practices for that industry.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
43. (p. 63) Expert businesses

A. are those which have owners who are passionate about one key business function.
B. are those where the entrepreneur does nearly everything in the simplest way possible.
C. usually lack good business procedures.
D. are those in which you notice everything seems to be done in the best way possible.
Expert businesses are those in which you notice everything seems to be done in the best way
possible.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
44. (p. 63) Which of the following relates to expert businesses?

A. The entrepreneur does nearly everything in the simplest way possible.
B. All the major functions of the firm follow standard business practices of the industry.
C. The founders are passionate about one or two of the key business functions.
D. They are satisfied if other activities are no worse than other businesses in their market.
Options a, c, and d pertain to specialized and minimalized levels of professionalization.

Difficulty: Medium
45. (p. 63) Following certain "best practices" are typical of these types of businesses.
A. Specialized businesses
B. Expert businesses
C. Minimalized businesses
D. Factor businesses
Expert businesses are those in which you notice everything seems to be done in the best way
possible. Often this means the firm has exceeded the standard business practices of the industry.
AACSB: Value Creation

Bloom's: Knowledge
Difficulty: Medium
46. (p. 63) _____ businesses have founders or owners who are passionate about one or two of the
key business functions, such as sales or operations.
A. Expert
B. Specialized
C. Minimalized
D. Global
The middle level of professionalization is called specialized, where as opposed to a "best"

restaurant, there is probably a place you know of with great food but so-so service.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
47. (p. 63) The middle level of professionalization is called _____, where as opposed to a "best"
restaurant, there is probably a restaurant you know of with great food but so-so service.
A. specialized
B. minimalized
C. expertise
D. standard
A situation that occurs when businesses have founders or owners who are passionate about one
or two of the key business functions is known as specialized business professionalization.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
48. (p. 63) Which of the following does NOT hold true of the minimalized level of
professionalization?
A. The entrepreneur does nearly everything in the simplest way possible.
B. Usually, there is no systematic accounting.
C. Record keeping will vary between nonexistent and haphazard.
D. Inspires the highest levels of trust among customers.
Typically, in those places running at a minimalized level of professionalization, the entrepreneur

figures that "good enough" is all that is necessary to keep the business going.

Difficulty: Medium
49. (p. 63) At which of these levels of professionalization does the entrepreneur do nearly
everything in the simplest way possible?
A. Expert
B. Specialized
C. Minimalized
D. Global
Typically, in those places running at a minimalized level of professionalization, the entrepreneur

figures that "good enough" is all that is necessary to keep the business going.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
50. (p. 64) Which of the following is NOT a typical career path for entrepreneurs?
A. Habitual entrepreneurship
B. Harvest entrepreneurship
C. Mature entrepreneurship
D. Spiral entrepreneurship
There are five typical career paths for entrepreneurs: habitual, growth, harvest, spiral, and
occasional entrepreneurs.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
51. (p. 64) _____ entrepreneurs are owners for a lifetime, sometimes in one business, and
sometimes across several firms.
A. Habitual
B. Harvest
C. Growth
D. Spiral
Usually these entrepreneurs have no succession plan and intend to keep working until they can
no longer continue.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
52. (p. 64) The career goal of which entrepreneur is personal satisfaction first, income second?
A. Growth entrepreneurs
B. Harvest entrepreneurs
C. Occasional entrepreneurs
D. Habitual entrepreneurs
Habitual entrepreneurs are owners for a lifetime, sometimes in one business, sometimes across
several firms.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
53. (p. 64) Which of the following holds true of habitual entrepreneurs?
A. Their goal is to work first in order to play later
B. Usually they have no succession plan
C. When they do retire, they tend to want to micromanage their successors
D. They work on a seasonal basis
Options a, c, and d pertain to harvest, growth, and occasional entrepreneurs.

Difficulty: Medium
54. (p. 64) What is the goal of growth entrepreneurs?
A. Personal satisfaction
B. Major success
C. Income
D. Work first in order to play later
Growth entrepreneurs' goal is major success, and if they top out with one business, they'll start
another growth-oriented company, often before they exit from the first one.

Bloom's: Knowledge
Difficulty: Medium
55. (p. 64-65) All of the following observations are true of growth entrepreneurs EXCEPT
A. their goal is to achieve major success.
B. they are interested in giving their firms strong balance sheets.
C. they are lifetime owners.
D. when they retire, they tend to want to micromanage their successors.
Harvest entrepreneurs are interested in giving their firms strong balance sheets, sizable market
shares, proprietary products or processes, and capable teams to take over from them.

Difficulty: Medium
56. (p. 65) Which of the following are owners with an exit plan?
A. Growth entrepreneurs
B. Harvest entrepreneurs
D. Habitual entrepreneurs
Harvest entrepreneurs may start several companies, but they build one company at a time,
harvest it, enjoy the proceeds, and then start another.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
57. (p. 65) Harvest entrepreneurs
A. are often wealthy, but largely unknown.
B. alternate periods of growth and stability which are determined by personal needs.
C. may scale down their ventures as they get older, but continue to work in their business.
D. are people who generally have another job that is their primary one.
Harvest entrepreneurs are often wealthy, but largely unknown.

Difficulty: Medium
58. (p. 65) As they age, these entrepreneurs' unspoken exit strategy is to let the time between deals
drag out.
A. Harvest entrepreneurs
B. Helical entrepreneurs
D. Growth entrepreneurs
As they age, these harvest entrepreneurs' unspoken exit strategy is to let the time between deals
drag out.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
59. (p. 65) _____ entrepreneurs alternate periods of growth and stability which are determined by
personal or family needs.
A. Occasional
B. Harvest
C. Spiral
D. Growth
Spiral, or helical, entrepreneurs are driven by a need to balance family and business, being
successful at each.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
60. (p. 65) Identify the strategy where the idea is to slow down when children are young and push
for growth when the children are older.
A. Spiral
B. Harvest
C. Growth
D. Habitual
Spiral, or helical, entrepreneurs alternate periods of growth and stability which are determined by
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
61. (p. 65) A(n) _____ entrepreneur's typical end-game strategy involves scaling down the
business.
A. occasional
B. helical
C. harvest
D. growth
Spiral, or helical, entrepreneurs alternate periods of growth and stability which are determined by
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
62. (p. 65) _____ entrepreneurs are people who generally have another job that is their primary
one.
A. Harvest
B. Occasional
C. Helical
D. Spiral
Occasional entrepreneurs are often fascinated by entrepreneurship and pursue it periodically.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
63. (p. 65) These entrepreneurs are the classic part-time entrepreneurs, who might work on a
seasonal basis.
A. Habitual
B. Spiral
C. Growth
D. Occasional
Occasional entrepreneurs are often fascinated by entrepreneurship and pursue it periodically.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
64. (p. 65) Doing work on a seasonal basis such as doing taxes or making Christmas wreaths is an
example of
A. occasional entrepreneurship.
B. spiral entrepreneurship.
C. growth entrepreneurship.
D. habitual entrepreneurship.
Occasional entrepreneurs are the classic part-time entrepreneurs, who might work on a seasonal
basis (e.g., doing taxes or making Christmas wreaths).
AACSB: Analytic
Difficulty: Easy
65. (p. 66) Family owned and managed small businesses represent what percent of American
businesses?
A. 58
B. 25
C. 39
D. 72
Small businesses that are also family businesses represent 39 percent of American businesses, or
about 10.8 million firms.
AACSB: Statistical Data Analysis & Management Science

Bloom's: Knowledge
Difficulty: Medium
66. (p. 66) Which of the following entrepreneurs employ about 58 percent of America's total
workforce?
A. Women entrepreneurs
B. Second career entrepreneurs
C. Family business owners
D. Minority entrepreneurs
Defined as firms with a majority family ownership and direct daily family involvement, family
business is a major economic force, employing 58 percent of America's total workforce.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
67. (p. 66) All of the following are characteristics of a family-owned business EXCEPT
A. they are the only group that faces the challenge of access.
B. they are a major source of funds and personnel for new small businesses.
C. they are a self-perpetuating source for future small businesses.
D. a strong family bond can become a strong business culture.
Access refers to the simplest form of discriminationoften women- or minority-owned firms are
simply excluded from the opportunities offered to firms owned by white males.

Difficulty: Hard
68. (p. 66) Two challenges typical to family businesses are

A. motivation and nepotism.
B. leadership and finances.
C. succession and access.
D. role conflict and succession.
There are two challenges typical to family businessesrole conflict and succession.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
69. (p. 66) What best describes the problem that arises when people have multiple responsibilities
and each makes different demands on them?
A. Role conflict
B. Succession
C. Leadership
D. Role ambiguity
Role conflict is at its worst when people fail to recognize it.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
70. (p. 66-67) Which of the following does not pertain to role conflict?
A. It describes the kind of problem that arises when people have multiple responsibilities
B. It is at its worst when people fail to recognize it
C. It causes a shortage of time
D. It is the process of intergenerational transfer of a business
Succession is the process of intergenerational transfer of a business.

Difficulty: Medium
71. (p. 67) For family business, the most effective approach for avoiding role conflict is
A. time management.
B. to avoid schedule overload.
C. to try and make decisions based on family necessities.
D. to keep family issues out of the business.
For family business, the most effective approach for avoiding role conflict is to keep family
issues out of the family business.

Difficulty: Medium
72. (p. 67) Only _____ of family-owned businesses survive beyond the first generation.
A. three-quarters
B. one-half
C. one-fourth
D. one-third
Only one-third of family-owned businesses survive beyond the first generation.
AACSB: Statistical Data Analysis & Management Science

Bloom's: Knowledge
Difficulty: Easy
73. (p. 67) _____ refers to the process of intergenerational transfer of business.
A. Role conflict
B. Succession
C. Leadership
D. Access
Succession plans deal with the people who will take over, what roles they will fill, and what
supports they will receive.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
74. (p. 68-69) Which of the following statements about a family council is false?
A. One way to maximize communication in the succession process is to create a family council.
B. The main function of the family council is to be focused on running the business.
C. A family council includes family members with immediate interests in the business.
D. The meetings can be a good forum for grappling with issues like role expectations.
The key difference between a family council and a board of directors is that the function of the
family council is to keep the family involved while the board is focused on running the business.

Difficulty: Medium
75. (p. 69) What is the key difference between a family council and a board of directors?
A. The board is focused on business-family relationships.
B. The board includes significant family membership.
C. The function of the family council is to keep the family involved.
D. Family councils should get professional advice at the start.

Difficulty: Medium
76. (p. 69-70) Which of the following statements about entrepreneurial teams is false?
A. Most teams are nonfamily related
B. The majority of new businesses have a team of two or more co-owners
C. The trend is toward even more businesses being developed by teams of entrepreneurs
D. When family members start a business, they start with already knowing and trusting each
other

Difficulty: Medium
77. (p. 70) The two fastest growing minority groups represent the largest segments of minority
business owners. These are
A. Hispanics and Asians.
B. Hispanics and Africans.
C. Asians and Africans.
D. Asians and Pacific Islanders.
Hispanics represent 40 percent of all ethnic business owners, Asians 30 percent, and African
Americans 27 percent.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
78. (p. 71) Identify the simplest form of discrimination.

A. Access
B. Role conflict
C. Set-asides
D. Collusion
Access refers to the simplest form of discriminationoften women- or minority-owned firms are
simply excluded from the opportunities offered to firms owned by white males.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
79. (p. 71) When woman or minority-owned businesses are simply excluded from the opportunities
offered to firms owned by white males, it is called the challenge of
A. consistency.
B. access.
C. flexibility.
D. mutuality.
Access problems for women- and minority-owned small businesses crop up most often as
discrimination in financing.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
80. (p. 71) Access problems for women- and minority-owned small businesses crop up most often
as
A. differences in labeling.
B. discrimination in financing.
C. problems involved in business contacts.
D. the presence and absence of certain skills.
Access problems for women- and minority-owned small businesses crop up most often as
discrimination in financing.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
81. (p. 71) All of the following observations pertain to set-asides EXCEPT
A. they are government contracting funds.
B. they are earmarked for particular types of firms.
C. they focus on extra efforts to network.
D. they are a solution for access-based challenges.
The second approach to solving problems of access is personal and involves making extra efforts
to network.

Difficulty: Medium
82. (p. 71) Which of the following statements about certification for women- and minority-owned
small businesses is false?
A. Certification consists of an examination based acknowledgement that the firm is owned and
operated as specified.
B. Certification is for every women- or minority-owned small business.
C. For those businesses that qualify, certification provides a ready means of access to
opportunity and to networks of businesses and government agencies.
D. For corporations, certification is handled by organizations that are not affiliated with the
government or big business, such as the National Minority Supply and Diversity Council.
Certification is not for every women- or minority-owned small business.

Difficulty: Medium
83. (p. 71) People who begin their business after having retired or resigned from work in
corporations at the age of 50 or later are called _____ entrepreneurs.
A. harvest
B. helical or spiral
C. late career
D. growth
Whether these individuals start their business as part of a postretirement career plan or after early
retirement has forced them to reevaluate their lives, a late career as a business owner has become
a necessity for them.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
84. (p. 72) Which of the following is NOT a challenge faced by second career entrepreneurs?
A. Adjusting to the entrepreneurial life
B. Reestablishing self-confidence
C. Keeping personal finances out of the business
D. Deciding whether to return to work
Whether second career or late career entrepreneurs start their business as part of a postretirement
career plan or after early retirement has forced them to reevaluate their lives, a late career as a
business owner has become a necessity for them.

Difficulty: Medium
85. (p. 72) The key for managing the demanding life of the entrepreneur is to
A. list all your responsibilities as soon as you get them.
B. prioritize your tasks based on their importance to your business and their due date.
C. get advice from people in your line of business about the basic activities of the small business.
D. perform all the business functions including sales, operations, accounting, finance, and human
resources yourself.
The key for managing the demanding life of the entrepreneur is to get advice from people in your
line of business, or from consultants about the basic activities of the small business.

Difficulty: Medium
Scenario: B&B Music

Bart Barker has always had the talent for playing several musical instruments and has a fabulous
voice. Bart has been playing music at family and friends' events for several years. At age 21,
Bart is determined to open his own business with his brother Brad who is a business major. Bart
is the idea person, whereas Brad is more the contemporary classic entrepreneur. Bart wants to
start and own the business as a lifetime venture, whereas Brad already has an exit plan for their
business. Despite these differences, the two brothers launch their business B&B Music Inc., with
great fanfare.
86. (p. 58) Being an idea person, Bart would not be driven by
A. great wealth.
B. hard work.
C. fame.
D. fast learning.
Idea people are not particularly driven by great wealth, but they are driven by having their idea
achieve greatness, and they can be great risk takers and learners while trying to make that idea
come alive.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
87. (p. 59) Being a contemporary classic entrepreneur, Brad would exhibit all of the following traits
EXCEPT being
A. a hard worker.
B. socially isolated.
C. an average income seeker.
D. a fast learner.
See Figure 3.1.

Difficulty: Medium
88. (p. 64) Bart appears to express an interest in which of the following careers?
A. Habitual
B. Harvest
C. Spiral
D. Occasional
Habitual entrepreneurs are owners for a lifetime, sometimes in one business, sometimes across
several firms. The owner's career goal is personal satisfaction first, income second.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
89. (p. 65) Brad appears to be leaning toward which of the following careers?
A. Habitual
B. Harvest
C. Spiral
D. Occasional
Harvest entrepreneurs are owners with an exit plan. Their goal is to work first in order to play
later.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
90. (p. 69) B&B Music can be described as a(n)
A. minority business.
B. entrepreneurial team.
C. second-career entrepreneurship.
D. expert business.
The majority of new businesses have a team of two or more co-owners, and the trend is toward
even more businesses being developed by teams of entrepreneurs.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Essay Questions
Chapter 04 Small Business Ideas: Creativity, Opportunity, and Feasibility Answer

Key
1. (p. 80) Search and capture of new ideas that lead to business opportunities is called opportunity
recognition.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
2. (p. 81) On the question of what came first for new businesses, according to PSED, a majority of
entrepreneurs indicated that business idea and the decision to start a business were simultaneous.
FALSE
AACSB: Analytic
Difficulty: Medium
3. (p. 82) Hobbies cannot be turned into successful businesses.

FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
4. (p. 83) According to entrepreneurs in PSED, work experience was the number one source of
ideas for their business.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
5. (p. 83) A license is a legal agreement granting you rights to use a particular piece of intellectual
property.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
6. (p. 84) In entrepreneurship, every good idea is a viable business opportunity.

FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
7. (p. 84) A typical I 2 P analysis consists of a one-page response to eight questionsfour about
the product, three about the process, and one about the people.
FALSE
AACSB: Analytic
Difficulty: Medium
8. (p. 87) "C" in the creativity tool SCAMPER stands for copy.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
9. (p. 87) Alex Osborne, a pioneer in the field of creativity, coined the word brainstorming.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
10. (p. 87) "S" in the creativity tool SCAMPER stands for summarize.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
11. (p. 89) Preparation and correlation are two stages of the creative process, according to Graham
Wallas.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
12. (p. 90) One way you can try to practice the business of innovation is to invite someone you
never included before to a meeting at which you are solving a problem or searching for a new
opportunity.
TRUE

Difficulty: Easy
13. (p. 90) Research suggests that the first good idea entrepreneurs come up with is always the
best.
FALSE
AACSB: Analytic
Difficulty: Medium
14. (p. 91) Customers generally view a new company negatively if it imitates established
companies and practices in the industry.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
15. (p. 91) One unusual ability found in the entrepreneurs Gaglio and Katz studied was that many
of them can come up with new ideas given nearly any combination of resources.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
16. (p. 92) According to research, start-up entrepreneurs felt most confident about obtaining start-
up capital.
FALSE
AACSB: Analytic
Difficulty: Medium
17. (p. 92) Feasibility studies consist of careful investigation of four primary areas: the
product/service, the industry and market, profitability, and the plan for future action.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
18. (p. 93) According to the feasibility study outline, entering into a franchise agreement,
partnerships, distributorships, etc., should be discussed in the business idea section.
FALSE
AACSB: Analytic
Difficulty: Medium
19. (p. 96) With the many sales and service businesses built using the Internet, a low-cost, low-risk
approach for testing feasibility exists using the concept of a pilot test.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
20. (p. 97) One of the pitfalls small business owners can fall into is to fail to build a company
culture that encourages new ideas and embraces change.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
21. (p. 80) Which of the following refers to searching and capturing new ideas that lead to business
opportunities?
A. Innovation
B. Entrepreneurial alertness
C. Opportunity recognition
D. Technology transfer
This process often involves creative thinking that leads to discovery of new and useful ideas.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
22. (p. 80) Researchers in the field of entrepreneurship and small business believe that _____
behavior is the most basic and important entrepreneurial behavior.
A. opportunity recognition
B. idea networking
C. observational
D. question-seeking
The search and capture of new ideas that lead to business opportunities is called opportunity
recognition.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
23. (p. 81) A special set of observational and thinking skills that help entrepreneurs identify good
opportunities refers to
A. innovation.
B. opportunity recognition.
C. technology transfer.
D. entrepreneurial alertness.
It is the ability to notice things that have been overlooked, without actually launching a formal
search for opportunities, and the motivation to look for opportunities.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
24. (p. 81) All of the following pertain to entrepreneurial alertness EXCEPT
A. entrepreneurs have a special set of observational skills.
B. entrepreneurs have thinking skills that help them identify opportunities.
C. it is the ability to notice things that have been overlooked.
D. it involves launching a formal search for opportunities.
Some scholars have suggested that entrepreneurs are able to notice things that have been
overlooked, without actually launching a formal search for opportunities.

Difficulty: Medium
25. (p. 81) If an owner of a fast-food restaurant notices that customers are asking for substitutions
of healthier ingredients to food items, she may be motivated to contact her suppliers to ask about
getting new ingredients, changing the menu, and increasing the healthy offerings on the menu to
keep customers satisfied. This is an example of
A. creativity.
B. technology transfer.
C. innovation.
D. entrepreneurial alertness.
Entrepreneurial alertness is the ability to notice things that have been overlooked, without
actually launching a formal search for opportunities, and the motivation to look for opportunities.
AACSB: Analytic
Difficulty: Medium
26. (p. 81) According to the PSED, a majority of entrepreneurs indicated that
A. the decision to start a business came first.
B. the business idea came first.
C. both idea and decision were simultaneous.
D. they have no recollection of what happened with business start-up.
See Table 4.1.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
27. (p. 81) Working for a very large organization in the tractor manufacturing industry, John
always heard complaints from customers about the parts and service aspect of the business.
Taking an early retirement, John started his small business to address the customer complaints he
had been hearing. Which of the following best describes the factor that led John to this business
idea?
A. A similar business
B. Chance
C. Work experience
D. Family and friends
Many successful business owners spent years working for a company and gained valuable
experience about how things might be done differently. Sometimes the idea grows out of
listening to customer complaints.
AACSB: Analytic
Difficulty: Medium
28. (p. 81) You might see a business in an area that intrigues you because you learn that there is a
growing market for this business and you think of a way to expand on the opportunity. Which of
the following factors is considered the business idea behind this?
A. Serendipity
B. Personal interest
C. A similar business
D. Work experience
Even if you don't have years of work experience in an industry or market, you might see a
business in an area that intrigues you because you like certain products, or you learn that there is
a growing market for this business and you think of a way to expand on the opportunity.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
29. (p. 81-82) According to the text, all of the following factors lead business owners to their
business ideas EXCEPT
A. work experience.
B. government regulation.
C. serendipity.
D. family and friends.
The factors that lead small business owners to their business ideas are work experience, a similar
business, hobbies, serendipity, family and friends, education and expertise, and technology
transfer and licensing.

Difficulty: Medium
30. (p. 82) When people find a way to turn their hobbies into successful businesses, which of the
following factors is considered as leading them to their business idea?
A. Family and friends
B. Education and expertise
C. Serendipity
D. Personal interest
Many people find a way to turn their hobbies or personal interests into successful businesses.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
31. (p. 82) When you happen to be at the right place at the right time resulting in a successful
business idea, which of the following factors can be said to be responsible?
C. Serendipity
Whether you think of it as being in the right place at the right time, as luck, or as being observant
to the cues around you, many businesses have been formed as a result of the unexpected.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
32. (p. 83) Many owners of consulting companies took their own skills and launched businesses by
selling those skills to other companies who needed them. This is an example of which of the
following factors leading to business ideas?
B. Serendipity
C. Education and expertise
Some small business owners decide first that they want to own a business and then go about
searching for a viable idea for that business. Often, would-be entrepreneurs look to their own
skills and talents for business ideas.
AACSB: Analytic
Difficulty: Medium
33. (p. 83) According to the entrepreneurs studied in PSED, which of the following factors was the
most frequently mentioned source that led to their business idea?
A. Discussion with potential investors
C. Family and friends
D. Work experience
In the Panel Study of Entrepreneurial Dynamics, work experience in a particular industry or

market was the most frequently mentioned source of ideas.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
34. (p. 83) One powerful but rarely used source of ideas is
A. family and friends.
B. work experiences.
C. existing customers.
D. government agencies.
One powerful but rarely used source of ideas are universities and government agencies. Both
develop a tremendous range of new technologies or refinements of existing technologies, but
never do anything with them.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
35. (p. 83) A _____ is a legal agreement granting you rights to use a particular piece of intellectual
property.
A. caveat emptor
B. franchise
C. set-aside
D. license
A license is a legal agreement granting you rights to use a particular piece of intellectual
property. In return, you are required to pay the owner of the license.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
36. (p. 84) The firm that obtains the rights to use a particular piece of intellectual property is the
A. licensor.
B. licensee.
C. obligor.
D. assignor.
property. In return, you (the licensee) are required to pay the owner of the license (the licensor).
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
37. (p. 84) The person or organization which is offering the rights to use a particular piece of
intellectual property is the
A. consignee.
B. assignee.
C. licensor.
D. licensee.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
38. (p. 84) _____ is a payment to a licensor based on the number or value of licensed items sold.
A. Milestone payment
B. Lump sum payment
C. Royalty
D. An exclusive right
Royalty is a payment per item sold.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
39. (p. 84) Which of the following best describes a licensee?
A. It is a person or organization offering the rights to use a particular piece of intellectual
property.
B. It is a legal agreement granting rights to use a particular piece of intellectual property.
C. It is a person or firm obtaining the rights to use a particular piece of intellectual property.
D. It is a person or organization offering the rights to use any piece of intellectual property.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
40. (p. 84) In a typical I 2 P analysis, this is a nontechnical description of the concept simple
enough for everyone to understand it.
A. What is the market and its size?
B. What is your product or idea?
C. Why will customers buy your product?
D. Who are the people behind the idea?
What is your product or idea? This is a nontechnical description of the concept simple enough
for everyone to understand it.
AACSB: Analytic
Difficulty: Medium
41. (p. 84) "Why might a cell phone that can play music MP3s be a better approach than a
dedicated MP3 player?" pertains to which of the following questions?
A. Is your product or idea innovative?
B. Why will customers buy your product?
C. Is your underlying technology unique?
D. Who are the people behind the idea?
Is your product or idea innovative? This is where you explain how your technological approach
is better than other approaches.
AACSB: Analytic
Difficulty: Medium
42. (p. 84) This question looks at the specific individuals, groups, or organizations you would
approach first to buy your product or service.
A. Who are the people behind the idea?
B. Describe how you create value for your customers.
C. How would you define the best initial set of customers?
D. What marketplace need does your product address better than any other option?
How would you define the best initial set of customers? (Who will buy it?) This question looks
at the specific individuals, groups, or organizations you would approach first to buy your product
or service.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
43. (p. 84) Which of the following looks like the simplest question but is actually the hardest one?
A. Is your underlying technology unique?
B. Who will buy your product?
C. What is your product or idea?
D. What is the market and its size?
How would you define the best initial set of customers? (Who will buy it?) This question looks
at the specific individuals, groups, or organizations you would approach first to buy your product
or service.

Difficulty: Medium
44. (p. 84-85) Which of the following is NOT a focus while answering the eight questions in a
typical I 2 P analysis?
A. People
B. Product
C. Market
D. Intellectual property protection
A typical I 2 P analysis consists of a one-page response to nine questions our about the
product, four about the market, and one about intellectual property protection.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
45. (p. 85-86) "Beyond the start-up dollars that will be needed to buy any raw materials to make the
product or develop the service, what information, relationships, and degree of effort will be
needed to turn the idea into reality?" pertains to which of the following?
A. Is your product or idea innovative?
B. What resources are needed to take the idea and sell it to the customer?
C. Describe how you create value for your customers.
D. What marketplace need does your product address better than any other option?
In addition to an I 2 P analysis, there are three additional questions to consider completing an

initial idea screening. They focus on people, resources, and profits. What resources are needed to
take the idea and sell it to the customer?
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
46. (p. 87) "S" in the creativity tool SCAMPER stands for
A. strategize.
B. substitute.
C. submit.
D. solicit.
Substitute: Think of what you might substitute for something else to form a new idea.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
47. (p. 87) A feature that allows your customers to order directly from a Web site rather than
visiting your store is an example of
A. elimination.
B. adaptation.
C. magnification.
D. substitution.
AACSB: Analytic
Difficulty: Hard
48. (p. 87) Which of the following is an idea trigger for the "substitute" cue in SCAMPER?
A. What opportunities can you think of that come as a result of replacing something that already
exists?
B. What separate products, services, or whole businesses can you put together to create another
distinct business?
C. What could you adapt from other industries or fields to your business?
D. What could I make more noticeable or dramatic, or different in some way from my
competitors?

Difficulty: Medium
49. (p. 87) The idea trigger "What separate products, services, or whole businesses can you put
together to create another distinct business?" pertains to which cue in SCAMPER?
A. Substitute
B. Magnify
C. Adapt
D. Combine
Combine: Think of possible combinations you can make that result in something entirely
different.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
50. (p. 87) _____ is a process of producing an idea or opportunity that is novel and useful,
frequently delivered from making connections among distinct ideas or opportunities.
A. Ethics
B. Creativity
C. Imitation
D. Flexibility
Much of what we know about creativity comes from understanding the process that highly
creative people go through when they get their ideas.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
51. (p. 87) When a bookstore starts to sell videos, music, and coffee as well, they are using which
element of SCAMPER?
A. Rearrange
B. Eliminate
C. Combine
D. Substitute
Combine: Think of possible combinations you can make that result in something entirely
different.
AACSB: Analytic
Difficulty: Medium
52. (p. 87) Which popular innovation strategy can be just as effective and much more likely in the
real world, than business opportunities that result from radical innovations?
A. Magnifying
B. Adapting
C. Eliminating
D. Rearranging
Adapt: Think about what could be adapted from products or services that already exist.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
53. (p. 87) Looking at the concept of "Book-of-the-Week" from Borders, if Olive Garden starts a
"Pasta-of-the-Week", it would be an example of which element of SCAMPER?
A. Adapt
B. Magnify
C. Combine
D. Substitute
Adapt: Think about what could be adapted from products or services that already exist.
AACSB: Analytic
Difficulty: Hard
54. (p. 87) Rejecting existing ideas, and presenting a way to do things differently refers to _____
strategy.
A. imitative
B. cost leadership
C. radical innovation
D. integration
The concept of adaptation is a popular innovation strategy that can be just as effective, and much
more likely in the real world, than business opportunities that are the result of radical innovations
such as inventions.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
55. (p. 88) The microchip industry was born when someone asked the question, "What if we shrunk
them?" This refers to which of the following cues?
A. Rearrange
B. Minimize
C. Put to other uses
D. Adapt
M in SCAMPER can cue you to "minimize" something. The microchip industry was born, for
example, when someone asked the question, "What if we shrunk them?"
AACSB: Analytic
Difficulty: Medium
56. (p. 88) The idea trigger "Suppose you learned that all the traditional uses for your product had
disappeared and that you have trailer truckloads out back with tons of product. What other uses
might there be?" refers to which cue?
A. Substitute
B. Put to other uses
C. Eliminate
D. Rearrange
Put to other uses: Think of ways you could generate a high number of opportunities for your
product or service beyond what it is traditionally used for.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
57. (p. 88) "M" in the creativity tool SCAMPER stands for
A. manage.
B. match.
C. market.
D. modify.
Magnify or modify: Taking an existing product and changing its appearance or adding more
features or increasing the hours your store is open or making its advertising more dramatic are
some ways you could magnify or modify your idea.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
58. (p. 88) There is much a small business can do to create memorable images and advertising for
itself, and it does not need expensive television ads to do it. Which element of SCAMPER is
being referred to here?
A. Magnify
B. Substitute
C. Combine
D. Put to other use
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
59. (p. 88) When Crest toothpaste introduces "New and Improved" toothpaste, it is an example of
which element of SCAMPER?
A. Modify
B. Substitute
C. Rearrange
D. Eliminate
AACSB: Analytic
Difficulty: Medium
60. (p. 88) Which element of SCAMPER involves thinking of ways to generate a high number of
opportunities for a service beyond its traditional function?
A. Putting to other uses
B. Magnifying or modifying
C. Adapting
D. Combining
Idea Trigger: Suppose you learned that all the traditional uses for your product had disappeared
and that you have trailer truckloads out back with tons of product. What other uses might there
be? Aim for quantity, and allow outrageous ideas to flow along with more mundane ones. Who
knows what new applications you may find.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
61. (p. 89) "What if people didn't have to leave their houses to go grocery shopping?" refers to
which cue?
A. Minimize
B. Reverse
C. Eliminate
D. Substitute
Idea Trigger: What could I get rid of or reduce that would eliminate something my customer has
to do, and as a result give the customer more than he or she expected?
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
62. (p. 89) Using paradox to challenge old ways of thinking such as using stimulants to calm
hyperactive children refers to which of the following cues?
A. Minimize
B. Substitute
C. Reverse
D. Rearrange
Idea Trigger: What can you rearrange or reorder in the way your product or service appears, or
the way businesses in your industry usually look or are decorated or located?
AACSB: Analytic
Difficulty: Medium
63. (p. 89) Searching for opportunities that arise when you get rid of something or stop doing
something refers to
A. adapting.
B. eliminating.
C. rearranging.
D. modifying.
Idea Trigger: What could I get rid of or reduce that would eliminate something my customer has
to do, and as a result give the customer more than he or she expected?
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
64. (p. 89) According to Graham Wallas, the creative thought includes which of the following
stages?
A. Industry survey
B. Elimination
C. Combination
D. Incubation
Incubationthinking about the problem or opportunity in a "not-conscious" way.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
65. (p. 89) According to Graham Wallas, exploring the problem or opportunity in all directions is
called
A. illumination.
B. incubation.
C. preparation.
D. verification.
Preparationexploring the problem or opportunity in all directions.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
66. (p. 89) According to Graham Wallas, thinking about the problem or opportunity in a "not-
conscious" way is called
A. preparation.
B. verification.
C. illumination.
D. incubation.
Incubationthinking about the problem or opportunity in a "not-conscious" way, putting it on

the back burner, so to speak.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
67. (p. 89) The creative thought process, according to Graham Wallas, includes all of the following
stages EXCEPT
A. incubation.
B. illumination.
C. combination.
D. verification.
According to Graham Wallas' creative thought process creative thought includes four stages:
preparation, incubation, illumination, and verification.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
68. (p. 90) According to the text, all of the following are techniques that you can try as you practice
the business of innovation EXCEPT
A. read magazines and trade journals about your area.
B. have a "scan the environment" day.
C. redesign your work environment.
D. invite someone you have never included before to a meeting at which you are solving a
problem.
Read magazines or trade journals outside your area.

Difficulty: Hard
69. (p. 90-91) All of the following are major pitfalls that business owners can become victims of
when trying to become more innovative EXCEPT
A. judging ideas too quickly.
B. stopping with the first good idea.
C. obeying rules that do not exist.
D. getting the "bandits on the train."
One major pitfall that business owners can become victims of when trying to become more
innovative is failing to get the "bandits on the train" and ask for support.

Difficulty: Medium
70. (p. 91) You assume, as the business owner, that you need to do all the work, make all the sales
calls, and solve everybody's problems. This refers to which major pitfall that business owners
can become victim to when trying to become more innovative?
A. Obeying rules that do not exist
B. Judging ideas too quickly
C. Identifying the wrong problem
D. Getting the "bandits on the train."
innovative is obeying rules that don't exist: We sometimes put obstacles in front of ourselves
because we think we can't do something, when in fact there is no reason we can't.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
71. (p. 91) An overall strategic approach in which the entrepreneur does more or less what others
are already doing refers to
A. imitative strategy.
B. innovative strategy.
C. incremental strategy.
D. status quo strategy.
Customers may view a new company as more legitimate if it imitates established practices in the
industry. This is central to the idea of pursuing an imitative strategy.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
72. (p. 91) This model has the entrepreneur assess whether the situation faced is one that is the
same as it has been traditionally or if it is changing.
A. Business process modeling
B. Opportunity identification process
C. Pilot test
D. Radical innovation strategy
Gaglio and Katz offer a model for thinking about the business implications of opportunities.
Called the opportunity identification process, it has the entrepreneur assess whether the situation
faced is one that is the same as it has been traditionally or if it is changing.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
73. (p. 91) Taking an idea and offering a way to do something slightly better than it is done
presently refers to
A. imitative strategy.
B. incremental strategy.
C. status quo strategy.
D. innovative strategy.
Strategies that involve pursuing an incremental strategy make a lot of sense when the business is
continuing on a fairly steady course.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
74. (p. 92) _____ means the extent to which the idea is viable and realistic, and the extent to which
you are aware of internal and external forces that could affect your business.
A. Flexibility
B. Consistency
C. Feasibility
D. Innovation
Feasibility studies consist of careful investigation of five primary areas: the overall business idea,
the product/service, the industry and market, financial projections, and the plan for future action.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
75. (p. 92) According to PSED, start-up entrepreneurs feel most confident about which of the
following aspects?
A. Complying with local/state/federal regulations
B. Obtaining start-up capital
C. Obtaining a bank's help
D. Attracting employees
See Table 4.2.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
76. (p. 92) Feasibility studies consist of careful investigation of all the following areas EXCEPT
A. product/service.
B. industry and market.
C. profitability.
D. idea generation.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
77. (p. 92) What is the goal of a feasibility study?
A. To create additional value for customers through great products or services.
B. To get useful ideas out of creative employees that affect the business's bottom line.
C. To assess if an idea can be profitably brought to market.
D. To assess how well a preliminary run of a business works and what problems it might have.
In crafting a feasibility study, the goal is to assess if the idea can be profitably brought to market.
AACSB: Analytic
Difficulty: Medium
78. (p. 93) The business idea component of the feasibility study includes which of the following
aspects?
A. Stage of development
B. Competition
C. Market penetration
D. You, your firm, and your fit
Unique features of the business idea component of the feasibility study include the description of
your business and you, your firm, and your fit.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
79. (p. 93) The product/service component of the feasibility study should include which of the
following aspects?
A. Stage of development
B. Competition
D. Cost forecast
Unique features of the product/service component of the feasibility study include: unique
features - benefits, unique features - limitations, stage of development, and legal restrictions and
rights.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
80. (p. 94) The industry and market component of the feasibility study should include which of the
following components?
A. Sales revenue forecast
B. The competition
C. Writing a business plan
D. Pricing
The industry and market component of the feasibility study should include current industry,
market potential for this industry, the competition, and your customers.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
81. (p. 95) The financial projections component of the feasibility study includes all of the following
EXCEPT
A. pricing.
B. operating expenses.
C. insurance requirements.
D. cost forecasts.
Insurance requirements is included in the product/service component.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
82. (p. 95) The future action plan component of the feasibility study includes which of the
following elements?
A. Profitability
B. The competition
C. Legal restrictions and rights
D. Writing a business plan
The feasibility analysis will help you get started writing your business plan. You will have the
information you need to address the competitive advantages and disadvantages of your business
and the strategies you will use to meet your goals.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
83. (p. 96) What refers to a preliminary run of a business, sales effort, program, or Web site with
the goal of assessing how well the overall approach works and what problems it might have?
A. Conversion rate
B. Pilot test
C. Incubation period
D. Commercialization
With many sales and service businesses built using the Internet, a low-cost, low-risk approach
for testing feasibility exists using the concept of a pilot test.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
84. (p. 96) The measure of the number of visitors to your Web site who have actually made a
purchase from you is known as
A. eyeball rate.
B. frame rate.
C. conversion rate.
D. pilot testing.
In the spirit of showing actual sales for a product or service, and being able to say how many
visitors became customersthe conversion rateis a powerful way to prove your idea is
potentially feasible.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
85. (p. 98) _____ is at the heart of entrepreneurship, because every time people start a business or
become the owner of one, it is a new start and often a new experience for them.
A. Innovation
B. Leadership
C. Marketing
D. Teamwork
Innovation is at the heart of entrepreneurship, because every time people start a business or
become the owner of one, it is a new start and often a new experience for them. Some businesses
are themselves built on new ideas or new twists on existing ideas.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Scenario: Tastes of India

Born and raised in India, Rashmi has always been on top of her game with regard to Indian
cooking. As a matter of fact, cooking was her passion and she always enjoyed reading, learning,
and experimenting with different ethnic cuisines. Ever since Rashmi's family moved to the
United States, cousins, friends, and other people coming to their house for dinner gatherings
have always commented that Rashmi should start a catering business. Realizing that her
American friends may not be able to handle or like the Indian food that is too hot and spicy,
Rashmi would make changes to the recipes to suit the local taste. Having heard enough times,
Rashmi is seriously contemplating whether she should start a catering business: "Tastes of
India."
86. (p. 82-83) Which of the following factors can be attributed to Rashmi considering the catering
business idea?
A. A similar business
B. Serendipity
C. Work experience
D. Family and friends
Ideas can come to you through your conversations with your family and friends.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
87. (p. 84-86) In assessing the viability of the catering business idea, Rashmi should consider all of
the following questions EXCEPT
A. What regulations are supporting this idea?
B. How would you define the best initial set of customers?
C. What resources are needed to take the idea and sell it to the customer?
D. What is the market and its size?
See Exhibit 4.1

Difficulty: Medium
88. (p. 88) Rashmi appears to be applying which element of the SCAMPER tool in her cooking?
A. Modify
B. Substitute
C. Rearrange
D. Eliminate
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
89. (p. 90) All of the following are pitfalls that Rashmi should be careful to avoid succumbing to
EXCEPT
A. judging ideas too quickly.
B. stopping with the first good idea.
C. obeying rules that do not exist.
D. getting the "bandits on the train."
innovative is failing to get the "bandits on the train" and ask for support.

Difficulty: Medium
90. (p. 92) In conducting the feasibility study for the "Tastes of India" idea, Rashmi should ensure a
careful investigation of all of the following areas EXCEPT
A. product/service.
B. cultural diversity management.
C. profitability.
D. industry and market.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Essay Questions
Chapter 05 Small Business Entry: Paths to Part-Time Entrepreneurship Answer
Key
1. (p. 120) Working for yourself for 40 or fewer hours a week is called part-time self-employment.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
2. (p. 120) Most people start in entrepreneurship via part-time self-employment.

TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
3. (p. 120) Part-time self-employment represents a very minor portion of all current
entrepreneurship.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
4. (p. 121) One situation in which to consider part-time business is when you are new to business
and need to gain basic experience.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
5. (p. 121) If you are new to business and working on your own, estimates suggest that a business
plan will take anywhere from 10 to 20 hours.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
6. (p. 122) The more time and energy you spend preparing for a small-scale part-time business, the
longer it takes to make a profit.
TRUE

Difficulty: Easy
7. (p. 136) The advantages of home businesses are the speed and ease of setup and having a highly
variable income.
FALSE
AACSB: Analytic
Difficulty: Medium
8. (p. 137) Primary disadvantages of stand retailing are that it requires a significant amount of
capital and time investment.
FALSE

Difficulty: Easy
9. (p. 137) In terms of rent per square foot, carts and kiosks are often among the least expensive
locations in the mall.
FALSE

Difficulty: Medium
10. (p. 137) The key success factor for a stand is having a location where there is enough foot or
vehicle traffic to sustain the business.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
11. (p. 139) One advantage of consignment approaches is that they permit full-time sales with only
a part-time involvement from you.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
12. (p. 139) Research indicates that most retail firms typically start out as a hobby.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
13. (p. 141) The majority of the part-time businesses are stand retailing.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
14. (p. 141) There are two key groups outside your business with whom you must deal - customers
and investors.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
15. (p. 142) For part-time entrepreneurs, time is the ultimate resource.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
16. (p. 143) Bootstrapping refers to finding a low-cost or no-cost way to do something.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
17. (p. 146) Cannibalizing occurs when people do work for their part-time business while they are
at their full-time job, blurring the boundary between them.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
18. (p. 146) Aggrandizing means taking business away from your employer.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
19. (p. 146) In deciding whether to make the move from part-time to full time, the key question is
usually government regulations.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
20. (p. 147) Part-time entrepreneurship is important because it gives people a chance to learn the
ropes in business and to test out their ideas.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
21. (p. 120) Working at your business 35 hours a week or less is called
A. franchising.
B. full-time self-employment.
C. aggrandizing.
D. part-time self-employment.
Working part time means that the entrepreneur can do other work, such as have a job in another
company, go to school, or take care of family.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
22. (p. 120) Which of the following does NOT hold true of part-time self-employment?
A. It is a minor portion of all current entrepreneurship.
B. There is tremendous volatility as individuals jump in and out of self-employment quickly and
frequently.
C. It accounts for around half of small businesses in the United States.
D. It is the way most people start in entrepreneurship.
Most entrepreneurs start out working part time on their new business.

Difficulty: Medium
23. (p. 120) Full-time approaches include all of the following EXCEPT
A. buying or inheriting existing businesses.
B. stand retailing.
C. franchising.
D. opening a new full-time business.
There are several approaches closely identified with part-time businesses. Historically, two
methods have been mentioned most oftenhome retail and stands.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
24. (p. 120) Part-time businesses are important for which of the following reasons?
A. They are important and necessary for our global competitiveness.
B. Majority of new inventions have come from part-time self-employed businesses.
C. Part-time self-employment is the way most people start in entrepreneurship.
D. Part-time businesses provide the cheap labor for large businesses and full-time entrepreneurs.
Part-time businesses are important for two reasons. First, most entrepreneurs start out working
part time on their new business. Second, the sheer number of part-time self-employeds makes
them a major force in our economy, even if it is one we do not always recognize.

Difficulty: Medium
25. (p. 120) The frequency of business starts and stops is referred to as
A. volatility.
B. aggrandizing.
C. bootstrapping.
D. moonlighting.
Many people jump into and out of self-employment (a change called volatility by economists)
for a few weeks at a time.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
26. (p. 120) Nowadays, the conventional wisdom is that if you are serious about starting a business,
you ought to start a business full time and prepare for it by
A. doing a business plan.
B. making bylaws.
C. doing a strategic plan.
D. creating an organizational chart.
These days, the conventional wisdom is that if you are serious about starting a business, you
ought to start a business full time and prepare for it by doing a business plan.
AACSB: Analytic
Difficulty: Easy
27. (p. 120-121) Which of the following statements about a business plan is false?
A. A business plan enables you to look at every aspect of your business.
B. Business plans are important if you intend to ask others for expertise or financial investments.
C. Estimates suggest that a business plan may take anywhere from 10 to 20 hours or more if you
are new to business.
D. If you are new to business and need to gain basic experience, you might want to obtain other
types of experience before writing a business plan.
Estimates suggest that a business plan may take anywhere from 50 to 200 hours or more if you
are new to business and working on your own.

Difficulty: Medium
28. (p. 121) Under which of the following situations might it make better sense to undertake a part-
time business first?
A. You are buying an existing business
B. You want to gain basic experience
C. You are opening a franchise
D. There is too much competition
One situation in which it might make better sense to undertake a part-time business first is when
you are new to business and need to gain basic experience.

Difficulty: Medium
29. (p. 121) All of the following are situations in which it might make better sense to undertake a
part-time business EXCEPT
A. when you are new to business and need to gain basic experience.
B. when you lack resources to pursue a full-scale business.
C. when there is a narrow window of opportunity.
D. when there is enough time and resources to get the entire business going.
A situation in which it might make better sense to undertake a part-time business first is one in
which you lack resources to pursue a full-scale business or create a business plan. Time is
probably the ultimate resource, and starting a business can tax it heavily.

Difficulty: Medium
30. (p. 121) _____ is/are probably the ultimate resource, and starting a business can tax it heavily.
A. Family
B. Friends
C. Money
D. Time
Time is probably the ultimate resource, and starting a business can tax it heavily.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
31. (p. 121) In all of the following situations, it might make better sense to undertake a part-time
business EXCEPT when
A. there is a narrow window of opportunity.
B. you lack the resources for a full-scale business.
C. you want to gain basic experience.
D. you are buying an existing business.
Buying or inheriting existing businesses is a full-time approach.

Difficulty: Medium
32. (p. 121) In organizing your part-time small business start-up, which of the following is NOT a
key consideration?
A. Cost to start-up
B. Competition
C. Time to start-up
D. Permanence
In learning how to organize your business, there are usually three key considerations for part-
time small business start-ups: the cost to start-up your new part-time business, the time to start-
up your business, the permanence of the business you are creating.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
33. (p. 122) Which of the following statements about the key considerations for part-time small
business start-ups is false?
A. You want a low cost of start-up, since you probably will not have a lot of money to invest.
B. The more time and energy you spend preparing for a small-scale part-time business, the
shorter it takes to make a profit.
C. In most cases, the cost to start-up and the time to market are closely related.
D. The fundamental idea of permanence is that customers want to know if the firm is likely to be
around for awhile, to provide customer service and future sales.
The more time and energy you spend preparing for a small-scale part-time business, the longer it
takes to make a profit.

Difficulty: Easy
34. (p. 122) Which of the following U.S. industries had the most number of establishments in
2007?
A. Manufacturing
B. Wholesale
C. Construction
D. Professional services
See Table 5.2.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
35. (p. 123) All of the following are reasons for the large numbers of home-based businesses in the
United States EXCEPT
A. the idea that a customer knows where the entrepreneur lives can be a point in favor of trusting
in the potential permanence of the firm.
B. it is inexpensive, since you are already living somewhere.
C. they generally give customers the strongest sense of legitimacy.
D. you can get your business going where you live in a moment.
Although home-based businesses do not always give customers the strongest sense of legitimacy,
the idea that a customer knows where the entrepreneur lives can be a point in favor of trusting in
the potential permanence of the firm.

Difficulty: Medium
36. (p. 123) Government specifications for acceptable use of land and buildings in particular areas
are called
A. licensing laws.
B. public utility laws.
C. environmental laws.
D. zoning laws.
Cities, counties, neighborhoods, apartment complexes, and dorms pass regulations which limit
the ways residents can use or modify their space. The government restrictions are called zoning
laws.

Bloom's: Knowledge
Difficulty: Easy
37. (p. 123) What is the greatest problem that home-based entrepreneurs face?
A. Zoning challenges
B. Gaining customers
C. Insurance problems
D. Delivering work
According to home-based entrepreneurs, the greatest problems they face come when there are
zoning challenges or family challenges to the business.
AACSB: Analytic
Difficulty: Medium
38. (p. 123) The limitations imposed on your property by your neighborhood group are known as
A. pacts.
B. covenants.
C. volatilities.
D. aggrandizements.
Cities, counties, neighborhoods, apartment complexes, and dorms pass regulations which limit
the ways residents can use or modify their space. The government restrictions are called zoning
laws, while the ones set up by other organizations are called covenants.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
39. (p. 124) Permission from a government organization to act differently than the laws state is
known as
A. a covenant.
B. volatility.
C. variance.
D. bootstrapping.
One approach to have your business operating from out of your home is to seek to get
permissioncalled a variance.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
40. (p. 126) An Internet site designed to introduce and explain a business to others is known as a(n)
A. e-commerce Web site.
B. portal Web site.
C. advocacy Web site.
D. informational Web site.
The informational Web site is an important type of Web site which informs possible customers
about your firm.

Bloom's: Knowledge
Difficulty: Easy
41. (p. 126) Products like music and cell phones are examples of the kind of goods we buy as
individuals. This type of e-commerce is called
A. business-to-business (B2B).
B. business-to-consumer (B2C).
C. consumer-to-consumer (C2C).
D. business-to-Internet (B2I).
B2C is business-to-consumer transactions using e-commerce.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
42. (p. 126) In _____ sales, one firm sells to another firm.
A. business-to-business (B2B).
B. business-to-consumer (B2C).
C. consumer-to-consumer (C2C).
D. business-to-Internet (B2I).
B2B is business-to-business transactions using e-commerce.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
43. (p. 126-127) Identify the correct statement about B2B.

A. For most of us, the B2B market is visible.
B. An example of a B2B transaction would be an individual buying a cell phone.
C. It involves electronically-facilitated transactions between consumers through a third party.
D. B2B e-commerce is larger than B2C e-commerce.
For most of us, the B2B market is invisible. An example of a B2C transaction would be an
individual buying a cell phone.

Difficulty: Medium
44. (p. 127) Identify the correct statement about a hosting package.
A. It should include at least 1 terabyte of traffic a month.
B. It should give you at least five Web pages of space to tell your story.
C. It should include at least two e-mail accounts using your domain name.
D. It should include an online Web site editor so you can make changes to your site without
buying Web-authoring software.
A hosting package for an informational site should include at least 1 gigabyte of traffic a month.
It should give you at least 10 Web pages of space to tell your story. The hosting package should
also include at least five e-mail accounts using your domain name.

Difficulty: Medium
45. (p. 127) A Web page in which entries are posted in reverse chronological order is a
A. blog.
B. tweet.
C. search engine.
D. push service.
Many blogs let readers respond online, so the entrepreneur and the potential customers can
interact directly.

Bloom's: Knowledge
Difficulty: Easy
46. (p. 128) Identify the correct statement about RSS feeds.
A. All Web sites push content out to customers by using an RSS feed.
B. An RSS feed sends whatever Web material you specify to subscribers to that feed.
C. RSS stands for "really simple sequence."
D. RSS feeds can be read only with special readers.
Today Web site packages include the ability to push content, like your blog, out to customers
who register at your site. Some sites do this by using an RSS feed. RSS stands for "really simple
syndication." RSS feeds can be read in many browsers or with special readers.

Difficulty: Easy
47. (p. 128) A listed, live connection to a different Web site, which in turn displays a similar link to
the first Web site is a(n)
A. sponsored link.
B. reciprocal link.
C. backlink.
D. incoming link.
In a reciprocal link, you display a link to another Web site and that Web site displays a similar
link to yours.

Bloom's: Knowledge
Difficulty: Easy
48. (p. 133) Identify the correct statement about the eBay Web site.
A. The eBay method of auctioning means you pay a fee for posting your product and a sales fee
based on the final bid price when the item sells.
B. Most online transactions use a credit card or an online payment system like PayMate, which is
a division of eBay.
C. eBay does not allow buyers and sellers anonymity.
D. On eBay, you can list a single item for sale only by creating a Web site to support your effort.
Most online transactions use a credit card or an online payment system like PayPal (which is a
division of eBay). eBay allows you a bit of anonymity. You can list a single item for sale on
eBay, without creating a Web site or a company to support your effort.

Difficulty: Hard
49. (p. 136) The party and door-to-door model represents which of the following part-time business
approaches?
A. Stand retailing
B. Consignment
C. Home retail
D. Mail order
There are several approaches closely identified with part-time businesses. Historically, two
methods have been mentioned most oftenhome retail (which consists of home parties and
door-to-door selling), and stands.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
50. (p. 136) Which of the following is also called multilevel marketing?
A. Network marketing
B. Auctioning
C. Catalog sales
D. Online marketing
One variation on the home model is network marketing efforts, also called multilevel marketing
or MLM.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
51. (p. 136) _____ means getting the customer to agree to buy.
A. Opening
B. Promoting
C. Auctioning
D. Closing
The fundamental success factor in door-to-door selling is closing the sale.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
52. (p. 136) Identify the statement that does not relate to home retail.
A. Low cost of setting up
B. Ability to do the work away from your home and employer
C. Provides a high steady income
D. Minimized potential conflicts
One of the disadvantages of home businesses comes from having a highly variable income.

Difficulty: Easy
53. (p. 136) Which of the following is NOT an advantage of home businesses?
A. Speed and ease of setting up.
B. Low cost of getting started.
C. Ability to do the work away from your home and employer.
D. Always working "on the road" thereby enhancing productivity.
One of the disadvantages of home businesses comes from always working "on the road," lacking
a base from which you can organize and work.

Difficulty: Medium
54. (p. 136) All of the following are disadvantages of home retailing EXCEPT
A. high cost of getting started.
B. always working "on the road."
C. lacking a base from which you can organize and work.
D. having a highly variable income.
One of the advantages of home businesses is the low cost of getting started.

Difficulty: Medium
55. (p. 136) The fundamental success factor in door-to-door selling is

A. closing the sale.
B. having a location with enough foot traffic.
C. approaching a "high-rent" district.
D. having a perishable product for sale.
Closing means getting the customer to agree to buy.

Difficulty: Hard
56. (p. 136) An approach to selling in which the salesperson recruits customers to become
distributors of the products or services to others is called
A. consignment shop.
B. network marketing.
C. auctioning.
D. licensing.
One variation on the home model is network marketing efforts, also called multilevel marketing
or MLM.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
57. (p. 137) One of the most ancient forms of small business is
A. stand retailing.
B. consignment.
C. mail order.
D. licensing.
Stand retailingthe roadside, flea market, farmers' market, or craft fair businessis one of the
most ancient forms of small business. It is mentioned in the Bible, and marketplaces full of
stands have been found in virtually all archeological digs.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
58. (p. 137) Which of the following represents an advantage of stand retailing?
A. Variable income
B. Minimum startup investment
C. Steady income
D. Strong consumer base
The advantage of stand businesses is that you can start with little investment.

Difficulty: Hard
59. (p. 137) _____ are often among the most expensive locations in the mall in terms of rent per
square foot.
A. Large anchor stores
B. Medium-sized boutique stores
C. Carts and kiosks
D. Food court stores
Carts and kiosks cost between $2,000 and $10,000.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
60. (p. 137) All of the following relate to "stand retail" EXCEPT
A. they tend to be either semipermanent ones or movable ones.
B. they need to be built in places where there is less traffic.
C. they can be quickly established.
D. they have a problem of building customer base.
The key success factor for a stand is having a location where there is enough foot or vehicle
traffic to sustain the business.

Difficulty: Medium
61. (p. 137) The key success factor for a stand is
A. having a location where there is enough foot or vehicle traffic.
B. having a variable income.
C. having nonperishable sale items.
D. sharing with other businesses to minimize the high rent.
High traffic concentrations are why flea markets, farmers' markets, and craft fairs are popular
locales for stands.
AACSB: Analytic
Difficulty: Medium
62. (p. 138) Retail stores in which customers can come and buy products placed in the shops by a
wide variety of sellers are called
A. licensed outlets.
B. franchised kiosks.
C. consignment shops.
D. auctions.
Many artists, artisans, authors, inventors, small-scale manufacturers, collectors of antiques or

other collectibles prefer to stick to their creating or discovering and let someone else handle the
selling process. The kind of businesses that do this are called a variety of names such as
consignment shops, auctioneers, or sales agents.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
63. (p. 138-139) Which of the following does NOT hold true of consignment shops?
A. It promotes the popular way which is to give your product to someone else to sell.
B. They are retail stores in which customers can come and buy products placed in the shops by a
wide variety of sellers.
C. The shop's owner handles the sale and gets a portion of the money from the sale in return.
D. Many consignment shops have a maximum selling price for items.
For any consignment, make sure there is a written contract outlining what the consignment agent
will do to sell your product, what the costs and fees are, and how they get paid (some will come
out of the selling price, others may be paid up front).

Difficulty: Medium
64. (p. 139) Which of the following represents an advantage of a consignment approach?
A. Full-time sale with only a part-time involvement from you
B. High potential for competing offers
C. Amount of time before payout
D. Sellers' fees
The advantage of consignment approaches is that they permit full-time sales with only a part-
time involvement from you.

Difficulty: Medium
65. (p. 139) Which of the following pertains to consignment shops?
A. They permit full-time sales with full-time involvement from you
B. They are high-risk level undertakings
C. They have low profitability because of seller fees
D. They have limited flexibility
time involvement from you, a low risk level, and the flexibility that comes from the variety of
consignment agents and agencies available to you.

Difficulty: Medium
66. (p. 139) Which of the following represents a disadvantage of a consignment approach?
A. Availability of different consignment stores and auctions
B. Long amount of time before payouts
C. Full-time sales with only a part-time involvement from you
D. High setup costs
time involvement from you, low setup cost, a low risk level, and the flexibility that comes from
the variety of consignment agents and agencies available to you.

Difficulty: Medium
67. (p. 139) Research indicates that most service and retail firms typically start out as a
A. losing venture.
B. franchise.
C. hobby.
D. self-employment business.
Research indicates that most service and retail firms typically start out as a hobby.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
68. (p. 140) The key device for managing time for part-time business individuals is
A. the to-do list.
B. auctioning.
C. hiring employees.
D. outsourcing.
Time management is the crucial skill for juggling part-time business and the key device for it is
the to-do list.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
69. (p. 141) The two key groups outside your business with whom you must deal with as part-time
business owners are
A. the state and federal governments.
B. the government and customers.
C. customers and employees.
D. employees and investors.
There are two key groups outside your business with whom you must dealgovernment and
customers.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
70. (p. 141) _____ refers to information provided to the government concerning the existence of,
name of, nature of, and contact information for your business.
A. Zoning
B. Franchising
C. Registration
D. Bootstrapping
For businesses run from a home or commercial venue like a fair or consignment shop, most
states and localities require some form of registration.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
71. (p. 141) _____ is the documented permission from the government to run your business.
A. Bootstrapping
B. Delegation
C. Licensing
D. Zoning
Part-time businesses have to deal with government, and three issues pop up repeatedly:
registration or licensing, taxes, and zoning.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
72. (p. 142) All of the following are challenges of being a part-time entrepreneur EXCEPT
A. delegation and outsourcing.
B. ethical challenges.
C. moving from part-time to full-time entrepreneur.
D. the ability to make money to sustain the business.
Four aspects of part-time entrepreneurship are very different from full-time business: Gaining
legitimacy and trust among customers, determining what you are able to delegate, the special
ethical challenge that comes from juggling part-time entrepreneurship and other work, and the
challenge you face when you try to move from part-time to full-time entrepreneurship.

Difficulty: Hard
73. (p. 142) The assignment of work to others over whom you have power refers to
A. delegation.
B. outsourcing.
C. licensing.
D. zoning.
Delegation happens when you assign work to those over whom you have power, usually people
you employ, those volunteering to help you out, or family members.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
74. (p. 142) Delegation does NOT make sense in which of the following situations?
A. When you want your business to operate in two places at once.
B. When trust is low and employees lack skills.
C. When you want your business to operate when you are not present.
D. When others can do things better than you.
Delegation makes sense in two situations. The first is when others can do things better than you.
The second is when you want your business to operate when you are not present, or operate in
two places at once.

Difficulty: Easy
75. (p. 142) Contracting with people or companies outside your business to do work for your
business refers to
A. moonlighting.
B. bootstrapping.
C. outsourcing.
D. licensing.
When you employ outsiders who are not your employees to handle all or part of a functional area
of your business, it is known as outsourcing.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
76. (p. 143) Which of the following is the most outsourced item by small businesses?
A. Payroll
B. Financial advice and management
C. Advertising and marketing
D. Legal issues
Issues such as law, computers, or financial records are the areas in which outsourcing is most
likely to occur.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
77. (p. 143) Finding a low-cost or no-cost way to do something is called

A. moonlighting.
B. bootstrapping.
C. outsourcing.
D. licensing.
Bootstrapping is a popular approach for all businesses and essential for part-time firms.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
78. (p. 144) All of the following are the key ideas of bootstrapping EXCEPT
A. cutting your personal and business expenses.
B. seeing if you can get things which you need for free.
C. seeing if you can substitute a lower-cost alternative before you buy.
D. borrowing heavily from banks while keeping your money untouched.
If you need money, borrow it from yourself first, then from family, then friends, and after that
banks, credit card advances, and finally, credit companies, in that order.

Difficulty: Medium
79. (p. 144) Ownership of a portion of a business is called
A. equity.
B. debt.
C. leverage.
D. cash flow.
Equity is defined as the ownership of a portion of a business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
80. (p. 144) Working on your own part-time business after your regular job is called
A. moonlighting.
B. bootstrapping.
C. outsourcing.
D. licensing.
The two ethical challenges of part-time businesses are moonlighting and aggrandizing.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
81. (p. 146) All of the following are major concerns of moonlighting EXCEPT
A. conflict of interest.
B. bootstrapping.
C. cannibalizing sales.
D. poisoning the well.
The major concerns are conflict of interest, cannibalizing sales, and poisoning the well.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
82. (p. 146) _____ means taking business away from your employer.
A. Bootstrapping
B. Licensing
C. Cannibalizing
D. Aggrandizing
Cannibalizing can come from your taking sales away from your employer or taking working
hours away to do your own business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
83. (p. 146) _____ refers to creating a negative impression among your employers' customers.
A. Bootstrapping
B. Cannibalizing
C. Aggrandizing
D. Poisoning the well
If you use your business contacts through your day job as the basis for your part-time self-
employment, you will inevitably find some customers who do not want to hear your sales pitch.
If, because of this, they tell your employer they are less likely to buy from him or her, your part-
time business has hurt the full-time one.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
84. (p. 146) Attempting to make yourself seem more accomplished than reality refers to
A. aggrandizing.
B. poisoning the well.
C. moonlighting.
D. cannibalizing.
Aggrandizing can spell the death of a firm if discovered at an inconvenient time.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
85. (p. 146) The most typical form of aggrandizement is

A. implying that a firm is a full-time one when it is only part time.
B. creating a negative impression among your employers' customers.
C. working on your own part-time business after your regular job.
D. finding a low-cost or no-cost way to do something.
The most typical form of aggrandizement is implying that a firm is a full-time one when it is
only part time.

Difficulty: Hard
Scenario: "Light a Candle"

Working as an accountant in the local government agency, Elizabeth has always had a liking for
candles. She collected thousands of candles over the years - different shapes, sizes, occasions,
and colors. After talking with a few co-workers, Elizabeth decided to get a kiosk at the flea
market for four weeks before Christmas to sell her candles with her business name: "Light a
Candle."
86. (p. 120) Elizabeth can be described as a(n)
A. full-time self-employed.
B. franchisor.
C. absentee employee.
D. part-time self-employed.
Working for yourself for 35 or fewer hours a week is called part-time self-employment. Working
part time means that the entrepreneur can do other work, such as have a job in another company,
go to school, or take care of family.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
87. (p. 137) "Light a Candle" can be described as

A. stand retailing.
B. mail ordering.
C. home retailing.
D. consignment retailing.
Stand retailingthe roadside, flea market, farmers' market, or craft fair businessis one of the
most ancient forms of small business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
88. (p. 137) Elizabeth should know that the challenge or disadvantage of her choice of business is
the
A. difficulty in setting up.
B. cost of setting up.
C. variable income.
D. seller fees.
The disadvantages of stands are the variable income they provide.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
89. (p. 146) If Elizabeth starts to take days off from work to staff the kiosk at the flea market, she
may be facing
A. bootstrapping.
B. conflict of interests.
C. poisoning the well.
D. aggrandizing.
Conflicts of interest happen when what is best for your part-time business is different from what
is best for your full-time employer or when people cannot be sure which of the two firms you
represent.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
90. (p. 139) If Elizabeth wants to have a full-time sale with only part-time involvement, she should
consider
A. consignment stores.
B. home retailing.
C. bootstrapping.
D. stand retailing.
time involvement from you.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Essay Questions
Chapter 06 Small Business Entry: Paths to Full-Time Entrepreneurship Answer
Key
1. (p. 154) There are only five ways to get into small business management.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
2. (p. 155) A buyout refers to starting a business from scratch.

FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
3. (p. 155) According to the Small Business Administration, 50 percent of new business start-ups
survive at least four years.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
4. (p. 157) Ninety percent of all start-ups are based on ideas from prior work experience, hobbies,
and family businesses.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
5. (p. 158) It is an unfortunate fact that most new products and services fail to gain acceptance.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
6. (p. 159) Given that multiple individuals create conflict, starting the business with one founder is
one of the top indicators of start-up success.
FALSE
AACSB: Analytic
Difficulty: Medium
7. (p. 159) Since one firm is so different than another, having experience and managing small firms
does not help, but having industry experience and knowledge is a key indicator that brings
success to the start-ups.
FALSE
AACSB: Analytic
Difficulty: Medium
8. (p. 159) One way that you can go about obtaining committed customers prior to start-up is to
specifically go into competition with your employer.
TRUE
AACSB: Analytic
Difficulty: Medium
9. (p. 161) In the book, Good to Great, Jim Collins asserts that for a firm to move from merely
"good" business to "great" business, they must first get the right product or service.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
10. (p. 162) One disadvantage of purchasing an existing business is that it requires more cash outlay
than creating a start-up.
FALSE

Difficulty: Medium
11. (p. 164) Brokers advertise and facilitate the sale of business for a fee, usually a percentage of
the ultimate selling price.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
12. (p. 165) Due diligence is the process of investigating to determine the full and complete
implications of buying a business.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
13. (p. 165) Due diligence in buying a business involves studying the financial statements of the
business including a balance sheet, an income statement, and a statement of cash flow.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
14. (p. 168) When you are structuring a deal, you should open negotiations with a price
substantially higher than your point of indifference.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
15. (p. 168) Buyouts are restricted to businesses that have a formal legal form of organization.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
16. (p. 169) The disadvantages of a buy-in are the same as its advantages.
TRUE
AACSB: Analytic
Difficulty: Medium
17. (p. 169) In a takeover, the seller seizes control of the business without the permission of all the
buyers.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
18. (p. 171) There are two basic forms of franchising: product and service franchising.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
19. (p. 175) Often, the founder of a small business finds it very difficult to give up decision-making
authority to family members.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
20. (p. 177) In the terms of small business, professional management is totally an issue of
education, titles, and credentials.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
21. (p. 154) Which of the following is NOT a path to full-time business ownership?
A. Franchising
B. Stand retailing
C. Starting a new business
D. Buying an existing business
There are only five ways to get into small business management: you may start a new business,
you may buy an existing business, you may franchise a business, you may inherit a business, or
you may be hired to be the professional manager of a small business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
22. (p. 154) A legal agreement that allows a business to be operated using the name and business
procedures of another firm is referred to as a
A. franchise.
B. license.
C. turnkey.
D. consignment.
Franchises may range from "turnkey," in which every part of setting up the business is handled
by professionals, to those in which the only thing that is franchised is the right to use the
business name.

Bloom's: Knowledge
Difficulty: Easy
23. (p. 154) A new business that is started from scratch is called a
A. buyout.
B. franchise.
C. start-up.
D. buy-in.
Start-ups may be deliberate, well planned, and financed.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
24. (p. 154) Purchases of existing businesses may occur through _____ in which the business is
bought over a period of time with money earned from the business.
A. turnkey
B. cash purchases
C. earn-outs
D. leveraged buyouts
Purchases of existing businesses may occur in any number of ways, from cash purchases to
"earn-outs" in which the business is bought over a period of time with money earned from the
business.
AACSB: Financial Theories, Analysis, Reporting, And Markets

Bloom's: Knowledge
Difficulty: Easy
25. (p. 154) _____ franchise is one in which every part of setting up the business is handled by
professionals.
A. Turnkey
B. Product or trade name
C. Single unit
D. Multi unit
Franchises may range from "turnkey," in which every part of setting up the business is handled
by professionals, to those in which the only thing that is franchised is the right to use the
business name.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
26. (p. 155) Which of the following is an advantage of a start-up?
A. It begins with a clean slate
B. It has initial name recognition
C. It is easy to establish and provide positive cash flow
D. It has easy access to revolving credit
Disadvantages of Start-ups: A start-up business has no initial name recognition. A start-up will
require significant time to become established and provide positive cash flows. A start-up usually
cannot easily gain revolving credit from suppliers and financial institutions.

Difficulty: Medium
27. (p. 155) Which of the following is a disadvantage of a start-up?

A. It begins with a clean slate
B. Absence of "legacy" locations, buildings, and equipment
C. Absence of initial name recognition
D. Providing new products or services
Options a, b, and d are all advantages of a start-up.

Difficulty: Medium
28. (p. 155-156) All of the following are advantages of a start-up EXCEPT
A. the use of the most up-to-date technologies.
B. the access to revolving credit line.
C. it can be kept small deliberately to limit the magnitude of possible losses.
D. it has a clean slate.
A start-up usually cannot easily gain revolving credit from suppliers and financial institutions.

Difficulty: Medium
29. (p. 155-156) All of the following are disadvantages of a start-up EXCEPT
A. absence of initial name recognition.
B. access to revolving credit line.
C. difficulty in financing.
D. it starts with a clean slate.
A start-up begins with a "clean slate" and this is an advantage of a start-up.

Difficulty: Medium
30. (p. 156) _____ refers to something the business owns that has economic value or is expected to
have economic value in the future.
A. Asset
B. Revolving credit
C. Cash flow
D. Synergy
Established businesses and franchises provide immediate assets, sales, and cash inflows that can
be used to obtain financing for the business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
31. (p. 156) A(n) _____ credit is a credit agreement that allows the borrower to pay all or part of the
balance at any time; as the loan balance is paid off, it becomes available to be borrowed again.
A. revolving
B. installment
C. social
D. nonrevolving credit
A start-up usually cannot easily gain revolving credit from suppliers and financial institutions.

Bloom's: Knowledge
Difficulty: Easy
32. (p. 156) Often the only competitive advantage for a "me-too" start-up is the
A. finance.
B. location.
C. marketing.
D. subsidy.
The vast majority of start-up businesses are "me-too" enterprises. This type of start-up can be
very difficult to differentiate from other similar businesses. Often, the only competitive
advantage may be the location of the start-up.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
33. (p. 157) The specific concept that leads to a start-up business usually comes from the _____ of
the person starting the business.
A. credentials
B. interests
C. education
D. experience
Two-thirds of all start-ups are based on ideas from prior work experience, hobbies, and family
businesses.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
34. (p. 157) Research into the indicators of successful start-ups shows that one of the best predictors
of success is
A. the level of experience of the founders.
B. suggestions from friends and associates.
C. random events.
D. specific education courses.
Research into the indicators of successful start-ups shows that one of the best predictors of
success is the level of experience of the founders. Random events, suggestions from friends and
associates, and specific education courses are the sources of only a relatively few start-up ideas.

Difficulty: Medium
35. (p. 157) Doing all of the following things has been shown to be the most effective route to
success EXCEPT
A. starting a business in a business incubator.
B. securing outside investment.
C. taking part in a mentoring program.
D. starting with one founder.
See Exhibit 6.1.

Difficulty: Medium
36. (p. 157) A _____ is an organization that provides financial, technical, and managerial help to
start-up businesses.
A. business incubator
B. trade association
C. venture capital firm
D. consultancy
Most incubators are associated with economic development agencies and are integrated into the
community.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
37. (p. 157-158) Which of the following statements about business incubators is false?
A. Incubator participants have individual office services, such as telephone answering, and
production and copying of documents.
B. They provide access to angel investors, public grants for seed money, and technology support.
C. They are created to strengthen the local economy by helping create jobs through the
establishment of successful small businesses.
D. They aid in the commercialization of new technologies, the revitalization of distressed
neighborhoods, and the creation of wealth.
Incubator participants share common office services, such as telephone answering, and
production and copying of documents.

Difficulty: Medium
38. (p. 158) In _____, executive volunteers contribute their time and energy in assisting start-up and
struggling small businesses as a public service.
A. mentoring programs
B. trade associations
C. business incubators
D. franchising
Successful business owners and corporate executives do well by doing good. They can, by
helping others, in a way repay the many people who helped them achieve success.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
39. (p. 158) The _____ phase is usually the most difficult time you will have in business.
A. start-up
B. work
C. growth
D. completion
The start-up phase is usually the most difficult time you will have in business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
40. (p. 158) When a small business start-up secures outside investment, one thing it accomplishes is
that
A. the business is critically examined by outsiders.
B. it brings the synergy from multiple founders.
C. the business produces a product or service for which there is a proven demand.
D. the founders take part in the mentoring program.
Securing outside investment accomplishes two things: First, the process of obtaining investment
funds means that your business will be critically examined by outsiders who have no vested
interest in your idea, product, or service.

Difficulty: Hard
41. (p. 159) A combination in which the whole is greater than the sum of its component parts refers
to
A. revolving credit.
B. synergy.
C. microinventory.
D. spin-off.
Having more founders in the business provides an opportunity for synergy, in which the business
results are greater than the sum of the input.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
42. (p. 159) Having multiple founders at a start-up is a key success indicator for all of the following
EXCEPT
A. providing a forum for examining ideas.
B. evaluating information.
C. dividing up the business risks and rewards.
D. making good business decisions.
Multiple founders can provide a forum for examining ideas, evaluating information, and making
good business decisions.

Difficulty: Medium
43. (p. 159) The amount by which sales prices exceed product costs refers to
A. high margins.
B. synergy.
C. spin-off.
D. asset.
High margins, the amount by which sales prices exceed product costs, provide a buffer for lots of
mistakes.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
44. (p. 159) The single greatest hurdle to a successful start-up is

A. obtaining and maintaining mentoring relationships.
B. obtaining and maintaining sufficient cash.
C. hiring and retaining qualified employees.
D. procuring enough inventory for sale.
The single greatest hurdle to a successful start-up is obtaining and maintaining sufficient cash to
support both operations and growth.

Difficulty: Hard
45. (p. 159) You can go about obtaining committed customers prior to start-up via all of the
following ways EXCEPT
A. starting a spin-off from your employer's business.
B. competing with your employer.
C. subcontracting services to your employer.
D. getting your employer's business into an incubator.
There are basically three ways that you can go about obtaining committed customers prior to
start-up: (1) You can start your new business as a "spin-off" from your current employer's
business. (2) You can start a business to specifically go into competition with your employer. (3)
Or, you can start a business to subcontract services to your employer or to other established
businesses.

Difficulty: Medium
46. (p. 159) A business that is created by separating parts of an operating business into a separate
entity is called a
A. synergy.
B. franchise.
C. spin-off.
D. turnkey.
Creating a spin-off is a regular business practice that is done by businesses of all sizes and at all
stages of development.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
47. (p. 159-160) All of the following holds true of creating spin-offs in businesses EXCEPT
A. it is a regular business practice that is done by big businesses at the initial stages of business
development.
B. they are created to get rid of "noncore" activities.
C. it is a business that is created by separating part of an operating business into a separate entity.
D. some of them are created when the parent lacks either the interest or the resources to pursue
the opportunity.
Creating a spin-off is a regular business practice that is done by businesses of all sizes and at all
stages of development.

Difficulty: Medium
48. (p. 161) In which way will working with a partner reduce the risk of a start-up?
A. Banks prefer partnered start-ups.
B. Federal government provides subsidies to partnering situations.
C. Partners may provide capital, equipment, or advice.
D. Partners eliminate the need to hire other employees.
Working with a partner can reduce the risks of start-up in several ways. Partners may provide
capital, equipment, advice, or specific services.

Difficulty: Easy
49. (p. 161) Which of the following statements about home-based businesses is true?
A. Having a business based at home increases the cash flow requirements of a start-up business.
B. From around 1960 to 1980, home-based businesses largely fell out of favor.
C. Because of the proximity of the business to the living area, no time is spent commuting
between home and office.
D. The U.S. Small Business Administration estimates that 93 percent of all businesses are home-
based, putting the number at around 15 million firms.
Having a business based at home is one way to reduce the cash flow requirements of a start-up
business. From around 1950 to 1990, home-based businesses largely fell out of favor. The U.S.
Small Business Administration estimates that 53 percent of all businesses are home-based,
putting the number at around 12 million firms.

Difficulty: Easy
50. (p. 162) Which of the following is an advantage of buying an existing business?
A. It is easy to find an appropriate existing business for sale given the technology today.
B. Purchasing a business often requires less cash outlay than for creating a start-up.
C. Existing managers and employees embrace change due to continuing operations that provide
job security.
D. New technology needs are eliminated.
Disadvantages to buying an existing business include: Finding a successful business for sale that
is appropriate for your experience, skills, and education is difficult and time-consuming. Existing
managers and employees may resist change. The business may be declining because of changes
in technology.

Difficulty: Hard
51. (p. 162) Which of the following is a disadvantage of purchasing an existing business?
A. Established customers leaving due to change.
B. Existing business processes being difficult to change.
C. Purchasing a business being significantly more expensive than a start-up.
D. Existing managers and employees resisting change.
There are some advantages of buying an existing business: Established customers provide
immediate sales and cash inflows. Business processes are already in place in an existing,
operating business. Purchasing a business often requires less cash outlay than does creating a
start-up.

Difficulty: Medium
52. (p. 164) Which of the following is an excellent way to find businesses for sale?
A. Yellow pages
B. Local community center
C. Networking
D. Universities
Networking is an excellent way to find businesses for sale.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
53. (p. 165) The process of investigating a business to determine its value is called
A. synergy.
B. spin-off.
C. due diligence.
D. heuristics.
During the process of due diligence every aspect of the business is examined in exacting detail.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
54. (p. 165) Identify the statement that is not a part of the steps which make up the process of due
diligence.
A. Conducting extensive interviews with the sellers of the business.
B. Making a personal examination of the site (or sites) of the business.
C. Interviewing customers and suppliers of the business.
D. Developing a brief business plan for the acquisition.
Develop a brief business plan for the acquisition.

Difficulty: Medium
55. (p. 165) This is not a reason for obtaining a set of financial statements when a business is
acquired.
A. The seller usually has to gather financial information and incurs added cost and time in
providing them.
B. As a business person you are most likely familiar with financial statements and can extract
useful information from them.
C. Financial statements are accepted as representative of the business by bankers and investors.
D. Financial statements are considered to be indicators of future business results.
The seller usually has financial statements available and incurs little added cost in providing
them.

Difficulty: Medium
56. (p. 165) Which of the following steps is NOT a part of due diligence?
A. Leveraging the contributions of the partner to provide faster growth.
B. Studying the financial reports and other records of the business.
C. Developing a detailed business plan for the acquisition.
D. Conducting extensive interviews with the sellers of the business.
Because of the contributions of the partner, the founder of the start-up may either (1) reduce the
amount of personal investment in time and money required to make the business succeed, or (2)
"leverage" the contributions of the partner to provide faster growth and higher returns on the
investment made in the start-up.

Difficulty: Medium
57. (p. 165) Which of the following terms means "let the buyer beware"?
A. Caveat lector
B. Spin-off
C. Caveat emptor
D. Synergy
A basic tenet of business law is "caveat emptor," or "let the buyer beware."
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
58. (p. 165) Which of the following is a primary goal of due diligence?
A. Finding any wrongdoing
B. Paying the top dollar for the business
C. Fulfilling all requirements for state regulations
D. Establishing yourself as a competitive threat
Due diligence has two primary goals. First, you are attempting to find any wrongdoing. Second,
you are trying to find any inefficiencies, unnoticed opportunities, waste, and mismanagement.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
59. (p. 165) Financial statements, in performing due diligence, should include all of the following
EXCEPT a(n)
A. balance sheet.
B. mission statement analysis.
C. income statement.
D. statement of cash flows.
Financial statements should include (1) a balance sheet, (2) an income statement, and (3) a
statement of cash flows.

Bloom's: Knowledge
Difficulty: Easy
60. (p. 165) Patents and trade secrets are examples of

A. ESOPs.
B. heuristics.
C. franchising.
D. intangible assets.
Intangibles include accounts receivable, patents, licenses, and liabilities.
AACSB: Analytic
Difficulty: Medium
61. (p. 166) _____ are the cash flows that have been reduced in value because they are to be
received in the future.
A. Book value cash flows
B. Replacement value cash flows
C. Free cash flows
D. Discounted cash flows
The most theoretically rigorous method of valuing an ongoing business, using discounted cash
flows, is based upon estimates of future cash outflows and inflows, given the change in
ownership.

Bloom's: Knowledge
Difficulty: Easy
62. (p. 166) _____ analysis is based on the concept that the longer you have to wait to receive
money, the less valuable it is right now.
A. Discounted cash flow
B. Replacement value cash flow
C. Free cash flow
D. Book value cash flow
Discounted cash flows are cash flows that have been reduced in value because they are to be
received in the future.

Bloom's: Knowledge
Difficulty: Medium
63. (p. 166) The process of determining the net present value of an investment opportunity requires
all of the following EXCEPT
A. estimating the cash that must be invested.
B. estimating the cash that will be returned.
C. estimating the periods in the future in which cash inflows will occur.
D. estimating the cost of capital to the seller.
The most theoretically rigorous method of valuing an ongoing business, using discounted cash
flows, is based upon estimates of future cash outflows and inflows, given the change in
ownership. Making such estimates is highly problematical.

Difficulty: Medium
64. (p. 166) Which of the following statements about asset valuation methods is false?
A. Estimates do not consider the value of an ongoing firm over the value of its identifiable
assets.
B. They are based on the assumption that a business is worth the value of its assets minus the
value of any liabilities.
C. It is very difficult and time consuming to separately identify and estimate the values of all the
assets of a business.
D. The application of asset valuation methods to business valuation is similar to having an
annuity.
The application of discounted cash flows to business valuation is similar to having an annuity.

Difficulty: Medium
65. (p. 166) The difference between original acquisition cost and the amount of accumulated
depreciation is called the
A. replacement value.
B. book value.
C. earnings multiple.
D. discounted cash flow.
Book value is the original acquisition cost of the asset, minus all depreciation expense
recognized to date.

Bloom's: Knowledge
Difficulty: Easy
66. (p. 166) All of the following are major problems with using book value EXCEPT
A. the original cost of an asset might bear no relation to its current value.
B. depreciation is an arbitrary, but nonsystematic, method of transferring asset value to expense.
C. internally developed assets, such as patents, trademarks, and trade secrets do not have book
value.
D. Depreciation makes no attempt to measure actual loss of value of an asset.
Depreciation is an arbitrary, although systematic, method of transferring asset value to expense.

Difficulty: Easy
67. (p. 167) The amount for which an asset would sell, less the costs of selling the asset is called
A. book value.
B. replacement value.
C. net realizable value.
D. earnings multiple.
Net realizable value is an estimate of the amount for which an asset would sell, less the costs of
selling it.

Bloom's: Knowledge
Difficulty: Easy
68. (p. 167) _____ is an estimate of what an identical asset would cost to be acquired and readied
for service.
A. Earnings multiple
B. Book value
C. Replacement value
D. Net realizable value
Replacement value is an estimate of what an identical asset would cost to be acquired and
readied for service. Net realizable value is usually significantly less than the replacement value
of any specific asset.

Bloom's: Knowledge
Difficulty: Easy
69. (p. 167) _____ of other firms in the same industry are commonly used to estimate the value of a
business. One major problem with this method is that no two firms are exactly alike.
A. Synergies
B. Comparable sales
C. Spin-offs
D. Industry heuristics
Comparable sales of other firms in the same industry are commonly used to estimate the value of
a business. This method has two major problems. First, no two firms are exactly alike. Second,
there are often no recent sales to use for comparison.

Bloom's: Knowledge
Difficulty: Easy
70. (p. 167) The ratio of the value of a firm to its annual earnings is called
A. unappropriated profit.
B. accumulated earnings.
C. retained earnings.
D. the earnings multiple.
The earnings multiple ratio is simply firm value divided by actual or expected annual earnings.
Multiplying forecast earnings by the earnings multiple provides a quick estimate of firm value.

Bloom's: Knowledge
Difficulty: Medium
71. (p. 167) _____ are rules of thumb that are commonly used to estimate firm value in relation to
some easily observable characteristic of the business.
A. Synergies
B. Spin-offs
C. Book values
D. Heuristics
Industry heuristics are similar to comparable sales in that they represent the combined experience
of people active in the industry.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
72. (p. 168) The price at which a buyer is indifferent about buying or not buying the business is
called
A. spin-off.
B. the point of indifference.
C. caveat emptor.
D. ESOP.
The term point of indifference comes from the idea that once that price is reached, you should be
indifferent as to whether or not a deal is made.

Bloom's: Knowledge
Difficulty: Easy
73. (p. 168) The purchase of substantially less than 100 percent of a business is called a
A. takeover.
B. buy-in.
C. spin-off.
D. buyout.
One basic way that a business may be bought is you may buy in, by acquiring some, but not all
of the ownership.

Bloom's: Knowledge
Difficulty: Easy
74. (p. 168) Seizing of control of a business by purchasing its stock to be able to select the board of
directors refers to
A. buy-in.
B. takeover.
C. merger.
D. heuristics.
You may take over a public business by buying a controlling interest of its stock.

Bloom's: Knowledge
Difficulty: Easy
75. (p. 168) The primary advantage to a buyout is

A. hands-off approach.
B. significantly less cost.
C. simplicity.
D. ESOP.
The primary advantage to a buyout is simplicity. The seller must only transfer his or her stock to
the purchaser to complete the transaction.

Bloom's: Knowledge
Difficulty: Medium
76. (p. 169) _____ are the only way a sole proprietorship may be purchased.
A. Buy-ins
B. Takeovers
C. Key resource acquisitions
D. Buyouts
Key resource acquisitions, also called bulk asset purchases, are the only way a sole
proprietorship may be purchased. This technique may also be used with any other form of
business.

Bloom's: Knowledge
Difficulty: Medium
77. (p. 170) Identify the statement that is not essential for an agreement to constitute a franchise.
A. The agreement does not require the franchisee to pay a fee for the right to enter into the
business.
B. The agreement grants the franchisee use of a brand name, trademark, service mark, logo, or
other commercial symbol which designates the franchisee as an affiliate of the franchisor.
C. The agreement provides that the franchisee may engage in business using a marketing plan or
system provided by the franchisor or proposed by the franchisee.
D. The agreement provides the franchisee with a legal right to engage in the business of offering,
selling, or distributing goods or services.
The agreement requires the franchisee to pay a fee for the right to enter into the business.

Difficulty: Hard
78. (p. 171) Which of the following statements determines the value of a franchise?
A. By the rights granted.
B. By the conditions and standards set.
C. By the operating permissions granted.
D. By the value of assets acquired.
The value of a franchise is determined by (1) the rights granted and (2) the cash flow potential to
the franchisee.

Difficulty: Medium
79. (p. 171) This is an agreement that provides only the rights to use the franchisor's trade name
and/or trademarks.
A. Product distribution franchising
B. Trade name franchising
C. Conversion franchising
D. Business format franchising
Trade name franchising is an agreement that provides only the rights to use the franchisor's trade
name and/or trademarks.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
80. (p. 171) Which of the following observations holds true of product distribution franchising?
A. It provides the franchisee with specific brand named products, which are resold by the
franchisee in a specified territory.
B. It provides an organization through which independent businesses may combine resources.
C. It is an agreement that provides only the rights to use the franchisor's trade name and/or
trademarks.
D. It is an agreement that provides a complete business format.
Product distribution franchising provides the franchisee with specific brand named products,
which are resold by the franchisee in a specified territory.

Difficulty: Medium
81. (p. 171) _____ provides an organization through which independent businesses may combine
resources.
A. Product distribution franchising
B. Trade name franchising
C. Conversion franchising
D. Business format franchising
Conversion franchising provides an organization through which independent businesses may

combine resources.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
82. (p. 171) Which of the following are forms of franchising?
A. Trade name, product distribution, and business format.
B. Product, service, and mix-format.
C. Regional, local, and global.
D. Sole proprietorship, partnership, and corporation.
There are four basic forms of franchising: trade name franchising, conversion franchising, and
business format franchising.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
83. (p. 174) Which of the following statements about family businesses succession is true?
A. Turning over management authority is not easy for most founders.
B. Fewer than 10 percent of family-owned businesses are successfully transferred to a second
generation.
C. It is easy for the heir of the founder to assume authority.
D. Fewer than 5 percent family-owned businesses succeed long enough to be inherited by the
third.
Turning over management authority is not easy for most founders, nor is it easy for the heir of
the founder to assume the authority. Fewer than 30 percent are successfully transferred to a
second generation. Fewer than 13 percent succeed long enough to be inherited by the third.

Difficulty: Easy
84. (p. 175) To avoid having the diversity of values, goals, and motivators from becoming the
source of such intrafamily strife, you and the other family business members should respect one
another's differences by all of the following ways EXCEPT
A. being certain that all family members know and accept that they are not forced to enter the
management of the business if they don't want to.
B. providing each member of the family business with the opportunity to obtain education and
experience outside the business.
C. allowing each family member who does wish to enter the business to find out and do those
functions and activities that he or she does best.
D. assuming that the leadership of the business must come from within the family.
To avoid having the diversity of values, goals, and motivators from becoming the source of such
intrafamily strife, you and the other family business members should respect one another's
differences by not assuming that the leadership of the business must come from within the
family.

Difficulty: Easy
85. (p. 176-177) Which of the following statements about the professional management of small
businesses is false?
A. If a business grows large enough, no matter how experienced a business owner is, eventually
the demands of managing will become too great to be handled alone.
B. As small businesses grow, the business starts to decline.
C. As small businesses grow, professional managers are hired to share the management load.
D. In terms of small business, professional management is an issue of education, titles, and
credentials.
In the terms of small business, professional management is not an issue of education, titles, or
credentials. A professional manager of a small business is one who has the experience and skills
to use a systematic approach to analyzing and solving business problems.

Difficulty: Easy
Scenario: Tavanna Tucker
Having owned several part-time businesses all her life, Tavanna, at 45, is considering a full-time
business ownership. She is very confused about what approach to take in her business pursuit.
She has come to you for advice, so now it is your turn in the "hot seat."
86. (p. 154) Given that Tavanna has no inheritance possibility, all of the following are other options
you could offer her for full-time business EXCEPT
A. buying a business.
B. franchising.
C. consignment business.
D. starting a new business.
There are only five ways to get into small business management: you may start a new business,
you may buy an existing business, you may franchise a business, you may inherit a business, or
you may be hired to be the professional manager of a small business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
87. (p. 155) Which of the following would you offer Tavanna as an advantage for starting a new
business?
A. Initial name recognition
B. Clean slate
C. "Legacy" locations, buildings, and equipment
D. Accessibility to experienced managers and workers
A start-up begins with a "clean slate." There are no "legacy" locations, buildings, equipment, or
software that can hamper productivity. A start-up may not have experienced managers and
workers.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
88. (p. 157) Based on what you have learned from this class, which of the following should
Tavanna NOT do to increase her chance of start-up success?
A. Getting a mentor
B. Securing outside investment
C. Building trust in her "story"
D. Starting her business without any other founders to avoid conflict
See Exhibit 6.1.

Difficulty: Medium
89. (p. 162) If Tavanna were to buy an existing business, which of the following disadvantages
should you point out?
A. Difficulty in determining the worth of the business.
B. Possibility of established customers leaving due to change.
C. Difficulty in changing existing business processes.
D. Buying a business being more expensive than starting one.
There are some advantages to buying an existing business: Established customers provide
immediate sales and cash inflows. Business processes are already in place in an existing,
operating business. Purchasing a business often requires less cash outlay than does creating a
start-up.

Difficulty: Hard
90. (p. 178) Tavanna brought with her a franchise business packet. She likes the idea but is unsure
what might be its disadvantage?
A. It is probably expensive and not profitable.
B. You give up control of marketing and operations.
C. You compete with the franchise company itself.
D. You receive no training and management support.
Disadvantages: Little control of business marketing and operations, and success determined to a
large extent by the success of the franchisor.

Difficulty: Hard
Essay Questions
Chapter 07 Small Business Strategies: Imitation with a Twist Answer Key
1. (p. 184) Objective is the idea and actions that explain how a firm will make its profits.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
2. (p. 184) Strategy in small business is special because most small businesses are more innovative
than imitative.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
3. (p. 184) The tool used in the first step of strategic planning is the SWOT analysis.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
4. (p. 186) Demand shortage and second sourcing are two of the seven entry wedges suggested by
Karl Vesper for small businesses pursuing an imitation strategy.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
5. (p. 187-188) There are two major classification systems that code industries: NAICS and SIC.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
6. (p. 189) In much the same way that families and societies are living things, industries can be
considered living too.
TRUE
AACSB: Analytic
Difficulty: Medium
7. (p. 189) Imitation minus one degree of similarity would be the business equivalent of incremental
innovation.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
8. (p. 190) Typically with a new product or service, you also have a unique setting.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
9. (p. 191) Market scale refers to the geography of your target market.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
10. (p. 192) Benefits can focus on value added to the products or services or on the cost of the
products or services.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
11. (p. 193) Cost benefits include scale and scope savings.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
12. (p. 196) Most entrepreneurs initially do an industry analysis to find out what the profits are in an
industry in order to better estimate possible financial returns.
TRUE
AACSB: Analytic
Difficulty: Medium
13. (p. 196) Funds left over after deducting the cost of goods sold is called net profit.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
14. (p. 198) There are three classic strategies for businesses of all types: differentiation, imitation,
and focus.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
15. (p. 200) Customization, super-support, and single-mindedness are three cost-driven strategies
offered by Porter for small businesses.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
16. (p. 202) In SWOT analysis, where strengths match the opportunities, you have the winning
combination and you should fight it.
FALSE

Difficulty: Medium
17. (p. 203) There are two types of resources: tangible and intangible.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
18. (p. 204) Transformational competencies come from combining tangible and intangible resources
in ways superior to the competition.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
19. (p. 205) Patents and trademarks are popular ways of protecting key information and
discouraging competitors.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
20. (p. 195) When the sales and profits actually start to fall, it is a sign that the industry is in its
decline stage.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
21. (p. 184) _____ is the idea and actions that explain how a firm will make its profits.
A. Strategy
B. Objective
C. Mission
D. Goal
Strategy defines for you, your customers, and your competition how your business operates.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
22. (p. 184) Most small businesses are more _____ than _____.
A. cost-directed; profit-directed
B. imitative; innovative
C. customer-driven; employee-driven
D. innovative; imitative
Strategy in small business is special because most small businesses are more imitative than
innovative.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
23. (p. 184) The first step of the small business strategy planning process
A. involves performing a SWOT.
B. involves reviewing and confirming the prestrategy decisions that define your firm and your
goal for it.
C. is where you consider your customers and the benefits you want to offer them.
D. is to study the dynamics and trends of your industry.
The first step of the small business strategy planning process involves reviewing and confirming
the prestrategy decisions that define your firm and your goal for it.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
24. (p. 184) The second step of the small business strategy planning process is considering with
_____
A. customers; benefits.
B. competitive advantage; value chain analysis.
C. prestrategy; VRIO analysis.
D. benefits; industry analysis.
The second step in the strategic planning process is where you consider your customers and the
benefits you want to offer them.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
25. (p. 184) The tool appropriate for the third step of the small business strategy process to study
the dynamics and trends of your industry is the
A. value chain analysis.
B. SWOT analysis.
C. VRIO analysis.
D. industry analysis.
The third step in the strategic planning process is to study the dynamics and trends of your
industry using a technique called industry analysis in order to identify the best way and time to
enter business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
26. (p. 184) The fourth step of the small business strategy planning process
A. is where you consider your customers and the benefits you want to offer them.
B. aims to refine your firm's capabilities in order to maintain a competitive advantage.
C. involves determining the best strategic direction and strategy for the firm.
D. is to study the dynamics and trends of your industry.
The fourth step involves building on the prior three steps to perform a SWOT (strength,
weakness, opportunity, and threat) analysis and determine the best strategic direction and
strategy for the firm.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
27. (p. 186) Which of the following statements about supply shortages is true?
A. Supply shortages occur when a new product is in demand
B. The target audience is the mass market
C. This is a long-term market
D. The key benefits are lower costs and scale savings
Supply shortages occur when a new product is in demand. The target audience is leading-edge
buyers who are willing to pay a premium to be the first to have the product. This is a short-term
market and one that changes rapidly. The key benefits are delivery, shopping ease, and style.

Difficulty: Medium
28. (p. 186) Which of the following is a key benefit of customer contracting?
A. Delivery
B. Personalization
C. Organizational practices
D. Technology
The key benefits of customer contracting are lower costs, scale savings, or organizational
practices.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
29. (p. 186) Second sourcing
A. occurs when business firms leave a market.
B. occurs because many big businesses have policies that provide for set-asides for purchases
from small businesses.
C. offers the advantage of being globally based.
D. at its best provides a competitive pressure to keep both suppliers providing the best service
and prices.
Second sourcing provides the customer with greater certainty of supplies or services, and at its
best provides a competitive pressure to keep both suppliers providing the best service and prices.

Difficulty: Medium
30. (p. 186) When does market relinquishment occur?

A. When there are rule changes by the government
B. When business firms leave a market
C. When a customer is willing to sign a contract with a small business to ensure a product
D. When a new product is in demand
Market relinquishment occurs when business firms leave a market.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
31. (p. 186) _____ occurs because government agencies, government-sponsored commercial
contracts, and many big businesses have policies that provide for quotas for purchases from
small businesses.
A. Second sourcing
B. Favored purchasing
C. Market relinquishment
D. Customer contracting
Favored purchasing occurs because government agencies, government-sponsored commercial

contracts, and many big businesses have policies that provide for set-asides or quotas for
purchases from small businesses.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
32. (p. 186) An opportunity that makes it possible for a new business to gain a foothold in a market
refers to
A. parallel competition.
B. incremental innovation.
C. entry wedge.
D. altruism.
Situations and benefits can help clarify entry wedges that can offer exceptional profits.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
33. (p. 186-187) Which of the following, according to Vesper, is NOT an entry wedge specific to
small businesses pursuing an imitation strategy?
A. Customer contracting
B. Market relinquishment
C. Government rules
D. Product differentiation
Vesper calls these entry wedges that are particularly likely to pop-up for individuals open to
imitative businesses: supply shortages, unutilized resources, customer contracting, second
sourcing, market relinquishment, favored purchasing, and government rules.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
34. (p. 187) What is the key benefit of rule changes by the government?
A. Place
B. Delivery
C. Quality
D. Technology
Key benefits of rule changes by the government are technology, service, personalization, lower
costs, and organizational practices.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
35. (p. 187) _____ is the general name for the line of products or services being sold.
A. Strategy
B. Competitive advantage
C. Market
D. Industry
Industry is vitally important to your core prestrategy decisions because simply put, there are
industries that are more profitable than others.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
36. (p. 187-188) Which are the two major classification systems that code industries?
A. NAICS and SIC
B. SCALE and SCOPE
C. SWOT and VRIO
D. SIC and SWOT
There are two major classification systems that code industries: the new NAICS (North
American industry classification system) and the better-known standard industrial classification
system, or SIC.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
37. (p. 188) Which of the following statements about NAICS and SIC codes is true?
A. SIC covers more industries
B. NAICS covers more of the newer types of industries
C. SIC codes have six digits
D. NAICS codes have four digits
SIC codes have four digits; NAICS have six. NAICS covers more industries and more of the
newer types of industries.

Difficulty: Easy
38. (p. 189) An overall strategic approach in which the entrepreneur does more or less what others
are already doing is called a(n)
A. cost-leadership strategy.
B. imitative strategy.
C. grand strategy.
Almost two-thirds of people starting businesses today plan to use imitation as their approach.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
39. (p. 189) An overall strategic approach in which a firm seeks to do something that is very
different from that of what others in the industry are doing is called a(n)
A. cost-leadership strategy.
B. imitative strategy.
C. grand strategy.
With an innovative strategy, you have the benefit of making your business precisely fit your own
ideas and preferences.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
40. (p. 189) The key benefit of an imitation strategy comes from the
A. customers.
B. employees.
C. competition.
D. government agencies.
Perhaps the key benefit of an imitative strategy comes from your customers. Chances are they
already know about the kind of product or service you are offering.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
41. (p. 189) Which of the following is an advantage of using an innovative strategy?
A. There is much opportunity to sell the business.
B. You can make your business precisely fit your own ideas and preferences.
C. There is the possibility to buy existing businesses.
D. The owner spends very little time in creating the processes.
With an imitative strategy, you benefit from being able to buy existing technologies. With highly
innovative businesses, there is often not much opportunity to sell the business, and the owner
spends a lot of energy in creating the processes and markets as well as informing suppliers,
resellers, and investors about the new product or service.

Difficulty: Medium
42. (p. 189) Imitation minus one degree of similarity would be the business equivalent of
A. incremental innovation.
B. cloning.
C. pure innovation.
Imitation minus one degree of similarity would be the business equivalent of cloning. It is
franchising in which you purchase a precise and complete copy of an existing business from the
franchisor.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
43. (p. 189) An imitation business that competes locally with others in the same industry is called
A. pure innovation.
B. entry wedge.
C. parallel competition.
D. incremental innovation.
You may adapt your business to fit local situations or your current situation. This approach is
called parallel competition.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
44. (p. 189) An overall strategic approach in which a firm patterns itself on other firms, with the
exception of one or two key areas is called
A. pure innovation.
B. differentiation focus.
C. pure imitation.
D. incremental innovation.
Imitation plus one degree of similarity is where you look at existing businesses and pattern
yourself after them, with the exception of one or two key areas in which you seek to do things in
a new, and hopefully better, way. This is called incremental innovation.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
45. (p. 190) The process of creating new products or services is called
C. pure innovation.
D. pure imitation.
Pure innovation is the process of creating new products or services, which results in a previously
unseen product or service.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
46. (p. 191) A(n) _____ is the business term for the population of customers for your products or
services.
A. market
B. industry
C. strategy
D. SIC
If you know your market inside and out, you are likely to know much of the key information for
how to be successful in your line of business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
47. (p. 191) There are two market decisions you need to make early in the process of going into
business:
A. NAICS and SIC.
B. scale and scope.
C. make or buy.
D. imitation and innovation.
There are two market decisions you need to make early in the process of going into business.
One of these is the scale of the market and the other is the scope of the market.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
48. (p. 191) _____ refers to the size of the market whereas _____ refers to its geographic range.
A. Scope; scale
B. Mass; niche
C. Scale; scope
D. Niche; mass
The scale of the market is the size of the marketwhether you plan to aim for a mass market or
a niche market. The scope of the market defines the geographic range covered by the market
from local to global.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
49. (p. 191) A customer group that involves large portions of the population is called a
A. niche market.
B. scope of market.
C. parallel competition.
D. mass market.
Mass markets are broad, and a mass-market approach targets the entire market.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
50. (p. 191) A _____ is a narrowly defined segment of the population that is likely to share interests
or concerns.
A. niche market
B. mass market
C. degree of similarity
D. parallel competition
Niche markets are specific and narrow, and in a niche market approach, you try to target only
customers in the niche.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
51. (p. 191) Identify the incorrect observation concerning niche markets.
A. Most industries have both mass and niche markets.
B. In this approach, you try to target customers only in the niche.
C. They are specific and broad.
D. It comprises of a segment of the population that is likely to share interests or concerns.
Niche markets are specific and narrow.

Difficulty: Medium
52. (p. 192) What types of customers are likely to generate more potential customers than any other
type?
A. Loyal customers
B. Local customers
C. Passionate customers
D. Corporate customers
Passionate customers: People who are not just loyal but are likely to rave about your business are
likely to generate more potential customers than any other type.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
53. (p. 193) Which of the following statements about value benefits is false?
A. They display characteristics related to the nature of the product or service itself.
B. Things like quality, fashion, and reputation are elements that give a product value in the eyes
of the customer.
C. They are important because they are almost always what lead to higher prices and higher
profits.
D. They refer to the ways by which a firm can keep costs low for the customer.
Cost benefits refer to the ways by which a firm can keep costs low for the customer.

Difficulty: Medium
54. (p. 193) Cost benefits
A. are important because they always lead to higher profits.
B. imply what the customer senses in the service.
C. display characteristics related to the nature of the service itself.
D. refer to the ways by which a firm can keep costs low for the customer.
A value benefit displays characteristics related to the nature of the product or service itself.
Value benefits are important because they are almost always what lead to higher prices and
higher profits. While value benefits refer to what the customer senses in the product or service,
cost benefits refer to the ways by which a firm can keep costs low for the customer.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
55. (p. 194) Value benefits can include all of the following EXCEPT
A. quality.
B. style.
C. delivery.
D. learning.
A value benefit displays characteristics related to the nature of the product or service itself.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
56. (p. 194) Cost benefits can come from all of the following EXCEPT
A. credit.
B. scale savings.
C. learning.
D. organizational practices.
Cost benefits refer to the ways by which a firm can keep costs low for the customer.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
57. (p. 194) This type of value benefit involved can come from the products or services that you
offer, or from your own firm's reputation.
A. Brand
B. Style
C. Personalization
D. Place
Brand/reputation: This can come from the products or services that you offer, or from your own
firm's reputation.

Difficulty: Medium
58. (p. 194) If your product helps the community, a group, the environment, or the world, what type
of value benefit is it?
A. Assurance
B. Personalization
C. Altruism
D. Quality
Altruism: If your product helps the community, a group, the environment, or the world, it is a
benefit.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
59. (p. 194) Buying in volume usually produces savings. Identify the type of cost benefit involved.
A. Scope savings
B. Lower costs
C. Scale savings
D. Learning
Scale savings: Buying in volume usually produces savings, so some firms buy in bulk and sell or
repackage in smaller amounts, passing along some of the cost savings.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
60. (p. 194) As a firm gets more experience, it can often work with fewer mistakes and greater
efficiencies, thereby lowering costs. What type of cost benefit is it?
A. Service
B. Scope savings
C. Learning
D. Organizational practices
Learning: As a firm gets more experience, it can often work with fewer mistakes and greater
efficiencies, thereby lowering costs.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
61. (p. 194) Changes in competitors, sales and profits in an industry over time is called
A. industry dynamics.
B. retrenchment.
C. a shake-out.
D. a transformational competency.
In setting strategy you need to look at your competitors in order to best position your firm, but
you also want to look at the changes in competitors, sales, and profits in your industrywhat are
called the industry dynamics to make sure it is a good time to enter it.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
62. (p. 195) Which of the following represent the five stages of industry life cycle?
A. Introduction, growth, maturity, decline, and death.
B. Introduction, pioneers, early adopters, decline, and death.
C. Pioneers, growth, early adopters, decline, and death.
D. Pioneers, early adaptors, late adopters, early majority, and death.
See Figure 7.3.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
63. (p. 195) An industry life cycle stage in which customer purchases increase at a dramatic rate is
the
A. decline stage.
B. growth stage.
C. boom.
D. shake-out.
Most products and services tend to grow at a regular rate, one at which the growth in the number
of firms more or less meets customer demand.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
64. (p. 195) A _____ type of life cycle growth stage is marked by a very rapid increase in sales in a
relatively short time.
A. decline stage
B. growth stage
C. boom
D. shake-out
When the original firms are unable to keep up with consumer demand, other firms jump in to
take advantage of the growth; this stage is often called the boom.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
65. (p. 195) A type of life cycle stage following a boom in which there is a rapid decrease in the
number of firms in an industry is the
A. shake-out.
B. growth stage.
C. maturity stage.
D. decline stage.
Eventually, when all booms come to an end, there is a stage called the shake-out in which many
of the firms close down.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
66. (p. 195) This is the third stage in the industry life cycle which is marked by a stabilization of
demand.
A. Growth stage
B. Maturity stage
C. Introduction stage
D. Decline stage
Whether through slow and steady growth or a boom and shake-out cycle, the industry eventually
reaches a relatively stable number of firms, with minor variations and a slow drop in numbers.
This is called the maturity stage.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
67. (p. 195) An organizational life cycle stage in which established firms must find new approaches
to improve the business and its chances for survival is called
A. retrenchment.
B. maturity.
C. growth.
D. introduction.
Eventually, when mature industries begin a decline stage, some industries face death, while
others find new life in a process called retrenchment.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
68. (p. 196) What represents the amount of money the owners take out of the firm annually and on
which they pay taxes?
A. Profit before taxes
B. Gross profit
C. Net profit
D. Rate of profit
Profit before taxes represents the amount of profit earned by a business before calculating the
amount of income tax owed.

Bloom's: Knowledge
Difficulty: Medium
69. (p. 196) Which of the following refers to funds left over after deducting the cost of goods sold?
A. Profit before taxes
B. Gross profit
C. Net profit
D. Rate of profit
Gross profit is what is left after deducting the cost of goods sold.

Bloom's: Knowledge
Difficulty: Medium
70. (p. 196) A research process that provides the entrepreneur with key information about the
industry, such as its current situation and trends is called
A. SWOT analysis.
B. VRIO analysis.
C. value chain analysis.
Most entrepreneurs initially do an industry analysis to find out what the profits are in an industry
in order to better estimate possible financial returns.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
71. (p. 196) The amount of money left after operating expenses are deducted for the business refers
to
A. net profit.
B. gross profit.
C. operating profit.
D. earnings before tax.
Net profit is what is left after deducting the operating expenses of the business.

Bloom's: Knowledge
Difficulty: Easy
72. (p. 196-197) Which of the following is NOT a key type of information needed to perform an
industry analysis?
A. How profits are made
B. Regulatory oversight agency requirement
C. Target market competitor concentration
D. SIC/NAICS number and description
The basics of industry analysis consist of knowing SIC/NAICS number and description, industry
size over time, profitability, how profits are made, target market competitor concentration,
analysis, and sources.

Difficulty: Hard
73. (p. 198) All of the following are classic strategies for businesses of all types EXCEPT
A. differentiation.
B. cost.
C. integration.
D. focus.
There are three classic strategies for businesses of all typesdifferentiation, cost, and focus.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
74. (p. 198) A type of generic strategy aimed at clarifying how one product is unlike another in a
mass market refers to _____ strategy.
A. differentiation
B. cost
C. integration
D. focus
Differentiation strategies are aimed at mass marketssituations in which nearly everyone might
buy your product or service.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
75. (p. 199) A generic strategy aimed at mass markets in which a firm offers a combination of cost
benefits that appeal to the customers is called _____ strategy.
A. differentiation
B. integration
C. cost
D. focus
Cost strategies are aimed at mass markets.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
76. (p. 199) _____ strategies target a portion of the market called a segment.
A. Differentiation
B. Integration
C. Cost
D. Focus
A focus strategy can use aspects of differentiation or cost approaches that are reformulated for
the niche market.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
77. (p. 200) Which of the following is NOT one of the supra-strategies identified by Shepherd and
Shanley?
A. Craftsmanship
B. Tightly manage centralization
C. Elite
D. Super-support
Strategy researchers such as Dean Shepherd and Mark Shanley as well as Michael Porter have
identified classic benefit combinations which they call supra-strategies.

Difficulty: Hard
78. (p. 201) In SWOT, strengths are
A. chances to make greater sales or profits in the environment.
B. characteristics of the business that give it an advantage over others in the industry.
C. elements in the environment that could cause trouble for the business.
D. characteristics that place the firm at a disadvantage relative to others.
Strengths are characteristics of the business or team that give it an advantage over others in the
industry.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
79. (p. 201) A group discussion in which criticism is suspended in order to generate the maximum
number of ideas is
A. mind mapping.
B. a focus strategy.
C. brainstorming.
D. a boom.
In a brainstorming session there is one special rulenobody can criticize or put down an idea.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
80. (p. 202) The strategic direction option, at the end of a SWOT analysis, where opportunities
match strength is
A. flaunt.
B. fight.
C. flee.
D. fix.
Strength/Opportunity Combination: If the cells that draw your attention most are these two, you
are positioned to flaunt your strengths.

Difficulty: Medium
81. (p. 202) At the end of a SWOT analysis, the strategic direction option, where strengths are
matched against threats, is
A. flaunt.
B. fight.
C. flee.
D. fix.
Strength/Threat Combination: If the cells that draw your attention most are these two, you need
to fight against the threats to your business, by organizing your start-up to compete more
aggressively and to more visibly emphasize your strengths, especially relative to your
competitors.

Difficulty: Medium
82. (p. 203) Which of the following refers to the particular way a firm implements customer
benefits that keeps the firm ahead of other firms in the market?
A. Industry analysis
B. Competitive advantage
C. Resource distribution
D. Value chain
Competitive advantage is your firm's edge in meeting and beating the competition.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
83. (p. 203) Capabilities, organizational processes, information, or knowledge of a firm that is not
clearly evident refers to
A. tangible resources.
B. competitive advantages.
C. intangible resources.
D. core competencies.
Intangible resources are those typically informational and expertise-based practices and routines
that are not clearly evident.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
84. (p. 204) The abilities of a firm to make its product or service in a way that enhances value or
efficiency compared to other firms refers to
A. transformational competencies.
B. organizational altruism.
C. value chain analysis.
D. combinational competencies.
Transformational competencies happen when the firm can make its product or service better in
value or more efficient in cost than those of other firms.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
85. (p. 204) A resource characteristic which enhances value through offering uniqueness to the
buyer is
A. a combinational competency.
B. a transformational competency.
C. a rare resource.
D. difficult to imitate.
If a resource is difficult to imitate, it helps secure your advantage.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Scenario: Healthy Wash

Following the health trend, Amy Amorouso and her two friends have decided to open a
laundromat with a workout facility. The concept of each of these exists separately and also there
are laundromats with bars or game rooms that already exist. This would be a different variation.
The main focus will be the laundromat with a small space allowed for a workout area, with a few
machines to test the idea.
86. (p. 184) The first thing that Amy and her friends need to do to pursue their strategy is to
perform
A. an industry analysis.
B. a SWOT analysis.
C. a VRIO analysis.
D. a value chain analysis.
Industry analysis is done in order to identify the best way and time to enter business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
87. (p. 191) Identify the two market decisions that Amy and her friends need to make.
A. Imitation and innovation
B. Local or global
C. Mass or niche
D. Scale and scope
There are two market decisions you need to make early in the process of going into business.
One of these is the scale of the market and the other is the scope of the market.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
88. (p. 189) Using the degree of similarity, Amy's concept of laundromat with a workout space can
be described as
C. cloning.
D. mass differentiation.
Incremental innovation is an overall strategic approach in which a firm patterns itself on other
firms, with the exception of one or two key areas.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
89. (p. 203) When performing a SWOT analysis, where Amy's business threats meet her business
weaknesses, what should her strategy option be?
A. Fix
B. Fight
C. Flee
D. Flaunt
Weakness/Threat Combination: This suggests that the business may not be in the right industry.
It could well make sense to flee this industry and look for an industry where you and any firm
you start would have some strengths, and where the threats from the environment are likely to be
less.

Difficulty: Hard
90. (p. 203) In performing a SWOT analysis, if Amy's business opportunities meet her business
threats, what should her strategy option be?
A. Fire-up
B. Fight
C. Flaunt
D. Fix
Opportunity/Threat Combination: This suggests that a lively or dynamic set of environmental

conditions have been identified, but the current product or service is possibly not distinctive
enough to be competitive. In such cases the need is to fire-up the product or service making it
superior in at least one major regard from other offerings.

Difficulty: Medium
Essay Questions
Chapter 08 Business Plans: Seeing Audiences and Your Business Clearly Answer
Key
1. (p. 214) One circumstance under which creating a business plan is absolutely necessary is when
outsiders accept it.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
2. (p. 214) The primary concern of joint venture partners is the amount scheduled for returns.
FALSE
AACSB: Analytic
Difficulty: Medium
3. (p. 215) If you need outside support to get a business going, you do not need to develop a
business plan since the outside support will take care of it.
FALSE
AACSB: Analytic
Difficulty: Medium
4. (p. 215) The five types of business planning presentations are vision, mission, goals, objectives,
and business plans.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
5. (p. 217) The elevator pitch is more like a sales pitch and should be between 20-50 words.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
6. (p. 218) Executive summaries are written in a formal style, suitable for investors, bankers, and
lawyers to read.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
7. (p. 221) A classic business plan contains a maximum of 20 pages but a more modern plan
requires 50-60 pages.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
8. (p. 221-222) A cover letter is not required when you send a full business plan to someone, but it is
required with a mission.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
9. (p. 223) In the closing paragraph of the cover letter, you describe the current situation of the
company and explain what you are seeking from the recipient.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
10. (p. 224) The last part of the company background describes its business model.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
11. (p. 225) The market section of the business plan talks about your employees - who they are and
what they like.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
12. (p. 227) A major organizational asset of a business is its location.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
13. (p. 228) There are two parts to the financial section of a business plan: critical risks and the deal
being offered to investors.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
14. (p. 228) For an existing business, the financial section should report five-year projections and
not the past year's since future progress is what bankers lend you money for.
FALSE
AACSB: Analytic
Difficulty: Medium
15. (p. 230) When your product or service is truly new to everyone, it is considered a pioneering
business.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
16. (p. 231) Screening plans give the basic overview of the firm and detailed look at the financials.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
17. (p. 231) An informational plan focuses on the market and operationalization of a new
invention.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
18. (p. 232) The only type of plan that adds material to a full business plan is the marketing plan.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
19. (p. 235) The conversion rate is also called the hit rate.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
20. (p. 237) Typically, the business plan presentation follows the content of the business plan.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
21. (p. 214) A document designed to detail the major characteristics of a firm is called a(n)
A. mission statement.
B. marketing plan.
C. executive summary.
D. business plan.
When you are serious about your business or when a lot of money of your own or someone else's
is at stake, creating a business plan is perhaps the most critical activity you can undertake.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
22. (p. 214) The extent to which a small business is taken for granted, accepted, or treated as viable
by organizations or people outside the small business is referred to as
A. tagline.
B. external legitimacy.
C. test marketing.
D. internal understanding.
Creating a business plan is the acknowledged best way to build external legitimacy for your firm.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
23. (p. 214) Which of the following is NOT a business plan concern of family and friend investors?
A. Competitive advantage
B. Amounts and schedules for returns
C. Funds use
D. Stability of firm
Business plan concerns of family and friend investors include amounts and schedules for returns,
stability of firm, and funds use and your investment (Refer Table 8.1).
AACSB: Analytic
Difficulty: Medium
24. (p. 214) Which of the following represents a business plan concern of silent partners/angel
investors?
A. Competitive advantage
B. Growth rate
C. Asset/collateral base
D. Benefit
Business plan concerns of silent partners/angel investors include growth rate, market, business
team, and amounts and schedules for returns (Refer Table 8.1).
AACSB: Analytic
Difficulty: Hard
25. (p. 214) _____ represents a business plan concern of joint venture partners.
A. Amounts and schedules of returns
B. Cash flow and cash cycle
C. Intellectual property protection
D. Stability of firm
Business plan concerns of joint venture partners include fit between the firms, competitive
advantage, benefits, intellectual property protection, and R&D (Refer Table 8.1).
AACSB: Analytic
Difficulty: Hard
26. (p. 214) Which of the following is NOT a business plan concern of bankers?
A. Cash flow and cash cycle
B. Asset/collateral base
C. Long-term prospects
D. Monitoring compliance
Business plan concerns of bankers include cash flow and cash cycle, asset/collateral base, and
long-term prospects (Refer Table 8.1).
AACSB: Analytic
Difficulty: Medium
27. (p. 214) All of the following are business plan concerns of potential customers EXCEPT
A. amounts and schedules for returns.
B. responsiveness to customers.
C. benefits.
D. competitive advantage.
Business plan concerns of potential customers include service/product quality, benefits,

competitive advantage, and responsiveness to customers (Refer Table 8.1).
AACSB: Analytic
Difficulty: Hard
28. (p. 214) Which of the following is a business plan concern of key employees in a business?
A. Intellectual property protection
B. Stability of firm
C. Monitoring compliance
D. Asset/collateral base
Business plan concerns of key employees include Stability of firm, Growth (as applies to
increased opportunities within the firm), and long-term prospects (Refer Table 8.1).
AACSB: Analytic
Difficulty: Hard
29. (p. 214-215) There are two circumstances under which creating a business plan is absolutely
necessary: (1) _____ and (2) _____.
A. when outsiders expect it; for internal understanding
B. for government requirement; for investor demands
C. for stakeholders; for stockholders
D. when family is involved; for friends' information
There are two circumstances under which creating a business plan is absolutely necessary. One is
when outsiders expect it. The other circumstance under which a business plan is needed is for
internal understanding.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
30. (p. 215) The extent to which employees, investors, and family members involve in the business,
know the business's purpose and operation, is called
A. external legitimacy.
B. test marketing.
C. internal understanding.
D. angel investing.
Internal understanding is when you want to get all the aspects of the business clear in your mind
and the minds of others in the business, such as your partners or your key employees.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
31. (p. 215) Which of the following statements about business plans is false?
A. If you are seeking a banker, investor, or partner, a business plan is absolutely essential.
B. If you are trying to run your business in an ambitious way, a business plan is vitally
important.
C. Typically, the higher-performing firms in any industry tend to be those who engage in
planning.
D. Having a business plan guarantees higher profits.
While having a business plan does not guarantee higher profits, it is essential to qualify to be
considered by business professionals for investments, loans, or credit lines.

Difficulty: Medium
32. (p. 215) The business planning presentation types include all of the following EXCEPT
A. mission.
B. annual objectives.
C. elevator pitch.
D. executive summaries.
The five types of business planning presentations are (1) vision statements, (2) mission
statements, (3) elevator pitches, (4) executive summaries, and (5) business plans.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
33. (p. 216) The length of a vision statement should be

A. 20-50 words.
B. 60-100 words.
C. 5-10 words.
D. 250-500 words.
The vision statement is a very simple 5-10 word sentence.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
34. (p. 216) Which of the following is perhaps a firm's most important single idea held by the owner
and employees?
A. Vision statement
B. Executive summary
C. Mission statement
D. Elevator pitch
The vision statement is a very simple 5-10 word sentence or a tagline that expresses the
fundamental idea or goal of the firm.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
35. (p. 216) The length of an executive summary should be
A. 20-50 words.
B. 60-100 words.
C. 5-10 words.
D. 250-500 words.
The length of an executive summary should be 250-500 words (Refer Figure 8.1).
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
36. (p. 216) A tagline that expresses the fundamental idea or goal of the firm is called its
A. vision statement.
B. executive summary.
C. mission statement.
D. elevator pitch.
A firm's vision statement is perhaps its most important single idea held by the owner and
employees.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
37. (p. 216) All of the following concern taglines EXCEPT
A. they are a good way to present vision statements, as they are brief and memorable.
B. they talk in terms of what will make a difference for the customer or the industry.
C. it expresses the fundamental idea or goal of the firm.
D. it can serve as the company's vision statement.
The vision statement is a very simple 5-10 word sentence or better yet a tagline that expresses
the fundamental idea or goal of the firm. Taglines are a good way to present vision statements,
because a good tagline is brief and memorable. The tagline can also serve as the company's
vision statement.

Difficulty: Medium
38. (p. 216) A memorable catchphrase that captures the key idea of a business, its service, product,
or customer is called a(n)
A. mission statement.
B. tagline.
D. business plan.
A tagline expresses the fundamental idea or goal of the firm.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
39. (p. 216) The _____ describes the firm's goals and competitive advantages.
A. vision statement
B. executive summary
C. mission statement
D. elevator pitch
The mission statement takes the vision statement's description of the firm's goal and adds the
competitive advantage information developed as part of the firm's strategy.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
40. (p. 216-217) All of the following observations hold true of mission statements EXCEPT
A. they are an action-oriented description of your business.
B. they rarely discuss profits, but often mention the entry wedge that follows from the firm's
strategy.
C. they might include the major competitive advantages of the firm, and its position in the
industry.
D. they are best when they are simple, short, and direct.
An elevator pitch is an action-oriented description of your business.

Difficulty: Medium
41. (p. 217) A 30-second action-oriented description of a business designed to sell the idea of the
business to another is called a(n)
A. vision statement.
B. mission statement.
D. elevator pitch.
An elevator pitch is designed to open the door to a more in-depth dialogue.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
42. (p. 217-218) Which of the following statements about an elevator pitch is true?
A. It is shorter than a vision statement or tagline.
B. It consistently leads to specific businesses.
C. The idea of the pitch is that you are alone with a prospective customer for the length of an
elevator ride.
D. The pitch ends with where the business is headed.
An elevator pitch is an action-oriented description of your business that is somewhat longer than
a vision statement or tagline. Even when it doesn't lead to any specific business, this information
about your business should be memorable enough so that the listener can tell others about your
business. The pitch ends with where the business is nowseeking money from seed investors.

Difficulty: Medium
43. (p. 218) While writing the elevator pitch, including something about your product or service
that people would remember and take to heart relates to the
A. hook of the plan.
B. purpose of the plan.
C. delivery of the plan.
D. position of the plan.
Elevator pitches have four success factors: the hook, the purpose, the what and where, and the
delivery.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
44. (p. 218) Which of the following is NOT a success factor of an effective elevator pitch?
A. Hook
B. Time
C. What
D. Delivery
Elevator pitches have four success factors: the hook, the purpose, the what and where, and the
delivery.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
45. (p. 218) A one- to two-page overview of the business, its business model, market, expectations,
and immediate goals represents a(n)
A. executive summary.
B. vision statement.
C. mission statement.
D. elevator pitch.
An executive summary is the key component of the written business plan because it is the one
element that nearly everyone will read first when they receive a plan.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
46. (p. 218-219) Which of the following is NOT a topic addressed in the executive summary?
A. Competitive advantages
B. Product
C. Mission
D. Finances
Executive summaries are usually organized in a series of short paragraphs, each with a particular
topic. These topics are: product, market, competitive advantages, management, business, and
finances.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
47. (p. 218-219) Which of the following statements about executive summaries is true?
A. Typically, they remain the least popular item to send people who ask about your business.
B. The order for the topics in an executive summary is fixed.
C. They do not give as much information about the business as the vision or mission statements
do.
D. They form the basis for additional discussion when someone asks for more detail.
Typically, executive summaries start out written, and they remain the most popular item to send
people who ask about your business. They give much more detail about the business than the
vision or mission statements or elevator pitch. The order for the topics in an executive summary
is not fixed.

Difficulty: Medium
48. (p. 220) Identify the correct statement about the 5-M Model.
A. It is typical to have multiple measures, and they are typically given in qualitative form.
B. Mission statements give the firm's major business goal, which can be stated quantitatively or
qualitatively, but always with a time period.
C. Methods typically involve identifying quantitatively stated strategic achievements which
would prove you have done what you set out to do as a business.
D. Mechanics are generally given as one-paragraph project descriptions.
It is typical to have multiple measures, and they are typically given in quantitative form.
Methods in this exercise typically involve identifying qualitatively stated strategic achievements
which would prove you have done what you set out to do as a business. Mechanics are often
given as one-line project descriptions.

Difficulty: Medium
49. (p. 221) The classic business plan contains _____ pages that include financials and appendixes.
A. 15
B. 25
C. 60
D. 40
The full (or classic) business plan contains a maximum of 25 single-spaced pages of text and 15
pages of financials and appendixes.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
50. (p. 221) A one-page document on a letterhead that introduces the business plan and owner and
indicates why the recipient is being asked to read the plan is called a(n)
A. executive summary.
B. cover letter.
C. appendix.
D. title page.
A cover letter is typically the first written material someone sees about your business, so it needs
to look and sound just right.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
51. (p. 221) Where the type of business is well established, what is the appropriate size for a
business plan?
A. 10 pages
B. 20 pages
C. 25 pages
D. 40 pages
Where the type of business is well established, these simple business plans may require only 10
pages of text. Even so, the financial section remains its usual length, although the appendixes
may be sparse.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
52. (p. 222) Which of the following is NOT a major component of a business plan?
A. Company
B. Markets
C. Organization
D. Regulations
The major components of a business plan include cover letter, title page, table of contents,
executive summary, the company, the market, the organization, the financials, and the
appendixes (Refer Table 8.2).
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
53. (p. 223) In the first paragraph of the cover letter, you
A. explain your company in detail.
B. describe the current situation of your company.
C. introduce yourself.
D. thank the reader for their consideration.
In the first paragraph of the cover letter, you introduce yourself and your business (Refer Skill
Module 8.2).
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
54. (p. 223) In which paragraph of the cover letter do you thank the recipient for his/her
consideration?
A. First
B. Second
C. Third
D. Fourth
In the fourth paragraph of the cover letter, you thank the recipient for his or her consideration, let
the reader know you are available to answer any questions, and close with a mention of your
future action, such as a promise to contact the recipient within a week (Refer Skill Module 8.2).
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
55. (p. 225) A product or service that is kept as a trade secret or is protected legally using patents,
trademarks, copyright, or service mark is called a
A. tagline.
B. proprietary technology.
C. pioneering business.
D. test marketing.
Proprietary technology is a product or service or an aspect of one that is kept as a trade secret or
is protected legally using patent, copyright, trademark, or service mark.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
56. (p. 225) The market section talks about your

A. employees.
B. stockholders.
C. customers.
D. family.
The market section of a business plan talks about your customerswho they are and what they
are like, who else is pursuing them, and how you plan to get or keep your customers.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
57. (p. 225) The market refers to the

A. total population of people or firms to whom you plan to sell.
B. geographic locations where you open business.
C. national boundaries where you operate.
D. local area where you recruit people for jobs.
The market refers to the total population of people or firms to whom you plan to sell.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
58. (p. 226) A good marketing strategy focuses on all of the following ideas EXCEPT
A. the overall strategy your firm pursues in the market.
B. the sales plan.
C. the long-term competitive plan.
D. harvesting the business plan.
A good marketing strategy section focuses on three ideas: (1) The overall strategy your firm
pursues in the market, (2) the sales plan that shows the specific ways you apply strategy to secure
sales from your customers, and (3) the longer-term competitive plan that shows how you protect
your firm from efforts of the competition to unseat you.

Difficulty: Hard
59. (p. 226) Which of the following is a supra-strategy?

A. Cost
B. Customization
C. Formula facilities
D. Differentiation
The overall strategy subsection discusses your generic strategy (differentiation, cost, focus) as
well as any supra-strategies (craftsmanship, customization, etc.) or fragmented industry
strategies (no-frills, formula facilities, etc.) you pursue.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
60. (p. 226) A "no-frills" strategy is an example of a
A. fragmented industry strategy.
B. generic strategy.
C. supra-strategy.
D. focus strategy.
Fragmented industry strategies include no-frills, formula facilities, etc.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
61. (p. 226) _____ involves introducing your product to potential customers and taking orders for
late delivery.
A. R&D
B. Test marketing
C. Preselling
D. New entrant business
The strongest sales plans talk positively about the results of pilot tests, preselling efforts, or
conventional sales already made.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
62. (p. 226) Which of the following refers to the part of a business that is focused on creating new
products or services and preparing new technologies, ideas, products or services for the firm's
market?
A. R&D
B. Test marketing
C. Preselling
D. New entrant business
Most business plans add a section on R&D or growth here to explain how they are working to
maintain an in-depth competitive advantage, with one or more additional generations of products
or services ready to be used, or quickly brought to market, in order to keep the competition one
generation behind your firm in meeting customer needs.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
63. (p. 226) Growth plans often talk about all of the following EXCEPT
A. longer-term partnerships to be sought.
B. new markets to be pursued.
C. ways to leverage the firm's assets.
D. the day-to-day specifics of how sales are achieved.
The sales plan addresses the day-to-day specifics of how sales are achieved.

Difficulty: Medium
64. (p. 226) The legal form of business and the place where it is registered should be presented
under which section of the business plan?
A. Company
B. Market
C. Organization
D. Financials
Legal and organization structures is a subsection of the organization that describe the legal form
of the business (LLC, LP, sole proprietorship, etc.) and where it is formally registered.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
65. (p. 228) Which of the following financial statements is NOT expected in the business plan?
A. Income statement
B. SEC filing statement
C. Balance sheet
D. Cash flow statement
The financial statements expected include: (1) income statements and its assumptions, (2) cash
flow and its assumptions, and (3) balance sheet and its assumptions.

Bloom's: Knowledge
Difficulty: Medium
66. (p. 228) For an existing business
A. income and cash flow are given monthly for the first year.
B. the tradition is to offer three years of data projections.
C. the financials offer two-year projections for the income, cash flow, and balance sheet.
D. the financials report the last five years of actual data.
For an existing business, the financials report the last two years of actual data, and then offer
three-year projections for the income, cash flow, and balance sheet. For a start-up business, the
tradition is to offer three years of data projections.

Difficulty: Medium
67. (p. 229) What is the goal of appendixes?

A. To inform customers and partners about the firm and the product.
B. To establish an ongoing relationship with the listener.
C. To provide supporting information that helps detail the key selling points of your plan.
D. To sell customers and investors on the idea of the business and their need for it.
The goal of appendixes is to provide supporting information that helps detail or support the key
selling points of your plan.

Difficulty: Medium
68. (p. 230) A firm whose product or service is new to the industries or is itself creating a new
industry is called
A. a new entrant business.
B. R&D.
C. test marketing.
D. a pioneering business.
When your product or service is truly new to everyone, it is considered a pioneering business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
69. (p. 230) When a firm sells its products in a limited area, for a limited time, it is called
A. an R&D venture.
B. a pioneering business.
C. test marketing.
D. a new entrant business.
Selling your product or service in a limited area, for a limited time is called test marketing.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
70. (p. 230) A firm whose product or service is established elsewhere and is new to this market is
called
A. an R&D venture.
B. a pioneering business.
C. test marketing.
D. a new entrant business.
When your product or service already exists but your firm is the first of its kind in your market, it
is considered a new entrant business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
71. (p. 231) Which of the following gives the basic overview of a firm and a detailed look at the
financials?
A. Screening plan
B. Operational plan
C. Marketing plan
D. Investing plan
If you intend to send your plan to professional funding sources such as private banks, investment
clubs, or venture capital firms, it is common to send what is called a mini-plan or a screening
plan.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
72. (p. 231) Which of the following is incorrect of screening plans?

A. The idea behind it is to give a basic overview of the firm and a detailed look at the financials.
B. It usually consists of the cover letter, title page, executive summary, and financial sections of
the business plan.
C. Appendixes are included only when it is important to prove the viability of contracts.
D. It consists of company and organization sections.
Informational plans typically consist of company and organization sections.

Difficulty: Medium
73. (p. 231) Identify the business plan that typically consists of company and organization sections.
A. Idea plan
B. Informational plan
C. Operational plan
D. Invention plan
Informational plans give potential customers or suppliers information about the company and its
product or service.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
74. (p. 231) Which of the following business plans is also called a "mini-plan"?
A. Invention plan
B. Idea plan
C. Operational plan
D. Screening plan
plan.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
75. (p. 231-232) Which of the following is NOT a special-purpose plan?
A. Screening plan
B. Key employer plan
C. Invention plan
D. Informational plan
Option b should be key employee/partner plan.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
76. (p. 232) A special form of informational plan posted on the Internet is the _____ Web site.
A. proof-of-concept
B. invention plan
C. operational plans
D. private placement memo
The proof-of-concept Web site is an Internet-based type of business plan providing information
or demonstration of a product or service designed to solicit information on customer interest.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
77. (p. 232) A key employee/partner plan is also referred to as all of the following EXCEPT
A. summary plan.
B. concept plan.
C. idea plan.
D. mini-plan.
A screening plan is also called a mini-plan.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
78. (p. 232) These plans are designed to be used as working documents within a business.
A. Idea plans
B. Informational plans
C. Operational plans
D. Invention plans
Operational plans are business plans designed to be used internally for management purposes.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
79. (p. 232) All of the following pertain to a private placement memorandum EXCEPT
A. it is the official version of a business plan offered to potential investors.
B. it is a legal document, and should be drafted by a lawyer.
C. it is used to send your business plan to professional funding sources.
D. it builds on a business plan, using information about the company, products and services,
strategy and operations, and competition.
plan.

Difficulty: Medium
80. (p. 232) Which of the following is a business plan that provides information to potential
licensees?
A. Screening plan
B. Business plan
C. Invention plan
D. Informational plan
An invention plan focuses on the market and operationalization of a new invention.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
81. (p. 232) Which of the following is a business plan designed to be used internally for
management purposes?
A. Screening plan
B. Informational plan
C. Invention plan
D. Operational plan
Operational plans are designed to be used as working documents within a business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
82. (p. 232) Identify the specialized legal form of business plan crafted by lawyers for the purpose
of soliciting formal investments.
A. Concept plan
B. Private placement memorandum
C. Proof-of-concept plan
D. Mini-plan
PPMs are the official version of a business plan offered to potential investors.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
83. (p. 235) Which of the following risks is NOT a common threat to business?
A. Understated numbers
B. Uncertain sales
C. Overlooked competition
D. Inadequate cushion
Some of the risks that are common threats to businesses are overstated numbers, numbers that
are wrong, inadequate cushion, uncertain sales, overlooked competition, etc.

Difficulty: Medium
84. (p. 235) The _____ is the percentage of people who buy out of the total population of people
you approach.
A. base rate
B. hit rate
C. tagline rate
D. proof-of-concept rate
Your conversion rate (alias hit rate) is the percentage of people who buy out of the total
population of people you approach.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
85. (p. 237) All of the following are key things an influential person looks for in your business plan
presentation EXCEPT
A. your passion for the business.
B. your expertise about the business and the plan.
C. how many others are already working with you.
D. how easy it would be to work with you.
The key things an influential person looks for in you are: (1) your passion for the business, (2)
your expertise about the business and the plan, (3) how professional you are in your work, and
(4) how easy it would be to work with you.

Difficulty: Hard
Scenario: Connie's Corner Caf

Having done the culinary classes at the local college, Connie has decided to explore the idea of
opening her own business, "Connie's Corner Caf". She has found the ideal location next to the
college. However, it appears that Connie will have to get some outside investors or bankers
involved for the financial backing to get this venture off the ground. When she talked to her local
bank manager, Mr. Johnson, he immediately asked for Connie's business plan. Connie knew she
was in trouble because she didn't even know what a business plan looked like.
86. (p. 214) Which of the following would represent Mr. Johnson's interest in Connie's business
plan?
B. Growth rate
C. Competitive advantage
D. Amounts and schedules for returns
Business plan concerns of bankers include cash flow and cash cycle, asset/collateral base, and
long-term prospects (Refer Table 8.1).
AACSB: Analytic
Difficulty: Medium
87. (p. 214) If Connie gets her family and friends involved as investors, which of the following
would be their concern or interest?
B. Growth rate
C. Competitive advantage
D. Amounts and schedules for returns
Business plan concerns of family and friends include amounts and schedules for returns, stability
of firm, funds use, and your investment (Refer Table 8.1).
AACSB: Analytic
Difficulty: Medium
88. (p. 221) Connie shops are established businesses and so Connie's business plans could/should be
_____ pages of text.
A. 40
B. 10
C. 20
D. 25
Where the type of business is well established, the market is well defined and well known, and
the entrepreneur comes to the business with experience in the industry, the amount of necessary
description drops dramatically. In such cases, these simple business plans may require only 10
pages of text.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
89. (p. 222) Connie needs to know that all of the following are key components of a business plan
she should include EXCEPT
A. the market.
B. the organization.
C. the regulatory limitations.
D. the financials.
The major components of a business plan include cover letter, title page, table of contents,
executive summary, the company, the market, the organization, the financials, and the
appendixes (Refer Table 8.2).
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
90. (p. 235) Connie should be aware of which of the following risks that may cause Mr. Johnson to
evaluate her plan negatively?
A. Most likely the numbers
B. Experiencing deficit
C. High hit rate for preselling
D. Adequate or high payback
Experience deficits: Do you (or someone else in your firm) have experience in (a) the line of
business, (b) the industry, (c) the locality, (d) managing? Have it, find it, or say how you'll learn
it.

Difficulty: Hard
Essay Questions
Chapter 09 Small Business Marketing: Product and Pricing Strategies Answer Key
1. (p. 274) Services are tangible, while goods are intangible.

FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
2. (p. 275) Hybrid products are a balanced combination of goods and services.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
3. (p. 277) The core product has features that differentiate it from the competition but are still
closely related to the augmented product.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
4. (p. 278) These simple basic rules apply for company names: being catchy, easy to spell and
pronounce, and being descriptive.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
5. (p. 279) The first stage of new product development process is idea evaluation/feasibility study.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
6. (p. 283) Only about 30 percent of all new product launches are successful.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
7. (p. 284) The standard product life cycle has four stages: introduction, growth, development, and
decline.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
8. (p. 285) During the maturity stage, acceptance of the product increases rapidly, and sales and
profits grow at higher rates than at any other part of the product life cycle.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
9. (p. 286) Once a product begins its permanent decline, this decline can be slow or fast, steady or
unsteady.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
10. (p. 286) It is easier to virtually eliminate the decline stage of a service.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
11. (p. 288) Most owners of small businesses set prices using some more or less arbitrary heuristic.
TRUE

Difficulty: Medium
12. (p. 290) Elastic products have no substitutes and are absolute necessities.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
13. (p. 291) Internal reference pricing may come from looking at competitive ads, researching on
the Internet, visiting several stores, or asking friends.
FALSE

Bloom's: Knowledge
Difficulty: Medium
14. (p. 294) Studies have shown that companies that compete on product innovation and high
quality achieve higher growth than those that try to compete on price.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
15. (p. 296) Most of the times it is a bad idea for a small firm to try to compete on price.
TRUE

Bloom's: Knowledge
Difficulty: Medium
16. (p. 296) Numbers that are multiples of ten are psychological hurdles for consumers.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
17. (p. 298) Periodic discounting refers to running a sale without a definite pattern or cycle.
FALSE

Bloom's: Knowledge
Difficulty: Medium
18. (p. 300) Cheaper movie tickets for afternoon matinee is an example of off-peak pricing.
TRUE

Difficulty: Medium
19. (p. 300) For small businesses, rebates are not a good idea because it takes away from a margin
that is already very low.
FALSE

Bloom's: Knowledge
Difficulty: Medium
20. (p. 301) Only 15 to 35 percent of consumers decide on a product using price as the number one
factor.
TRUE

Bloom's: Knowledge
Difficulty: Medium
21. (p. 274) A product can include all of the following EXCEPT
A. goods.
B. ideas.
C. people.
D. price.
A product is anything that is offered to the market to satisfy consumer wants, needs, and
demands. This can include goods, services, people, and ideas.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
22. (p. 274) An item's capability of being touched, seen, tasted, or felt is called
A. tangibility.
B. inseparability.
C. heterogeneity.
D. perishability.
If you need transportation customized to your needs, you could start with buying a car. The car
has tangibility; it is something you can touch.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
23. (p. 274) Goods are _____, while services are _____.
A. heterogeneous; homogeneous
B. tangible; intangible
C. inseparable; separable
D. perishable; not perishable
If you need transportation customized to your needs, you could start with buying a car. The car
has tangibility; it is something you can touch, but your check also covered the cost of a warranty
on the car, which is a service, and something intangible.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
24. (p. 275) Leasing a car is an example of a

A. service-dominated product.
B. good-dominated product.
C. pure service.
D. hybrid good and service combination.
Leasing a car is an example of a hybrid good and service combination.
AACSB: Analytic
Difficulty: Medium
25. (p. 275) Which of the following is INCORRECT about services?

A. Services are inseparable from consumption
B. Services are tangible
C. Services are heterogeneous
D. Services are perishable
Services are intangible.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
26. (p. 276) A quality of a service in which the service being done cannot be disconnected from the
provider of the service is called
A. perishability.
B. tangibility.
C. inseparability.
D. heterogeneity.
A cab ride is an example of the inseparability of services.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
27. (p. 276) A quality of a service in which each time it is provided it will be slightly different from
the previous time refers to
A. perishability.
B. tangibility.
C. inseparability.
D. heterogeneity.
One of the characteristics differentiating goods and services is heterogeneity.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
28. (p. 276) If a service is not used when offered, it cannot be saved for a later use, thereby
describing its
A. perishability.
B. tangibility.
C. inseparability.
D. heterogeneity.
Car rentals show the problem of the perishability of services. If a cab goes without a fare for an
hour, that is one hour of revenue that is lost foreverit literally perished.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
29. (p. 276) Which of the following includes the entire bundle of products and services that you
offer?
A. Total product
B. Augmented product
C. Hybrid product
D. Core product
The total product includes the entire bundle of product and services that you offer, but is based
not only on what you as the small business owner thinks about the product, but also about how
customers think about it.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
30. (p. 277) The very basic description of what a product is refers to
A. the total product.
B. an augmented product.
C. the hybrid product.
D. the core product.
The core product is the basic description of what your company does.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
31. (p. 277) Identify the product that has features which differentiate it from the competition but is
still closely related to the core product.
A. Total product
B. Core product
C. Augmented product
D. Me-too product
What you describe as your product or service is your augmented product and has features that
differentiate it from the competition.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
32. (p. 277) The group of people on which a marketer focuses promotion and sales efforts is called
a
A. me-too group.
B. target market.
C. maturity group.
D. breakeven market.
As a small business owner, using the total product approach can help you get inside your
customers' heads and figure out the most cost-effective "bundle" of value and cost benefits to
give your target market.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
33. (p. 278) Which of the following is NOT the best option when naming your company?
A. Catchy name
B. Easy to spell and pronounce
C. Same as your product name or your name
D. Descriptive of your business
Catchy, easy to spell and pronounce, and descriptive are usually the best options.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
34. (p. 279) Which of the following is the first stage of the new product development process?
A. Idea screening
B. Commercialization
C. Idea evaluation
D. Idea generation
Behind every great product is a great idea. The traditional first idea generatorand often what
gets an entrepreneur startedis something they need or want themselves and either can't find or
can't find the way they want it.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
35. (p. 279) Products essentially similar to something already on the market are called
A. parallel competition products.
B. prototypes.
C. test market products.
D. me-too products.
Existing products are commonly referred to as me-too products.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
36. (p. 280) In the new product development process, what stage comes after idea generation?
A. Idea screening
B. Commercialization
C. Idea evaluation
D. Product development
Idea screening is the process of selecting the most promising ideas to be further evaluated for
feasibility.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
37. (p. 280) Idea screening
A. is the process of specifying the details of each idea's technological feasibility, its cost, how it
can be marketed, and its market potential.
B. is the process of selecting the most promising ideas to be further evaluated for feasibility.
C. involves the first versions of products called prototypes which are used in further consumer
testing.
D. is the process of making the new product available to consumers.
feasibility.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
38. (p. 280) This is an exhaustive process of specifying the details of each idea's technological
feasibility, its cost, how it can be marketed, and its market potential.
A. Idea screening
B. Product development
C. Idea evaluation
D. Commercialization
A basic tool for idea evaluation is feasibility analysis.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
39. (p. 281) The first versions of products in formal development are called
A. test markets.
B. prototypes.
C. total products.
D. hybrid products.
In the product development stage, if you are just starting out (rather than adding a product to
your product line), you may need to get a prototype made.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
40. (p. 281-283) Which of the following statements about prototypes is true?
A. If you are not in business, or if you are in a very different business, prototyping is not very
difficult.
B. If a rapid prototyping model can be developed, the molds for manufacturing can be made, but
expensively, by modern manufacturers.
C. Test marketing involves selling the prototype in a simulated market environment only.
D. The Internet makes it easier to find companies willing to bid on and build prototypes.
Test marketing involves selling the prototype in either a real or simulated market environment. If
you're not in businessor if you are in a very different businessprototyping and test marketing
services are very difficult. If a rapid prototyping model can be developed, the molds for
manufacturing can be made inexpensively by most modern manufacturers.

Difficulty: Medium
41. (p. 282-283) Which of the following statements about prototypes is false?
A. Once the prototype is developed and tested, the product is ready for test marketing.
B. Small businesses, for financial reasons, primarily choose smaller local markets and conduct
fewer tests than their larger counterparts.
C. Standard test marketing introduces the product and the marketing strategy in the simulated
environment.
D. If you are not in business or are in a very different business, test marketing services are very
difficult.
Standard test marketing introduces the product and the marketing strategy in the actual
environment.

Difficulty: Medium
42. (p. 283) Which of the following is the final stage of the new product development process?
A. Idea screening
B. Feasibility study
C. Commercialization
D. Product development
Commercialization is the process of making the new product available to consumers.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
43. (p. 283) _____ is the process of making the new product available to consumers.
A. Commercialization
B. Test marketing
C. Breakeven
D. Pricing psychology
Even with support, commercialization is a risky process.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
44. (p. 284) Standard product life cycle has four stages:
A. introduction, growth, maturity, and decline.
B. core, growth, total, and decline.
C. introduction, core, merge, and decline.
D. introduction, growth, merge, and decline.
The product life cycle has four stages: introduction, growth, maturity, and decline (Refer Figure
9.3).
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
45. (p. 283-285) Which of the following statements about the introduction stage of the product life
cycle is true?
A. The risks from competition in the introduction stage are generally high.
B. From a marketing standpoint, the more innovative the product, the slower the sales.
C. The best sales method is to focus on the absolute advantage your product has over the
competition.
D. All products survive the introduction phase of the product life cycle.
For all the marketing money being spent, the risks from competition in the introduction stage are
generally low since most competitors will wait to see if your product is a threat and has staying
power before they act. The best sales method is to focus on the relative advantage your product
has over the competition. It should be noted that not all products survive the introduction phase
of the product life cycle.

Difficulty: Medium
46. (p. 285) During the _____ stage of product life cycle, acceptance of the product increases
rapidly and sales and profits grow at higher rates than at any other part of the product life cycle.
A. maturity
B. introduction
C. growth
D. decline
Marketing goals during this time are to maximize your market share and keep ahead of
competitors, so this is when you try to get into all the markets you can nationally (or
internationally).
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
47. (p. 285) Identify the incorrect statement about the growth stage of the product life cycle.
A. Prices tend to drop as production becomes more efficient and competition increases.
B. During this stage, advertising and promotion are much more critical than in the introduction
stage.
C. From a marketing standpoint, consumers are aware of your product and know how it will
make their lives better.
D. This stage is when you try to get into all the markets you can nationally or internationally.
During this stage, advertising and promotion are much less critical than in the introduction stage,
but keeping up with production and ensuring good distribution become more critical.

Difficulty: Medium
48. (p. 285) What is the challenge a small business faces in the maturity stage?
A. Keeping sales and profits at a fairly high level.
B. Educating customers about your product.
C. Keeping up with production and ensuring good distribution.
D. Convincing intermediaries about why your product is preferable.
During this stage sales will level off, and profits follow suit, but both should be at fairly high
levels. Keeping both at that fairly high level is the challenge the small business faces.

Difficulty: Medium
49. (p. 285-286) Which of the following statements about the maturity phase of the product life cycle
is false?
A. Manufacturers find ways to cut costs to keep market share.
B. Since there are few new users for the product, most gains in market share are made by stealing
customers from competitors.
C. A product can stay in the maturity stage for only a short period of time.
D. As weaker competitors start to leave the market, you will have opportunities to take their
"leftover" customers.
A product can stay in the maturity stage for a long period of time.

Difficulty: Medium
50. (p. 286) At which stage of the product life cycle do promotions such as coupons, rebates, and
multipacks become an important marketing tool?
A. Growth
B. Decline
C. Introduction
D. Maturity
Techniques used to bolster sales during the maturity-stage include promotions (coupons, rebates,
multipacks, etc.).
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
51. (p. 286) Identify the correct statement about the decline phase of the product life cycle.
A. Advertising and promotion expenses are usually nearly ratified at this point.
B. Many products go into decline, only to be resurrected in the future as styles come back to old
standards.
C. Companies upgrade their product lines in order to cut costs.
D. Companies market to less profitable segments to squeeze as much profit out of the final stage
as possible.
Advertising and promotion expenses are usually nearly eliminated at this point. Companies pare
back their product lines and don't market to less profitable segments in order to cut costs and
squeeze as much profit out of the final stage as possible.
AACSB: Comprehension
Bloom's: Knowledge
Difficulty: Reflective Thinking
52. (p. 288) All of the following influence the prices you set for your products EXCEPT
A. costs.
B. customer.
C. competition.
D. employees.
There are four main reasons why owners of small businesses pay so much attention to the issue
of price. 1. Price is a major factor in determining customers' perceptions of quality and
desirability. 2. Because of this, price is central to competitive strategy. 3. Price is directly related
to your company's gross revenue and sales volume. There is a fourth reason, but only the owners
and managers talk about it.

Bloom's: Knowledge
Difficulty: Medium
53. (p. 288) Of all the marketing variables available, which is the easiest to change?
A. Price
B. Product
C. Promotion
D. Placement
Of all the marketing variables available, price is the easiest to change.

Bloom's: Knowledge
Difficulty: Medium
54. (p. 288) The optimum price is primarily a function of all of the following EXCEPT
A. demand for the product or service.
B. value delivered by the customer.
C. prices set by competing firms.
D. your business strategy and product placement.
The optimum price is based on a mix of four important factors: demand for the product or
service, value delivered to the customer, prices set by competing firms, and your business
strategy and product placement.

Difficulty: Medium
55. (p. 290) _____ is the amount of profit, usually stated as a percentage of the total price.
A. Elasticity
B. Breakeven
C. Margin
D. Markup
Margin is the amount of profit, usually stated as a percentage of the total price.

Bloom's: Knowledge
Difficulty: Medium
56. (p. 290) _____ products have lots of substitutes or are not necessities.
A. Elastic
B. Hybrid
C. Inelastic
D. Augmented
Elastic products are products for which there are any number of substitutes and for which a
change in price makes a difference in quantity purchased.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
57. (p. 290) Which of the following is an example of an elastic product?

A. Candy bar
B. Antibiotics
C. Heating oil
D. Drinking water
Elastic products have lots of substitutes, or are not necessities.
AACSB: Analytic
Difficulty: Medium
58. (p. 290) Which of the following is an example of an inelastic product?

A. Luxury goods
B. Hamburgers
C. Gasoline
D. Coffee
An inelastic product is something people cannot, or will not do without, or for which there are
few substitutes.
AACSB: Analytic
Difficulty: Medium
59. (p. 291) A product for which there are few substitutes and for which a change in price makes
very little difference in quantity purchased is called a(n)
A. hybrid product.
B. total product.
C. elastic product.
D. inelastic product.
An inelastic product is something people cannot, or will not do without, or for which there are
few substitutes.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
60. (p. 291) A consumer's mental image of what a product price should be refers to
A. breakeven price.
B. internal reference price.
C. fixed cost price.
D. external reference price.
Consumers have internal reference prices. Basically these are expectations about what a price
should be, based on their own knowledge internal reference pricing.

Bloom's: Knowledge
Difficulty: Easy
61. (p. 291) _____ prices may come from looking at the competitive ads, researching the Internet,
visiting several stores, or asking friends.
A. Breakeven
B. Internal reference
C. Fixed cost
D. External reference
Consumers have external reference prices from gathering information from outside sources.

Bloom's: Knowledge
Difficulty: Medium
62. (p. 291-292) Consumers' internal reference price may be based on

A. looking at competitive ads.
B. their understanding of how much it would cost to make it.
C. researching on the Internet.
D. visiting several stores.
Consumers' internal reference price may be based on the last time they purchased something,
recollections of what they might have read or heard in the past, their understanding of how much
it would cost to make it, or their perception of the value the product has.
AACSB: Comprehension
Bloom's: Knowledge
Difficulty: Analysis
Difficulty: And Markets
Difficulty: Financial Theories
Difficulty: Reporting
63. (p. 294) Increasing market share
A. usually means pricing toward the high end of the competition in order to take market share
from the competition.
B. becomes more popular as a product reaches the decline phase of the product life cycle.
C. should not be an objective for a small business.
D. is a much better option for the small firm than maximizing profits.
Increasing market share usually means pricing toward the low end of the competition in order to
take market share from the competition. This strategy becomes more popular as a product
reaches the maturity phase of the product life cycle. Maximizing profits is a much better option
for the small firm.

Difficulty: Medium
64. (p. 295) _____ is the end price to your customer that might be four times from what you got.
A. Skimming
B. Price escalation
C. Premium pricing
D. Partitioned pricing
Everyone who handles your product will be expecting to make something from it. If you are
using a traditional retailer, your product may go through several middlemen before getting on the
shelf. The end price to your customer might be four times from what you got. This is called price
escalation.

Bloom's: Knowledge
Difficulty: Medium
65. (p. 296) _____ is charging the highest price the market will bear.
A. Skimming
B. Psychological price
C. Breakeven
D. Return pricing
This technique is usually only possible if you are absolutely the first product or service of your
type in the market, and only if it's something people really want.

Bloom's: Knowledge
Difficulty: Easy
66. (p. 296) What pricing is used for non-status symbol types of products?
A. Prestige pricing
B. Odd-even pricing
C. Premium pricing
D. Captive pricing
Premium pricing is used for non-status symbol types of products, such as toothpaste, shampoo,
or laundry detergent.

Bloom's: Knowledge
Difficulty: Medium
67. (p. 296) Generally, _____ pricing is for an item considered a status symbol, whereas, _____
pricing is used for non-status symbol types of products.
A. skimming; total
B. prestige; premium
C. return; skimming
D. premium; prestige
Generally prestige pricing is for an item considered a status symbol, such as a Rolex watch or a
Mercedes automobile. Premium pricing is used for non-status symbol types of products, such as
toothpaste, shampoo, or laundry detergent. The idea behind both is the same.

Bloom's: Knowledge
Difficulty: Medium
68. (p. 297) _____ pricing refers to setting the price for a base item and then charging extra for each
additional component.
A. Captive
B. Prestige
C. Partitioned
D. Premium
Partitioned pricing works because once consumers make a decision that a certain product is the
one they want, they are very reluctant to change their mind.

Bloom's: Knowledge
Difficulty: Medium
69. (p. 297) Which of the following refers to setting the price for an item relatively low and then
charging much higher prices for the expendables it uses?
A. Prestige pricing
B. Captive pricing
C. Partitioned pricing
D. Odd-even pricing
In captive pricing, you sell something, usually a base system, at a relatively low price, but the
expendables it uses are relatively expensive.

Bloom's: Knowledge
Difficulty: Medium
70. (p. 298) The practice of setting (usually) three price points: good, better and best quality refers
to which of the following?
A. Captive pricing
B. Partitioned pricing
C. Price lining
D. Breakeven point pricing
Price lining is an attempt to appeal to several different markets.

Bloom's: Knowledge
Difficulty: Medium
71. (p. 298) Identify the term for an attempt to appeal to several different markets.
A. Prestige pricing
B. Captive pricing
C. Price lining
D. Random discounting
Price lining is the practice of setting (usually) three price points: good quality, better quality, and
best quality.

Bloom's: Knowledge
Difficulty: Medium
72. (p. 298) _____ discounting refers to sales that happen on some regular cycle.
A. Off-peak
B. Bundling
C. Random
D. Periodic
Periodic discounting refers to sales conducted at either predictable or nonpredictable intervals.

Bloom's: Knowledge
Difficulty: Easy
73. (p. 299) A back-to-school sale is an example of

A. periodic discounting.
B. random discounting.
C. price skimming.
D. off-peak pricing.
Periodic discounting means patterned or systematic price reduction. Examples include holiday
sale, back-to-school sale, etc. (Refer Table 9.1).

Difficulty: Medium
74. (p. 299) Senior citizens' discounts are an example of
A. limit pricing.
B. price discrimination.
C. penetration pricing.
D. price signaling.
Price discrimination means charging different prices to different groups, usually to attract a
different demographic. Examples include senior citizens' discounts (Refer Table 9.1).

Difficulty: Medium
75. (p. 299) At or near industry average price is called

A. captive pricing.
B. bait pricing.
C. the going rate.
D. price signaling.
Going rate means the at or near industry average (Refer Table 9.1).

Bloom's: Knowledge
Difficulty: Medium
76. (p. 299) Selling a name brand at or near cost in order to attract traffic to a retailer is termed
A. bait pricing.
B. loss leaders.
C. price signaling.
D. customary pricing.
Loss leaders means selling a name brand at or near cost in order to attract traffic to a retailer
(Refer Table 9.1).

Bloom's: Knowledge
Difficulty: Medium
77. (p. 299) What is an extremely low penetration price that discourages competitors from entering
a market called?
A. Everyday low price
B. Going rate
C. Price signaling
D. Limit pricing
Limit pricing means extremely low penetration price to discourage competitors from entering a
market (Refer Table 9.1).

Bloom's: Knowledge
Difficulty: Medium
78. (p. 299) The term for charging the absolute highest possible price due to inelastic demand is
A. price skimming.
B. premium pricing.
C. professional pricing.
D. penetration pricing.
Price skimming means charging the absolute highest possible price due to inelastic demand
(Refer Table 9.1).

Bloom's: Knowledge
Difficulty: Medium
79. (p. 299) Advertising an inexpensive product and placing it near better, more expensive models
is called
A. reference pricing.
B. captive pricing.
C. bait pricing.
D. limit pricing.
Bait pricing means advertising an inexpensive product and placing it near better, more expensive
models (Refer Table 9.1).

Bloom's: Knowledge
Difficulty: Medium
80. (p. 300) "Buy one large pizza and get a regular one free," offer to long-time customers is an
example of
A. partitioned pricing.
B. loyalty programs.
C. referral discounts.
D. coupons.
Loyalty programs are a reward given to repeat customers. Examples include buying nine
sandwiches, and so getting the tenth one free (Refer Table 9.1).

Difficulty: Easy
81. (p. 300) Charging lower prices at certain times to encourage customers to come during slack
periods refers to
A. off-peak pricing.
B. bundling.
C. random discounting.
D. partitioned pricing.
Lower prices during off-peak periods in order to even out purchases is off-peak pricing.

Bloom's: Knowledge
Difficulty: Easy
82. (p. 300) Rebates are a great tool for small businesses because
A. the redemption rate is extremely high.
B. they create loyalty programs.
C. the redemption rate is extremely low.
D. they generate referral businesses.
A rebateeven one that is not redeemedleaves people with the impression they saved (or
could save) money.

Bloom's: Knowledge
Difficulty: Medium
83. (p. 300) Identify the term used for combining two or more products in one unit and pricing it
less than if the units were sold separately.
A. Factoring
B. Coupons
C. Bundling
D. Loyalty programs
This technique is particularly effective for promoting the sales of a second product or service that
might not be doing as well or is newly introduced.

Bloom's: Knowledge
Difficulty: Medium
84. (p. 300) What is the term used for combining more than one unit of the same product and
pricing it lower than if each unit were sold separately?
A. Multiple packs
B. Coupons
C. Factoring
D. Loyalty programs
A variation of bundling is selling multiple or bonus packs, such as buying five bottles of hand
lotion for the price of three.

Bloom's: Knowledge
Difficulty: Medium
85. (p. 300) These are especially good for getting customers to return to your business.
A. Multiple packs
B. Coupons
C. Bundling
D. Loyalty programs
Loyalty programs are intended to tie customers to your business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
86. (p. 301) Which of the following are discounts given to customers who introduce friends to the
business?
A. Coupons
B. Referral discounts
C. Periodic discounts
D. Rebates
A variation on the loyalty discount is the referral discount, in which a current customer refers a
new customer to use the service or buy the product.

Bloom's: Knowledge
Difficulty: Medium
Scenario: Tinker Toys, Inc.

Tammy is a student at a local university majoring in psychology. She has always been fascinated
by toys. So she entered the business area that was her comfort zone - toys. Having done the
business plan for Tinker Toys and established the business officially, Tammy is exploring the toy
product ideas and its pricing.
87. (p. 280) Having generated several toy ideas, the next step Tammy needs to pursue in the new
product development process is
A. product development.
B. idea evaluation.
C. idea screening.
D. commercialization.
feasibility.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
88. (p. 281) The first versions of the toy products that Tammy develops in the formal development
are called
A. hybrids.
B. test markets.
C. total products.
D. prototypes.
Concepts that survive to this stage are ready for formal development. The first versions are called
prototypes and are used in further consumer testing.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
89. (p. 285) Once Tammy has introduced her toys in the market, during which stage of the product
life cycle would the acceptance of her products increase and sales and profits grow faster than at
any other time?
A. Growth
B. Maturity
C. Introduction
D. Decline
During the growth stage acceptance of the product increases rapidly.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
90. (p. 296) If Tammy were to charge the highest price the market would bear, it would be called
A. skimming.
B. return pricing.
C. psychological pricing.
D. partitioned pricing.
This technique is usually only possible if you are absolutely the first product or service of your
type in the market, and only if it's something people really want.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Analysis
Difficulty: And Markets
Difficulty: Financial Theories
Difficulty: Reporting
Essay Questions
Chapter 10 Small Business Promotion: Capturing the Eyes of Your Market Answer
Key
1. (p. 308) Establishing your unique selling points is known as your value proposition.
TRUE

Bloom's: Knowledge
Difficulty: Medium
2. (p. 309) Most entrepreneurs assume that everyone is their target market.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
3. (p. 309) The process of dividing the market into smaller portions of people that have certain
common characteristics is called stereotyping.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
4. (p. 309) Segmentation refers to getting your message out to the target market so that they can
make decisions about your product or service.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
5. (p. 313) One way to develop a succinct message about your business is to think of three to five
key words that would describe your business to anyone.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
6. (p. 314) Advertising is often used to support the corporate identity and value propositions that are
established through public relations efforts.
TRUE

Bloom's: Knowledge
Difficulty: Medium
7. (p. 315) To be effective, brochure contents should focus on the product features and benefits and
not about the company information.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
8. (p. 315) A sales document typically printed on colored paper to be posted or handed out is called
a brochure.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
9. (p. 316) When it comes to promoting a small business that is just starting out, spreading the news
by word-of-mouth is the fastest way to build a client base.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
10. (p. 318) Most service providers get business usually through referrals or word-of-mouth.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
11. (p. 319) The process of personal selling involves the following steps: prospect and evaluate,
attend, decide, and sell.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
12. (p. 321) During the presentation stage of personal selling, AIDA is critical: prospector's
attention, developing individuality, decision, and action.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
13. (p. 322) Building relationships over time is an investment in building your sales.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
14. (p. 326) Follow-up refers to doing what you said you would do.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
15. (p. 328) In order to be effective, the headline of a press release must communicate the five Ws
and one H.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
16. (p. 329) The body of the press release should be written with the most important information
and quotes first.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
17. (p. 331) Public recognition includes power and currency.

FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
18. (p. 331) A news story should have public recognition, importance, and interest.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
19. (p. 331) A good story refers to a concept in public interest which alludes to a character to whom
the public can relate.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
20. (p. 334) Having a great product or service does not do you or your business any good if
potential customers do not know about it.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
21. (p. 308) Small business owners' unique selling points that will be used to differentiate their
products and/or services from those of the competition refers to their
A. press kits.
B. value proposition.
C. trendiness.
D. segmentation.
You can think of defining your value proposition along the same categories of value and cost
benefits of quality, style, delivery, service, technology, shopping ease, place, and scale and
scope.

Bloom's: Knowledge
Difficulty: Easy
22. (p. 309) _____ is the process of dividing the market into smaller portions of people who have
certain common characteristics.
A. Value proposition
B. Market penetration
C. Segmentation
D. CRM
Income, or disposable income, is also a key segmentation device.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
23. (p. 309) Your _____ is the segment(s) you select to concentrate your marketing efforts.
A. target market
B. CRM
C. customer vector
D. value proposition
Marketers use information on the target market's wants and needs in order to tailor the product or
service, as well as its price, distribution, and promotion.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
24. (p. 309) Dividing the market into different segments using certain cities or neighborhoods refers
to _____ segmentation.
A. geographic
B. economic
C. demographic
D. cultural
Dividing the market into different segments can be done geographically (in a certain city or
neighborhood).
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
25. (p. 309) Dividing the market into different segments using income, age, or religion refers to
_____ segmentation.
A. geographic
B. economic
C. demographic
D. cultural
Dividing the market into different segments can be done demographically (income, age, religion,
ethnicity, and many others).
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
26. (p. 309) A clothing company that divides the market using characteristics of clothing that are
practical, stylish, for a particular sport, etc., refers to segmentation by the
A. demography.
B. economy.
C. trendiness.
D. benefits sought.
Dividing the market into different segments can be done by the benefits sought (clothing that is
practical, stylish, for a particular sport, etc.).
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
27. (p. 313) To develop a(n) _____, one should try to think of three to five key words that would
describe their business to anyone.
A. advertisement
B. succinct message
C. public relations piece
D. press kit
Effective messages are succinct messages that will make your business clear to potential clients
and customers.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
28. (p. 314) How much of each message conveyance you will use to sell your product as well as
your objective in using each one is known as the
A. promotional mix.
B. marketing mix.
C. AIDA.
D. CRM.
Traditional message conveyance includes advertising, sales promotion, public relations, direct
marketing, and personal selling. The promotional mix essentially describes how much of each of
these five you will use and the objective of each.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
29. (p. 314) _____ is often used to support the corporate identity and value propositions that are
established through _____ efforts.
A. Personal selling; point of sale
B. Public relations; advertising
C. Advertising; personal selling
D. Advertising; public relations
Advertising is a method of conveying your messages to your target audience. In public relations,
determining your target is determining which media are likely to reach your customer.

Bloom's: Knowledge
Difficulty: Hard
30. (p. 314-315) Which of the following statements about advertising is false?
A. The key for effective advertising is reinforcing the name and what it stands for in the
consumer's mind.
B. For effective advertising, approaches which provide the highest level of certainty possible in
reaching the target market should be used.
C. It is a method where it is easy to discern feedback.
D. Advertising can be done in print ads in newspapers, magazines, and other print media.
Advertising is a method where it is hard to discern feedback.

Difficulty: Medium
31. (p. 315) Brochures and flyers
A. are standard blank papers typically imprinted with your company's name and contact
information.
B. are sales documents to be posted or handed out, typically printed on sheets of colored paper or
printed in color on white stock of paper.
C. will give more information about your firm and products than your business card.
D. provide potential customers an education in your product, including stories of customers'
whose problems were solved, an FAQ list, as well as a page on your products or services.
Brochures and flyers give more information about your firm and products than your business
card (Refer Exhibit 10.1).
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
32. (p. 315) Which of the following statements about signs is false?
A. They are a form of advertising
B. They need to be large enough to be read by passing traffic
C. They should reflect your firm
D. Homemade signs indicate high quality and professionalism
Homemade signs do not indicate high quality and professionalism (Refer Exhibit 10.1).

Difficulty: Medium
33. (p. 315) Business stationery
A. puts your name and message in front of potential clients, existing clients, suppliers, and
others.
B. can be produced on your computer and printed with good results.
C. gives more information about your firm and products than brochures and flyers.
D. can be printed on nice paper and put into a pocket folder with a sticker with your firm's name
and address on it.
Business stationery puts your name and message in front of potential clients, existing clients,
suppliers, and others (Refer Exhibit 10.1).
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
34. (p. 315) These can be produced for pennies in quantity.

A. Sales packets
B. Signs
C. Promotional novelties
D. Business cards
Promotional novelties can be produced with your company's name and slogan for pennies in
quantity (Refer Exhibit 10.1).
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
35. (p. 315) Which of the following provide potential customers an education in your product or
service, including stories of customers' whose problems were solved, an FAQ list, as well as a
page on your products or services, and a page on you and your firm?
A. Promotional novelties
B. Sales packets
C. Business cards
D. Brochures
Sales packet provides potential customers an education in your product or service, including
stories of customers whose problems were solved, an FAQ list, as well as a page on your
products or services, and a page on you and your firm (Refer Exhibit 10.1).
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
36. (p. 316) _____ refer to terms included in the hidden portions of a Web page which are used by
search engines to describe your Web site and evaluate its focus and category placement.
A. Press kits
B. Keyword and description tags
C. Brochures
D. Flyers
A company's Web site needs unique keyword and description tags for each screen in order to
obtain a prominent listing on search engines.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
37. (p. 316) When it comes to promoting a small business that is just starting out, spreading the
news by _____ is the fastest way to build a client base.
A. word-of-mouth
B. full-scale advertising
C. personal selling
D. point-of-sale
When it comes to promoting a small business that is just starting out, spreading the news by
word-of-mouth is the fastest way to build a client base. Whether a potential customer meets the
owner directly or hears of the business secondhand, a connectedness is established that cannot be
matched by advertising or other marketing methods.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
38. (p. 316) _____ is a form of communication that encourages the customer to take immediate
action, such as coupons, sales, or contests.
A. Buzz marketing
B. Sales promotion
C. Viral marketing
D. Public relations
Good examples of sales promotions include coupons, sales, contests, sweepstakes, giveaways,
samples, "buy one get one free," and other gimmicks.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
39. (p. 318) Which of the following statements about buzz marketing is false?
A. It has aspects of network marketing in that you tell one person who tells another who tells still
another.
B. The phrase is most commonly used in reference to using electronic media to pass the message
along.
C. It is a sub-discipline of direct marketing.
D. In buzz marketing, if your product is relevant and appealing, it is likely to be picked up and
sent along via e-mail, blog, or a social networking site.
Buzz marketing is word-of-mouth marketing.

Difficulty: Medium
40. (p. 318) Name the electronic equivalent of word-of-mouth advertising, in which the advertiser's
message spreads quickly and widely via e-mail, Web site, blogs, and other online tools.
A. Referral marketing
B. Telephone marketing
C. Mobile marketing
D. Viral marketing
In buzz marketing, if your product is relevant and appealing, it is likely to be picked up and sent
along via e-mail, blog, or a social networking site like Facebook or MySpace. This is often called
viral marketing.

Bloom's: Knowledge
Difficulty: Medium
41. (p. 319) Personal selling
A. involves activities used to establish and promote a favorable opinion by the media.
B. allows you to only guess what future features clients may want to see.
C. includes issue recognition, trendiness, and visuals.
D. has the advantage that you can be flexible in your presentation.
Personal selling allows you to find out the buyers' main concerns and address them; in
advertising you can only guess.

Difficulty: Medium
42. (p. 319) Process of personal selling includes all of the following EXCEPT
A. presenting.
B. closing.
C. prospecting and evaluating.
D. deciding.
The process of personal selling includes prospect and evaluate, prepare, present, close, and
follow-up.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
43. (p. 319-320) _____ means finding out what you can about the clients before approaching them.
A. Evaluation
B. Closing
C. Prospecting
D. Preparation
The process of personal selling includes prospect and evaluate, prepare, present, close, and
follow-up.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
44. (p. 320) _____ means cleaning up your list to remove potential clients that are unable or
unlikely to buy your product.
A. CRM
B. Pre-qualifying
C. Cognitive dissonance
D. Closing
Preparation means finding out what you can about the clients before approaching them. In
business-to-business selling, you may be able to check out their Web site and find out more
about what sorts of products the potential client makes.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
45. (p. 321) Closing the sale refers to
A. asking the prospect to buy your product.
B. being turned down, asking for referrals.
C. delaying the decision to buy for few days.
D. stimulating interest on part of prospects.
The close is the commitment from the customer.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
46. (p. 321) The trial close technique is described by which of the following?
A. "I'll just need your credit card for payment."
B. "This rate will end at the end of the day."
C. "Which credit card would you like to use to pay for that?"
D. Customer asks to think about it and you say "What are the chances you will buy later?"
Trial close ("Which credit card would you like to use to pay for that?")

Difficulty: Medium
47. (p. 321) "This rate will end at the end of the day" describes which of the following closing
techniques?
A. Trial
B. Urgency
C. Assumptive
D. Threatening
Urgency close ("This rate will end at the end of the day.")

Difficulty: Medium
48. (p. 321) "I will just need your credit card for payment" represents which of the following
closing techniques?
A. Trial
B. Urgency
C. Assumptive
D. Threatening
Assumptive close ("I'll just need your credit card for payment.")

Difficulty: Hard
49. (p. 322) Doubt that occurs after a purchase has been made is called
A. cognitive dissonance.
B. customer vector.
C. segmentation.
D. trendiness.
Cognitive dissonance is an inconsistency between experience and belief.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
50. (p. 322) An inconsistency between experience and belief refers to

A. value proposition.
B. segmentation.
C. trendiness.
D. cognitive dissonance.
Doubt that occurs after a purchase has been made is cognitive dissonance.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
51. (p. 323) Identify the strategy whose goal is growth, based on selling existing customers a
product or service they have never bought before.
A. Market expansion
B. Product expansion
D. Diversification
Selling the same customers a new product is called product expansion.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
52. (p. 323) Name the strategy whose goal is growth, based on selling in areas or to groups
previously not served by the business.
A. Market penetration
C. Diversification
D. Market expansion
If you are looking at people who have not been customers, you might seek a market expansion
strategy to sell your existing products to them.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
53. (p. 323) _____ is a strategy whose goal is growth, based on adding new products or services to
the firm's existing collection of offerings.
A. Market penetration
C. Diversification
D. Market expansion
If you are looking at people who have not been customers, you might seek a diversification
strategy if you are trying to sell them newly developed products.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
54. (p. 323) Which is the strategy whose goal is growth, based on selling more of the firm's product
or service to the existing customer base?
A. Market expansion
D. Diversification
Selling the same products to the same customers is called a market penetration approach.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
55. (p. 323) What is the key to CRM?

A. Tracking sales by purchase basis
B. Follow-through and follow-up
C. The data on current or prospective customers
D. Press release and press kit
The key to CRM is the data on current or prospective customers.

Difficulty: Medium
56. (p. 323) Which of the following data gives you the particulars on your customers?
A. Contact data
B. Performance data
C. Product data
D. Service data
For all existing customers you want two kinds of datacontact data and performance data.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
57. (p. 323) _____ data gives you information on the date and type of contact, since in many sales
situations, it can take repeated contacts before a sale is made.
A. Channel
B. Performance
C. Intercommunication
D. Sales
For all existing customers you want two kinds of datacontact data and performance data.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
58. (p. 325) Which of the following is a type of CRM report that segments by customer or customer
group on purchases or dates of purchase?
A. Customer vector
B. Sales report
C. Customer service
D. Interim report
A customer vector which is a type of data report from your CRM database which lets you
summarize information by date, by product or service being sold, by groups of customers, or by
the purchases of an individual person or firm.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
59. (p. 325) If you track sales by purchase basis

A. you might figure how to better target ads or promotions to particular types of customers.
B. you might be able to tell which mailing lists produce the best returns.
C. you can tell which of your advertising efforts resulted in the most sales, so it makes it easier
to decide which marketing efforts to continue.
D. you could find a product which has low quality.
If you track sales by purchase basis, you can tell which of your advertising efforts resulted in the
most sales, so it makes it easier to decide which marketing efforts to continue or expand.

Difficulty: Medium
60. (p. 325) You might figure how to better target ads or promotions to particular types of
customers
A. if you track sales by purchase basis.
B. if you look at customer source basis and purchase.
C. by tracking sales organized by product and customer satisfaction.
D. if you link sales and purchase basis to the type of customer.
If you link sales and purchase basis to the type of customer (by industry, location, education, or
age) you might figure how to better target ads or promotions to particular types of customers.

Difficulty: Medium
61. (p. 325) Which of the following is perhaps the simplest and most important analysis of data?
A. Sales by purchase basis
B. Sales by customer
C. Customer source basis and purchase
D. Sales organized by product satisfaction
Perhaps the simplest and most important analysis is sales by customer.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
62. (p. 326) The proof of a CRM effort is seen in all of the following EXCEPT
A. higher levels of customer loyalty in existing customers.
B. higher levels of purchasing from your existing customers.
C. low levels of customer loyalty in new customers.
D. more tracked prospects making initial purchases from you.
The proof of a CRM effort is seen in (1) higher levels of customer loyalty in existing customers,
(2) higher levels of purchasing from your existing customers, and (3) more tracked prospects
making initial purchases from you.

Difficulty: Medium
63. (p. 326) Which of the following refers to doing what you said you would do?
A. Spin-off
B. Bottom line
C. Follow-up
D. Follow-through
If you remember to keep up your CRM database (which is the biggest problem for entrepreneurs)
a good CRM system will remind you of the promises you have made.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
64. (p. 326) This refers to the contacts you periodically make with customers in order to remind
them of your business, and your interest in their business.
A. Follow-up
B. Customer service
C. Follow-through
D. Board meetings
This can be done through personal contacts by phone, mail, or personal visits, although
increasingly contact is done electronically through e-mails, electronic newsletters, discussion
lists, or interactive Web services like blogs or wikis.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
65. (p. 327) Which of the following Acts lets you contact people with whom you have done
business by asking customers' permission to e-mail them?
A. The Communications Act
B. The Do-Not-Call Implementation Act
C. The CAN-SPAM Act
D. The Junk Fax Prevention Act
While the CAN-SPAM act lets you contact people with whom you have done business, sending
unwanted e-mail is not something which will endear you to your customers.

Bloom's: Knowledge
Difficulty: Medium
66. (p. 328) What is the term for the activities used to establish and promote a favorable opinion by
the media?
A. Press relations
B. Cognitive dissonance
C. Press release
D. Public recognition
Press relations are those activities you do to influence or increase media coverage of your
business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
67. (p. 328) In the presentation component of personal selling, "A" in AIDA stands for
A. holding the prospects attention.
B. asking permission to present.
C. attending a personal selling presentation.
D. having an all or nothing option in the sale.
Attention: Get their attention with a catchy headline.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
68. (p. 328) AIDA in the presentation component of personal selling includes all of the following
EXCEPT
A. getting prospect's attention.
B. stimulating interest.
C. deciding on product.
D. customer taking action.
AIDA (attention, interest, desire, and action).
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
69. (p. 328) A written announcement intended to draw news media attention to a specific event is
called
A. a press kit.
B. a press release.
C. identification tags.
D. a cultural resonance.
The press release is the key method for telling your business story.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
70. (p. 329) The goal of _____ in AIDA is to get people to be potential clients.
A. action
B. desire
C. interest
D. attention
Action: The goal is to get them to be potential clients; kind of hard if they don't know where to
find you.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
71. (p. 329) The five Ws and one H of the story should be presented in the _____ of the press
release.
A. headline
B. closing paragraph
C. opening paragraph
D. middle of the body
Interest: While the title should start to pique their interest, the opening paragraph should really
capture them. This first paragraph should include the who, what, when, where, why, and how of
the story.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
72. (p. 331) A newsworthy item should have all of the following EXCEPT
A. public recognition.
B. public importance.
C. public interest.
D. public power.
Press releases are meant to draw the attention of the public to something that's new and
newsworthy which could be a range of things, from products and people to services and
solutions. It should have public recognition, public importance, or public interest.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
73. (p. 331) _____ should include product or service brochures, business cards, product
information, and other materials that can provide background material for a reporter; they should
include a letter of introduction and may include a brief history of the firm and information about
the owner and other key managers.
A. Press kits
B. The promotional mix
C. Flyers
D. Business stationery
Press kits are a type of sales kit sent to media outlets which is focused around a press release.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
74. (p. 331) Identify the concept in public recognition which alludes to the extent to which the
public is familiar with the problem at hand.
A. Public importance
B. Currency
C. Issue recognition
D. Public recognition
Public recognition includes issue recognition (Have you solved a problem that is an at-large
issue? If your problem is not familiar to the public, people need to be familiarized with it before
they understand your news).
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
75. (p. 331) A concept in public recognition which alludes to the fit of the topic to current fashion
or public interest refers to
A. currency.
B. trendiness.
C. cultural resonance.
D. mat release.
Public recognition includes trendiness (Is your news a low-carb diet or a Cabbage Patch Kid?
That is, will you be able to ride the wave of fashion or will you be just another in a long and
dated line of related stories?).
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
76. (p. 331) A concept in public importance which alludes to potential shifts in control or influence
refers to
A. currency.
B. power.
C. trendiness.
D. proximity.
Public importance includes power (Does your news represent a power struggle or shift? Power
affects the community, and the farther its potential reaches, the more newsworthy the event.).
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
77. (p. 331) Public recognition includes
A. power.
B. proximity.
C. a good story.
D. human interest.
Public recognition includes proximity (News is sure to attract attention if it can potentially affect
a number of people. The more people it will affect, the further your story will spread.).
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
78. (p. 331) Public interest includes all of the following EXCEPT
A. a good story.
B. human interest.
C. visuals.
D. power.
Public importance includes power.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
79. (p. 331) Which of the following is a concept in public importance that alludes to the degree to
which the issue is immediate in its impact?
A. Currency
B. Power
C. Proximity
D. Famous faces
Public importance includes currency (Your event will have its greatest importance while the
issues are current. Will your news be connected to other recent events?).
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
80. (p. 331) A concept in public interest which alludes to a character to whom the public can relate
refers to
A. cultural resonance.
B. good story.
C. trendiness.
D. human interest.
Public interest includes human interest (A character with whom the public can relate helps
generate interest and attention. Can you pull human interest into your news? The human interest
story line helps connect the news to the audience with emotion.)
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
81. (p. 332) A concept in public interest which alludes to events with a broad appeal within the
market or population refers to
A. cultural resonance.
B. good story.
C. trendiness.
D. human interest.
Public interest includes cultural resonance (Broad cultural themes expose the event or news to a
wider audience. Does the event or campaign speak to a wide demographic range? Is it meant
to?).
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
82. (p. 332) Which of the following refers to activities used to establish and promote a favorable
opinion by the public?
A. Public relations
B. Public recognition
C. Public importance
D. Public interest
Public relations include publicity and other forms of communication to the public in general in
order to promote a favorable opinion by the public about your firm.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
83. (p. 332) Identify the term that helps in building goodwill and is a good way to get the word out
about your firm.
A. Publicity
B. Sponsorships
C. Donations
D. Power
Sponsorships: Paying for a local organization's needs in exchange for recognition.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
84. (p. 332) Information about your company and its activities that is disseminated to the public in
order to get their good opinion is known as
A. a mat release.
B. a succinct message.
C. publicity.
D. public interest.
Public relations include publicity and other forms of communication to the public in general in
order to promote a favorable opinion by the public about your firm.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
85. (p. 333) Monetary or other gifts to organizations or people who are in need are called
A. value propositions.
B. mat releases.
C. sponsorships.
D. donations.
Donations are a paying forward approach, and do not need to be millions of dollars.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
86. (p. 334) A news release that is typeset and thus may be photographically reproduced for
inclusion in a newspaper is called a(n)
A. social media release.
B. product press release.
C. event release.
D. mat release.
Aside from advertising, there are several tools that can help your news gather a piece of the
limelight. Offer (through a national service) ready-to-reproduce, typeset feature stories to smaller
newspapers (mat releases, color pages).
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Scenario: Howard Homes

Harry Howard, a successful real estate broker, has established his own real estate company in
western Pennsylvania. He gained his on-the-job experience working at a very large real estate
company where he had a whole staff supporting the brokers' work. Now on his own, with two
secretaries, Harry is building his dream of owning and growing his own business. He wants to
mainly focus on middle-to-upper-income homeowners and is exploring what type of promotional
material he needs to have.
87. (p. 315) Harry just received in mail several boxes of _____ which puts his name and message in
front of potential clients, existing clients, suppliers, and others.
A. brochures
B. sales packets
C. business stationery
D. flyers
Business stationery puts your name and message in front of potential clients, existing clients,
suppliers, and others (Refer Exhibit 10.1).
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
88. (p. 315) If Harry wants to develop brochures for his company's services, he needs to know that
they
A. are sales document to be posted or handed out, typically printed on sheets of colored paper or
printed in color on white stock of paper.
B. are standard blank papers typically imprinted with his company's name and contact
information.
C. can be run off rather inexpensively at many copy centers.
D. give less information about his firm and products than his business card.
Brochures can be run off rather inexpensively at many copy centers (Refer Exhibit 10.1).

Difficulty: Medium
89. (p. 316) Which of the following would be the fastest way for Harry to build his client base?
A. Word-of-mouth
B. Full-scale advertising
C. Personal selling
D. Point-of-sale
When it comes to promoting a small business that is just starting out, spreading the news by
word-of-mouth is the fastest way to build a client base.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
90. (p. 329) In developing a press release for his company, Harry needs to include the five Ws and
one H in the
A. headline.
B. closing paragraph.
C. opening paragraph.
D. middle of the body.
Interest: While the title should start to pique their interest, the opening paragraph should really
capture them. This first paragraph should include the who, what, when, where, why, and how of
the story.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
Essay Questions
Chapter 11 Small Business Distribution and Location Answer Key
1. (p. 342) Usually the first technique an entrepreneur uses to get customers is word-of-mouth.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
2. (p. 343) Door-to-door sales do offer the flexibility of having your product available around the
clock and at convenient locations.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
3. (p. 344) The current rate for a direct mail address list is about $500 per thousand names.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
4. (p. 347) Magazines are very appropriate places for direct response advertising for business-to-
business selling.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
5. (p. 350) A company that will warehouse your products and fill your customer's orders for you is
called a multichannel firm.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
6. (p. 350) A middleman business which buys and sells to other businesses rather than consumers is
called a retailer.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
7. (p. 351) Unfortunately for the entrepreneurs, many distributors and wholesalers are not interested
in taking on a start-up product.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
8. (p. 352) Direct exporting refers to selling directly to foreign countries using middlemen such as
agents and export trading companies and not selling to the domestic consumers.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
9. (p. 353) The advantage of the United Nations having 192 member countries is that a new
exporter can and should market their product since they are very similar in cultural, political, and
economic environments.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
10. (p. 354) In exporting, the easiest payment procedure is to require up-front cash payment prior to
shipment.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
11. (p. 354) For payment procedures in exporting, typical methods include letters of credit or
documentary drafts.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
12. (p. 355) One of the major mistakes commonly made by U.S. businesspeople is being too
sensitive to cultural differences.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
13. (p. 357) There are three typical locations for services: at the client's location, at the mutually
accessible location, and at your firm's location.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
14. (p. 359) Businesses with high customer contact include such diverse operations as medical or
legal offices and manufacturing businesses.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
15. (p. 361) Traffic generators are other businesses that bring customers to the area.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
16. (p. 363) You should start the leasing process by looking for locations.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
17. (p. 364) HVAC is the least expensive type of repair.

FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
18. (p. 366) Layout needs to be designed so as to eliminate unnecessary and excessive employee
movement.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
19. (p. 366) Grid layout is the layout more typically found in upscale department stores.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
20. (p. 367) Leasing is an option with a considerably lower initial cash outlay, and it is often the
only feasible choice for new businesses.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
21. (p. 342) For small business location issues, there are two basic "where" questions to be
considered
A. Where are my customers? Where should I be?
B. Where are my customers? Where are my suppliers?
C. Where are the raw materials? Where are the finished products?
D. Where are the sales? Where are the profits?
There are two basic "where" questions to be considered. The first one is, "Where are my
customers?" The second question is, "Where should I be?"

Difficulty: Hard
22. (p. 342) The distribution channel of manufacturers to the consumer is referred to as
A. wholesaler marketing.
B. direct marketing.
C. middlemen sales.
D. agent-buyer relationship.
Figure 11.1 lists the typical distribution channels that may be used to get to the consumer, which
include direct marketing or direct selling; they work equally well for manufacturers of goods and
for services.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
23. (p. 342, 344, 348) Which of the following is NOT a form of direct marketing?
A. Word-of-mouth
B. Telemarketing
C. Guerilla marketing
D. Wholesalers
A wholesaler is a middleman business which buys (typically in large quantities) and sells
(typically in smaller quantities) to businesses rather than consumers.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
24. (p. 342) _____ is usually the first technique an entrepreneur uses to get customers.
A. Internet
B. Guerilla marketing
C. Word-of-mouth
D. Telemarketing
Word-of-mouth is a means of spreading information about your business through the comments
friends and customers make to other potential customers.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
25. (p. 342) One method of spreading information about one's business through the comments
friends and customers make to other potential customers is called
A. word-of-mouth.
B. guerilla marketing.
C. telemarketing.
D. direct sales.
Word-of-mouth is a great way to get customers and is usually the first technique an entrepreneur
uses.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
26. (p. 342) Which of the following is NOT a method of direct selling?
A. Vending machine
B. Word-of-mouth
C. Leasing space at a craft fair
D. Industrial sales
Word-of-mouth is a means of spreading information about your business through the comments
friends and customers make to other potential customers.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
27. (p. 343) Which of the following direct sales methods offer the flexibility of having your product
available around the clock and at convenient locations?
A. Leasing space at a craft fair
B. Farmers' markets
C. Vending machines
D. Door-to-door sales
Vending machines are typical for less expensive, convenience products.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
28. (p. 344) Which of the following is NOT a form of direct mail?
A. Catalogs
B. E-mails
C. Faxes
D. Vending machines
Vending machines are a form of direct sales.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
29. (p. 344) Which of the following are more modern forms of direct mail?
A. Catalogs and e-mailing
B. Direct faxing and e-mailing
C. Sales letters and e-mailing
D. Postcards and direct faxing
Direct faxing and direct e-mailing are more modern forms of direct mail.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
30. (p. 344) What is perhaps the greatest challenge of the direct mail approach?
A. The need for adequate preparation before selling
B. The need for writing and photography skills
C. The need to find the right market for your offering
D. A way to get customers' attention
Perhaps the greatest challenge is the need to find the right market for your offering. In direct
mail, market translates into getting the right mailing list or sales vehicle.

Difficulty: Medium
31. (p. 345) Which of the following statements about catalogs is true?
A. Typically, the number of catalogs you will have to order is 10,000 at a minimum.
B. Creating and disseminating a catalog online saves you the cost of printing and mailing.
C. Most full-time entrepreneurs typically try to get their products into existing catalogs.
D. Depending on the size and quality of the catalog, costs for print versions start at around $2
each.
Depending on the size and quality of the catalog, costs for print versions start at around 50 cents
each and can rapidly go up to $2, $5, or more. Typically, the number of catalogs you will have to
order is 5,000 at a minimum. Most part-time entrepreneurs typically try to get their products into
existing catalogs.

Difficulty: Medium
32. (p. 346) A _____ is a set of goods or services that consists of only one or a few items.
A. customer-managed inventory
B. vendor-managed inventory
C. microinventory
D. just-in-time inventory
In microinventories, you try to buy your product or prepare your service only after you get an
order.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
33. (p. 346) A _____ is having just enough product on your shelves to meet the immediate
purchases; this usually requires frequent shipment from your supplier.
A. macroinventory
B. in-process inventory
C. microinventory
D. just-in-time inventory
A just-in-time inventory is just having enough product on your shelves to meet the immediate
purchases. This usually requires frequent shipment from your supplier.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
34. (p. 346) Which of the following is the least expensive form of direct mail?
A. Catalogs
B. Videos
C. Direct faxing
D. E-mail
E-mail is one of the least expensive forms of direct mail, and the cost per recipient is, by far, the
lowest.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
35. (p. 346) Which of the following is the most expensive form of direct marketing?
A. E-mail
B. Telemarketing
C. Brochures
D. Leaflets
While most consumers find this method particularly annoying, telemarketing still remains a
viable form of direct marketing because it works. It is, however, the most expensive form of
direct marketing.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
36. (p. 346) Which of the following is NOT a requirement of the national law related to e-mailing?
A. Do not in any way falsely misrepresent who you are.
B. For direct e-mailing, sender must use harvested e-mail addresses.
C. All emails should allow recipient the opportunity to "opt-out."
D. Do not in any way falsely misrepresent where the e-mail is from.
Randomly generated e-mail addresses or harvested e-mail addresses are not to be used.

Difficulty: Hard
37. (p. 346) Contact via telephone for the express purpose of selling a product or service is called
A. direct response advertising.
C. telemarketing.
D. multichannel marketing.
Telemarketing remains a viable form of direct marketing because it works.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
38. (p. 346) Telemarketing can either be _____ or _____.

A. in person; on the phone
B. by fax; e-mail
C. door-to-door; direct response advertising
D. inbound; outbound
Telemarketing can either be inbound (customer calls company) or outbound (company calls
customer).
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
39. (p. 347) In _____, you place an ad in a magazine, newspaper, radio, billboard, or television that
includes a phone number, e-mail, or snail-mail address, and wait for the orders to come in.
A. telemarketing
B. direct mail sales
C. guerilla marketing
D. direct response advertising
Direct response advertising involves placing an advertisement in a magazine or newspaper, on

television or radio, or in any other media. The ad contains an order blank with a phone number
and e-mail or regular mail address with the intent of having the customer place an immediate
order.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
40. (p. 347) Which of the following is the cheapest form of direct response advertising?
A. Billboard
B. Radio, 30-second spot
C. Magazine newsweekly, 4-color page
D. Newspaper daily, 1/3 black and white page
Table 11.1 lists the cost per 1,000 for various forms of direct response advertising. Billboard is
the cheapest amongst the options given in this question, at $2.61.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
41. (p. 347) Which form of direct response advertising allows for very specific targeting and offers
an appropriate place for direct response advertising for business-to-business selling?
A. Television
B. Radio
C. Newspaper
D. Magazines
A magazine allows for very specific targetinga hobby, sporting interest, a certain age, or other
demographic groupand often offers classified type ads (less expensive) or multipage, full color
ads (much more expensive). Magazines are also very appropriate places for direct response
advertising for business-to-business selling. Virtually every industry, trade, and profession has a
magazine dedicated to it.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
42. (p. 347) Which of the following direct response advertising forms allows for specific
geographic segmentation?
A. Newspapers
B. Magazines
C. National television
D. Home shopping networks
Newspapers allow geographic segmentation; that is, they are a great source if you want to attract
people in a specific geographic region (think restaurant, day care center, and the like).
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
43. (p. 348) What form of direct response advertising provides both geographic and demographic
segmentation, though the audience for this medium is generally highly distracted?
A. Television
B. Radio
C. Magazines
D. Newspapers
Radio ads provide both geographic and demographic segmentation; if you do custom designed
cowboy boots or train horses, a radio ad on the local country western station might be just the
right place. On the other hand, radio audiences are generally highly distracted; people listen to
the radio while driving, or doing housework or other tasks and might not be able to drop
everything to write down your phone number.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
44. (p. 348) The use of creative and relatively inexpensive ways to reach your customers with
techniques such as door-knob hangers and flyers under windshield wipers is called
A. multichannel marketing.
C. direct sales.
D. direct mail.
Guerilla marketing is a term for unusual and nearly free advertising.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
45. (p. 348) _____ is a form of direct response advertising that reaches local people but does not
permit a lot of details.
A. Radio
B. Billboard
C. Magazine
D. Newspaper
Billboards reach local people but do not permit a lot of details.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
46. (p. 349) The use of several different channels to reach your customers, for example, a Web site,
direct mail, and traditional retailing is called
A. guerilla marketing.
B. Internet marketing.
C. multichannel marketing.
D. direct sales.
The term multichannel marketing refers to using several outlets for contacting your customers.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
47. (p. 349) This form of marketing allows your customers to contact you in the way they feel the
most comfortable.
A. Guerilla marketing
B. Multichannel marketing
C. Internet marketing
D. Direct sales
The term multichannel marketing refers to using several outlets for contacting your customers. If
you include in your classified ad your phone number, your Web site, and your e-mail address,
then you are a multichannel marketer. One customer may pick up the phone. Others will e-mail
or browse your Web site. This simply allows your customers to contact you in the way they feel
most comfortable.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
48. (p. 350) With direct marketing, one option to consider when you are doing quantity shipping is
A. the retailer.
B. the U.S. Postal Service.
C. a fulfillment center.
D. the wholesaler.
A fulfillment center is a company that will warehouse your products and fill your customers'
orders for you.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
49. (p. 350) A company that will warehouse your products and fill your customers' orders for you is
called
A. a retailer.
B. the U.S. Postal Service.
C. fulfillment center.
D. a wholesaler.
With direct marketing, one option to consider when you are doing quantity shipping is a
fulfillment center.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
50. (p. 350) The end user of a product or service is called a(n)
A. consumer.
B. agent.
C. wholesaler.
D. retailer.
Intermediaries provide the service of getting the product to the end consumer.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
51. (p. 350) A middleman business which sells to consumers or end-users of a product is called
a(n)
A. manufacturer.
B. agent.
C. wholesaler.
D. retailer.
Wholesaler, retailer, and agent, along with distributors and a dozen or so others, are commonly
referred to as intermediaries.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
52. (p. 350) A middleman business which buys and sells to businesses rather than consumers is
called a(n)
A. manufacturer.
B. agent.
C. wholesaler.
D. retailer.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
53. (p. 350) Identify the term for any form that assists in getting your product to your end
customer.
A. Electronic malls
B. Intermediaries
C. Born internationals
D. Traffic generators
Intermediaries frequently small businesses themselvesprovide the service of getting the

product to the end consumer, including such functions as inventory control, advertising and
promotion, delivery and warranty services, to name a few.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
54. (p. 350) A middleman business which represents a manufacturer's products or services to other
business-to-business middleman firms is called a(n)
A. retailer.
B. wholesaler.
C. agent.
D. supplier.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
55. (p. 351) Who can afford to take a chance on unknown firms or products due to low overheads
and unlimited shelf space?
A. E-tailers
B. Wholesalers
C. Retailers
D. Fulfillment centers
An e-tailer is an electronic retailer; a store that exists only on the Internet.

Bloom's: Knowledge
Difficulty: Easy
56. (p. 351) One suggestion for finding out which distribution channel is correct for your product is
to
A. start at the end and work your way up by asking each link from whom they buy.
B. ask the competitors.
C. explore what regulations are required from the small businesses.
D. ask the customers who do they prefer buying the products from.
How do you find out which distribution channel is correct for your product? One suggestion is to
start at the end and work your way up by asking each link from whom they buy.

Difficulty: Hard
57. (p. 351) A store that exists only on the Internet is called a(n)
A. wholesaler.
B. e-tailer.
C. agent.
D. electronic manufacturer.
An e-tailer is an electronic retailer.

Bloom's: Knowledge
Difficulty: Easy
58. (p. 352) A new firm that opens a Web site immediately, thus being exposed to customers around
the world is called
A. freight forwarders.
B. indirect exporters.
C. born internationals.
D. e-tailers.
Because of the Internet, once a company has a Web site, it is essentially an international
business, a whole new breed of firms known as born internationals.

Bloom's: Knowledge
Difficulty: Easy
59. (p. 352) Putting together an export strategy involves answering all of the following questions
EXCEPT
A. where should we go?
B. whom do we contact over there?
C. are we ready?
D. which employees do we send?
Putting together an export strategy involves answering three questions:

1. Are we ready?
2. Where should we go?
3. Whom do we contact over there?

Difficulty: Medium
60. (p. 352) Exporting using middlemen such as agents or export management companies is
referred to as
A. indirect exporting.
B. freight forwarding.
C. e-tailers.
D. high credit risk exporting.
With indirect exporting, you use agents, export management companies, or export trading
companies as intermediaries to handle most of the exporting process.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
61. (p. 352) All of the following are examples of using middlemen for indirect exporting EXPECT
A. export management companies.
B. agents.
C. export trading companies.
D. fulfillment centers.
If you want to use outside experts, there are three intermediaries who can help. With indirect
exporting, you use agents, export management companies, or export trading companies as
intermediaries to handle most of the exporting process.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
62. (p. 353) Firms specializing in arranging international shipmentspackaging, transportation, and
paperwork are called
A. born internationals.
B. e-tailers.
C. direct exporters.
D. freight forwarders.
Freight forwarders are specialists in export-related activities including tariff schedules, shipping,
insurance, packing, transportation arrangements, customs clearing, and other export details.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
63. (p. 354) Which of the following can be exercised only when presented with specified shipping
documents?
A. Documentary drafts
B. Letter of credit
C. Airway bill
D. Bill of lading
There are a variety of payment procedures available. The easiest for you is to require up-front
cash payment prior to shipment. This eliminates your risk, but puts the customer at risk.
Providing credit to your customers reverses the risk, and puts it all on you. Both of these are
possible methods of receiving payments, but less often used. More typical methods include
letters of credit or documentary drafts.

Bloom's: Knowledge
Difficulty: Medium
64. (p. 354) A(n) _____ is a document issued by a bank that guarantees a buyer's payment for a
specified period of time upon compliance with specified terms.
A. documentary draft
B. letter of credit
C. import document
D. freight document
There are a variety of payment procedures available. The easiest for you is to require up-front
cash payment prior to shipment. This eliminates your risk, but puts the customer at risk.
Providing credit to your customers reverses the risk, and puts it all on you. Both of these are
possible methods of receiving payments, but less often used. More typical methods include
letters of credit or documentary drafts.

Bloom's: Knowledge
Difficulty: Medium
65. (p. 356) For many entrepreneurs, their hometown is their first choice for the location of their
business because of all of the following EXCEPT
A. convenience and a familiar setting.
B. elimination of a lot of possible family issues.
C. local government offering subsidized locations to local businesses.
D. their knowledge about the market or potential customers.
The first choice, and often only choice, for many entrepreneurs is their hometown because it
offers convenience and a familiar setting, and it eliminates a lot of possible family issues. There
may also be valid business reasons for this choice: The local banker knows you and is more
likely to loan you money; you know your marketthe potential customers in the areaand
understand their wants and needs; you have seen an unmet need that you can fill; and, for many
entrepreneurs, friends and family are often the first customers and are great at spreading the word
about your business.

Difficulty: Medium
66. (p. 357-358) Restaurants and barbershops are examples of which of the following locations for
services?
A. Client's location
B. Mutually accessible location
C. Your firm's location
D. Competitor's location
Barbershops, dentist offices, video rental stores, and restaurants are services typically located at a
site that is extremely convenient for the client and reasonably so for the owner and employees.
AACSB: Analytic
Difficulty: Medium
67. (p. 358) Identify this type of service in which face-to-face meetings with the client are
infrequent.
A. Mutually accessible location
B. Remote location
C. Client's location
D. Competitor's location
There are three typical locations for services: at the client's location, at a mutually accessible
location, and at your firm's location. In a remote location, face-to-face meetings with the client
are infrequent.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
68. (p. 359) When an existing firm with the correct manufacturing capabilities makes your product
for you, it is called
A. contract manufacturing.
B. sheltered workshops.
C. e-tailing.
D. freight forwarding.
In contract manufacturing, a firm with the capabilities to produce your product is contracted to
manufacture it for you, usually for a flat per unit fee and a possible setup charge.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
69. (p. 359) These can be used to perform light manufacturing or assembly sort of business.
A. Contract manufacturing
B. E-tailing
C. Sheltered workshops
D. Freight forwarding
A sheltered workshop is a nonprofit organization or institution that provides business services by

using handicapped or rehabilitated workers.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
70. (p. 359) For high customer contact businesses, which of the following is NOT a critical site
selection consideration?
A. Traffic
B. Customer ease
C. Cost potential
D. Competition
For businesses with high customer contact, there are three critical site selection considerations:
traffic, customer ease, and competition.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
71. (p. 359) Which of the following is a nonprofit organization or institution that provides business
services by using handicapped or rehabilitated workers?
A. Contract manufacturing
B. E-tailing
C. Sheltered workshops
D. Freight forwarding
Sheltered workshops can be used to perform light manufacturing or assembly sorts of businesses.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
72. (p. 359) Which of the following is an example of a high customer contact form of business?
A. Manufacturing businesses
B. Legal offices
C. Headquarters of client location-based services
D. Remote location services
Generally low customer contact businesses are manufacturing businesses, the headquarters of
client location-based services, or remote location services.
AACSB: Analytic
Difficulty: Easy
73. (p. 361) Other businesses that bring customers to the area are called
A. traffic generators.
B. competitors.
C. nonprofit organizations.
D. local government agencies.
Traffic generators are other businesses that draw customers to the area and may include
supermarkets, office complexes, schools, and malls.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
74. (p. 362) All of the following are examples of low customer contact businesses EXCEPT
A. industrial parks.
B. business incubators.
C. empowerment zones.
D. retail establishments.
Retail establishments are an example of high customer contact businesses.
AACSB: Analytic
Difficulty: Easy
75. (p. 364) Which of the following statements about HVAC is false?
A. It can be the most expensive type of repair.
B. For any type of equipment, you want the landlord to at least guarantee the first six months of
operation.
C. It is one of the types most likely to go wrong.
D. If the location has a central air system so everyone shares the same air conditioner and heating
equipment, it is the landlord's responsibility.
For any type of equipment, you want the landlord to at least guarantee the first year of operation.

Difficulty: Hard
76. (p. 364) _____ are permanent changes made to the location to fit your business's needs.
A. Build-ins
B. Improvements to buildings
C. Leasehold improvements
D. Improvements to land
"Leasehold improvements" are permanent changes made to the location to fit your business's
needs.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
77. (p. 364) "Tenant improvement allowances" or "construction allowances" are rent dollars
typically
A. $1 to $10 a square foot.
B. $5 to $25 a square foot.
C. $10 to $50 a square foot.
D. $15 to $75 a square foot.
"Tenant improvement allowance" or "construction allowance" are rent dollars (typically $5 to

$25 a square foot) they agree to let you put into improving your location.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
78. (p. 364) _____ is a concession which covers the time while you prepare your location prior to
opening.
A. Rent-free use period
B. Leasehold improvement
C. Construction allowance
D. Tenant improvement allowance
"Rent-free use period" is a concession which covers the time while you prepare your location
prior to opening.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
79. (p. 365) Which of the following statements about handling an early termination is false?
A. The bailout clause lets you out of the lease if sales do not meet an agreed-to level.
B. If your business falters, you are obligated to continue paying your monthly rent and fees for
the duration of the lease.
C. In terms of a three-year lease, with a one-year cap you are obligated to pay one year's more
rent.
D. In terms of a three-year lease, if you close down after only six months, you are obligated to
pay 30 more months' rent.
To understand a cap, think about a three-year lease. If you close down after only six months, you
are still obligated to pay 30 more months' rent. With a one-year cap you are only obligated to pay
6 months' more rent.

Difficulty: Medium
80. (p. 366) In the _____ layout, material flows in on one side of the operation and continues to the
other end of the operation.
A. grid
B. production line
C. free-form
D. process
Most assembly manufacturing in the production line layout way, often with conveyors moving
subassemblies from one station to another.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
81. (p. 366) Which of the following formats is much more appropriate for low-volume, flexible
manufacturing?
A. Grid layout
B. Production line
C. Free-form layout
D. Process layout
Process layout, groups similar machines/or functions together, not unlike a typical machine shop.
This format is much more appropriate for lower-volume, flexible manufacturing.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
82. (p. 366) Identify the layout by which most assembly manufacturing is done.
A. Production line
B. Process
C. Grid
D. Free-form
Most assembly manufacturing in the production line layout way, often with conveyors moving
subassemblies from one station to another.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
83. (p. 366) This form of layout has aisles running from the front of the store to the back like the
typical grocery.
A. Production line
B. Process
C. Grid
D. Free-form
The grid layout is a very efficient and organized layout although it lacks some visual impact.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
84. (p. 366) What is the term used for the layout of a store that is laid out in sections with aisles that
angle or meander through the store?
A. Production line
B. Process
C. Grid
D. Free-form
The free-form layout is the layout more typically found in upscale department stores, clothing
stores, and the like.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
85. (p. 366) Which of the following layouts is more typically found in upscale department stores?
A. Grid layout
B. Production line
C. Free-form layout
D. Process layout
The free-form layout is the layout more typically found in upscale department stores, clothing
stores, and the like.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
86. (p. 367) Which of the following is a disadvantage of leasing?

A. It is costly and slow
B. You are usually limited in the renovations you can do
C. Any remodeling that needs to be done may overshadow any time or money savings
D. It is an option with a considerably high initial cash outlay
One of the main downsides of leasing is that you are usually limited in the renovations you can
do.

Difficulty: Hard
Scenario: Simulate Strategy

While teaching strategy at ABC University, Jessica developed an interactive strategy simulation
game to teach and reinforce the strategy concept to students in her class. She saw that students
were able to grasp the concepts much better playing the game, rather than from reading the book.
Jessica tinkered with the game for two years in her class to perfect it and remove the glitches.
Her thought was that if her students were learning more efficiently with this game, then could
other students at other universities benefit as well? The result was the launch of Simulate
Strategy, Inc.
87. (p. 342) Knowing the market of professors at other universities well, Jessica has decided to
approach them for her product sales. This method can be described as
A. direct marketing.
B. going international.
C. using middlemen.
D. wholesaling.
Word-of-mouth, a form of direct marketing, is a great way to get customers and is usually the
first technique an entrepreneur uses.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
88. (p. 346) Given that Jessica has a very limited budget, which of the following forms of direct
mail might be least expensive?
A. Brochures
B. Sales letters
C. E-mailing
D. Post-cards
E-mail is one of the least expensive forms of direct mail, and the cost per recipient is, by far, the
lowest.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
89. (p. 347) If Jessica places an advertisement in "Chronicle of Higher Education," a leading
publication for University professors about her product with her e-mail and contact information,
it can be described as
A. guerilla marketing.
B. telemarketing.
C. direct sales.
D. direct response advertising.
In direct response advertising, you place an ad somewheremagazine, newspaper, radio,

billboard, or television, for examplethat includes a phone number, e-mail address, or snail-
mail address and wait for the orders to come in.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
90. (p. 352) Some of Jessica's students suggested that she create a Web site for her product and
company. Being a new company immediately starting a Web site, her company can be called
A. freight forwarders.
B. born international.
C. a middleman.
D. an exporter.
A born international is a new firm that opens a Web site immediately, thus being exposed to
customers from around the world.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Essay Questions
Chapter 12 Marketing Plans: Saying How You'll Get Sales Answer Key

1. (p. 374) A marketing plan is required to convince a bank or private investor to loan you money or
a store or distributor to carry your product. It is not required if you plan to use your own personal
savings and direct marketing.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
2. (p. 374) A systematic written plan of all phases of marketing for a business is known as a
marketing plan.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
3. (p. 374) Normally, the first step in creating the business plan is creating the marketing plan.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
4. (p. 374) Marketing research can show what the competitors are doing correctly but cannot
identify their weaknesses.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
5. (p. 374) Marketing research can verify the size of the potential market.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
6. (p. 374) Research falls into two major categories: secondary and post-secondary research.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
7. (p. 374) Secondary research is often free and quick.

TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
8. (p. 374) Vince is a marketing research executive for a retail firm. He has been assigned the task
of identifying the reason for low sales of its products in a specific area compared to other areas
of the same city. Vince should conduct secondary marketing research to get accurate
information.
FALSE

Difficulty: Medium
9. (p. 374) Glen is using the information available on the Internet, to conduct a research on "Retail
Marketing." Glen is conducting a primary research.
FALSE

Difficulty: Medium
10. (p. 376) The easiest way of finding the selling prices of different products is through secondary
research.
TRUE
AACSB: Analytic
Difficulty: Easy
11. (p. 377) Primary data are specific to the problem you are solving.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
12. (p. 378) Focus group method refers to gathering data by simple observation.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
13. (p. 378) Ethnographic research is an observational method of collecting data.

TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
14. (p. 379) While conducting a survey, asking questions to people on the phone is the most
expensive method.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
15. (p. 379) With close-ended questions it is much easier to compare groups and to statistically
analyze.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
16. (p. 379) Questionnaires in which respondents have to choose between age levels e.g. below 20,
20 to 29, 30 to 39 etc. can be categorized as dichotomous questions.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
17. (p. 379-380) Open-ended questions are not useful in marketing research since they can be
answered in many ways.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
18. (p. 379) Data gathered through close-ended questions provide more information than those
collected through open-ended questions.
FALSE
AACSB: Analytic
Difficulty: Easy
19. (p. 382) Differential advantage occurs as a result of something a company does in either -
product, price, place, or promotion.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
20. (p. 382) Differential advantage is also known as competitive advantage.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
21. (p. 384) With prestige pricing, people will pay more for a particular name brand because of the
perceived benefits of using the brand.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
22. (p. 384) Promotion can create a differential advantage, although more likely it will be the means
by which you convey this advantage to the customers.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
23. (p. 385) An example of demographic segmentation is dividing the market based on whether
people live in the city or rural areas.
FALSE
AACSB: Analytic
Difficulty: Medium
24. (p. 387) Generally, marketers choose one of three targeting strategies: cost, differentiation, and
focus.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
25. (p. 387) A differentiated strategy is useful when there is really no difference in the reasons why
consumers buy your products.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
26. (p. 387) When a firm chooses one particular segment on which to focus all its efforts, the firm is
using a concentration strategy.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
27. (p. 387) The primary reason for targeting is that you don't waste a lot of effort and money.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
28. (p. 388) Identifying the target market for the product or service, gives us an answer to "how
crowded the market is."
FALSE
AACSB: Analytic
Difficulty: Medium
29. (p. 388) Direct competition for a firm are those products that people use if they do not purchase
the firm's product or service category.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
30. (p. 390) For a new company the marketing plan provides the justification for going into the
market.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
31. (p. 390) A written marketing plan does not include financial projections if it is not a part of an
entire business-plan.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
32. (p. 391) The creation of a marketing plan is a one-time process.
FALSE
AACSB: Analytic
Difficulty: Easy
33. (p. 374) Examining the current situation includes all of the following EXCEPT
A. what your existing competition is doing.
B. how you define your product or service.
C. how will you solve employee grievances.
D. to whom will you sell.
The marketing plan examines your current situation, including what your existing competition is
doing, and states how you define your product or service, to whom you will sell it, at what price,
with what advertising, and how you will get it to your customers.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
34. (p. 374) Creating a(n) _____ plan is the first step in putting together your business plan.
A. marketing
B. operational
C. financial
D. human resource
Creating the marketing plan is the first step in putting together your business plan.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
35. (p. 374) _____ refers to systematic collection and interpretation of data to support future
marketing decisions.
A. Marketing plan
B. Marketing research
C. Socialization
D. Sales forecasting
Marketing research is defined as the systematic collection and interpretation of data to support
future marketing decisions.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
36. (p. 374) _____ research is research gathered to answer a specific marketing question.
A. Primary
B. Post secondary
C. Secondary
D. Consumer
Primary research is research gathered to answer a specific marketing question.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
37. (p. 374) Ethan is a marketing research executive for Coca Cola. Recent sales figures suggest
that the sales for Coke have fallen drastically in Cincinnati, Iowa. The regional manager wants
Ethan to conduct a market research in Cincinnati. Which of the following research should Ethan
use?
A. Post secondary
B. Secondary
C. Primary
D. Closed
Primary research refers to new information collected to solve a problem at hand or answer
current questions.

Difficulty: Medium
38. (p. 374) _____ refers to information already collected for some other purpose than the current
problem.
A. Primary data
B. Open-ended research
C. Secondary data
D. Closed research
Secondary research is research already gathered for some other reason than your specific
question, but can be just as useful.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
39. (p. 374) Which of the following is a problem with secondary data?
A. It may not be economical
B. It may not be timely
C. It may be too user-friendly
D. It may be competitive
Problems with secondary data include that the data may not be timely and you don't always
know why the data were gathered and whether they were gathered correctly.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
40. (p. 374) The challenge in _____ is finding data.

A. primary research
B. secondary analysis
C. ethnographic research
D. focus group
The challenge in secondary analysis is finding data because secondary research is about finding
relevant information from sources that have gathered the information for a different purpose.
AACSB: Analytic
Difficulty: Medium
41. (p. 378) Data gathered by simple observation seeing what customers do rather than asking them
refers to
A. focus group.
B. survey methodology.
C. ethnographic research.
D. secondary research.
There are a number of methods for gathering data. One category consists of observation methods
where the researcher could go to the local grocery store and watch people shop. He/She could
make lists of the products they choose and the time they spend making decisions. This is called
ethnographic research.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
42. (p. 378) Noel is a management student who needs to conduct primary data for his project on
"Retail Marketing." He goes to a local department store and observes customers. He makes a
note of the different products the customers choose, and the time they spend in making decisions
in choosing different products. Which of the following best explains this type of research?
A. Focus group
B. Survey
C. Secondary
D. Ethnographic
There are a number of methods for gathering data. One category consists of observation
methods, where the researcher could go to the local grocery store and watch people shop. He/She
could make lists of the products they choose and the time they spend making decisions. This is
called ethnographic research.

Difficulty: Medium
43. (p. 378-379) Which of the following is an informal approach and a good way to test your
questions to make sure your audience understands exactly what you are asking?
A. Ethnographic research
B. Survey
C. Focus group
D. Branching
Focus-group, a more informal approach, is a good way to test your questions to make sure your
audience understands exactly what you are asking.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
44. (p. 378) A form of data gathering from a small group led by a moderator is called
A. focus group.
B. survey methodology.
C. ethnographic research.
D. secondary research.
Focus group is a method in which a small group (8 to 20 people) is asked to meet to discuss a
series of questions about a particular product or service. A skilled researcher, who can make sure
the questions are asked the right way and the data are systematically collected, conducts these
meetings.
AACSB: Analytic
Difficulty: Medium
45. (p. 379) A data collection method using a questionnaire is called
A. secondary research.
B. a survey.
C. a focus group.
D. ethnographic research.
Survey is a more typical data-gathering tool where data is gathered by using some form of
questionnaire.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
46. (p. 379) Which of following is the most expensive survey method?
A. Mail
B. Phone
C. In-person
D. On line
In person tends to be the most expensive method, with telephone coming in second, and mail the
least expensive.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
47. (p. 379) This form of survey has the lowest return rate and does not allow for much flexibility.
A. Mail
B. Face To Face
C. Telephonic
D. Internet
Mail has the lowest return rate and does not allow for much flexibility.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
48. (p. 379) Which of the following are the two major types of questions used in surveys?
A. Formal and informal
B. Primary and secondary
C. Open-ended and close-ended
D. Personal and professional
There are two major types of questions used in surveys: open- and close-ended questions.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
49. (p. 379) Identify the form of questions that gives you several predetermined groups from which
to choose.
A. Categorical questions
B. Scalar questions
C. Dichotomous questions
D. Open-ended questions
Categorical questions give you several predetermined groups from which to choosefor
example, age levels (under 20, 20 to 29, 30 to 39, etc.).
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
50. (p. 380) These questions provide data that are more difficult to tabulate and the answers can be
difficult to compare.
A. Categorical questions
B. Open-ended questions
C. Scalar questions
D. Dichotomous questions
Open-ended questions provide data that are more difficult to tabulate; they take considerably
more time to ask and evaluate, and answers can be difficult to compare.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
51. (p. 379) Questions that have only two possible choices are called _____ questions.
A. open-ended
B. categorical
C. dichotomous
D. scalar
Questions that have only two possible choices are known as dichotomous questions.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
52. (p. 379) Jeff is a market research executive who has prepared questionnaires for his
respondents. The questionnaires allow respondents to answer in either a "Yes" or a "No." This
questionnaire can be categorized under which of the following question type?
A. Open-ended
B. Categorical
C. Scalar
D. Dichotomous
Questions that have only two possible choices are known as dichotomous questions.

Difficulty: Medium
53. (p. 379) If you are asked a question: What is your ethnicity? White, African American,
Hispanic, Asian, other, it reflects a _____ question.
A. open-ended
B. categorical
C. dichotomous
D. scalar
Questions that are answered by selecting the proper category are called categorical questions; for
example, "What is your ethnicity? White, African American, Hispanic, Asian, American Indian,
Other."
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
54. (p. 379) Questions that allow respondents to express themselves as they choose are called _____
questions.
A. open-ended
B. categorical
C. dichotomous
D. scalar
Questions that allow respondents to express themselves as they choose are referred to as open-
ended questions.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
55. (p. 379) With _____ questions, it is much easier to compare groups and statistically analyze.
A. informal
B. open-ended
C. close-ended
D. subjective
With close-ended questions, which can be answered only in certain ways, it is much easier to
compare groups and to statistically analyze.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
56. (p. 379) _____ questions can help you find new niches and perfect your product or service
before you introduce it.
A. Categorical
B. Dichotomous
C. Open-ended
D. Scalar
Open-ended questions, which can be answered in many ways, can help you find new niches and
perfect your product or service before you introduce it.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
57. (p. 379) Which of these is not a close-ended question type?

A. Scalar
B. Dichotomous
C. Categorical
D. Subjective
Close-ended questions include scalar, dichotomous, and categorical question types.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
58. (p. 379) Open-ended questions are best for all of these EXCEPT
A. gathering preliminary information.
B. when samples are small.
C. comparing groups and statistical analysis.
D. when there are data that is difficult to get any other way.
With close-ended questions, it is much easier to compare groups and to statistically analyze.
AACSB: Analytic
Difficulty: Hard
59. (p. 381) One of the most important pieces of the marketing plan that determines your
profitability and ultimately whether you will stay in business or not is
A. knowing what your sales will be.
B. regulations that affect your business.
C. estimating the human resource need.
D. having the succession plan in place.
One of the most important pieces of the marketing planand of the business planis knowing
what your sales will be.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
60. (p. 382) A Web-based program that uses artificial intelligence technique to automate tasks such
as searches is called a(n)
A. e-tailer.
B. bot.
C. blogger.
D. tag identification.
Bot is a Web-based program that uses artificial intelligence techniques to automate tasks such as
searches.
AACSB: Use of Information Technology; Analytic

Bloom's: Knowledge
Difficulty: Easy
61. (p. 382) The characteristic that separates one company from another in product, price,
promotion and/or distribution, is referred to as
A. differential advantage.
B. sales forecasting.
C. marketing research.
Differential advantage is the characteristic that separates one company from another in product,
price, promotion, and/or distribution.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
62. (p. 382) Which of the following is also known as competitive advantage?
A. Marketing strategy
B. Sales forecasting
C. Differential advantage
D. Marketing research
What makes your product or service different from the competition? In marketing terms, this is
called a differential advantage, or what strategists call a competitive advantage.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
63. (p. 385) Which of these represent the first step of a marketing plan?
A. Examining the current situation
B. Discussing the target market
C. Creating a detailed marketing strategy and objectives
D. Addressing the 4 P's
The components of a marketing plan are fairly straightforward. First you discuss your target
marketthe people who will be buying your product. Second, you explain your current situation
vis--vis your competition. In the third section, detail your marketing strategy and objectives.
Finally, you explicitly address the 4 Ps: product, promotion, price, and place.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
64. (p. 385) Which of these is the final step of a marketing plan?
A. Examining the current situation
B. Discussing the target market
C. Creating a detailed marketing strategy and objectives
D. Addressing the 4 P's
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
65. (p. 385) A marketing plan examines all of these areas EXCEPT
A. target market.
B. current situation.
C. marketing strategy and objectives.
D. employee issues involving product creation.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
66. (p. 385) The process of dividing the market into groups that have somewhat homogeneous
needs for a product or service is called
A. market segmentation.
B. sales forecasting.
C. marketing research.
Market segmentation is the process of dividing the market into groups that have somewhat
homogeneous needs for a product or service.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
67. (p. 385) When you divide the market you serve based on regions, such as, Northeast, Southeast,
and Midwest, it is called
A. personality segmentation.
B. benefit segmentation.
C. demographic segmentation.
D. geographic segmentation.
Geographic segmentation is market segmentation according to location.
AACSB: Analytic
Difficulty: Medium
68. (p. 385-386) When you divide your total market based on age and income, it is called
A. personality segmentation.
B. benefit segmentation.
C. demographic segmentation.
D. geographic segmentation.
Demographic segmentation is market segmentation according to age, income, ethnicity, or any

demographic variable.
AACSB: Analytic
Difficulty: Medium
69. (p. 386) An automobile company has different categories of cars for different types of
customers. The have segmented it as: speed cars, safety cars, capacity cars etc. Customers can
choose their cars accordingly. Which of the following best explains this type of segmentation?
A. Demographic
B. Geographic
C. Personality
D. Benefit
Benefit segmentation divides customers into groups based on what benefits they seek when
making product or service decisions.
AACSB: Analytic
Difficulty: Medium
70. (p. 387) Generally marketers choose one of these targeting strategies EXCEPT
A. undifferentiated.
B. concentrated.
C. differentiated.
D. cost-leadership.
Generally, marketers choose one of three targeting strategies: undifferentiated, differentiated,

and concentrated.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
71. (p. 387) A _____ is the population segment or segments that are likely to buy your product or
service.
A. trade area
B. target market
C. test market
D. national market
A target market is the population segment or segments that are/is likely to buy your product or
service.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
72. (p. 387) A(n) _____ strategy is useful when there is really no difference in the reasons why
consumers buy your products.
A. undifferentiated
B. concentrated
C. differentiated
D. demographic segmentation
An undifferentiated strategy is useful when there is really no difference in the reasons why
customers buy your products, that is, when it makes no sense to try to segment or target a
particular market.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
73. (p. 387) Which of the following strategy is ideal while selling bottled water in a beach on a hot
summer day?
A. Benefit segmentation
B. Concentrated
C. Differentiated
D. Undifferentiated
An undifferentiated strategy is useful when there is really no difference in the reasons why
customers buy your products, that is, when it makes no sense to try to segment or target a
particular market. While buying bottled water at a beach on a hot summer day, folks don't care
what brand of water it is, and they are unlikely to go someplace specific for the water.
AACSB: Analytic
Difficulty: Easy
74. (p. 387) A(n) _____ strategy is used when there is more than one market segment likely to need
a product or service.
A. undifferentiated
B. concentrated
C. differentiated
D. cost-leadership
A differentiated strategy is used when there is more than one market segment likely to need a
product or service.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
75. (p. 387) Snackos is a company that manufactures snacks. They advertise their products with the
catch phrase "Snackos, snacks with nutritious value and more for your money". What kind of
strategy are they following?
A. Differentiated strategy
B. Concentrated strategy
C. Undifferentiated strategy
D. Cost leadership strategy
A differentiated strategy is used when there is more than one market segment likely to need a
product or service.

Difficulty: Medium
76. (p. 387) A(n) _____ strategy is used when a firm chooses one particular segment on which to
focus all its efforts.
A. undifferentiated
B. concentrated
C. differentiated
D. cost-leadership
A concentrated strategy is used when a firm chooses one particular segment on which to focus all
its efforts.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
77. (p. 387) Maya runs a business of home-based new born baby wear through the Internet called
"First Memories". She targets her business at all first time mothers around the globe. Identify the
type of marketing strategy involved.
A. Differentiated strategy
B. Concentrated strategy
C. Undifferentiated strategy
D. Cost leadership strategy
A concentrated strategy is used when a firm chooses one particular segment on which to focus all
its efforts.

Difficulty: Medium
78. (p. 388) Which of these tools is useful in conducting a situation analysis?
A. SWOT analysis
B. Marketing research
C. Sales forecasting
D. Ethnographic research
SWOT analysis helps in considering your competition which is a key component in situational
analysis.
AACSB: Analytic
Difficulty: Medium
79. (p. 388) The key component in your situation analysis is to consider your
A. employees.
B. suppliers.
C. distributors.
D. competitors.
The key component in your situational analysis will be to consider your competition.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
80. (p. 388) In situation analysis, you need to consider those who provide the same product or
service, otherwise known as
A. promotional marketers.
B. direct competition.
C. your product distributors.
D. indirect competition.
Other firms that provide the same product or service as your firm are your direct competition.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
81. (p. 388) Companies that provide alternates that are dissimilar to your product/service that
consumers might choose to meet a similar need are called
A. direct competition.
B. simulators.
C. indirect competition.
D. promotional marketers.
Indirect competition are companies that provide alternatives that are dissimilar to your product/
service that consumers might choose to meet a similar need.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
82. (p. 388) Identifying the weaknesses of your competition would result in the identification of
_____ for your firm.
A. strengths
B. weaknesses
C. opportunities
D. threats
The piece of information identifying competition gives us is a chance to find out what its
strengths and weaknesses are. Weaknesses in particular can identify opportunities for our
company to excel.
AACSB: Analytic
Difficulty: Medium
83. (p. 389) Which of these is NOT one of the 4Ps?

A. Product
B. Price
C. Place
D. Plan
The 4P's include: Product, Place, Price, and Promotion.
AACSB: Analytic
Difficulty: Medium
84. (p. 389) An example or photo of your product or service is a great visual aid in helping you sell
your plan in your written market plan. This is an example of
A. defining your product.
B. defining your product price.
C. using a promotional tool for your product.
D. defining a distribution system for your product.
In defining your product, you need to describe all the details. An example or photo of your
product or service is a great visual aid in helping you sell your plan.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
85. (p. 390) A firm is planning to introduce a new product in the market. Which of the following
strategy includes determining the ideal medium through which the customers should be
educated?
A. Product
B. Placement
C. Pricing
D. Promotion
Determining the ideal method for reaching the target market is a part of advertising, which
comes under promotional strategy.
AACSB: Analytic
Difficulty: Easy
Scenario: Super Sports

Fred Fike has served as a guide for adventure sports such as kayaking and rock climbing, and is
an active climber and a professional bicycle racer. He has decided to venture into the business of
high-end bicycles under the banner Super Sports, Inc. Fred needs to explore the idea of location,
marketing, and financing. He has a pretty good idea of location, so he concentrates on marketing
issues.
86. (p. 374) Fred has received various different numbers from the local Chamber of Commerce and
Economic Development office on how big the potential market is. Which of these can verify the
size of the potential market for Fred?
A. Marketing research
B. Profit forecasting
C. Market segmentation
D. Location analysis
Marketing research is a systematic collection and interpretation of data to support future

marketing decisions. It can verify the size of the potential market.

Difficulty: Medium
87. (p. 374) The numbers and data offered to Fred by the Chambers of Commerce and Department
of Economic Development are called
A. open-ended research.
B. primary data.
C. close-minded figures.
D. secondary data.
Secondary research is research already gathered for some other reason than the specific question,
but can be just as useful.

Difficulty: Medium
88. (p. 379) If Fred decides to conduct a survey to collect data, compare groups, and statistically
analyze data, which of these questions should he avoid?
A. Scalar
B. Dichotomous
C. Open-ended
D. Categorical
With close-ended questions, which can be answered only in certain ways, it is much easier to
compare groups and to statistically analyze. Scalar, dichotomous, and categorical questions are
close-ended questions.
AACSB: Analytic
Difficulty: Hard
89. (p. 379) If Fred wants to find new niches and perfect his services before he opens Super Sports,
he should focus on which of these questions?
A. Scalar
B. Dichotomous
C. Open-ended
D. Categorical
Open-ended questions, which can be answered in many ways, can help you find new niches and
perfect your product or service before you introduce it.
AACSB: Analytic
Difficulty: Medium
90. (p. 385) In developing his marketing plan, Fred should know that _____ should be his first step.
A. conducting a situation analysis
B. identifying the target market
C. addressing the 4 Ps
D. detailing the marketing strategy and objectives
AACSB: Analytic
Difficulty: Medium
Essay Questions
Chapter 13 Small Business Accounting: Projecting and Evaluating Performance
Answer Key
1. (p. 402) One reason why accounting is important to a small business is that it shows how much
your business is worth.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
2. (p. 402) Financial accounting is forward-looking and attempts to predict the results of
management decisions.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
3. (p. 403) The accounting equation is simply stated as Assets = Liabilities - Owners' Equity.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
4. (p. 404) Expenses are the value given up to obtain something that you want.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
5. (p. 405) The primary reason to acquire and use a computerized accounting system in your
business is to ensure the accuracy of your accounting information.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
6. (p. 407) Payroll records help ensure that employment taxes are kept current.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
7. (p. 408) The final output of a computer system is a set of financial statements and reports.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
8. (p. 409-410) There are two formats for income statements: revenue-only format and, revenue and
expense format.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
9. (p. 411) One difficulty in understanding and interpreting the income statements is the dispute
over when to recognize revenues.
TRUE
AACSB: Analytic
Difficulty: Medium
10. (p. 412) Statement of cash flows is also referred to as the statement of financial position.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
11. (p. 413) Liquidity is a measure of the ability of a business to meet both short-term and long-
term obligations.
TRUE
AACSB: Analytic
Difficulty: Medium
12. (p. 413) Financial flexibility of a business is a matter of judgment, whereas financial strength is
an objective assessment.
FALSE
AACSB: Analytic
Difficulty: Medium
13. (p. 415) Cash flow statements can be either direct statements or indirect statements.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
14. (p. 419) Expendables are often fixed costs.

FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
15. (p. 420) Variable costs decrease if output increases.

FALSE
AACSB: Analytic
Difficulty: Medium
16. (p. 422) The first step in budgeting is to make a forecast of your future profits.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
17. (p. 426) The cost of goods sold budget shows the predicted cost of product actually sold during
the accounting period.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
18. (p. 428) It is common to create the budgeted income statement in only a fiscal period format.
TRUE
AACSB: Analytic
Difficulty: Medium
19. (p. 429) Variance analysis is the process of determining the effect of price and quantity changes
on revenues and expenses.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
20. (p. 432) Outsourcing requires that a decision be made whether the business should make a
component of its own product, or purchase the component from another business.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
21. (p. 402) Accounting is important to a small business for all of these reasons EXCEPT
A. banks, creditors, development agencies, and investors require it.
B. it provides easy-to-understand plans for business operations.
C. it makes it difficult for others to acquire your business.
D. it proves what your business did financially.
The availability of accounting information does not make the acquisition of a business difficult.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
22. (p. 402) Which of these is used by managers for planning and controlling?
A. Managerial accounting
B. Tax accounting
C. Financial accounting
D. Market accounting
Managerial accounting is forward-looking and attempts to predict the results of management

decisions.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
23. (p. 402) _____ is a formal, rule-based set of accounting principles and procedures intended for
use by outside owners, investors, banks, and regulators.
A. Managerial accounting
B. Tax accounting
C. Financial accounting
D. Market accounting
Financial accounting can be a highly valuable aid in decision making.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
24. (p. 402) Which of these is NOT identified as a most basic accounting concept?
A. Business entity
B. Costs and expenses
C. Going concern
D. Buy and sell
The most basic accounting concepts are business entity, going concern, accounting equation,
revenues, expenses, and costs, and information usefulness.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
25. (p. 403) Which of the following accounting concepts makes it possible to separate business
transactions from personal transactions?
A. Business entity
C. Going concern
D. Accounting equation
The business entity concept makes it possible to distinguish between money that a business
borrows, and money that is borrowed for personal needs.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
26. (p. 403) Which of these refers to the concept that a business is expected to continue in existence
for the foreseeable future?
A. Business entity
C. Going concern
D. Buy and sell
Accounting assumes that this year's business results will affect next year's, and that the intent of
business is to make money over a period of many years.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
27. (p. 403) Which of these represent the accounting equation?
A. Liabilities = Assets + Owners' Equity
B. Assets = Liabilities + Owners' Equity
C. Assets = Liabilities - Owners' Equity
D. Owners' Equity = Assets + Liabilities
Assets must equal the sum of liabilities and owners' equity.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
28. (p. 403) Going concern is the

A. legal obligation to give up things of value in the future.
B. accounting concept that implies that a business may continue in business even if it is sold to
other owners.
C. difference between assets and liabilities of a business.
D. value given up to obtain something that you want.
The going concern concept states that a business is expected to continue in existence for the
foreseeable future.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
29. (p. 404) A(n) ______ is something you owe someone else.
A. asset
B. liability
C. owners' equity
D. cash flow
A liability is a legal obligation to pay some amount at a time in the future.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
30. (p. 404) "_____" means that the value of the item can be realized, or must be paid as cash within
one year, while "_____" means that the asset will still be valuable more than one year in the
future, or that the business may take longer than one year to pay the amount owed.
A. Dated, current
B. Current, long-term
C. Current, dated
D. Long-term, current
"Current" means that the value of the item can be realized, or must be paid as cash within one
year. "Long-term" simply means that the asset will still be valuable more than one year in the
future, or that the business may take longer than one year to pay the amount owed.
AACSB: Analytic
Difficulty: Medium
31. (p. 404) The financial state of having more debt than assets means, you are
A. rich.
B. profitable.
C. bankrupt.
D. solvent.
Bankruptcy is a condition where liabilities are greater than assets resulting in an inability to pay
debts.

Difficulty: Medium
32. (p. 405) What do you call a decrease in owners' equity caused by consuming your product or
service?
A. Opportunity cost
B. Cost
C. Owners' equity
D. Expense
Expenses are reductions in owners' equity that recognize the value of goods (inventory) and
services (labor) used to produce your product or service.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
33. (p. 405) A(n) _____ is simply a record of transactions that are similar in nature.
A. report
B. description
C. account
D. narrative
Transactions are not actually entered directly into the balance sheet. Rather, an account is
created.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
34. (p. 405) The most commonly used small business accounting systems include all of these
EXCEPT
A. Quickbooks.
B. Peachtree.
C. Great Plains.
D. TaxCut.
TaxCut is a tax program from H&R Block.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
35. (p. 406) A regular and systematic reduction in income that transfers asset value to expense over
time is called
A. bankruptcy.
B. depreciation.
C. liquidity.
D. opportunity cost.
Fixed asset accounting automatically calculates and accumulates depreciation.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
36. (p. 406-407) An accounting system should accomplish all of the following tasks EXCEPT
A. provide a simple, easy-to-understand user interface.
B. have an exhaustive context-sensitive help function.
C. enforce security measures to reduce the opportunity for employee misuse or fraud.
D. avoid the export of financial data.
An accounting system should be able to export financial data in a form that can be used by your
accountant and can be imported into tax preparation and spreadsheet programs.
AACSB: Analytic
Difficulty: Medium
37. (p. 407) Fixed asset accounting
A. ensures that payroll and employment taxes are kept current.
B. automatically calculates and accumulates depreciation.
C. records if your business keeps surplus cash invested in securities.
D. records if your business has made improvements to leased property or equipment.
Payroll records ensure that payroll and employment taxes are kept current. Investments records
are used if your business keeps surplus cash invested in securities. Leasehold records are used if
your business has made improvements to leased property or equipment.
AACSB: Analytic
Difficulty: Medium
38. (p. 407) Which of the following accounting functions allows a business to keep track of what it
owes, make timely payments in order to capture prompt pay discounts, and maintain a good
credit rating?
A. Credit card sales
B. Accounts receivable records
C. Accounts payable records
D. Payroll records
Credit card sales function enables reconciling sales records with the amount of discount and
charge backs taken by a credit card provider. Accounts receivable records are used if you provide
credit to your customers. Payroll records ensure that payroll and employment taxes are kept
current.
AACSB: Analytic
Difficulty: Medium
39. (p. 407) Accurate and timely _____ are essential for making decisions concerning the extension
of credit. They also help produce accurate billing of customers, and thus help to maintain good
customer relations.
A. payroll records
B. leasehold records
C. accounts payable records
D. accounts receivable records
Payroll records ensure that payroll and employment taxes are kept current. Leasehold records are
used if your business has made improvements to leased property or equipment. Accounts payable
records track what a business owes.
AACSB: Analytic
Difficulty: Medium
40. (p. 408) Formal summaries of the content of an accounting system's records of transactions are
called
A. operating activities.
B. investing activities.
C. financial statements.
D. variance analyses.
There are five common financial statements: income statement, statement of retained earnings,
statement of owners' equity, balance sheet, and cash flow statement.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
41. (p. 408) Which of these is NOT a common financial statement?
A. Statement of retained earnings
B. Statement of depreciation
C. Cash flow statement
D. Balance Sheet
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
42. (p. 409) The sum of all profits and losses, less all dividends paid since the beginning of the
business is called
A. liabilities.
B. retained earnings.
C. net income.
D. tax liability.
The statement of retained earnings is a common financial statement.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
43. (p. 409) Which of these refers to the concept that information flows from the income statement
through the statement of retained earnings, and of owners' equity to the balance sheet?
A. Articulate
B. Going concern
C. Opportunity cost
D. Leveraging
Financial statements are articulate, that is, information flows from the income statement through
the statement of retained earnings, the statement of owners' equity to the balance sheet.
Information from the income statement and the balance sheet flows to the cash flow statement.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
44. (p. 409) Which statement lists revenues and expenses, and shows the amount of profit a
business makes for a specified period of time?
A. Balance sheet
B. Statement of retained earnings
C. Income statement
D. Cash flow statement
The income statement is the primary source of information about a business' profitability. It
shows the amount of revenues earned minus its expenses which equals net income.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
45. (p. 409-410) There are two formats for income statements, a(n)
A. single-step and multiple-step format.
B. revenue-only and revenue and expense format.
C. owners' equity and balance sheet format.
D. cash flow and retained earnings format.
A single-step format lists all revenues and gains together and then lists all expenses and losses
together. A multiple-step format lists revenues from operations separately from other income and
gains.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
46. (p. 410) Which income statement format is preferred by most owners and managers of small
businesses?
A. Single-step
B. Multiple-step
C. Revenue-only
D. Retained earnings
Most owners and managers of small businesses prefer the multiple-step format because of its
greater detail.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
47. (p. 411) There are two difficulties that arise in understanding and interpreting the income
statements. One is the disagreements about what exactly should be reported as revenues and the
other is
A. whether to report the revenues.
B. what should be considered as expenses.
C. disputes over when to recognize revenues.
D. the preferable tax rate to incorporate.
Problems arise in determining the amounts and timing of gains, losses, and expenses.
AACSB: Analytic
Difficulty: Medium
48. (p. 411) _____ is the most used item on the income statement.
A. Net income
B. Cost of sale
C. Revenue
D. Operating income
Operating income is the most used item on the statement. It represents just how well
management achieved sales and controlled costs to produce profits.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
49. (p. 411-412) Lenders use operating income specifically
A. as a measure of how well management achieved sales.
B. as an indication of future sales.
C. as a measure of how much debt a business can support.
D. as an indication of a business's ability to control costs.
Lenders use operating income as a measure of how much debt a business can support. Interest is
deductible for determining income tax, therefore net income before tax is available to make
interest payments.
AACSB: Analytic
Difficulty: Medium
50. (p. 412) The _____ is also called the Statement of Financial Position.
A. balance sheet
B. income statement
C. cash flow statement
D. statement of retained earnings
The information in the balance sheet is used to determine the liquidity, financial flexibility, and
financial strength of the business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
51. (p. 412) Which of these is a statement of what a business owns, what it owes to others, and how
much value the owners have invested in it?
A. Income statement
B. Balance sheet
C. Cash flow statement
D. Statement of retained earnings
The balance sheet explicitly details the accounting equation for your business.
AACSB: Analytic
Difficulty: Medium
52. (p. 412) The information in the balance sheet is used to determine all of these EXCEPT
A. liquidity.
B. financial flexibility.
C. profitability.
D. financial strength.
The income statement is the primary source of information about a business' profitability.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
53. (p. 412) _____ is a measure of how quickly a company can raise money through internal
sources by converting assets to cash.
A. Financial flexibility
B. Profitability
C. Financial strength
D. Liquidity
Liquidity is a measure of the expected time before an asset can be converted into cash, and of the
expected time before a liability must be paid.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
54. (p. 413) Which of the following ratios is used to estimate the liquidity of a firm?
A. Inventory turnover ratio
B. Total asset to total liabilities ratio
C. Current ratio
D. Quick ratio
The most common ratio used to estimate liquidity is the current ratio. It is calculated by dividing
the value of current assets by the value of current liabilities.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
55. (p. 413) The value of current assets divided by current liabilities is called
A. inventory turnover ratio.
B. current ratio.
C. total asset to total liabilities ratio.
D. quick ratio.
Current ratio is the most common ratio used to estimate liquidity.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
56. (p. 413) _____ is an indicator of the business's ability to manage cash flows so that the company
has the financial ability to respond appropriately if an unexpected opportunity or problem arises.
A. Liquidity
B. Financial flexibility
D. Profitability
There are no accepted financial ratios that are indicators of financial flexibility. It is a matter of
judgment, usually based on experience.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
57. (p. 413) The rule of thumb for evaluating current ratio is that the minimum acceptable ratio is
A. 3.0.
B. 2.0.
C. 1.0.
D. 4.0.
Current ratio is the value of current assets divided by current liabilities. The rule of thumb for
evaluating current ratio is that the minimum acceptable ratio is 2.0, and higher is better.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
58. (p. 413) Which of these refers to the ability of a business to survive adverse financial events?
A. Liquidity
B. Financial flexibility
D. Profitability
In evaluating financial strength, more cash and cash equivalents indicate higher strength.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
59. (p. 413-414) Which of the following is more indicative of a business's financial strength?
A. Short-term investments
B. Prepaid expenses
C. Accounts payable
D. Large inventories
Current assets that comprise cash, short-term investments, and accounts receivable are more
indicative of strength than are inventories and prepaid expenses. Excessive amounts of inventory
in the current assets are indicative of management problems and financial weakness.
AACSB: Analytic
Difficulty: Medium
60. (p. 414) What do you call the acquisition cost of the asset that is listed in a balance sheet?
A. Historical value
B. Financial strength
C. Liquidity
D. Depreciation
All values listed in a balance sheet are historical values.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
61. (p. 414) Which of the following statements is true regarding the balance sheet?
A. It has a limited impact on financial ratios.
B. It contains an exhaustive list of a business's assets and liabilities.
C. The balance sheet contains exact figures.
D. All values listed in a balance sheet are historical values.
Every balance sheet typically contains estimated amounts. Certain assets and liabilities are
omitted from the balance sheet. Because all values listed in a balance sheet are historical values
and cash is always current, ratios such as return on assets (current income/net average asset
value) have a current value as numerator and a denominator that, at best, is measured in older
dollars of greater purchasing power.
AACSB: Analytic
Difficulty: Medium
62. (p. 416) Activities involved in producing and selling goods and services are called _____
activities.
A. operating
B. investing
C. financing
D. marketing
Operating activities include all the functions that are performed to create your product or service.
Thus the receipt of cash from customers is an operating activity.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
63. (p. 416) _____ activities include the acquisition and disposal of property, plant, equipment, and
investment securities of other firms.
A. Operating
B. Investing
C. Financing
D. Marketing
For investing activities, the outflows are the cash investments made by the business to acquire
noncash assets.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
64. (p. 416) Activities through which cash is obtained from and paid to lenders, owners, and
investors are called _____ activities.
A. operating
B. investing
C. financing
D. marketing
Financing activities are those actions taken by management to finance the operations of the
business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
65. (p. 416) Which of the following simply reconciles the net increase or decrease with the
beginning cash balance and the ending cash balance?
A. Net effect of foreign exchange rates
B. Noncash investing and financing
C. Net change in cash balance
D. Noncash operating activities
Net change in cash balance is one of the items that must be reported in the statement of cash
flows.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
66. (p. 417) The primary criteria for a small business's record keeping system are all of these
EXCEPT
A. simplicity of use.
B. accuracy of detail.
C. timeliness of reports.
D. economical in cost.
The primary criteria for a small business's record keeping system are: (1) simplicity of use, (2)
accuracy of detail, (3) timeliness of reports, (4) understandability to the manager of the business,
and (5) security of data.
AACSB: Analytic
Difficulty: Medium
67. (p. 417) The key in controlling receivables is to have them _____, by sorting them into groups
of those that are 30, 60, 90, and over 90 days past due.
A. recorded
B. cataloged
C. aged
D. classified
Often businesses step up collection efforts when the receivables are more than 30 days overdue,
with many businesses treating receivables more than 90 days old as delinquent.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
68. (p. 418) Identify the managerial accounting technique which looks at the fixed and variable
costs of a business to arrive at a number of unit sales to maximize profits.
A. Cost-volume-profit analysis
B. Marginal revenue costs analysis
C. Break even analysis
D. Cash flow analysis
Cost-volume-profit analysis (CVP) is based on sorting costs into only two categories: variable
costs and fixed costs. The total cost is the sum of variable costs and fixed costs.
AACSB: Analytic
Difficulty: Medium
69. (p. 418-420) Which of the following statements is true about fixed costs?
A. They can be assigned to a specific item sold or manufactured.
B. They are unaffected by changes in output.
C. Fixed cost per item increases as the number of units produced increases.
D. They include expendables.
Fixed costs are those costs that cannot be (or are extremely difficult to be) assigned to a specific
item sold or manufactured. The fixed cost item decreases as the number of units produced
increases. Expendables are often variable costs.
AACSB: Analytic
Difficulty: Medium
70. (p. 419) Which among the following is a variable cost?
A. Lighting
B. Security
C. Shipping
D. Cleaning
The cost of shipping commonly varies with changes in output, and thus is a variable cost.
Lighting, security, and cleaning are fixed costs.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
71. (p. 420) _____ is the idea that it is cheaper (per item) to make many of an item than few.
A. Inventory turnover
B. Economy of scale
C. Breakeven point
D. Historical value
The fixed cost per item decreases as the number of items produced increases.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
72. (p. 421) Breakeven point

A. is the point at which total costs equal gross revenue.
B. is the point at which fixed costs equal variable costs.
C. is the point at which total costs equal profit.
D. is the point at which variable costs equal gross revenue.
At breakeven you neither make any money nor lose any.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
73. (p. 422) Estimated or hypothetical financial statements are called
A. pro forma statements.
B. assumed income statements.
C. tentative balance sheets.
D. annual report statements.
Pro forma is Latin for "in the form of". It is used to describe financial statements, containing
estimated or hypothetical information.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
74. (p. 422) What becomes a standard against which performance can be measured, once it has been
established?
A. Budget
B. Liquidity
C. Balance sheet
D. Statement of cash flows
A budget establishes resource restraints within which managers and employees must operate. It
becomes the basis for controlling activities and the use of resources.
AACSB: Analytic
Difficulty: Medium
75. (p. 422) A financial plan for the future based on a single level of operations is called a(n)
A. balance sheet.
B. budget.
C. income statement.
D. statement of cash flows.
A budget is a quantitative expression of the use of resources necessary to achieve a business's

strategic goals.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
76. (p. 423) A comprehensive budget is otherwise known as the

A. master budget.
B. sales budget.
C. purchases budget.
D. universal budget.
A master budget, also referred to as a comprehensive budget, consists of sets of budgets that
detail all projected receipts and spending for the budgeted period.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
77. (p. 424) The first step in preparing a master budget is to prepare a _____ budget.
A. production
B. direct materials
C. sales
D. direct labor
The first step in preparing a master budget is to prepare a sales budget. The sales budget shows
the projected future level of sales in units multiplied by the sales price per unit.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
78. (p. 426) The _____ budget shows the number of units that are expected to be acquired during
the budget period.
A. cash receipts
B. labor
C. sales
D. purchases
The specific number of units that must be bought in each period is a function of how many units
are on hand at the beginning of the period, how many are projected to be sold, and the desired
number of units to be held in inventory at the end of the period.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
79. (p. 426) The quantity of goods sold times the price expected to be paid for each product is the
calculation used for the
A. overhead budget.
B. sales budget.
C. purchases budget.
D. cost of goods sold budget.
The cost of goods sold budget shows the predicted cost of product actually sold during the
accounting period.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
80. (p. 428) _____ is an accounting method which assigns costs based on the different types of
work a business does in order to sell a particular product or service.
A. Differential revenues and expenses
B. Net present value analysis
C. Cost-volume-profit analysis
D. Activity-based cost estimates
It is becoming more common for managers to use activity-based cost estimates for overhead.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
81. (p. 428) The difference between an actual and budgeted revenue or cost is called
A. liquidity.
B. financial flexibility.
C. variance.
D. investing activities.
Management can determine where the business is not meeting goals through examining a report
of variances.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
82. (p. 429) The process of determining the effect of price and quantity changes on revenues and
expenses refers to
A. accounting analysis.
B. variance analysis.
C. pro forma budgeting.
D. financial flexibility.
Variances occur because of one of two events: (1) Prices are different from what was estimated,
or (2) Quantities are different from what was estimated.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
83. (p. 431) To make good decisions, we need all of these EXCEPT
A. good information.
B. efficient ways to condense information so it is understandable.
C. methods to help compare alternatives.
D. certainty situation.
To make good decisions we need (1) good information, (2) efficient ways to condense
information so it is understandable, and (3) methods to help compare alternatives.
AACSB: Analytic
Difficulty: Medium
84. (p. 432) _____ analysis is based on the concept that a dollar to be received right now has more
utility than does a dollar to be received at some time in the future.
A. Liquidity
B. Net present value
D. Budget
Net present value analysis is a managerial accounting simplification method used to aid
investment decisions.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
85. (p. 432) This methodology comprises estimating the changes in revenues and expenses from
current operating results that will occur if each alternative is taken.
A. Variance analysis
B. Net present value analysis
C. Accounting analysis
D. Differential revenues and expenses
Differential revenues and expenses is a managerial accounting simplification method used to aid
investment decisions.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Scenario: Barb's Bakery

Barb Bowman fell into the baking business. It used to be a hobby. She made and sold cakes and
cookies for birthdays and family events in the neighborhood and for friends' parties. Now,
having opened the bakery, the business has taken off and Barb is wondering what sort of records
she needs to keep.
86. (p. 402) Barb needs to know that accounting is important to her business because of all of these
EXCEPT
A. it provides easy to understand plans for business operations.
B. it shows how much her business is worth.
C. it is the bakery industry requirement.
D. she can't know what her business is doing without it.
Accounting is important to a small business for various reasons: It proves what your business did
financially; it shows how much your business is worth; banks, creditors, development agencies,
and investors require it; it provides easy-to-understand plans for business operations and; you
can't know how your business is doing without it.
AACSB: Analytic
Difficulty: Medium
87. (p. 405) Which of these most commonly used accounting systems may be useful for Barb to
keep records?
A. Peachtree
B. TaxCut
C. TurboTax
D. Checkpro
TurboTax and TaxCut are tax programs. Checkpro is a check cashing system.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
88. (p. 408) Barb will need all of these commonly used financial statements EXCEPT
A. income statement.
B. balance sheet.
C. cash flow statement.
D. depreciation statement.
AACSB: Analytic
Difficulty: Medium
89. (p. 409) When exploring the accounting system software, Barb should know that _____ lists
revenues and expenses and shows the amount of profit her business has made for a specified
period of time.
A. income statement
B. balance sheet
C. cash flow statement
D. depreciation statement
The income statement is the primary source of information about a business' profitability. The
income statement shows the amount of revenues earned minus its expenses which equals net
income.
AACSB: Analytic
Difficulty: Medium
90. (p. 412) Which of these statements would describe what Barb's Bakery owns, what it owes to
others, and how much value Barb has invested in it?
A. Income statement
B. Balance sheet
C. Statement of retained earnings
D. Statement of owner's equity
A balance sheet is a statement of what a business owns (assets), what it owes to others
(liabilities), and how much value the owners have invested in it (equity).
AACSB: Analytic
Difficulty: Medium
Essay Questions
Chapter 14 Cash: Lifeblood of the Business Answer Key
1. (p. 442) According to a recent poll by NFIB Foundation, less than 20 percent of small businesses
experience money problems indicating the importance and effectiveness of these businesses.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
2. (p. 442) Cash-to-cash cycle is also referred to as operating cycle.

TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
3. (p. 444) Many small businesses experience difficulty or even failure because of the mismatch in
time between receiving cash and spending cash.
TRUE

Difficulty: Medium
4. (p. 445) While all money is currency; all currency is not money.
FALSE

Difficulty: Easy
5. (p. 446) The difference between revenue and expense is called sales.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
6. (p. 446) Currency is the most common form of cash.

TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
7. (p. 446) In December 2003, the supply of currency in circulation in the U.S. was $663 billion.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
8. (p. 447) A person or business entity that possesses a security is called demand depositor.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
9. (p. 449) The bank available balance is the actual cash value of the account and can vary
significantly from the ledger balance.
TRUE

Difficulty: Medium
10. (p. 449-450) Delays in transferring money among banks due to internal procedures is called
processing float.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Learning Objective: 14-4-
11. (p. 450) When reconciling is done, the corrected bank balance and the corrected book balance
will be identical.
TRUE

Difficulty: Medium
12. (p. 451) Budgets are the essential starting point for all financial and accounting considerations
in a small business.
TRUE

Difficulty: Medium
13. (p. 453) Credit customers pay on average 10 percent of what they owe in the month following
the sale, and 10 percent thereafter per month, which translates to minimum payment
requirements.
FALSE
AACSB: Analytic
Difficulty: Hard
14. (p. 459) The best prevention method, or approach for avoiding a cash flow problem is attending
to and understanding your business operations.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
15. (p. 460) One technique to increase cash flow is to offer discounts for deferred payments.
FALSE
AACSB: Analytic
Difficulty: Medium
16. (p. 460) The most simple and most effective way to obtain payments from customers is asking
for your money.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
17. (p. 460) Factoring is a method of borrowing against payables account.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
18. (p. 462) There are two factors of cash outflows that must be controlled: the amount and timing
of cash being paid out.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
19. (p. 463) The rule of thumb for trade discounts is that you should always capture 5 percent or
more, if the billing period is less than 30 days.
FALSE
AACSB: Analytic
Difficulty: Hard
20. (p. 463) Stock options or added vacation days are examples of non cash incentives.
TRUE
AACSB: Analytic
Difficulty: Medium
21. (p. 464) Use of temporary agencies is the key factor that adds to the cost of employees.
FALSE

Difficulty: Medium
22. (p. 464) Consignment is the practice of trading goods and services without the use of money.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
23. (p. 464) Primary advantage of bartering is that it is essentially tax-free as long as no cash is
involved.
FALSE

Difficulty: Hard
24. (p. 465) An often overlooked cause of cash shortage is the growth trap.
TRUE
AACSB: Analytic
Difficulty: Medium

25. (p. 442) The small business owners in the NFIB Foundation poll reported that all of these were
causes of cash flow problems EXCEPT:
A. difficulty collecting money due from customers.
B. seasonal variations in sales.
C. unexpected decreases in sales.
D. unexpected increases in taxes.
Approximately 55 percent of small businesses that fail do so because of cash flow problems with
an immediate impact, not because of lack of profitability.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
26. (p. 442) Approximately 55 percent of small businesses that fail do so because of:
A. cash flow problems with an immediate impact.
B. lack of profitability.
C. missing the mark on product demand.
D. sour banking relationships.
Nearly one-fifth of small business managers reported that cash flow how much and when
money will come into and go out of the businessis a continuing problem, one they face daily.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
27. (p. 442) The time that is required for a business to acquire resources, convert them into a
product, sell the product, and receive cash from the sale refers to:
A. seasonal sales.
B. cash-to-cash cycle.
C. hard-to-soft circle.
D. charge back cycle.
Cash flow management is a problem for small businesses because of the difficulty of matching
the timing of the receipt of cash to the timing of the need to expend cash.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
28. (p. 443) Amounts owed to vendors for merchandise or services purchased on credit is called:
A. receivables.
B. demand deposits.
C. payables.
D. charge back.
The promises of your customers to pay are receivables, which you will collect in the future.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
29. (p. 443) Amounts that are owed to a business for merchandise that was sold on credit refers to:
A. receivables.
B. demand deposits.
C. payables.
D. charge back.
Some of the purchases are done by cash; others on credit, creating payables, which have to be
paid the next month. These amounts owed to vendors are called payables.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
30. (p. 445) Money in the end is a form of:

A. information.
B. paper.
C. plastic.
D. culture.
The U.S. Dallas Federal Reserve Bank provides the following definition: Money is a medium of
exchange accepted by the community, meaning it's what people buy things with and sell things
for. Money provides a standard for measuring value, so that the worth of different goods and
services can be compared. And lastly, money is a store of value that can be saved for later
purchases.
AACSB: Analytic
Difficulty: Medium
31. (p. 445) There are two purposes of money:
A. to buy and to accumulate.
B. to make exchanges and to keep track of wealth.
C. to buy and to sell.
D. to save and to accumulate.
Money can even be used for quantifying the value of nonmonetary assets, such as when juries
make awards for pain and suffering.

Difficulty: Easy
32. (p. 446) The difference between revenue and expense is called:
A. sales.
B. interest.
C. profit.
D. overhead.
A profit on your accounting spreadsheet or in your account book is not money in your hand.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
33. (p. 446) Money that is immediately available to be spent is called:

A. profit.
B. sales.
C. charge back.
D. cash.
Cash is composed of the three forms of money that can be immediately used to make payments:
currency, demand deposits, and traveler's checks.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
34. (p. 446) Assets that may be quickly converted to cash is called:
A. cash equivalent.
B. inventory.
C. receivables.
D. payables.
Businesses use cash equivalents because they provide a better measure of the resources available
to pay current bills than is provided by cash alone.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
35. (p. 446-447) Cash is composed of all of these forms of money that can be immediately used to
make payments EXCEPT:
A. currency.
B. receivables.
C. demand deposits.
D. traveler's checks.
Your customers then either pay you immediately, or agree to pay you soon. The promises of your
customers to pay are receivables, which you will collect in the future.
AACSB: Analytic
Difficulty: Medium
36. (p. 446) The bills and coins printed by government to represent money refers to:
A. currency.
B. receivables.
C. demand deposits.
D. traveler's checks.
Currency is the most familiar form of cash.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
37. (p. 446) _____ make up most of the non currency cash.
A. Marketable securities
B. Demand deposits
C. Commercial papers
D. Receivables
Demand deposits are accounts that let you withdraw any amount of the balance immediately,
without any advance notice to the institution.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
38. (p. 446-447) Money held in checking and savings accounts are called:
A. demand deposits.
B. marketable securities.
C. commercial papers.
D. receivables.
Demand deposits make up most of the noncurrency cash.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
39. (p. 447) _____ are made up of stocks and bonds for which there is an active auction market.
A. Demand deposits
B. Marketable securities
D. Receivables
Marketable securities represent either ownership or debt of publicly held firms and government
issued debt, in the form of bonds, notes, and bills.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
40. (p. 447) _____ are notes issued by credit-worthy corporations.
A. Demand deposits
B. Marketable securities
D. Receivables
Marketable securities are made up of stocks and bonds for which there is an active auction
market, such as the NASDAQ or the New York Stock Exchange.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
41. (p. 447) _____ must be paid in less than one year from the date of the financial statement on
which it is reported.
A. Commercial paper
B. Receivables
C. Marketable securities
D. Short-term debt
Commercial paper and short-term debt are two forms of short-term financing (30 days to 1 year)
whereby a company with good credit can issue a note for cash to another company.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
42. (p. 447) The two forms of short-term financing are short term debt and:
A. cash equivalent.
B. commercial paper.
C. marketable security.
D. demand deposit.
Short-term debt is expected to be collected in less than a year, but it can be sold to other
investors at any time.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
43. (p. 447) Cash can come from all of these sources for a small business EXCEPT:
A. cash flow from subsidy.
B. cash flow from operations.
C. cash flow from investing.
D. cash from financing.
Financing for small businesses may be in the form of cash donated to the business in return for
ownership or in the form of money borrowed from other entities.

Difficulty: Medium
44. (p. 448) The _____ is the name given to the sum of cash inflows and cash outflows recorded in
the firm's accounting records.
A. bank ledger balance
B. company book balance
C. clearing house
D. bank available balance
This account (usually called the cash account) includes records of all inflows of cash, such as
cash from sales, receipts on receivables, checks received from customers, and deposits made
directly to the bank through electronic transfers.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
45. (p. 448) Which of the following is usually called the cash account?
A. Clearinghouse
B. Bank available balance
C. Bank ledger balance
D. Company book balance
This account (usually called the cash account) includes records of all inflows of cash, such as
cash from sales, receipts on receivables, checks received from customers, and deposits made
directly to the bank through electronic transfers.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
46. (p. 449) The sum of deposits and withdrawals recorded in a bank's accounting records is called
the:
A. bank ledger balance.
B. company book balance.
C. clearinghouse.
D. bank available balance.
A bank ledger balance may vary significantly from the actual value of cash that the bank is
holding for the depositor because of delays in collecting deposits and delays in making cash
transfers.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
47. (p. 449) The _____ is the actual cash value of the account.
A. bank ledger balance
B. company book balance
C. clearinghouse
D. bank available balance
The bank available balance is the amount of money that has been received from or on behalf of
the customer less all amounts of money that have actually been paid out of the depositor's
account by the bank.
AACSB: Analytic
Difficulty: Medium
48. (p. 449) Which of these refers to an entity that processes checks and electronic fund transfers for
banks and other financial organizations?
A. Credit unions
B. Thrifts
C. Clearinghouse
D. Trade unions
Checks, drafts, and automated clearinghouse payments result in receipts or disbursements of

money only after some delay.
AACSB: Analytic
Difficulty: Easy
49. (p. 449) A negative balance in a depositor's bank account is referred to as:
A. overdraft.
B. float.
C. ledger balance.
D. reconciling.
Some banks will allow established customers to overdraft their accounts by paying a check when
the available balance is not sufficient to cover the check amount, but the ledger balance is.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
50. (p. 449) Delays in the movement of money among depositors and banks is referred to as:
A. overdraft.
B. float.
C. ledger balance.
D. reconciling.
There are two primary types of floats: availability float and processing float.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
51. (p. 450) There are two primary causes of float:

A. book balance float and bank ledger float.
B. bank ledger balance and bank available balance.
C. reconciling float and charge back float.
D. availability float and processing float.
Float is the term used to describe the delay in movement of money among depositors and banks.
AACSB: Analytic
Difficulty: Medium
52. (p. 450) What is the term used for delays in delivering checks from the writer of the check to the
recipient's bank?
A. Availability float
B. Overdrafting
C. Processing float
D. Reconciling
The other type of float is availability float which refers to the delays in transferring money
among banks due to internal procedures.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
53. (p. 449-450) Delays in transferring money among banks due to internal procedures is referred to
as:
A. availability float.
B. overdrafting.
C. processing float.
D. reconciling.
The other type of float is called processing float which refers to the delays in delivering checks
from the writer of the check to the recipient's bank.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
54. (p. 450) Which of these refers to the accounting process that identifies the causes of all
differences between book and bank balances?
A. Overdrafting
B. Reconciling
C. Charge back
D. Liquidity
Most small business managers concentrate their attention on maintaining a positive book balance
and assume that this means there will be an adequate available balance.
AACSB: Analytic
Difficulty: Medium
55. (p. 450) Information that the bank knows about your account that you do not know includes all
of these EXCEPT:
A. the amount of service charges taken from your account.
B. the amount of any direct payments made to your account by your customers.
C. the deposits you have made after bank closing.
D. the amount of any interest received or charged.
Along with these the fourth piece of information that the bank knows is the amount of any
checks that were returned because of nonsufficient funds (NSF).
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
56. (p. 450) Accepting payments by credit card causes significant differences between the bank and
book balances due to all of the following reasons EXCEPT:
A. the service provider records the gross amount of each credit card sale.
B. the service provider takes up to three working days to actually make the deposit to your
account.
C. the credit card service provider deposits to your account the sale amount less the credit card
service fee.
D. credit card clearing services also will reduce the amount deposited in the event of fraud.
Instead of the service provider, your business will record the gross amount of each credit card
sale.

Difficulty: Hard
57. (p. 450) A reduction in the bank account of a merchant by a credit card company refers to:
A. reconciling.
B. liquidity.
C. overdrafting.
D. charge back.
This is one of the reasons for the difference between bank and book balance while accepting
payments from credit cards.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
58. (p. 451) For small businesses, the key budget is the _____ budget.
A. cash
B. retained earnings
C. sales
D. marketing
The cash budget identifies when, how, and why cash is expected to come into the business, and
when, how, and why it is expected to leave.

Difficulty: Easy
59. (p. 452) The _____ is a schedule of the amounts and timing of the receipt of cash into a
business.
A. cost of goods sold budget
B. cash receipts budget
C. sales budget
D. payables budget
The basis to being able to control your business's money is to understand and be able to predict
the patterns of cash flows. Understanding and predicting begin when you prepare a cash receipts
budget.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
60. (p. 452) The basis to being able to control a business's money is to understand and be able to
predict the patterns of cash flows. This is possible by preparing a:
A. cash disbursements budget.
B. comprehensive budget.
C. cash receipts budget.
D. cash budget.
The cash receipts budget is a schedule of the amounts and timings of the receipt of cash into a
business.

Difficulty: Easy
61. (p. 455) Identify the budget that is a schedule of the amounts and timings of payments of cash
out of a business.
A. Cash disbursements budget
B. Comprehensive budget
C. Cash receipts budget
D. Cash budget
With the cash receipts and cash disbursements budgets complete, we need to know only how
much money we expect to have on the first day of the year to put together a cash budget for the
first quarter.

Difficulty: Medium
62. (p. 456) These are also referred to as master budgets.

A. Cash disbursements budget
B. Cash receipts budget
C. Comprehensive budget
D. Cash budget
The final step in budgeting part of business planning is to put everything together to create a
complete set of pro forma financial statements that you can use for raising money, for evaluating
your operations, and for managing your business. This leads to the creation of the comprehensive
budget or the master budget.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
63. (p. 460) Which of these is NOT a technique to increase cash inflows?
A. Taking deposits and progress payments.
B. Foregoing receivables.
C. Asking for your money.
D. Taking on noncore paying projects.
One technique to increase cash inflows is factoring receivables.
AACSB: Analytic
Difficulty: Medium
64. (p. 460) Cash payments received before product is completed or delivered is called:
A. noncore payments.
B. payables.
C. deposits and progress payments.
D. discounted payments.
Deposits and progress payments can greatly smooth the receipt of cash in businesses which
otherwise have highly variable levels of cash flows.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
65. (p. 460) When a business offers you a discount of 2 percent if you pay the bill in full within 7
days, it is called:
A. noncore payments.
B. progress payments.
C. receivables discount.
D. discount for prompt payments.
Discounts for prompt payment will often motivate your customers to make payments in a timely
manner.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
66. (p. 461) Revenue-producing tasks and activities related to, but not part of the primary strategy
of a business is called:
A. noncore projects.
B. discontinued tasks.
C. factoring receivables.
D. off-the-books strategy.
Taking on noncore projects can often provide desperately needed cash during slow business
periods.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
67. (p. 461) _____ is a method of borrowing against receivables.

A. Factoring
B. Noncore project
C. Discounted payment
D. Reconciling
Factoring receivables should be considered only if other, less expensive methods to increase cash
flows have not been sufficient.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
68. (p. 461) To factor your receivables your _____ must have good credit ratings.
A. suppliers
B. business
C. customers
D. agents
Your credit rating is irrelevant because it is the customers who pay the factor, not you.
AACSB: Analytic
Difficulty: Easy
69. (p. 462) Every business that maintains inventory has an optimal level that minimizes the total
cost of all of the following EXCEPT:
A. frequent purchases.
B. carrying inventory.
C. processing orders.
D. losing sales due to being out of stock.
Setting reasonable standards and carefully monitoring usage and stocking levels reduce the
amount of cash required for these essential business resources while maximizing revenues.
AACSB: Analytic
Difficulty: Medium
70. (p. 462-463) All of the following provides savings in cash outflows EXCEPT:
A. trade discounts.
B. taking on noncore paying projects.
C. barter.
D. use of temporary agencies.
Taking on noncore paying projects is one of the techniques of increasing cash flows.

Difficulty: Easy
71. (p. 463) Percentage discounts from gross invoice amounts provided to encourage prompt
payment is referred to as:
A. core discount.
B. trade discount.
C. non cash incentives.
D. consignment.
Trade discounts are given by suppliers and vendors to encourage customers to make timely
payments on account.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
72. (p. 463) The most common noncash incentive(s) is/are:

A. autonomy.
B. stock options.
C. added vacation days.
D. compensating time off.
The hope of the employee is that the stock will go up significantly in price and, that upon either
selling or exercising the option, the employee will realize large gains.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
73. (p. 464) The practice of accepting goods for resale, without taking ownership of them and
without being responsible to pay prior to their being sold is called:
A. bartering.
B. consignment.
C. noncash incentive.
D. reconciling.
Consignment sales are the norm in the operation of art galleries.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
74. (p. 464) In _____ you may trade similar items without creating a taxable transaction.
A. bartering
B. consignment
C. noncash incentives
D. cash-to-cash cycle
Barter is the practice of trading goods and services without the use of money.

Difficulty: Easy
75. (p. 464) The practice of trading goods and services without the use of money is called:
A. bartering.
B. consignment.
C. noncash incentive.
D. reconciling.
Barter alleviates the need for cash by trading good for good, service for service, or service for
good. Barter is legal in the United States and is widely practiced among small businesses.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
76. (p. 465) Using methods to appear to be paying bills on time, when in fact payment is being
delayed or avoided is called:
A. gaming the payment process.
B. growth trap.
C. charge back.
D. cash-to-cash cycle.
Methods range from simply not paying a bill when it is due to sending checks that you've
"forgotten" to sign, to sending checks in payment and then stopping payment after the payment
has been recorded, but the check has not yet cleared.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
77. (p. 465) Which of the following is the term used for a financial crisis that is caused by a
business growing faster that it can be financed?
A. Cash-to-cash cycle
B. Gaming the payment process
C. Charge back
D. Growth trap
In this situation, you are in a "trap" made by growth: Growing will produce more money, but
right now you need money to grow.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
78. (p. 465-466) Which of these is the number one strategy employed by small businesses for
handling money shortages?
A. Borrowing
B. Using personal money
C. Adjusting scheduled purchases
D. Laying off employees
The other means are: adjust scheduled payments, try to collect money due, sell investments, and
sell receivables.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
79. (p. 465-466) Which of these is NOT a strategy employed by small businesses for handling money
shortages?
A. Selling receivables
B. Adjusting scheduled payments
C. Filing for bankruptcy
D. Selling investments
The three most common strategies employed to handle money shortages, in order of use, are (1)
use personal money, (2) borrow, and (3) adjust scheduled purchases.
AACSB: Analytic
Difficulty: Medium
Scenario: Tammy's Craft Corner

Working at a local university, Tammy's favorite hobby included anything related to crafts. She
could spend hours pouring over the craft books to actually working on and talking to people
about craft projects. Tammy was great at what she did and liked to do, but lacked the money
management skills. So when Tammy opened her business "Tammy's Craft Corner". Her son, a
business major, decided to step in and help mom with managing the money side of the business.
80. (p. 442) Tammy needs to know that the time that is required for her to acquire resources,
convert them into craft products, sell the products, and receive cash from the sale is called:
A. accounts payable cycle.
B. reconciling.
C. demand deposits timeframe.
D. cash-to-cash cycle.
This is also called the operating cycle of a business.
AACSB: Analytic
Difficulty: Medium
81. (p. 443) The amount owed to vendors from whom Tammy purchased the craft merchandise on
credit is called:
A. payables.
B. demand deposits.
C. receivables.
D. inventory.
Things you may buy on credit are called payables, which you will have to pay next month.
AACSB: Analytic
Difficulty: Medium
82. (p. 447) Tammy insists that cash for her business can come from all of these sources. Her Son
should point out that _____ is not one of the sources for Tammy's cash needs.
A. cash flow from operations
B. cash from financing
C. cash flow from subsidies
D. cash flow from investing
Financing may be in the form of cash donated to the business in return for ownership or in the
form of money borrowed from other entities.

Difficulty: Hard
83. (p. 448) As Tammy always ended up writing more checks than the money she had in her
checking account, her son recommended that she establish with her bank to _____ her account so
that her checks could be paid.
A. partial close
B. overdraft
C. demand deposit
D. float
Some banks will allow established customers to overdraft their accounts by paying a check when
the available balance is not sufficient to cover the check amount, but the ledger balance is.
AACSB: Analytic
Difficulty: Hard
84. (p. 460) Which of these techniques is not one that Tammy can use to increase her cash inflows?
A. Taking deposits and progress payments.
B. Asking for her money from customers.
C. Taking on noncore paying projects.
D. Offering discounts for deferred payments.
In fact, Tammy should offer discounts for prompt payments.

Difficulty: Hard
Essay Questions
Chapter 15 Small Business Finance: Using Equity, Debt, and Gifts Answer Key
1. (p. 479) In the U.S., government programs are the number one source of small business
financing.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
2. (p. 479) A legal obligation to pay money in the future is called equity capital.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
3. (p. 479) More forms of financing are available to existing firms than to start-ups.
TRUE
AACSB: Analytic
Difficulty: Medium
4. (p. 480) Angel investors generally provide financing during the operations phase of business.
FALSE
AACSB: Analytic
Difficulty: Medium
5. (p. 482) People who buy ownership rights in a business are considered outside equity investors.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
6. (p. 483) Limited liability companies' primary advantage is that owners may easily choose
whether to be taxed as an entity or have tax items pass through.
TRUE
AACSB: Analytic
Difficulty: Medium
7. (p. 483) A charge for the use of money, usually figured as a percentage of principal is called a
dividend.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
8. (p. 485) From the point of view of an existing owner, financing with equity is expensive and
guaranteed to create problems of control and decision making.
TRUE
AACSB: Analytic
Difficulty: Medium
9. (p. 485) The most common source of capital for established ongoing small businesses is
borrowed funds.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
10. (p. 486) The four Cs of borrowing are character, capacity, collateral, and community.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
11. (p. 486) There are four primary CRAs: Equifax, Experian, Trans Union, and E-Trade.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
12. (p. 487) Goodwill can be used as collateral.

FALSE
AACSB: Analytic
Difficulty: Medium
13. (p. 488) Reduced taxes is the most common form of institutional gift financing.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
14. (p. 490) Economic Development Agency (EDA) grants are much more common than are those
from general governments.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
15. (p. 491) Giving a gift has tax implications.

TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
16. (p. 492) The more debt that is included in the capital mix, the higher the weighted average cost
will be.
FALSE
AACSB: Analytic
Difficulty: Medium
17. (p. 493) A measure of the amount of debt relative to total investment is called cost of capital.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
18. (p. 494) Borrowing money for capital investment enhances the potential for higher rates of
return for the owners.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
19. (p. 498) During the start-up phase of a small business the primary financial management need is
to obtain sufficient funds to pay for all the costs of starting and running a business.
TRUE
AACSB: Analytic
Difficulty: Medium
20. (p. 500) Accredited investors are a popular source of funding for cash-intensive firms at the
seed and start-up.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium

21. (p. 479) Which of these represent the number one source for small business financing?
A. Owners
B. Angel investors
C. Government programs
D. Banks
In general the entrepreneurs' own pockets are the first source of financing for most businesses.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
22. (p. 479) Which of these financing sources is very rarely used by small businesses?
B. Angel investors
C. Credit cards
D. Banks
Family and friends, credit cards, and banks are some of the major sources of financing for small
businesses. Angel investors are used very rarely.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
23. (p. 479) Any valuable asset that is donated to your business without any obligation to repay or
to give any ownership interest is called
A. debt.
B. equity capital.
C. a gift.
D. a tax credit.
There are two general sources of gift financing: institutional gifts and personal gifts.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
24. (p. 479) A legal obligation to pay money in the future is called
A. debt.
B. equity capital.
C. gift.
D. tax credit.
Debt can take many forms. A business may borrow money directly from banks, development
agencies, governments, or individuals.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
25. (p. 479) When you sell part of your business, the money you receive is
A. debt.
B. equity capital.
C. gift.
D. tax credit.
Equity capital refers to money contributed to the businesses in return for part ownership of the
business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
26. (p. 480) "Profits are secondary to cash flow" is a financial management need in which phase of
business?
A. Financing for growth
B. Financing for exit
C. Financing for start-up
D. Financing for operations
During the start-up phase of a small business the primary financial management need is to obtain
sufficient funds to pay for equipment, buildings, inventory, and indeed, all the costs of starting
and running a business. See Table 15.1
AACSB: Analytic
Difficulty: Hard
27. (p. 480) Cash flow "smoothing" is a financial management need in which phase of business?
A. Financing for growth
B. Financing for exit
C. Financing for start-up
D. Financing for operations
At this stage of the business, the emphasis of financial management is to build owner wealth, to
conserve assets, to match cash inflows to outflows, and to maximize the return on capital assets
by making optimal investing decisions. See Table 15.1
AACSB: Analytic
Difficulty: Hard
28. (p. 480) Angel investors provide _____ financing in the _____ phase of business.
A. equity; financing for start-up
B. debt; financing for growth
C. gift; financing for exit
D. equity; financing for operations
Angel investors are a popular source of funding for cash-intensive firms at the earliest stages
seed and start-up. See Table 15.1
AACSB: Analytic
Difficulty: Medium
29. (p. 480) Personal credit cards provide _____ financing in the _____ phase of business.
A. equity; financing for start-up
B. debt; financing for growth
C. gift; financing for exit
D. equity; financing for operations
When firms require financing for growth, personal credit cards are used as a source of debt
financing. See Table 15.1
AACSB: Analytic
Difficulty: Medium
30. (p. 480) Which of these sources of equity financing is available during all four phases of
business?
A. Angel investors
B. Friends and family
C. Venture capital
D. Self generated funds
Angel investors and friends and family provide financing for start-ups. Self-generated funds are
available during the financing for growth, operations, and exit phases of business. See Table 15.1
AACSB: Analytic
Difficulty: Medium
31. (p. 480) Which of these provide debt financing during the start-up phase of business?
A. Angel investors
B. Factor receivables
C. Public stock offerings
D. Incubators
Factor receivables are a source of debt financing during the financing for operations phase of
business. Angel investors and public stock offerings are forms of equity financing. See Table
15.1
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
32. (p. 482) _____ is money from selling part of your business to people who are not and will not
be involved in the management of the business.
A. Debt
B. Outside equity
C. Gift
D. Tax abatement
People who buy ownership rights in your business are considered outside equity investors.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
33. (p. 482) People who buy ownership rights in your business are considered
A. outside equity investors.
B. family.
C. debt holders.
D. creditors.
Outside equity investors are called so because they are not part of the management of the
business but they have legal ownership rights to your business.
They also let you use their money now in order to get wealth in the future.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
34. (p. 482) A legal "artificial" entity that is formed by filing specific documents with a state
government is called a
A. sole proprietorship.
B. partnership.
C. corporation.
D. general partnership.
A corporation is a legal form of business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
35. (p. 482) LLCs have a choice, under federal tax law, of being taxed as either a corporation or as
a
B. limited liability company.
C. independent, single person business.
D. partnership.
Limited Liability Companies (LLCs) are a relatively new form of organization whose primary
advantage is that owners may easily choose whether to be taxed as an entity or have tax items
pass through.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
36. (p. 483) In general, all the forms of business organizations can be categorized along two
dimensions: (1) how much responsibility owners have for the organization's liabilities, and (2)
A. how the business is taxed.
B. how the business is financed.
C. who the target market is.
D. whether it is a manufacturing or service organization.
Businesses are either taxed as entities or the revenues and expenses of the business are "passed
through" to the owners who report them on their individual income tax forms.
AACSB: Analytic
Difficulty: Medium
37. (p. 483) In business and in law, responsibility is called

A. assets.
B. liability.
C. equity.
D. value system.
In terms of the form of the organization, the amount of responsibility (liability) the owners
personally face for the debts of the business can be all or "none."
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
38. (p. 483) A business formed by a single individual who is responsible for all debts and claims
against the business is called a
A. limited liability company.
B. corporation.
C. partnership.
D. sole proprietorship.
Sole proprietorships are not separate from their owners, and thus there is no specific
documentation that creates their existence.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
39. (p. 483) Ownership of corporations is established by _____ while ownership of limited liability
companies is shown by _____.
A. stock certificates; LLC agreements
B. share agreements; stock certificates
C. stock certificates; member share certificates
D. member share certificates; share agreements
Ownership of corporations is established by stock certificates. Ownership of limited liability

companies is shown by member share certificates.
AACSB: Analytic
Difficulty: Medium
40. (p. 483) The percentage amount that the payout of an investment differs from original cost is
called as
A. dividend.
B. gain on investment.
C. risk.
D. interest.
Gain on investment is calculated as (payout - investment + dividends)/ investment.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
41. (p. 483) A charge for the use of money, usually figured as a percentage of the principal is called
A. interest.
B. dividend.
C. tax.
D. risk.
Lenders expect a return on money from making loans, by getting back the amount they had plus
more money in the form of interest.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
42. (p. 484) The level of probability that an investment will not produce expected gain is called
A. interest.
B. dividend.
C. risk.
D. diversification.
Investors protect themselves from risk by investing in several businesses so that the ones that do
succeed provide gains that more than offset the losses from those that don't.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
43. (p. 484) To invest in multiple investments of differing risk profiles for the purpose of reducing
overall investment risk is called
A. growth potential.
B. dividend.
C. specialization.
D. diversification.
To protect themselves from losing everything, investors diversifyinvest in several businesses

so that the ones that do succeed provide gains that more than offset the losses from those that
don't.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
44. (p. 484) The primary concern for equity investors is
A. growth potential.
B. protecting the principal.
C. interest.
D. repayment.
To estimate how much gain they might get from investing in your business, investors consider
the growth potential of your business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
45. (p. 485) Using outside equity in your business

A. will increase your own exposure to financial loss.
B. will protect it from increased costs in the form of interest.
C. is inexpensive.
D. solves problems of control and decision-making.
Using outside equity in your business will reduce your own exposure to financial loss. From the
point of view of an existing owner, financing with equity is expensive and guaranteed to create
problems of control and decision making.
AACSB: Analytic
Difficulty: Medium
46. (p. 485) In the Small Business Administration guaranteed loan payment programs, you must be
_____ before you qualify.
A. approved by a bank
B. turned down by a bank
C. partner with a bank as a co-signer
D. a successful business
Having been turned down by a bank, you can apply for an SBA guaranteed loan. Through this
avenue, you will still borrow from your own bank, but the SBA will guarantee the bank that if
your business fails, the SBA will pay off your loan.
AACSB: Analytic
Difficulty: Medium
47. (p. 485) Identify the organization authorized by the SBA to make insured loans to small
businesses that are expected to increase economic activity within a specific geographic area.
A. Community development organization
B. Accelerator
C. Small business investment companies
D. Limited partnerships
Sources for SBA guaranteed loans include community development organizations, and for small
loans, microlenders.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
48. (p. 485) Private businesses that are authorized to make SBA insured loans to start-ups and small
businesses are called as
A. community development organizations.
B. accelerators.
C. small business investment companies.
D. limited partnerships.
A directory of small business investment companies (SBICs) is maintained on the SBA Web site.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
49. (p. 486) Accelerators are also called as

A. LLCs.
B. corporations.
C. partnerships.
D. incubators.
Accelerators exist solely for the purpose of facilitating the start-up and growth of new
businesses.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
50. (p. 486) An organization that supports start-up technology businesses by providing inexpensive
office space, a variety of support services and resources is called as a(n)
A. accelerator.
B. community development organization.
C. small business investment company.
D. credit reporting agency.
Accelerators exist solely for the purpose of facilitating the start-up and growth of new
businesses. They provide advice for finding loans, and, in some cases, have the ability to make
loans to member businesses.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
51. (p. 486) Which of the following statements is true regarding the Fair Credit Reporting Act?
A. It requires that consumers investigate and report any inaccuracies to all nationwide CRAs.
B. It provides CRAs with 60 days to investigate cases of inaccurate information.
C. It requires that CRAs independently confirm information.
D. It requires that all information reported by CRAs be accurate.
The Fair Credit Reporting Act does not require that CRAs independently confirm any
information. It is incumbent upon the consumer to notify the CRA in writing of any inaccurate
information. The CRA has 30 days in which to investigate. The CRA must also forward copies
of all relevant information that you provide to the source of the inaccurate information. The
source must then make its own investigation and report any inaccuracies to all nationwide CRAs.
AACSB: Analytic
Difficulty: Medium
52. (p. 486) What do you call a business that collects, collates and reports information concerning
an entity's use of debt?
A. Community development organization
B. Credit reporting agency
C. Accelerator
D. Small business investment companies
Credit reporting agencies (CRAs) collect, collate, and report the credit histories of individuals
and businesses.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
53. (p. 486) _____ is judged largely by the owner's personal credit rating and by that of the
business.
A. Capacity
B. Collateral
C. Character
D. Condition
The owner's character and business reputation are important considerations for lenders when they
decide whether or not to let a business have money.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
54. (p. 486) The information collected and reported by the CRA does NOT include which of these
areas?
A. Personal health history information
B. Identifying information
C. Credit information
D. Public record information
Medical history is not related to credit and is prohibited from being reported.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
55. (p. 487) The amount that revenues exceed expenses is known as
A. profit.
B. cash flow.
C. operating margin.
D. goodwill.
The capacity of the business to repay loans is measured primarily by two factors: profitability
and cash flows from operations.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
56. (p. 487) The _____ of the business is the most important single factor for being able to borrow
significant amounts of money.
A. character
B. capacity
C. condition
D. collateral
The capacity of the business to repay loans is measured primarily by two factors: profitability
and cash flows from operations.
AACSB: Analytic
Difficulty: Medium
57. (p. 487) Which of these refers to something of value given or pledged as security for payment of
a loan?
A. Character
B. Capacity
C. Condition
D. Collateral
Collateral may consist of financial instruments, such as stocks, bonds, and negotiable paper, or of
physical goods, such as trucks, machinery, land, or buildings.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
58. (p. 487) _____ is the value of a business that exceeds the sum of the value of all individual
assets but that cannot be sold separately from the business.
A. Goodwill
B. Collateral
C. Inventory
D. Debt
Goodwill is a valuable intangible asset but cannot be transferred to a lender to satisfy debt.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
59. (p. 488) There are two general sources of gift financing
A. institutional and personal.
B. debt and equity.
C. consumer and commercial banks.
D. angel and venture capital.
There are two general sources of gift financing: one is institutional, from government agencies
and foundations, and the other is personal, from family or occasionally from friends.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
60. (p. 488) The most common form of institutional gift financing is in the form of
A. incubators.
B. reduced taxes.
C. state grants.
D. donated capital.
The most common form of institutional gift financing is in the form of reduced taxes, either
through tax abatement or in the form of a credit against taxes payable.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
61. (p. 489) _____ is provided by state and local governments, primarily to encourage specific
activities that are expected to improve the blighted areas or provide additional employment.
A. Debt capital
B. Venture investment
C. Tax abatement
D. Equity capital
Tax abatement is a legal reduction in taxes by a government.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
62. (p. 489) Gifts of money made to a business for a specific purpose are called
A. equities.
B. debts.
C. tax credits.
D. grants.
The stated purpose of grant programs is to encourage development of small businesses, thereby
increasing the economic activity of the country.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
63. (p. 489) Direct reductions in the amount of taxes that must be paid, dependent upon meeting
some legal criteria are called as
A. tax abatements.
B. grants.
C. tax credits.
D. debts.
Tax credits are provided for the purpose of encouraging investment in specific types of assets, to
increase economic activity in specified disadvantaged geographical areas, increase the welfare of
specific groups of citizens, or support industries that are held to be of national strategic interest.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
64. (p. 489) The two largest governmental grant programs that are specifically intended for small
business are
A. SBIR and STTR.
B. SBA and SBDC.
C. EDA and DBED.
D. tax credits and tax abatement.
The two largest governmental grant programs that are specifically intended for small business
are the Small Business Innovation Research (SBIR) program and the Small Business Technology
Transfer (STTR) program.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
65. (p. 489) It is required that every U.S. agency that makes research grants provide a minimum of
_____ percent of its grant budget to small businesses, as defined by the SBA.
A. 10
B. 2
C. 18
D. 25
In 2002, the SBIR program resulted in over $1.5 billion in grants made to participating small
businesses.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
66. (p. 490) Which of these is a government organization that works to increase economic activity
in the form of job opportunities within a specific geographic area?
A. Small Business Administration
B. Center for regional progress
C. Economic development agency
D. Rural economic enterprise agency
Most economic development agencies prefer to provide loans rather than providing equity capital
or gift capital.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
67. (p. 490) Which of these refers to an institution to which private wealth is contributed and from
which private wealth is distributed for public purposes?
A. SBA
B. Limited Liability Company
C. EDA
D. Foundation
Foundations exist for the purpose of addressing some identified social need that cannot be
adequately met by market forces.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
68. (p. 491) Where family or friends let you add your purchases with theirs in order to get lower
prices it is called as
A. piggybacking.
B. accelerated cash-outs.
C. free use.
D. overpayment.
Piggybacking is a form of a personal gift. See Exhibit 15.1
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
69. (p. 491) When you are given the funds for your business from an account your family set up for
your future education or first home, then it is called as
A. piggybacking.
B. accelerated cash-outs.
C. free use.
D. overpayment.
Accelerated cash-outs are a form of personal gifts. See Exhibit 15.1
AACSB: Analytic
Difficulty: Medium
70. (p. 491) Which of these is NOT a form of a personal gift?

A. Tax credits
B. Free use
C. Forgiveness
D. Piggybacking
Tax credits are a form of institutional gift financing. See Exhibit 15.1
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
71. (p. 492) Komter and Vollebergh showed that gifts given to extended kin are usually made
because of
A. feelings of affection.
B. tax avoidance.
C. feelings of obligation.
D. hidden agenda.
Komter and Vollebergh showed that gifts given to extended kin are usually made because of
feelings of obligation and rarely because of feelings of affection.
AACSB: Analytic
Difficulty: Medium
72. (p. 492) _____ refers to the percentage cost of obtaining future funds.
A. Risk
B. Cost of capital
C. Financial leverage
D. Optimum capital structure
Firm value is inversely related to cost of capital at any level of operations.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
73. (p. 492) Which of the following is the term used for the expected average future cost of funds?
A. Optimum capital structure
B. Financial leverage
C. WAC
D. Financial risk
The more debt that is included in the capital mix, the lower the weighted average cost will be.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
74. (p. 493) This is the measure of the amount of debt relative to total investment.
A. Cost of capital
B. Financial leverage
C. Optimum capital structure
D. Financial risk
As debt increases as a percentage of total investment (called financial leverage), the value of the
firm increases at a decreasing rate.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
75. (p. 493) When debt increases as a percentage of total investment, the value of the firm
A. increases at a decreasing rate.
B. decreases significantly.
C. increases at an accelerated rate.
D. enhances equity position.
As debt increases as a percentage of total investment (called financial leverage), the value of the
firm increases at a decreasing rate. At some debt-to-equity ratio, the firm value peaks and then
begins to decrease as added debt is incurred.
AACSB: Analytic
Difficulty: Hard
76. (p. 493) The ratio of debt to equity that provides the maximum level of profits is called the
A. cost of capital.
B. declining financial leverage position.
C. optimum capital structure.
D. WAC.
Few, if any, small business owners attempt to estimate the optimum capital structure of their
business. Making such calculations takes too much time for the value provided.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
77. (p. 494) Borrowing increases potential profits by
A. increasing the weighted average cost of capital.
B. minimizing capital funds.
C. lowering the weighted average cost of capital.
D. enhancing the equity position in the business.
The more debt that is included in the capital mix, the lower is the weighted average cost of
capital.
AACSB: Analytic
Difficulty: Medium
78. (p. 494) The ratio of profits to owner investment in a business is called
A. return on equity.
B. return on assets.
C. return on sales.
D. return on inventory.
Return on equity measures the management's effectiveness in using investor funds to provide
profits.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
79. (p. 496) Restrictions imposed by loan contracts on the operations of a business, such as
requiring that a specific minimum net worth be maintained, a specific debt-to-equity ratio not be
exceeded, no dividends be paid to stockholders and so on, are known as
A. financial contracts.
B. legal bonds.
C. loan covenants.
D. credit assurance.
Loan covenants, can seriously limit management's freedom to operate the business and can make
taking on shareowners seem like less of a burden.
AACSB: Analytic
Difficulty: Medium
80. (p. 496) Identify the type of ratio that measures how productive a particular asset is in producing
sales activity.
A. Current ratios
B. Profitability ratios
C. Activity ratios
D. Leverage ratios
Activity ratios such as asset turnover ratio, accounts receivable turnover ratio, inventory turnover
ratio, and average holding period are used to analyze income statements.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
81. (p. 496) Which type of ratio measures management effectiveness in creating wealth from sales
and from invested funds?
A. Liquidity ratios
B. Activity ratios
C. Asset turnover ratios
D. Profitability ratios
As a firm reaches its break-even point, profits become a reality, and Profitability Ratios become
increasingly important to the firm.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
82. (p. 496) _____ measure the business's ability to pay debts and expenses that are due in the
current accounting period.
A. Liquidity ratios
B. Profitability ratios
C. Activity ratios
D. Leverage ratios
Current ratio is a commonly used liquidity ratio.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
83. (p. 496) Identify the type of ratio that measures the relative risk that a business setback could
cause bankruptcy.
A. Liquidity ratios
B. Gross margin ratios
C. Leverage ratios
D. Profitability ratios
Leverage Ratios are important because they look at the longer-term success of the firm, as well
as its ability to weather threats leading to bankruptcy.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
84. (p. 497) This ratio measures the percentage of sales revenue available to pay operating costs and
to provide profits after paying for inventory.
A. Profitability ratios
B. Gross margin ratios
C. Activity ratios
D. Quick ratios
Gross margin ratio is calculated as: Gross margin/Sales revenue. See Table 15.4
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
85. (p. 497) This ratio is the measure of how much money can be made available very quickly to
pay obligations within the fiscal year.
A. Current ratios
B. Acid test ratios
C. Activity ratios
D. Leverage ratios
Acid test ratio is also known as quick ratio. See Table 15.4
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
86. (p. 498) This is a set of theories and techniques used to optimize the receipt and use of capital
assets.
A. Wealth management
B. Financial management
C. Risk management
D. Quality management
A business's needs for financial management change as the business develops, as economic
conditions vary, and as your needs and goals change.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
87. (p. 499) During the start-up phase of a small business the "3-F investors" are all of these
EXCEPT
A. friends.
B. family.
C. fools.
D. foundations.
Outsiders who provide funding during the start-up phase of a small business are often referred to
as "3-F investors," that is, "friends, family, and fools."
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
88. (p. 499) Which of these is the least available funding source for new firms?
A. Loans from family and friends
B. Owner capital
C. External loans from commercial-rate lenders
D. External loans from motivated lenders
Owner's capital is the most widely available source, while loans from commercial-grade lending
institutions such as banks are the least available. Loan and finance companies are more likely
sources of financing than banks because these lenders are "motivated" by the payoff from high-
interest-rate loans.
AACSB: Analytic
Difficulty: Medium
89. (p. 500) Which of the following statements is true regarding business angels?
A. Individual angels are publicly known and hence easy to find.
B. Individual angels typically invest between $50,000 to $100,000.
C. Individual angels may invest remotely via syndicate.
D. The reporting requirements of individual angels are usually formal and are set by an angel
fund.
Individual angels are hard to find. They prefer to invest in businesses which are in close
proximity. Reporting requirements vary by individual. See Table 15.5
AACSB: Analytic
Difficulty: Hard
90. (p. 502) If you plan to _____your business, you should be removing all surplus cash, and
tightening the cash-to-cash cycle to the shortest time possible.
A. transfer
B. sell
C. terminate
D. close
If you plan to sell your business, your goals should be to optimize capital structure for profits.
Investors usually will not pay to "buy" cash in your business. Therefore, you should be removing
all surplus cash, and tightening the cash-to-cash cycle to the shortest time possible.
AACSB: Analytic
Difficulty: Hard
Scenario: Johnny's "Joyride Graphics"

"Joyride Graphics", a graphic design company, is a dream of Johnny Jackson, a native of
Jacksonville. Being in a rural University town, Johnny knows quite a few people. This situation
has put Johnny in a dilemma with his business start-up phase financing. He is really confused
about where else he can get money other than his own pocket for his "Joyride Graphics".
91. (p. 480) Given that the Joyride Graphics is in a start-up phase, which of these would represent
its financial management need?
A. Building owner's wealth
B. Profits being secondary to cash flow
C. Investing to build equity and firm value
D. Cash for building inventory levels
During the start-up phase of a small business the primary financial management need is to obtain
sufficient funds to pay for equipment, buildings, inventory, and indeed, all the costs of starting
and running a business. See Table 15.1

Difficulty: Medium
92. (p. 480) As Joyride Graphics moves into the growth phase, which of these would more likely
become its dominant financial management need?
A. Cash flow "smoothing"
B. Investing to build equity and firm value
C. Productivity
D. Cash for marketing
The emphasis of financial management during periods of growth is to obtain increasing amounts
of cash inflows to pay for added inventory, productive assets, and employees needed to meet
growing levels of business operations. See Table 15.1

Difficulty: Medium
93. (p. 480) In which phase of the business should Johnny be able to apply and obtain institutional
gift financing?
A. Growth
B. Merge
C. Start-up
D. Develop
During the growth phase, firms can apply for SBIR, STTR, and state grants. See Table 15.1

Difficulty: Medium
94. (p. 483) If Johnny wants limited liability with Joyride Graphics, he can consider any of these
legal forms EXCEPT
A. a corporation.
B. a limited partnership.
C. a sole proprietorship.
D. an LLC.
A sole proprietorship is a business owned by a single individual who is responsible for all debts
and claims against the business.

Difficulty: Medium
Essay Questions
Chapter 16 Assets: Inventory and Operations Management Answer Key

1. (p. 508) Given the high interest rate charges, current practice is for small businesses to provide
direct credit to customers.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
2. (p. 509) Providing customer credit usually results in increased sales revenues and lowered
transaction costs.
TRUE
AACSB: Analytic
Difficulty: Hard
3. (p. 509) One of the policies for managing customer credit requires business owners to maintain
constant "aging" of accounts to quickly identify customers who become delinquent.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
4. (p. 510) When you factor receivables, you get about 50 percent of the amount due, where as,
when you pledge receivables, you immediately get 75 to 80 percent of the amount due.
FALSE
AACSB: Analytic
Difficulty: Hard
5. (p. 510) Accounts receivable are the largest current asset that most manufacturing, wholesale,
and retail firms have.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
6. (p. 511) The total cost of keeping inventory is the sum of the cost of buying it, the cost of
keeping it on hand, and the cost of ordering more.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
7. (p. 511-512) EOQ is also known as the reorder point.

FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
8. (p. 513) The cost of owning and holding inventory is far greater than the cost of ordering
inventory.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
9. (p. 513) The ultimate extension of pull-through processing is just-in-time inventory

management.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
10. (p. 513-514) Given the high cost of keeping and counting inventory, most small businesses use
the perpetual inventory method.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
11. (p. 513-514) The main drawback of using periodic inventory systems is the high cost in time
needed for constant record keeping.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
12. (p. 514) In the POS systems, every sale is immediately recorded in the accounting system.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
13. (p. 515) The value of operating assets is a function of their utility.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
14. (p. 516) Replacement value is an accounting term that describes the difference between the
original acquisition cost of capital assets and the amount of depreciation expense that has been
recognized for them.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
15. (p. 516) The primary advantage of replacement value is that you can be quite confident of its
accuracy.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
16. (p. 516-517) Potential buyers and investors are most interested in the book value of the asset
since it represents the real cost of that asset.
FALSE
AACSB: Analytic
Difficulty: Hard
17. (p. 518) Cost of owning an asset includes cost incurred in financing, insuring, taxing, or
tracking an asset.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
18. (p. 519) The two most commonly used financial ratios for comparing investment alternatives
are payback period and return on sales.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
19. (p. 521) The primary advantage of ROI is that it focuses on the time value of money.
FALSE
AACSB: Analytic
Difficulty: Medium
20. (p. 522) There are two basic types of leases: operating leases and capital leases.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
21. (p. 508) _____ is money that is owed to your business by your customers.
A. Inventory
B. Accounts receivable
C. Factor receivables
D. Accounts payable
Relatively few small businesses provide credit to their customers; current practice is for small
businesses to provide credit only by accepting bank-issued credit cards.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
22. (p. 508) Which of these represents the current practice for small businesses to provide credit?
A. Providing credit by accepting bank-issued credit cards.
B. Providing no credit.
C. Providing direct credit to customers to build loyalty.
D. Providing credit only when approved and backed by government agencies.
Relatively few small businesses provide credit to their customers; current practice is for small
businesses to provide credit only by accepting bank-issued credit cards.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
23. (p. 508) Which of these is true about providing credit?
A. It usually results in lower sales revenues.
B. It accelerates the receipt of cash.
C. It reduces the cost of selling.
D. It forces all the customers to pay.
Providing credit reduces the cost of selling, because it is much less expensive to obtain repeat
business than it is to get new customers.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
24. (p. 508) All of these are negative effects of extending credit to customers EXCEPT:
A. it delays the receipt of cash.
B. it creates a borrowing situation for the owners of the business providing credit.
C. some customers with credit will not pay.
D. it increases the cost of selling.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
25. (p. 509) Which of these is NOT a recommended policy for managing accounts receivable?
A. Maintaining constant "aging" of customers to quickly identify the ones who may become
delinquent.
B. Using your bank as a lock box for the receipt of payments.
C. Enforcing significant late fees and interest on past due accounts.
D. Discontinuing credit sales to customers who become significantly late in paying.
One the policies to manage accounts receivables is to maintain constant "aging" of accounts (not
customers as given in option A) to quickly identify customers who become delinquent.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
26. (p. 510) Selling the right to collect accounts receivable to an entity outside your business is
called:
A. pledging receivable.
B. factoring.
C. EOQ.
D. JIT inventory.
A factoring company will usually pay you about 75 to 80 percent of the total amount that can be
collected.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
27. (p. 519) What is the difference between the gross amount of the receivables and the amount that
is ultimately collected?
A. Factor's profit margin
B. Lock box
C. Profit maximization
D. Commission
A factoring company will usually pay you about 75 to 80 percent of the total amount that can be
collected. The factor then collects the receivables. The difference between the gross amount of
the receivables and the amount that is ultimately collected is the factor's profit margin.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
28. (p. 510) Giving a third party legal rights to debts owed your business in order to provide
assurance that borrowed money will be repaid refers to:
A. pledging receivable.
B. factoring.
C. EOQ.
D. JIT inventory.
Pledging receivables to a commercial lender is usually less expensive than factoring. When you
pledge receivables, your business is liable only for the borrowed amount and accrued interest on
the loan, regardless of the amount that is subsequently collected from your customers.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
29. (p. 510) Pledging receivables will get you about _____ of the amount that can be collected,
where as, factoring can get you _____ percent of the amount due.
A. one-fourth; 90-95
B. one-fifth; 40-45
C. one-half; 75-80
D. three-fourth; 20-25
In factoring, you forever give up all rights to the factor's discount. For this amount, the finance
company assumes your bad debt risk. If a factor does not collect enough to make a profit, it's the
factor's problem, not yours.
AACSB: Analytic
Difficulty: Hard
30. (p. 521) Which of these is the largest current asset that most manufacturing, wholesale, and
retail firms have?
A. Cash
B. Property, plant, and equipment
C. Accounts receivable
D. Inventory
Manufacturing firms, wholesalers, and retailers simply cannot operate effectively without a
minimum level of inventory on hand.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
31. (p. 510) Products that are held for sale to customers are called:
A. inventory.
B. layaways.
C. accounts receivable.
D. equipments.
Inventory is the largest current asset that most manufacturing, wholesale, and retail firms have.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
32. (p. 511) Which of the following is a statistical technique that determines the quantity of
inventory that a business must hold to minimize total inventory cost?
A. JIT
B. EOQ
C. Reorder point
D. Microinventory
The total cost of keeping inventory is the sum of: the cost to buy the inventory; the cost to store,
protect, and maintain inventory; and the cost of making an order to purchase inventory.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
33. (p. 511) EOQ helps you think in terms of
A. buying and selling.
B. ordering costs and carrying costs.
C. borrowing cost and kiting costs.
D. ordering cost and lost sales.
If you consider both these and purchase price, you get the economic order quantity (EOQ)the
quantity at which the total cost of inventory is minimized.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
34. (p. 512) Which of these also refers to reorder point?

A. Microinventory
B. JIT
C. Optimum stocking level
D. EOQ
The optimum stocking level is the amount of inventory that results in the minimum cost.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
35. (p. 512) The _____ is the amount of inventory that results in the minimum cost, considering the
cost of lost sales resulting from running out of stock, the number of units sold per day, and the
number of days required to receive inventory.
A. microinventory
B. periodic inventory
C. EOQ
D. optimum stocking level
The optimum stocking level is also called reorder point.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
36. (p. 513) JIT inventory system attempts to reduce inventory levels to the absolute minimum by
all of the following EXCEPT:
A. accepting inventory only as it is sold.
B. assembling product in the absolute minimum time possible.
C. keeping safety stock in case sales might be greater than forecast.
D. shipping product to the customer immediately upon completion.
The ultimate extension of pull-through processing is just-in-time inventory management.
AACSB: Analytic
Difficulty: Medium
37. (p. 512) In practice, managers of small businesses tend to use which of these when it comes to
inventory?
A. Heuristic
B. EOQ
C. Statistical analysis
D. JIT analysis
A heuristic is a rule of thumb.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
38. (p. 513) The practice of acquiring inventory only in response to a completed sale is called a(n):
A. economic order quantity.
B. pull-through system.
C. periodic inventory.
D. perpetual inventory.
Once a customer sale is made, an order is placed to either obtain or produce the product. Each
stage of the production process operates in response to this order, ultimately reaching back to the
acquisition of the raw materials from which the product is made.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
39. (p. 513) The practice of purchasing and accepting delivery of inventory only after it has been
sold to the final customer is called a(n) _____ inventory system.
A. EOQ
B. periodic
C. JIT
D. perpetual
The ultimate extension of pull-through processing is just-in-time inventory management.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
40. (p. 513) All of these are primary inventories of manufacturing EXCEPT
A. raw material.
B. work in process.
C. finished goods.
D. presold goods.
The primary inventories are three: raw materials; work in progress; and finished goods.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
41. (p. 513) The purchase of inventory, very typical with Internet firms, only after a sale is made is
called:
A. microinventory.
B. periodic inventory.
C. perpetual inventory.
D. point-of-sale system.
This practice is the ultimate just-in-time process.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
42. (p. 513) The process of physically counting business assets on a set schedule is called:
A. microinventory.
C. point-of-sale system.
The time between counts is usually one business year, although periodic inventories may be
conducted twice per year, quarterly, monthly, or as often as your business needs require.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
43. (p. 513) For periodic inventory, the time between counts is usually:
A. one quarter.
B. six months.
C. one business year.
D. 30 days.
The time between counts is usually one business year, although periodic inventories may be
conducted twice per year, quarterly, monthly, or as often as your business needs require.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
44. (p. 513-514) A system of recording the receipt and sale of each item as it occurs is called:
A. microinventory.
C. point-of-sale system.
A perpetual inventory system maintains a constant record of the amounts and value of inventory
that has been sold and the amounts and value of inventory on hand.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
45. (p. 514) _____ is one method used to reduce the cost of perpetual inventory system.
A. Bar coding
B. Periodic inventory
C. Microinventory
D. JIT
Bar codes are computer readable tags that are unique to each item of inventory. The most
common bar codes are called UPCs or universal product codes.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
46. (p. 514) _____ comprises both hardware and software to integrate inventory management
directly into your accounting system.
A. Microinventory
B. Point-of-sale system
C. Periodic inventory
D. Perpetual inventory
In these systems, every sale is immediately recorded in the accounting system. Revenue is
increased and inventory is decreased simultaneously.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
47. (p. 515) Capital assets are otherwise known as:

A. operating assets.
B. inventory.
C. intangible assets.
D. current assets.
There are two fundamental kinds of assets in a businessshort-term, which includes inventory
and accounts receivable, and operating or capital assets.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
48. (p. 516) This method defines utility as being the net cash inflows that the asset will produce.
A. Future cash flow valuation
B. Investment cash flow valuation
C. Financing cash flow valuation
D. Discounted cash flow valuation
The value of the asset is the sum of these cash flows discounted for time and cost of capital.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
49. (p. 515) Assets that are expected to provide economic benefits for periods of time greater than
one year are called:
A. accounts receivable.
B. short-term investments.
C. capital assets.
D. cash and cash equivalent assets.
Transportation, manufacturing, automobile repair, mining, ranching, and farming businesses all
require the use of substantial capital assets in the form of land, buildings, and machinery.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
50. (p. 516) Which of these is NOT an accounting method to value capital assets?
A. Disposal value
B. Book value
C. Replacement value
D. Inflation value
The four accounting methods to value capital assets are (1) book value, (2) disposal value, (3)
replacement value, and (4) fair market value.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
51. (p. 516) _____ is an accounting term that describes the difference between the original
acquisition cost of capital assets and the amount of depreciation expense that has been
recognized for them.
A. Book value
B. Disposal value
C. Fair market value
D. Replacement value
This is true for two reasons: (1) Purchase price is not an indicator of the current value of any
asset, and (2) depreciation is not, nor is it intended to be, any measure of the consumption
through use of an asset's value.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
52. (p. 527) _____ is a method of estimating asset value by calculating the net amount that you
would realize were you to sell the asset in an "arm's-length" transaction.
A. Book value
B. Disposal value
C. Fair market value
D. Replacement value
This is accomplished by subtracting from the estimated sale price the estimated costs of selling,
disassembly, shipping, indeed, all costs necessary to dispose of the asset. Disposal value is the
residual of many estimates.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
53. (p. 516) What is an arbitrary, but regular and systematic method used to take an asset value as
an expense for the purpose of calculating net income or loss?
A. Book value
B. Depreciation
C. Arm's length transaction
D. Disposal value
Depreciation is based on three assumptions: (1) that the asset has a fixed, determinable period of
utility, (2) that the asset has a fixed, determinable value that will exist when the depreciation
process is complete, and (3) that the value of the asset will decline in a continuous and
predictable manner over the period of utility.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
54. (p. 516) The price at which goods and services are bought and sold between willing sellers and
buyers in an arm's-length transaction is called:
A. book value.
B. disposal value.
C. fair market value.
D. replacement value.
In contrast to disposal value, fair market value is assigned from the point of view of the buyer,
and thus includes the selling price and all costs to install, test, and prepare the asset for
productive use.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
55. (p. 516) Depreciation is based on all of the following assumptions EXCEPT
A. that the asset has a fixed, determinable period of utility.
B. that the asset has a fixed, determinable value that will exist when the depreciation process is
complete.
C. that the value of the asset will decline in a continuous and predictable manner over the period
of utility.
D. that it is the cost incurred to replace one asset with an identical asset.
Depreciation is an arbitrary, but regular and systematic, method used to take asset value as an
expense for the purpose of calculating net income or loss.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
56. (p. 516) _____ is the fixed and determinable value of an asset that will exist when the
depreciation process is complete.
A. Useful life
B. Salvage value
C. Book value
D. Disposal value
Depreciation is an arbitrary, but regular and systematic, method used to take asset value as an
expense for the purpose of calculating net income or loss.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
57. (p. 516) The primary advantage of replacement value is:
A. accuracy.
B. high cost.
C. low taxes.
D. low cost.
The disadvantage is that the price of a new asset is often much greater than the price of an
essentially identical asset already in your business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
58. (p. 516) Identify the term used for an asset with a fixed determinable period of utility.
A. Useful life
B. Salvage value
C. Book value
D. Disposal value
Depreciation is based on three assumptions: (1) that the asset has a fixed, determinable period of
utility, (2) that the asset has a fixed, determinable value that will exist when the depreciation
process is complete, and (3) that the value of the asset will decline in a continuous and
predictable manner over the period of utility.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
59. (p. 516) Which of the following is not generally considered to be very useful for any purpose
other than accounting and income taxes?
A. Replacement value
B. Salvage value
C. Book value
D. Disposal value
Book value is an accounting term that describes the difference between the original acquisition
cost of capital assets and the amount of depreciation expense that has been recognized for them.
AACSB: Analytic
Difficulty: Medium
60. (p. 516) Laws, regulations, and the requirements of GAAP require that _____ value be used for
financial reporting and income tax purposes.
A. book
B. fair market
C. replacement
D. disposal
Book value is generally considered to be not very useful for any purpose other than accounting
and income taxes, each of which, through law, regulation, and practice, require its use.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
61. (p. 516-517) If you are offering assets as collateral, lenders are most interested in _____ value.
A. book
B. fair market
C. replacement
D. disposal
If you are considering an investment opportunity, disposal value provides an estimate of the
timing and amounts of cash flows that can be used for net present value and internal rate of
return calculations. If you are offering your business for sale, as the seller of a business you
would view disposal value as a "lower limit" for the selling price because it approximates the
amount that would be realized were the business to be liquidated.
AACSB: Analytic
Difficulty: Hard
62. (p. 517) Potential buyers and investors are most interested in _____ value of your assets.
A. book
B. fair market
C. replacement
D. disposal
Replacement value sets an "upper level" for the value of your business assets as an
approximation of the cost that would be incurred to equip a start-up business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Hard
63. (p. 518) A general term for real estate, but that can also be applied as a legal term for anything
owned or possessed is called:
A. property.
B. plant.
C. equipment.
D. inventory.
If your business is wholesale or retail merchandising, the issues of property, plant, and
equipment (PPE) are most likely of relatively minor importance to your success.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
64. (p. 518) What is the cost incurred in financing, insuring, taxing, or tracking an asset?
A. Cost of owning
B. Whole of life costs
C. Cost of operating
D. Cost of disposition
All capital assets cause you to incur four costs over time: (1) the cost of acquiring the asset, (2)
the cost of owning the asset, (3) the cost of operating the asset, and (4) the cost of disposing of
the asset.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
65. (p. 518) A general term for the facilities of a business is called:
A. property.
B. plant.
C. equipment.
D. inventory.
If your business is wholesale or retail merchandising, the issues of property, plant, and
equipment (PPE) are most likely of relatively minor importance to your success.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
66. (p. 518) The sum of all costs of capital assets including acquisition, ownership, operation, and
disposal refers to:
A. cost of operation.
B. cost of owning.
C. whole of life cost.
D. replacement cost.
All capital assets cause you to incur four costs over time: (1) the cost of acquiring the asset, (2)
the cost of owning the asset, (3) the cost of operating the asset, and (4) the cost of disposing of
the asset.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
67. (p. 518) The direct cost incurred in using an asset for the purpose for which it was intended is
called:
A. cost of disposition.
B. cost of owning.
C. whole of life cost.
D. cost of operating.
Costs of operating the asset include the energy the asset consumes, maintenance, loss of
economic value resulting from wear and obsolescence, and any necessary training of operators.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
68. (p. 518) Cost incurred in the activities necessary to get rid of an asset is called:
A. whole of life costs.
B. cost of disposition.
C. cost of owning.
D. cost of operation.
Such costs include meeting environmental regulations, disassembly, advertising, commissions,

shipping, insurance, and fees.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
69. (p. 519) _____ refers to the process of deciding among various investment opportunities to
create a specific spending plan.
A. ROI
B. Payback period
C. Capital budgeting
D. Return on asset
The goal of capital budgeting is to improve the quality of decisions about how to best use the
scarce resources of the business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
70. (p. 519) The two most commonly used financial ratios for comparing investment alternatives
are:
A. current and quick ratios.
B. return on sales and return on investment.
C. operating profit margin and net profit margin.
D. payback period and ROI.
There are also two more complex approaches called net present value (NPV) and internal rate of
return (IRR).
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
71. (p. 520) The amount of time it takes a business to earn back the funds it paid out to obtain a
capital asset is called:
A. return on sales.
B. net profit margin.
C. ROI.
D. payback period.
The main advantage of using the payback period is its simplicity.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
72. (p. 520) A capital budgeting equation used to measure the relationship between initial
investment and the profits that are expected to be received from making the investment is called:
A. ROI.
B. return on sales.
C. current ratio.
D. NPV.
ROI is calculated as follows: ROI = (average annual profits)/(average investment)
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
73. (p. 520) The primary disadvantage of the payback period is that:
A. it disregards the time value of money.
B. it is highly complex.
C. it does not allow the comparisons of alternatives.
D. it incorporates all cash flows that occur after the payback period.
The main advantage of using the payback period is its simplicity.

Difficulty: Hard
74. (p. 522) Renting capital assets provides all of these advantages EXCEPT:
A. it requires little or no cash investment.
B. it does not require extensive paperwork.
C. it protects you from unexpected repairs.
D. it usually results in higher sales revenues due to repeat business.
In contrast to renting, purchasing often requires that your business be able to pay cash of 20
percent or more of the purchase price in order to be able to borrow funds to finance your
purchase.
AACSB: Analytic
Difficulty: Medium
75. (p. 522) All of the following are the disadvantages to rental EXCEPT:
A. it requires that you make regular payments.
B. the number of dollars paid in rent usually exceeds the number of dollars you would spend to
own the asset.
C. by renting capital equipment you incur ongoing costs if business conditions change.
D. you do not have an ownership position.
Renting capital equipment provides an easy method to avoid ongoing costs if business conditions
change.
AACSB: Analytic
Difficulty: Medium
76. (p. 522) A lease in which at the end of the lease period the asset becomes the property of the
lessee, possibly with an additional payment is called a(n):
A. operating lease.
B. short-term lease.
C. reverse lease.
D. capital lease.
The test to determine if a lease is a capital lease, rather than an operating lease, is the existence
of provisions for title of the asset to pass to the lessee at a price less than the asset's fair market
value.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
77. (p. 522-523) Which of the following is not a benefit of leasing?

A. You can usually obtain a very low down payment.
B. The process of negotiating and closing a lease is usually less complicated and expensive than
making a purchase and obtaining borrowed funds.
C. It is usually much easier for you to replace leased assets than it is to replace assets you own.
D. Leased assets have less number of restrictions on how they may be used, maintained, and
disposed of.
Because actual ownership of the asset remains with the lessor until the provisions of the lease
contract are fulfilled, the owner is not faced with the expensive and time consuming process of
repossession.

Difficulty: Medium
78. (p. 523) The primary disadvantage of leasing is that:
A. it usually costs more than would purchasing.
B. assets tend to have more breakdowns.
C. it requires extensive paperwork than would purchasing.
D. it generates fewer dollars in revenue sales.
A secondary disadvantage is that leased assets are usually subject to numerous restrictions on
how they may be used, maintained, and disposed of.
AACSB: Analytic
Difficulty: Medium
79. (p. 523) Under this type of arrangement, a small business may buy only that share that it can
reasonably use during the course of business.
A. Partnership
B. Fractional ownership
C. Joint Ventures
D. Limited company
Through fractional ownership, many small businesses now have access to business jets by having
purchased as little as one-sixteenth of the ownership rights.
AACSB: Analytic
Difficulty: Medium
80. (p. 525) Operational control depends on all of the following types of feedback EXCEPT:
A. informational feedback.
B. corrective feedback.
C. interpretive feedback.
D. reinforcing feedback.
A business that has multiple systems requires complicated feedback. Information must be
communicated among all managers and employees who are part of the system.

Difficulty: Medium
Scenario: A-One Garage Doors

Having worked in the door installation industry for about six years, Harry has started his own
company called "A-One Garage Doors". The company assembles, installs, provides services and
repairs for both residential and industrial garage doors. Like any other business when it comes to
residential accounts Harry's conditions are cash but for industrial accounts he thinks he should
offer credit. Furthermore, he is contemplating what level of inventory he should keep to meet the
demand.
81. (p. 508) Harry needs to know that when it comes to providing credit, this is true.
A. It reduces the cost of selling.
B. It forces all customers to pay.
C. It usually results in lower sales revenues.
D. It accelerates the receipt of cash.

Difficulty: Medium
82. (p. 508) Harry should be made aware that all of these are negative effects of extending credit to
his customers EXCEPT:
A. he may end up borrowing money to fill the gap.
B. sometimes customers who use credit will not pay.
C. it delays the receipt of cash.
D. it increases the cost of selling.

Difficulty: Medium
83. (p. 511) If Harry were to use EOQ, it would help him in terms of:
A. borrowing cost and buying cost.
B. lost sales cost and shelf-life cost.
C. ordering cost and carrying cost.
D. buying and selling.
If you consider both these and purchase price, you get the economic order quantity (EOQ)the
quantity at which the total cost of inventory is minimized.

Difficulty: Medium
84. (p. 513) If Harry adopts the practice of purchasing and accepting delivery of inventory only
after it has been sold to the final customer, it would be referred to as a(n) _____ inventory
system.
A. point-of-sale
B. JIT
C. EOQ
D. periodic
Just-in-time inventory is the practice of purchasing and accepting delivery of inventory only after
it has been sold to the final customer.
AACSB: Analytic
Difficulty: Medium
85. (p. 514) If Harry adopts a perpetual inventory system, _____ is one method that can be used to
reduce the cost.
A. periodic inventory
B. JIT
C. microinventory
D. bar coding
Bar coding is one method used to reduce the cost of perpetual inventory systems.
AACSB: Analytic
Difficulty: Medium
Essay Questions
Chapter 17 Small Business Protection: Risk Management and Insurance Answer

Key

1. (p. 540) Risk is the probability that future states of being will be better than you expect.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
2. (p. 541) The most common form of employee theft is the pilfering of items of small value.
TRUE
AACSB: Analytic
Difficulty: Medium
3. (p. 542) OSHA rules in most industries do not apply to firms with fewer than 50 employees.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
4. (p. 544) Although customers are, by definition, the "reason for being" of any business, they also
are the source of considerable business risk.
TRUE
AACSB: Analytic
Difficulty: Medium
5. (p. 545) The best strategy for managing any risk is to develop a business environment that
eliminates the probability of the event occurring.
FALSE
AACSB: Analytic
Difficulty: Medium
6. (p. 547) Managing risks to tools, equipment, inventory, and other physical assets is largely a
function of developing and enforcing appropriate business policies and procedures.
TRUE
AACSB: Analytic
Difficulty: Medium
7. (p. 549) The advantage with legal protection methods for intellectual property is that there are
multiple government agencies in each area that will assist a small business owner in maintaining
their legal rights.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
8. (p. 549) Copyrights, trademarks, and patents provide automatic protection to small business
owners.
FALSE
AACSB: Analytic
Difficulty: Medium
9. (p. 550) Intellectual property is constantly under attack.

TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
10. (p. 550) Separation of duties is a core management technique to safeguard money and other
valuable assets of a business.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
11. (p. 551) According to the Wells Report, the most costly employee frauds compared to total
business assets occur in businesses with fewer than 20 employees.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
12. (p. 553) In managing risk from violation of tax regulations, small business owners should make
paying taxes their first financial priority.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
13. (p. 554) The Technical Assistance Program is specifically aimed at the needs of hotels, motels,
restaurants, and other affected small businesses.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
14. (p. 556) Identifying risks is the first task to be completed before a comprehensive insurance
program can be developed for a business.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
15. (p. 558) Worker's compensation insurance is mandated by the legislatures of all the states and
territories of the United States.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
16. (p. 558) Errors and omissions insurance cover claims made by clients of attorneys, accountants,
and other consultants.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
17. (p. 560) Business interruption insurance provides funds to pay the ordinary operating expenses
of your business if it is forced to close temporarily because of an insured event.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
18. (p. 561) General credit insurance is easily affordable.

FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
19. (p. 562) Disability insurance is the most highly desired form of insurance for most employees.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
20. (p. 563) A disadvantage of joint ventures is that a partner can lose more than its investment in
the venture.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
21. (p. 540) Generally speaking, _____ is the probability that future states of being will be worse
than you expect.
A. risk
B. certainty
C. uncertainty
D. bankruptcy
Business risk is the probability that the future state of the business will be less successful than
planned, resulting in the loss of value of business assets.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
22. (p. 541) Inventory can be stolen, spoiled, or become obsolete. Production machinery can break
down. Furniture, office equipment, vehicles, and buildings can be damaged or destroyed by
vandalism, accidents, fire, flood, or wind. All of these represent risks related to the
A. personnel of the business.
B. customers of the business.
C. property of the business.
D. goods of the business.
Every business owns things of value such as machinery, skills, reputation, experience, furniture,
intellectual property, and so on. Each and every one of these types of property involves specific
forms of risk.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
23. (p. 541) The most common form of _____ is the pilfering of items of small value, such as office
supplies and small hand tools, or actions such as making copies for their children to use at school
or otherwise using company resources to make personal items.
A. breach of trust
B. contract violation
C. property risk
D. employee theft
Theft by personnel may involve direct stealing of money or other assets of the business, or may
be the conduct of an illegal act that is intended to provide personal benefit at a cost to the
business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
24. (p. 541) Misappropriation of business property by employees of that business refers to
A. OSHA violations.
B. employee theft.
C. loss of key employees.
D. noncompliance with ADA regulations.
Theft by personnel may involve direct stealing of money or other assets of the business, or may
be the conduct of an illegal act that is intended to provide personal benefit at a cost to the
business.

Bloom's: Knowledge
Difficulty: Easy
25. (p. 542) Which one of these government agencies is created to enforce safety in the workplace?
A. EEOC
B. OSHA
C. SBA
D. IRS
Occupational Safety and Health Administration (OSHA) is a government agency created to

enforce safety in the workplace.

Bloom's: Knowledge
Difficulty: Medium
26. (p. 542) In 1964, EEOC established five protected classes. Which of these is NOT one of them?
A. Race
B. Color
C. Age
D. Religion
In 1964, EEOC established five protected classes: "race, color, religion, sex or national origin."
Since then the authority of the EEOC has grown through the passage of the Age Discrimination
in Employment Act of 1967.

Bloom's: Knowledge
Difficulty: Medium
27. (p. 542) Age Discrimination in Employment Act makes it illegal to discriminate against people
who are older than _____ years of age.
A. 40
B. 25
C. 18
D. 65
The Age Discrimination in Employment Act was passed in 1967.

Bloom's: Knowledge
Difficulty: Medium
28. (p. 542) Which of these acts provide training for workers who are injured on the job?
A. Age Discrimination in Employment Act
B. Americans with Disabilities Act of 1990
C. Civil Rights Act of 1991
D. Rehabilitation Act of 1973
The authority of the EEOC has grown through the passage of Rehabilitation Act of 1973.

Bloom's: Knowledge
Difficulty: Medium
29. (p. 542) A series of acts by Congress that prohibit discrimination on the basis of race, color,
religion, sex, or national origin refers to the
A. Civil Rights Act of 1991.
B. ADEA of 1967.
C. Americans with Disabilities Act of 1990.
D. Rehabilitation Act of 1973.
The authority of the EEOC has grown through the passage of (1) the Age Discrimination in
Employment Act of 1967 (ADEA), (2) Rehabilitation Act of 1973, (3) Americans with
Disabilities Act of 1990 (ADA), and (4) the Civil Rights Act of 1991, all of which grant
additional rule-making and enforcement powers.

Bloom's: Knowledge
Difficulty: Medium
30. (p. 542-543) Which of these is NOT a strategy for dealing with compliance?
A. Staying small enough to remain below the thresholds for which these agencies' rules apply.
B. Indifferencenot spending time on compliance and, if caught, closing the business.
C. Fighting for what you believe to be right.
D. Growing very large so that these regulations do not apply.
A large size does not mean that a business will not have to deal with compliance issues.
AACSB: Analytic
Difficulty: Medium
31. (p. 543) Employees whose experience and skills are critical to the success of a business are
called _____ employees.
A. managerial
B. key
C. owner
D. family
Loss of key employees is a particularly acute risk for small businesses.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
32. (p. 544) The risk from customers arise from

A. injuries suffered while on business property and injury from using the business' products.
B. mental anguish from higher prices and loss of customers due to limited service.
C. mental anguish from high prices and injuries from using the high-priced products.
D. injuries suffered while on business property and injuries suffered at business property owner's
house.
These risks are in addition to the familiar risk of customers, who are sold products or services on
credit, not paying as they have agreed.
AACSB: Analytic
Difficulty: Medium
33. (p. 545) The magnitude of losses resulting from _____ claims has increased greatly in recent
years with an increase in class action lawsuits.
A. product liability
B. professional liability
C. premises liability
D. personal liability
Payment for injury or damage that occurs during the use of the business's products is referred to
as product liability.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
34. (p. 545) Certainly, the _____ your firm is, the _____ exposure you have to class action product
liability suits. This is partly due to the fact that a small business has _____ customers who can
claim harm.
A. smaller; greater; more
B. smaller; less; fewer
C. bigger; less; limited
D. bigger; more; limited
The smaller your firm is, the less exposure you have to class action product liability suits. This is
true for two reasons: A small business has fewer customers who can claim harm, and a small
business does not have the "deep pockets" of cash and other assets that can be raided by
rapacious law firms.
AACSB: Analytic
Difficulty: Medium
35. (p. 545) Restaurants, clothing retailers, barbers, and beauticians face relatively low risks of loss
from nonpayment because
A. most customers prefer making upfront payments for such products and services.
B. few people have credit cards that have charge limits big enough to buy such things.
C. giving credit to customers increases sales.
D. the amount that any one customer charges is unlikely to be big enough to threaten the
business if it is not paid.
Restaurants, clothing retailers, barbers, and beauticians face relatively low risks of loss from
nonpayment. First, most of these businesses provide credit only by accepting credit cards, which
reduces the risk of nonpayment. Second, the amount that any one customer charges is unlikely to
be big enough to threaten your business if it is not paid.
AACSB: Analytic
Difficulty: Medium
36. (p. 545) Payments for injury or damage that occurs during the use of the business's products is
referred to as
A. fringe benefits.
B. product liability.
C. customer service.
D. OSHA requirements.
The magnitude of losses resulting from product liability claims has increased greatly in recent
years with an increase in class action lawsuits.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
37. (p. 545) Different risks in the business can be managed by doing all of these EXCEPT
A. making specific plans for and arrangements to deal with foreseeable events.
B. creating and enforcing an appropriate code of conduct for yourself and all employees.
C. actively working to create physical hazards in your workplace as a test.
D. ensuring that valuable assets are physically secure.
The best strategy to manage risk is to develop a business environment that minimizes the
probability of the event occurring and the amount of loss that can be experienced if the event
does occur. You do this by (1) making specific plans for and arrangements to deal with
foreseeable events, (2) creating and enforcing an appropriate code of conduct for yourself and all
employees, (3) ensuring that valuable assets are physically secure, and (4) actively working to
get rid of any physical hazards in your workplace.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
38. (p. 546) A business can protect itself from _____ by performing regular inspections and
maintenance of the plumbing and fire suppression systems of its buildings.
A. floods
B. storms
C. hurricane
D. mudslides
Floods often occur from breaks in water supply pipes, from accidental activation of fire
suppression sprinklers, from blockages in storm and sanitary sewers, and from run off of water
that is sprayed upon burning buildings.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
39. (p. 547) _____ are programs designed to report on your keystrokes or data, or give remote
control of your PC to others.
A. Worms
B. Firewalls
C. Viruses
D. Spyware
Some spyware may use your computer to send out advertising spam on behalf of the hacker's
clients. Other spyware lets the hacker actually see and even steal data on your PC, including
passwords and credit card information.
AACSB: Use of Information Technology

Bloom's: Knowledge
Difficulty: Medium
40. (p. 547) _____ are programs or pieces of equipment called routers which serve as a barrier
between your PC and the Internet.
A. Passwords
B. Firewalls
C. Spyware
D. Encryptions
A firewall is used to protect a PC.

Bloom's: Knowledge
Difficulty: Medium
41. (p. 548) Which of the following practices should be adopted to ensure that a computer is kept
secure?
A. Using simple passwords
B. Changing passwords infrequently
C. Having a PC set to lock itself up after a few minutes of inactivity
D. Opening downloads from unexpected sources
A computer can only be secure if the people using it practice safe surfingusing complex
passwords, changing them frequently, and keeping passwords to themselves, not opening
downloads from unknown, unexpected, or untrustworthy sources, and having your PC set to lock
itself up after a few minutes of inactivity.

Bloom's: Knowledge
Difficulty: Medium
42. (p. 549) Which of these represents the problem with legal protection methods for intellectual
property?
A. There is no governmental agency that will assist small business owners in maintaining their
legal rights.
B. The cost of legal protection for intellectual property is so high that it is practically useless for
a small business owner.
C. Legal protection methods for intellectual property are primarily "reserved" for large business
with huge legal staff.
D. Legal protection methods can only be offered for tangible property and not intellectual
property.
Holding legal rights to intellectual property provides the owner solely with grounds to pursue
lawsuits against infringement.
AACSB: Analytic
Difficulty: Medium
43. (p. 550) ______ occurs when the owner of real property does not enforce property rights and
allows a non owner to use the property as if it were his or her own.
A. Intellectual property violation
B. Separation of duty
C. Property liability
D. Adverse possession
Although land is not subject to being physically stolen, you can lose your property rights through
a process called adverse possession.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
44. (p. 550) Physically protecting your property from theft can be termed as
A. asset liability.
B. adverse possession.
C. separation of duties.
D. vendor fraud.
Separation of duties refers to a type of internal control that separates the physical control of an
asset from the person accounting for that asset.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
45. (p. 550) Developing and enforcing rules that prevent the employee responsible for the asset
from being able to account for the asset is called
A. separation of duties.
B. asset liability.
C. adverse possession.
D. vendor fraud.
Separation of duties is a core management technique to safeguard money and other valuable
assets of a business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
46. (p. 551) Which is the number one method for fraud detection?
A. Internal audit
B. Internal control
C. Tip
D. External audit
The Wells Report found that nearly 40 percent of all frauds that were detected were found
because of a tip.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
47. (p. 551) This is a set of rules and procedures that work to limit the opportunity for employee
theft or malfeasance.
A. Internal audit
B. Internal control
C. Tip
D. Whistle blowing rewards
Internal control is a matter of establishing policies and procedures that work to make dishonesty
difficult and honesty easy.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
48. (p. 551) Which is the primary method of ensuring honesty in employees?
A. Tips
B. External audit
C. Whistle blowing rewards
D. Internal control
Internal control is a matter of establishing policies and procedures that work to make dishonesty
difficult and honesty easy.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
49. (p. 552) The greatest threat of loss from employee dishonesty occurs when
A. two or more employees collude.
B. employees lose their jobs.
C. employees are paid above market wages.
D. the owner establishes the culture of trust.
Employee collusion is both very common and very difficult to detect.
AACSB: Analytic
Difficulty: Medium
50. (p. 552) Which of the following is stolen through false employee sales?
A. Cash
B. Identity
C. Inventory
D. Credit card
The most common form of employee collusion is the theft of cash and inventory. Cash is most
usually stolen by making false disbursements. Inventory is stolen through false employee sales.
AACSB: Analytic
Difficulty: Medium
51. (p. 552) Employee contracts should include all of the following provisions EXCEPT
A. limit the employee's freedom to go into competition.
B. contain the employee's specific promise not to disclose sensitive or secret information.
C. offer punishments for providing inadequate termination notice.
D. cross training among employees.
When a key employee is identified, an employment contract should be negotiated which should
include provisions that offer rewards for providing adequate termination notice and a smooth
transition for replacements.
AACSB: Analytic
Difficulty: Medium
52. (p. 552) The most common form of employee collusion is
A. selling trade secrets to competition.
B. the theft of cash and inventory.
C. lying about work hours and absences.
D. the fraud related to healthcare activities.
Cash is most usually stolen by making false disbursements. Inventory is stolen through false
employee sales.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
53. (p. 552) _____ are laws and regulations that specify the requirements of taxation.
A. Tax systems
B. Tax slabs
C. Tax codes
D. Tax guides
The tax codes of all levels of government have become ever more complex, placing more and
more responsibility on businesses for calculating, collecting, and paying various taxes.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
54. (p. 553) Which of the following should be undertaken in order to reduce a business's exposure
to the risk of violating tax regulations?
A. Understate revenues and overstate deductible expenses
B. Reconcile the cash register tape to the cash register contents every day
C. Take cash from the businesses before it is recorded as revenue
D. Borrow from tax money in order to make payments to creditors
Most owners "skim" in ways small and large by taking cash from their businesses before it is
recorded as a revenue. Tax agents know assume that you have understated your revenues and
overstated your deductible expenses. It is your responsibility to prove that you have not.
Business owners must not give in to the temptation to "borrow" from tax money.
AACSB: Analytic
Difficulty: Medium
55. (p. 553) Which of the following statements is true regarding the OSHA Act?
A. It covers employees in mining, transportation, and state and local governments.
B. OSHA offers consultation services to employers for a fee.
C. A business must report within twenty four hours any accidents that result in a fatality or in the
hospitalization of three or more employees.
D. "Low- hazard" industries are exempt from the record keeping requirements of the regulations.
The OSHA Act covers all employees except those in mining, transportation, state and local
governments, and self-employment. OSHA offers free consultation services to employers. A
business must report within eight hours any accidents that result in a fatality or in the
hospitalization of three or more employees.
AACSB: Analytic
Difficulty: Medium
56. (p. 555) The best way to meet the basic laws of OSHA is to provide a place of employment that
is free of recognized hazards and to
A. provide medical examinations.
B. outsource OSHA requirements.
C. hire external experts for actual assessments.
D. keep the employee size below 100 to avoid any OSHA requirement enforcement.
The best way to meet the basic laws of OSHA is to provide a place of employment that is free of
recognized hazards and to: (1) Maintain tools and equipment in good condition. (2) Provide
appropriate safety equipment and training in its proper use.
(3) Provide medical examinations.
AACSB: Analytic
Difficulty: Medium
57. (p. 555) A(n) _____ is valuable process that can greatly help you with the issues of keeping
risks at acceptable levels. It is strictly a management tool which is not provided to outsiders, it
can be structured and conducted in any systematic manner you find acceptable.
A. insurance program
B. internal audit
C. external audit
D. internal control
A properly conducted, independent internal audit will give you an evaluation of your overall
level of business risk.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
58. (p. 556) All of the following should be undertaken in order to ensure that an internal audit is
effective EXCEPT
A. meet with whomever is going to conduct the internal audit in the presence of other members
of the management.
B. write an engagement agreement with the auditor that clearly establishes the scope of work to
be done.
C. provide sufficient authority to the auditor to ensure that he or she can accomplish the goals of
the audit.
D. establish with the auditor that you and your board of directors have the final authority to
review and approve the audit plan.
To be sure that the audit effectively meets your goals in having it conducted, you should meet
(without the presence of other members of your management) with whomever is going to
conduct the internal audit.
AACSB: Analytic
Difficulty: Hard
59. (p. 556) A contract between two or more parties in which one party agrees, for a fee, to assume
the risk of another is called
A. coverage.
B. insurance.
C. separation of duties.
D. OSHA enforcement.
Insurance provides a benefit by requiring a relatively small fee compared to the amount of loss
that is possible.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
60. (p. 556) The _____ likely an event is to occur, and the _____ the potential amount that the
insurance company must pay, the _____ the price that you must pay for coverage.
A. more; lesser; lower
B. less; greater; higher
C. more; greater; higher
D. less; lesser; higher
The more likely an event is to occur, and the greater the potential amount that the insurance
company must pay, the higher the price that you must pay for coverage. For this reason,
insurance coverage is either not available or is excessively expensive for common events.
AACSB: Analytic
Difficulty: Medium
61. (p. 556) The first task to be completed before a comprehensive insurance program can be
developed for your business is
A. to develop a financial plan.
B. to assess internal strengths.
C. to identify risks.
D. to provide a business succession plan.
Risks vary with the nature of the business.
AACSB: Analytic
Difficulty: Medium
62. (p. 556) Which among the following is a risk specific to dentists and physicians?
A. Business interruption
B. Malpractice claims
C. Errors and omissions claims
D. Product liability claims
Risks that are common to most small businesses include fire, flood, storm, theft, business
interruption, and loss of key personnel. Business-specific risks include product liability claims
for manufacturers, malpractice claims for dentists and physicians, and errors and omissions
claims for lawyers and accountants.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
63. (p. 557) These are required by law and exist to provide social protection from harm caused to
employees, customers, and uninvolved individuals.
A. OSHA enforcement
B. Coverages
C. Separation of duties
D. Insurance
Coverages are contractual provisions of insurance policies that specify what risks the insurance
company is assuming.
AACSB: Analytic
Difficulty: Medium
64. (p. 557) The most common mandatory insurance coverage includes
A. liability for damages caused by vehicle accidents.
B. maternity leave.
C. travel cancellation liability.
D. property damage at workplace by disgruntled employees.
Coverages required by law exist to provide social protection from harm caused to employees,
customers, and uninvolved individuals.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
65. (p. 557) All of the following are occasions when risks can be insured EXCEPT
A. when the risk is calculable.
B. when the value of any loss is measurable in dollars.
C. when the pool of potential policyholders is of sufficient size.
D. when the policyholder has an insurable personal interest.
The policyholder must have an insurable financial interest. See The Thoughtful Entrepreneur -
What Risks Can be Insured?
AACSB: Analytic
Difficulty: Medium
66. (p. 558) Desired coverages beyond mandatory insurance include all of the following EXCEPT
A. general liability.
B. product liability.
C. malpractice coverage.
D. vehicle accident liability.
Vehicle liability insurance is mandated by the legislatures of all the states and territories of the
United States.
AACSB: Analytic
Difficulty: Medium
67. (p. 558) Which of the following is an example of a special type of liability insurance that covers
losses from harm caused during the performance of your profession?
A. Unemployment insurance
B. Errors and omissions insurance
C. Liability insurance
D. Worker's compensation insurance
Errors and omissions insurance covers claims made by clients of attorneys, accountants, and
other consultants.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
68. (p. 558) This form of insurance is also called as a success protector policy.
A. Unemployment insurance
B. Worker's compensation insurance
C. General liability insurance
D. Product liability
General liability policies exist to pay losses that are not covered by other liability insurance.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
69. (p. 558) _____ exist to pay losses that are not covered by other liability insurance.
A. Malpractice insurance
B. Errors and omissions insurance
C. General liability insurance
D. Product liability insurance
General liability insurance is often referred to as an umbrella policy, or a success protector

policy.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
70. (p. 559) The cost of property insurance is determined largely by all of the following EXCEPT
A. the property's insurable value.
B. the amount of nondeductible loss.
C. the amount of co-insurance required.
D. the loss limits of the policy.
The cost of property insurance is determined largely by the amount of deductible loss.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
71. (p. 559) The amount of an asset for which a company will write an insurance policy is called
A. personal protection plan.
B. insurable value.
C. deductible.
D. co-insurance.
All the value of a property does not have insurable value.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
72. (p. 559) A(n) _____ is an amount of loss that is specifically excluded by the insurance contract.
A. insurable value
B. co-insurance
C. deductible
D. coverage
A deductible is an amount of loss that will not be paid by an insurance company.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
73. (p. 559) As a general rule, the _____ the deductible, the _____ the policy premium payments
will be.
A. higher; lower
B. higher; higher
C. lower; higher
D. lower; lower
As a general rule, the higher the deductible, the lower the policy premium payments will be.
AACSB: Analytic
Difficulty: Medium
74. (p. 560) ______ is a contract requirement that works to prevent property owners from
deliberately underinsuring.
A. Deductible
B. Co-insurance
C. Insurable value
D. Separation of duty
Co-insurance requires that the owner carry insurance in an amount equal to a stated minimum
percentage of the market value of the property, most usually 80 percent.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
75. (p. 560) Co-insurance requires that the owner carry insurance in an amount equal to a stated
minimum percentage of the market value of the property, most usually _____ percent.
A. 50
B. 60
C. 70
D. 80
Co-insurance requires that the owner carry insurance in an amount equal to a stated minimum
percentage of the market value of the property, most usually 80 percent. If the owner allows
insurance coverage to fall below this amount, then the amount that the insurance company will
pay in the event of loss is reduced by an amount proportional to the amount of underinsurance.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
76. (p. 560) Identify the insurance that provides funds to pay the ordinary operating expenses of
your business should it be forced to close temporarily because of an insured event.
A. Crime insurance
B. Theft insurance
C. Business interruption insurance
D. Bond insurance
Although business interruption insurance can be purchased as a stand-alone policy, it is most

usually acquired as a provision of commercial property insurance.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
77. (p. 560) _____ offers protection against losses from crimes committed against your business.
A. Felony insurance
B. Crime insurance
C. Security insurance
D. Safety insurance
The greatest number of crimes of which you are likely to be victim are committed by trusted
employees.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
78. (p. 560) Which of these are also called dishonesty bonds?
A. Credit bonds
B. Rescue bonds
C. Surety bonds
D. Fidelity bonds
Fidelity bonds repay employers for losses caused by dishonest or negligent employees.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
79. (p. 560) This type of bond is purchased only for the employer's benefit.
A. Credit bonds
B. Rescue bonds
C. Surety bonds
D. Fidelity bonds
Fidelity bonds cover losses from employee fraud, theft, forgery, and embezzlement.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
80. (p. 561) Which of the following statements is true regarding credit insurance?
A. It covers normal losses from credit customers not paying their bills.
B. Typical covered events include recessions, wars, or trade embargos.
C. It requires the merchant to provide co-insurance in the amount of 10 to 20 percent of the
credit loss.
D. It is available only for retailers.
Credit insurance covers abnormal losses from credit customers not paying their bills. Typical
covered events include customers who cease business because of bankruptcy or business
interruptions caused by fire, storm, wind, floods, and earthquakes. Less common and more
expensive coverage exists that will pay for losses that arise from general economic conditions
such as recession, war, or trade embargos. Credit insurance is available only for manufacturers
and wholesalers.
AACSB: Analytic
Difficulty: Medium
81. (p. 562) _____ is the most common kind of coverage on key persons.
A. Life insurance
B. Health insurance
C. Dental insurance
D. Credit insurance
Life insurance provided by the employer is usually term insurance.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
82. (p. 562) _____ is a form of insurance that does not accumulate any value over the contract
term.
A. Buyout insurance
B. Life insurance
C. Term insurance
D. Period insurance
Life insurance provided by you, the employer, is usually term insurance.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
83. (p. 562) Which of the following is true regarding disability insurance?
A. Disability insurance is usually provided as a stand-alone policy.
B. The most common disability coverage pays specific fixed costs of the business in the event
that the owner or other named key person becomes disabled.
C. Buyout insurance provides funds to the business to purchase the ownership position of a
disabled partner.
D. It is the most highly desired form of insurance for most employees.
Disability insurance is usually provided as part of life insurance. The most common disability
coverage provides the insured person with funds to replace income lost because of the inability
to work. Medical coverage is the most highly desired form of insurance for most employees.
AACSB: Analytic
Difficulty: Medium
84. (p. 562) The most highly desired form of insurance for most employees is
A. life insurance.
B. medical insurance.
C. credit insurance.
D. disability insurance.
Medical coverage is quite expensive, and the cost has been increasing rapidly in recent years.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
85. (p. 563) Partnerships through which two or more businesses combine to undertake a specific
economic activity is called
A. corporations.
B. sole proprietorships.
C. joint ventures.
D. S-corporations.
Each business involved in a joint venture keeps its own identity and conducts its own business
separately from that of the other partners.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
86. (p. 563) Which of the following statements is true regarding joint ventures?
A. They are most usually formed and taxed as partnerships.
B. It allows for proportionate allocation of revenues and expenses among the partner businesses.
C. Each partner can lose more than its investment in the venture.
D. Businesses involved in joint ventures combine their business identities.
It allows for disproportionate allocation of revenues and expenses among the partner businesses.
Each partner can lose no more than its investment in the venture. Each business involved in a
joint venture keeps its own identity.
AACSB: Analytic
Difficulty: Medium
87. (p. 563) Governments often _____ very risky ventures that private companies would otherwise
never attempt.
A. neutralize
B. subsidize
C. secure
D. oppose
Risk for a government is very different from risk for private business. Governments often
subsidize very risky ventures that private companies would otherwise never attempt.
AACSB: Analytic
Difficulty: Medium
Scenario: Klassic Karate

Being a black belt in two different martial arts, Kirk Karwan has opened his martial arts school,
"Klassic Karate" to teach karate to young children and adults. Kirk has hired six other black belts
to help him teach the 300 plus children and adults who have signed up at the school. When asked
by some parents about the type of insurance the school carries and how he manages the different
risks, Kirk was stunned. Not only had he not bought the insurance but he had not even thought
about it or any other types of risks.
88. (p. 541) When it comes to the other black belts hired by Kirk, which of these represent a
business risk that Kirk needs to manage?
A. Klassic Karate's location
B. Klassic Karate's marketing
C. Violation of government regulations
D. Karate being inappropriate for children
Violation of government regulations is a source of significant business risk.

Difficulty: Medium
89. (p. 556) The first task that Kirk needs to complete before a comprehensive insurance program
can be developed for Klassic Karate is
A. to provide a business succession plan for Klassic Karate.
B. to raise the number of participants for Klassic Karate.
C. to develop a financial plan for Klassic Karate.
D. to identify risks faced by Klassic Karate.
Identifying risks is the first task to be completed before a comprehensive insurance program can
be developed for your business.

Difficulty: Medium
90. (p. 558) Desired coverage beyond mandatory insurance that Kirk may want to consider includes
all of these EXCEPT
A. unemployment insurance.
B. catastrophe.
C. product liability.
D. general liability.
Unemployment insurance for employees is a mandatory requirement.

Difficulty: Hard
Essay Questions
Chapter 18 Legal Issues: Recognizing Your Small Business Needs Answer Key
1. (p. 575) Clients and attorneys start with a natural conflict of interest related to money.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
2. (p. 575) When using a retainer, the attorney does not get paid until you get paid.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
3. (p. 578) Small-claims courts work only when you are owed money, can prove it, and have
exhausted other procedures like calls and letters to the customer.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
4. (p. 579) The name of your business can be called its doing business as (dba) name.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
5. (p. 581) The major advantage of sole proprietorship is that the legal entity is separate and distinct
from its owners as individuals.
FALSE
AACSB: Analytic
Difficulty: Medium
6. (p. 582) The total liability issue in general partnerships is like that of sole proprietorship,
therefore, partnerships are something to avoid.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
7. (p. 584) In the case of a professional corporation, the shareholders are responsible for debts of the
corporation.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
8. (p. 585) If the business is a corporation or an LLC, the owner can "only" lose what he or she has
in the business.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
9. (p. 586) In business negotiations, if one side wins, the other side loses.
FALSE
AACSB: Analytic
Difficulty: Medium
10. (p. 587) It is important to always keep issues of legality in the back of your mind when
negotiating without a lawyer present.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
11. (p. 588) Torts can arise when a person's legal rights are violated in ways other than from a
breach of contract.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
12. (p. 590) The Sarbanes-Oxley Act covers small businesses that are not publicly traded.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
13. (p. 591) In the case of mediation, the dispute is put to a neutral third party who is a judge.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
14. (p. 592) All contracts have to be in writing to be enforceable.

FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
15. (p. 593) Small businesses almost always do better before judges and almost never do better
before arbitrators. Therefore, the court becomes a preferred choice for small business owners
over arbitrators in contract disputes.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
16. (p. 594) If you want to ensure control over the selling process, make it very clear on the Web
site that the representations of merchandise or services are not actual offers to the buyer.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
17. (p. 596) Patents are essentially monopolies granted to inventors by the U.S. government giving
patent owners the exclusive rights to make, use, or sell that invention for a certain period of
time.
TRUE
AACSB: Analytic
Difficulty: Medium
18. (p. 600) A trade secret is not created by the government.

TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
19. (p. 601) Copyright involves the expression of ideas as well as the idea themselves.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
20. (p. 602) A trademark once granted lasts for 10 years and can continue to be renewed for another
5 years at a time.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium

21. (p. 572) Which of these countries has one of the most litigious societies in the world?
A. France
B. Japan
C. Switzerland
D. Germany
The United States is one of the most litigious societies in the world, along with countries such as
Germany, Sweden, Israel, and Austria.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
22. (p. 575) A method of billing for lawyers in which a fixed amount is paid for a certain task is
called
A. hourly fees.
B. flat fees.
C. retainers.
D. contingency fees.
An attorney may have a flat fee for handling all the paperwork to establish a corporation.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
23. (p. 575) When using a(n) _____, the attorney will be paid a specified amount every month
regardless of the workload for that month.
A. hourly fee
B. flat fee
C. retainer
D. contingency fee
Usually there is a retainer agreement which specifies what types of work a monthly fee covers
and when and how much additional fees are when circumstances change.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
24. (p. 575) Fee paid by a client to an attorney for legal services that is dependent upon the outcome
of a case is referred to as
A. contingency fees.
B. hourly fees.
C. flat fees.
D. retainers.
With a contingency fee, the attorney will take a percentage of your recovery (if your side wins)
as his or her fee.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
25. (p. 575) This type of fee is typical in accident situations, but is not usually used in everyday
contract and business-related matters.
A. Hourly fees
B. Flat fees
C. Contingency fees
D. Retainers
A contingency fee is a fee paid by a client to an attorney for legal services that is dependent upon
the outcome of a case.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
26. (p. 576) Which of these is NOT an element to most aspects of business law?
A. Taking care of the associated paperwork.
B. Finding the right information.
C. Negotiating the specific outcome you want.
D. Providing the service to other clients in the group.
There are three elements to most aspects of business lawfinding the right information,
negotiating the specific outcome you want, and then taking care of the paperwork associated
with it.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
27. (p. 576) There are two basic categories of information available to small business owners:
A. legal and commercial.
B. free and paid.
C. consumer-related and industry-related.
D. online and in-print.
Finding the right information is one of the three elements to most aspects of business law.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
28. (p. 578) Which of the following is true regarding a small-claims court?
A. These courts will accept cases where the stakes are as large as $100,000.
B. Most of these courts are designed so that ordinary citizens can bring their cases in.
C. This legal option is available to entrepreneurs who can afford an attorney.
D. These courts should be the first course of action for entrepreneurs in case of any problems.
Many of these small-claims courts will accept cases where the stakes are as large as $10,000.
This legal option does not involve attorneys. Small-claims courts work only when you have
exhausted other procedures like calls and letters to the customer.
AACSB: Analytic
Difficulty: Medium
29. (p. 579) _____ is the filing made with a state in which the business operates disclosing the trade
name or assumed name of the business along with the owners of the business.
A. Fictitious name filing
B. dba name filing
C. Trade name filing
D. Progressive name filing
The name of your business is called its trade name. It can also be called an assumed name or a
doing business as (dba) name. If you use something other than your own name then the trade
name must be registered in the states in which your firm does business. The filing is typically
called an assumed name filing or a fictitious name filing.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
30. (p. 580) All business forms are types of separate, legal entities EXCEPT
A. partnerships.
B. sole proprietorships.
C. LLCs.
D. corporations.
A legal entity is a unit recognized as having rights and duties apart from the owners of the
company. In a sole proprietorship, the owner and the firm are one and the same.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
31. (p. 580) A _____ is a unit recognized as having rights and duties apart from the owners of the
company.
A. plaintiff
B. defendant
C. legal entity
D. sole proprietorship
A legal entity is a being, human or nonhuman, such as a corporation, that is recognized as having
rights and duties, such as the right to own property.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
32. (p. 580) The party who files a law suit is called a
A. plaintiff.
B. defendant.
C. sole proprietor.
D. judge.
An individual may hold property ownership and be a plaintiff or a defendant in a lawsuit.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
33. (p. 580) The person being sued is referred to as a

A. plaintiff.
B. defendant.
C. lawyer.
D. judge.
An individual may hold property ownership and be a plaintiff or a defendant in a lawsuit.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
34. (p. 580) Which of the following is an advantage of corporations?
A. Personal in nature
B. Low incorporation fees and taxes
C. Ease of conducting business in another state
D. Relatively permanent
Corporations are impersonal, have high incorporation fees and taxes, and its powers are limited
to those stated in chartersmaking it difficult to do business in another state. Refer Table 18.2
AACSB: Analytic
Difficulty: Medium
35. (p. 580) Burdensome procedures, reports, and statements required by governments are
disadvantages of which of the following?
A. Corporations
B. Limited partnership
C. Sole proprietorships
D. General partnerships
Sole proprietorships and general and limited partnerships are easy to form.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
36. (p. 580) Which of these is a disadvantage of corporations?
A. Impersonal
B. Limited life
C. Unlimited liability for the firm's debt
D. Limited capital
Corporations are relatively permanent in nature. The owners' liability for the firm's debt is
limited to their investment in it. Corporations can also easily raise large amounts of capital. Refer
Table 18.2
AACSB: Analytic
Difficulty: Medium
37. (p. 580-581) For start-ups, the most popular business form is the
A. corporations.
B. partnerships.
C. sole proprietorships.
D. LLCs.
The major advantage of the sole proprietorship is that it is extremely easy to set up.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
38. (p. 581) Unless advised otherwise by your attorney, the best choice for a new small business is
a
A. partnership.
B. C corporation.
C. sole proprietorship.
D. limited liability company.
LLCs are simple to set up and relatively easy to maintain once started.
AACSB: Analytic
Difficulty: Medium
39. (p. 581) Which of these is an advantage of sole proprietorship?
A. Secrecy
B. Can have representative management
C. Relatively permanent
D. Ease of raising large amounts of cash
Corporations can have representative management. Sole proprietorships often have limited
capital as well as a limited life.
AACSB: Analytic
Difficulty: Medium
40. (p. 581) Which among the following is a disadvantage of sole proprietorships?
A. No specific tax advantages
B. Difficult to organize, operate, and dissolve
C. Owner has to share profits
D. Inadequate management and employee skills
Sole proprietorships have unique tax advantages, are the easiest and simplest to organize,
operate, and dissolve, and the owner is not required to share profits. Refer Table 18.3
AACSB: Analytic
Difficulty: Medium
41. (p. 581) Which of the following is a document that sets forth information about a limited
company that is filed with the state to establish an LLC?
A. Articles of incorporation
B. Articles of organization
C. Articles of partnership
D. Articles of presentation
Articles of organization specify aspects such as ownership, profit splitting, buyouts, and the like.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
42. (p. 582) Which of these is an advantage of partnerships?

A. Each partner is responsible for the acts of every other partner.
B. Can use ideas and plans of more than one person.
C. Being relatively permanent.
D. Owner's liability for the firm's debt is limited to their investment in it.
A disadvantage of partnerships is the fact that each partner is responsible for the acts of every
other partner. Partners also face unlimited liability and the partnership has limited life. Refer
Table 18.4
AACSB: Analytic
Difficulty: Medium
43. (p. 582) Which among the following is a disadvantage of partnerships?
A. Lack of division of labor
B. Difficulty in raising capital
C. Complex procedures involved in set up
D. Death of any one of the partners terminates the partnership
In partnerships, division of labor and management responsibility takes place. It is possible to

raise more capital since good credit may be available. Partnerships are easy to form. Refer Table
18.4
AACSB: Analytic
Difficulty: Medium
44. (p. 582) A partnership where all partners are equally and fully responsible for the business's
obligations is called a(n)
A. LLC.
B. limited partnership.
C. general partnership.
D. S corporation.
In a general partnership, authority is shared equally between partners unless otherwise stated in
articles of partnership.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
45. (p. 582) The difficulty and costs involved in maintaining the legal form of a business relates to
A. the personal liability of the business owner.
B. the complexity and organizational costs in setting up and maintaining an entity.
C. the control of the business.
D. the ability of the business to raise capital.
Personal liability of the business owner relates to how much the owner can lose if there are
problems arising from the business. Control of the business refers to who runs the business and
how decision making is split among various people. Ability of the business to raise capital relates
to whether the business can borrow money, issue stock, or issue bonds.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
46. (p. 582) Of the newer business forms, the easiest to form and the most user-friendly is the
A. LLC.
B. C corporation.
C. sole proprietorship.
D. partnership.
LLCs are simple to set up and relatively easy to maintain once started. They can be used for an
individual or a group of partners.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
47. (p. 583) Which form of business requires no government permission to set up?
A. Limited partnerships
B. Corporation
C. Professional corporation
D. Sole proprietorship
Corporations and professional corporations are created by the state. Limited partnerships
generally require filings with the state. Refer Table 18.5
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
48. (p. 584) Which form of business faces double taxation?

A. Sole proprietorship
B. Partnership
C. Corporation
D. LLC
A corporation is taxed on its income at the corporate rate, and shareholders are taxed on
dividends at their individual rate.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
49. (p. 584) Which among the following forms of business does NOT enjoy pass through taxation
or have the option of pass through?
A. LLC
B. Professional corporation
C. S corporation
D. Corporation
Double taxation is imposed on corporations. A corporation is taxed on its income at the corporate
rate, and shareholders are taxed on dividends at their individual rate. Refer Table 18.5
AACSB: Analytic
Difficulty: Medium
50. (p. 584) _____ refers to the situation where earnings of the business are distributed to the
business owners and those owners pay individual tax on the earnings.
A. Check the box taxation
B. Double taxation
C. Single taxation
D. Pass through taxation
LLCs, professional corporations, and S corporations enjoy pass through taxation. Refer Table
18.5
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
51. (p. 584) This is a choice LLCs can make on their tax returns to be taxed as a corporation or a
partnership.
A. Check the box taxation
B. Double taxation
C. Pass through taxation
D. Single taxation
As the firm becomes profitable, the advantages of the LLC organized with Form 8832 as a
check-the-box corporation can make a lot of sense.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
52. (p. 585) The dissolution of a corporate form, making it back into a sole proprietorship or general
partnership, if the court finds that the owner carelessly mixed up personal and business assets or
finances is(are) called
A. piercing the veil.
B. pass through taxation.
C. torts.
D. exculpatory clause.
Error! Hyperlink reference not valid.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
53. (p. 587) Which among the following is considered to be the hardest part of the negotiation
process?
A. Prepare
B. Position
C. Propose
D. Pounce
Proposing solutions that provide value and balance for both you and the other party is often the
hardest part of the negotiating process, but it is also the aspect which has received the most
attention.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
54. (p. 587) Scaling returns or considerations according to the size of the contribution of the party to
your success relates to which of the following?
A. Seeking to create value.
B. Seeking mutual safety.
C. Seeking outcomes commensurate with investment.
D. Seeking balance.
Scaling returns or considerations according to the size of the contribution of the party to your
success aims to satisfy people or organizations that are major factors in your business and makes
it clear that you cannot accommodate every small contributors' every need.
AACSB: Analytic
Difficulty: Medium
55. (p. 587) Which of the following negotiation techniques involves understanding what drives the
other side's needs and seeking alternative ways to solve a problem?
A. Seeking long-term solutions
B. Seeking balance
C. Seeking to create value
D. Seeking mutual safety
Seeking to create value involves listening to what drives the other side's needs and seek
alternative ways to solve the problem. Adding new acceptable factors enlarges the negotiated
pie.
AACSB: Analytic
Difficulty: Medium
56. (p. 588) Responsibility for the actions of another is called

A. direct liability.
B. independent contractor liability.
C. vicarious liability.
If a business is facing vicarious liability, there are two typical arguments that can be used to
deflect the liability: (1) the actor is not an employee, but an independent contractor, and (2) the
actions were outside the scope of agency/employment.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
57. (p. 588) Vicarious liability is also called as
A. indirect liability.
B. contractual liability.
C. direct liability.
D. personal injury liability.
Vicarious liability refers to responsibility for the actions of another.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
58. (p. 588) Torts are ______ wrongs.

A. no-liability
B. homicide
C. criminal
D. civil
Torts can arise when a person's legal rights are violated in ways other than from a breach of
contract.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
59. (p. 588) If your business was facing vicarious liability, which of these arguments may be helpful
in deflecting the liability?
A. Ignorance
B. Independent contractor argument
C. Financial inability argument
D. Actions are within the scope of agency/employment argument
If your business is facing vicarious liability, there are two typical arguments you can try to
deflect the liability: (1) the actor is not an employee, but an independent contractor, and (2) the
actions were outside the scope of agency/employment.
AACSB: Analytic
Difficulty: Medium
60. (p. 588) Persons working to achieve a certain goal without being subjected to substantial
controls by another are called
A. independent contractors.
B. partners.
C. corporate owners.
D. lawyers.
The independent contractor is employed for a project or a distinct term and the service the
contractor provides is not central to the operation of the business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
61. (p. 588) According to the IRS, to be an independent contractor
A. the person must decide how the work must be done in consultation with the employer.
B. the person's expenses must be paid by the employer.
C. the person must perform a service that is central to the operation of the business.
D. the person must be employed for a distinct term.
According to the IRS, to be an independent contractor, the person must solely decide how the
work is to be done, pay for his or her own expenses directly, and the service provided must not
be central to the operation of the business.
AACSB: Analytic
Difficulty: Medium
62. (p. 589) Identify this federal law that describes the steps publicly traded businesses must take to
protect and provide their key financial information.
A. The Service Contract Act
B. Sarbanes-Oxley Act
C. Walsh-Healy Public Contracts Act
D. Davis-Bacon Act
The purpose of the Sarbanes-Oxley Act is to make the financial activities of companies more
visible to the shareholders, government, and public.

Bloom's: Knowledge
Difficulty: Medium
63. (p. 590) A formal dispute resolution method that operates using the court system, typically with
a lawyer representing each party is called which of these?
A. Litigation
B. Arbitration
C. Mediation
D. Piercing the veil
Problems of contract or tort law can be handled either through litigation, arbitration, or
mediation.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
64. (p. 591) Which among the following dispute resolution methods is generally much faster to
complete and the least expensive?
A. Litigation
B. Arbitration
C. Mediation
In the case of mediation, the dispute is put to a neutral third party who is not a judge.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
65. (p. 591) When the dispute is put to a neutral third party who is not a judge it is called as
A. arbitration.
B. mediation.
C. litigation.
D. piercing the veil.
While arbitration and court cases have decisions that are binding, mediation works only if the
two sides agree to the decision and settlement.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
66. (p. 591) Which of these refers to a dispute resolution process held instead of court cases in
which both sides present their case to a legal professional?
A. Litigation
B. Arbitration
C. Mediation
Arbitration is a way of settling disputes in place of going to court. Often it involves the two sides
of a case presenting their perspective, facts, and materials to a private judge.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
67. (p. 592) In which of the following dispute resolution methods is the decision nonbinding on the
parties involved?
A. Arbitration
B. Litigation (regular courts)
C. Litigation (small-claims court)
D. Mediation
Decisions are binding in the case of arbitration and litigation. Refer Table 18.7
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
68. (p. 592) Which of the following dispute resolution methods favors those with more money for
legal help?
A. Arbitration
B. Litigation (regular courts)
C. Litigation (small-claims court)
D. Mediation
Litigation is expensive, and thus large, well-funded companies have a definite advantage over
small businesses. A small-claims court offers a friendly format for small businesses. Refer Table
18.7
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
69. (p. 592) Among which of the following dispute resolution methods do both parties represent
themselves?
A. Litigation (small-claims court) and arbitration
B. Arbitration and litigation (regular courts)
C. Litigation (regular courts) and mediation
D. Litigation (small-claims court and regular courts)
In the case of litigation in regular courts, both parties are represented by attorneys. Refer Table
18.7
AACSB: Analytic
Difficulty: Medium
70. (p. 593) Which of these refer to a part of a contract in which a person agrees not to open a
certain type of business or seek employment doing certain things in a particular area for a period
of time?
A. Noncompete clause
B. Exculpatory clause
C. Hold harmless clause
D. Waiver
In a noncompete clause someone promises not to open a competing business or to go to work for
a competitor.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
71. (p. 593) Differences among state laws necessitates the need for
A. specialty contracts.
B. interstate contracts.
C. hold harmless agreements.
D. field contracts.
Interstate contracts are necessary when doing business outside your home state because state
laws vary.
AACSB: Analytic
Difficulty: Medium
72. (p. 593) Which of these refer to a part of a contract in which a party to the contract states that he
or she will not be responsible for certain actions?
A. Noncompete clause
B. Exculpatory clause
C. Hold harmless clause
D. Waiver
Exculpatory clauses say that a party to the contract will not be responsible for certain things.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
73. (p. 593) Hold harmless agreements is otherwise known as
A. waivers.
B. intellectual property.
C. noncompete clause.
By agreeing to a hold harmless clause in a contract, one party is agreeing not to hold the other
responsible for his or her actions. A waiver is a part of a contract in which a party intentionally
gives up legal rights or claims.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
74. (p. 593) A(n) _____ is a contract by which a new party agrees to perform a duty that one of the
original parties to a contract was already legally obligated to perform.
A. exculpatory clause
B. subcontract
C. specialty contract
D. waiver
A subcontract may be necessary to fulfill the promises of a larger contract.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
75. (p. 594) In business to business, contracts are often transactions involving _____ which link
suppliers of raw materials and components with wholesalers and retailers, often using dedicated
lines or satellites.
A. encryptions
B. third-party certificates
C. trading partner agreements
D. electronic data interchange
Electronic data interchange systems link suppliers of raw materials and components with
wholesalers and retailers, often using dedicated lines or satellites. In this way an order for new
inventory may be submitted electronically.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
76. (p. 596) Property coming from some sort of original thought such as trademarks and copyrights
are called
A. property, plant, and equipment.
B. land and buildings.
C. tangible property.
D. intellectual property.
Intellectual property is a type of intangible property in which what is being protected is an idea
or a form of expression. This includes the law of patents, trade secrets, copyrights, and
trademarks.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
77. (p. 596) A grant by the U.S. government to an inventor for an idea that is new, useful, and
nonobvious, giving the inventor the exclusive right to make, use, or sell his or her idea is called
a
A. trade secret.
B. copyright.
C. trademark.
D. patent.
Patents are essentially monopolies granted to inventors by the U.S. government.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
78. (p. 596) Exclusive rights given to the creator of a literary or artistic work to make use of that
work is called a
A. trade secret.
B. copyright.
C. trademark.
D. patent.
Copyright involves the expression of ideas, not (as with patents and trade secrets) the ideas
themselves.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
79. (p. 596) Distinctive words, slogans, or images, that identify a product and its origin is called a
A. trade secret.
B. copyright.
C. trademark.
D. patent.
A trademark will indicate the source of particular goods.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
80. (p. 596) Identify the patent that covers the look of a product and those parts that are essential or
a part of the design.
A. Plant patents
B. Utility patents
C. Design patents
D. Nonprovisional patents
A design patent is a 14-year patent for a new, original, and ornamental design for an article of
manufacture.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
81. (p. 596) Someone who uses intellectual property without the permission of the owner is called
a(n)
A. infringer.
B. plaintiff.
C. defendant.
D. attorney.
Infringers are subject to being sued by the patent holder.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
82. (p. 596) This is not created by the government but is information known to certain people in the
company that makes that company more competitive.
A. Copyright
B. Trade secret
C. Patent
D. Trademark
To protect a trade secret, the secret must literally be kept a secret from all except those who need
to know to operate the business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
83. (p. 600-601) Which of these is NOT a step in protecting trade secrets?
A. Using warning labels
B. Confidentiality agreements
C. Restricting physical access
D. Only known to company employees and suppliers
To protect a trade secret, the secret must literally be kept a secret from all except those who need
to know to operate the business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
84. (p. 601) Copyrights for new works last for

A. the creator's life.
B. the creator's life plus 70 years.
C. 120 years after creation.
D. 95 years after its first publication.
Copyrights for new works last for the creator's life plus 70 years. If it is a "work for hire" bought
from the creator, the copyright lasts for 120 years after creation or 95 years after its first
publication, whichever is less.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
85. (p. 601-602) Which of the following statements is true regarding trademarks?
A. Some words or groups of words can be both trademarks and service marks.
B. A trademark once granted lasts for 25 years.
C. A trademark can continue to be renewed for another 5 years at a time.
D. Trademarks are exclusive right given to the creator of a literary or artistic work.
A trademark once granted lasts for 10 years and can continue to be renewed for another 10 years
at a time. A trademark is a distinctive word, slogan, or image that identifies a product and its
origin.
AACSB: Analytic
Difficulty: Medium
Scenario: Design-an-Ad
Debbie is a marketing and graphic arts major at ABC University and is exploring the idea of
starting her own business, "Design-an-Ad". She has several options that she is considering
going alone into business, joining with two other friends or her brother David. Where she needs
help is in determining the form of business she should consider.
86. (p. 575) Debbie speaks with a lawyer, Mr. Hutchinson, for help with the business form
paperwork. Mr. Hutchinson indicated that he will charge a fixed amount for handling the
paperwork once Debbie has decided on the form. Mr. Hutchinson's method of billing is called
A. flat fees.
B. a retainer.
C. hourly fees.
D. contingency fees.
Flat fees are a fixed amount paid for a certain task.

Difficulty: Medium
87. (p. 580-581) For start-ups like Design-an-Ad, the most popular business form is the
A. LLC.
B. sole proprietorship.
C. corporation.
D. partnership.
The major advantage of the sole proprietorship is that it is extremely easy to set up.

Difficulty: Medium
88. (p. 581) If Debbie decides to go with sole proprietorship, she should know that this is one of its
disadvantages.
A. Secrecy.
B. Owner doesn't have to share profits.
C. Absence of tax advantages.
D. Difficulty in obtaining credit.
Secrecy is one of the advantages of a sole proprietorship as is the fact that the owner doesn't have
to share profits. Sole proprietorships also have unique tax advantages. Refer Table 18.3

Difficulty: Medium
89. (p. 581) Based on what you have learned in this chapter, unless otherwise advised by Mr.
Hutchinson, the best choice for Design-an-Ad is
B. partnership.
C. limited liability company.
D. C corporation.
LLCs are simple to set up and relatively easy to maintain once started. They can be used for an
individual or a group of partners. An LLC offers legal protection to owners for assets they
personally hold outside the LLC. It also gives the owners the benefits of single taxation, if they
choose to go that route.

Difficulty: Medium
90. (p. 582) If Debbie decides to enter into a partnership with her friends, she should know that this
is one of its disadvantages.
A. Difficulty in obtaining credit
B. An impasse may develop if the partners become incompatible
C. Lack of specialized skills
D. An inability to use ideas and plans from multiple partners
Partnerships can raise more capital since good credit may be available. Specialized skills are
available from individual partners. Partnerships have a limited life. Refer Table 18.4

Difficulty: Medium
Essay Questions
Chapter 19 Human Resource Management: Small Business Considerations Answer

Key

1. (p. 608) Adding employees increases the amount of work that can be done but it also increases
the demands on the owner.
TRUE
AACSB: Analytic
Difficulty: Medium
2. (p. 609) Typically, a probationary period for employees lasts one year.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
3. (p. 612) Networking is relatively a low-cost, although time intensive, method of recruiting.
TRUE
AACSB: Analytic
Difficulty: Medium
4. (p. 612) Employee referral is a significantly underused method of recruiting primarily due to its
high-cost.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
5. (p. 613) Professional groups are a hybrid between outsourcing and having a paid staff.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
6. (p. 614) A job description defines and discusses all the essential knowledge, skills, and abilities
that are needed to fill the position.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
7. (p. 614) Barter involves trading products or services for those of another business.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
8. (p. 619) There are two different types of training: free and paid.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
9. (p. 619) Off-the-job training is delivered to employees while they perform their regular jobs.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
10. (p. 620) On-the-job techniques include orientations, job instruction training, lectures, and case
studies.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
11. (p. 620) One guideline for training suggests making training an ongoing process.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
12. (p. 621) The most important reward that employees of small businesses want is job security.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
13. (p. 622) A common reason people leave a company is if they feel they are not developing
professionally.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
14. (p. 623) One of the first steps in developing a compensation plan is to determine your
organization's salary philosophy.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
15. (p. 625) Employee sponsored health insurance is fairly standard among small businesses.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
16. (p. 626) Perks are a great way to provide long-term boosts in motivation.
FALSE
AACSB: Analytic
Difficulty: Medium
17. (p. 627) The two key factors in traditional leadership theories are task and person.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
18. (p. 628) Meritocracy is the management philosophy of selecting and promoting people based
solely on their being the most capable person for the job.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
19. (p. 629) Employee ownership is a rare event.

TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
20. (p. 631) Lines of communication means having a way for the person who has failed to meet a
metric, or made a mistake, or is facing firing to have their side of the story heard.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
21. (p. 608) Adding employees

A. decreases the amount of work that can be done.
B. reduces the legal requirements faced by an employer.
C. increases the demands on the owner.
D. increases the business's profitability.
Adding employees increases the demands on the owner. Now sales need to be made to cover the
employee's wages or salary, and, when adding employees, the owner and business become
responsible for the safety and well being of the employee, as well as face legal requirements as
an employer.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
22. (p. 608) Compensation, training time, employee tax, and accounting costs are some of the
additional expenses involved in adding
A. part-time employees.
B. full-time employees.
C. contract employees.
D. temporary employees.
There are many additional expenses to having a full-time employee on staff as opposed to a part-
time employee. The cost of adding an employee includes compensation, training time, and
employee tax and accounting costs. Presumably, such costs are outweighed by greater
productivity.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
23. (p. 608) The match between the needs, expectations, and culture of the small business with the
expectations and the skills of the individual employees is called
A. employee referral.
B. employee fit.
C. job description.
D. job analysis.
Before making a full-time offer, let an applicant work part time for a while to see how well she
or he fits in with the organization and the work.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
24. (p. 609) _____ refers to the trial period in which an employee has temporary status before a
formal offer to work full time is presented.
A. Test period
B. Probationary period
C. Employee referral period
D. Psychological contract period
Typically, a probationary period lasts 90 days.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
25. (p. 609) When you hire employees, typically, a probationary period lasts
A. 180 days.
B. 90 days.
C. 30 days.
D. 1 year.
The probationary period is a trial period in which an employee has temporary status before a
formal offer to work full time is presented.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
26. (p. 610) Which among the following federal employment laws requires the payment of same
wages to males and females for work requiring equal skill, effort, and responsibility in similar
working conditions?
A. Fair Labor Standards Act
B. Immigration Reform and Control Act of 1986
C. Worker Adjustment and Retraining Notification Act
D. Executive Order No. 11246
The Fair Labor Standards Act requires payment to most hourly employees of minimum wage and
time and a half for overtime hours. Refer Table 19.1

Bloom's: Knowledge
Difficulty: Medium
27. (p. 610) Which among the following federal employment laws prohibits discrimination with
respect to any condition of employment based on race, color, sex, religion, or national origin,
except where religion, sex, or national origin is a bona fide occupational qualification which is
reasonably necessary to the conduct of a particular business?
B. Title VII of the Civil Rights Act of 1964
D. Executive Order No. 11246
Title VII of the Civil Rights Act of 1964 includes a prohibition on harassment, including sexual
harassment. Refer Table 19.1

Bloom's: Knowledge
Difficulty: Medium
28. (p. 610) The Immigration Reform and Control Act of 1986
A. requires payment of same wages to males and females.
B. prohibits hiring of unauthorized aliens.
C. includes a prohibition on harassment.
D. governs confidentiality of medical information.
The Immigration Reform and Control Act of 1986 prohibits hiring of unauthorized aliens and
employment discrimination based on national origin or citizenship status. Refer Table 19.1

Bloom's: Knowledge
Difficulty: Medium
29. (p. 610) The_____ requires employers to complete I-9 forms for each employee.
D. Immigration Reform and Control Act of 1986
The Immigration Reform and Control Act of 1986 prohibits hiring of unauthorized aliens and
prohibits employment discrimination based on national origin or citizenship status. Refer Table
19.1

Bloom's: Knowledge
Difficulty: Medium
30. (p. 610) The Age Discrimination in Employment Act prohibits employment discrimination
against individuals who are _____ years old and older.
A. 30
B. 40
C. 50
D. 60
The Age Discrimination in Employment Act prohibits employment discrimination against

individuals who are 40 years old and older. Refer Table 19.1

Bloom's: Knowledge
Difficulty: Medium
31. (p. 610) The Americans with Disabilities Act

A. requires that make employers make reasonable accommodation for limitations of qualified
applicant or employee unless to do so creates undue hardship.
B. prohibits discrimination with respect to any condition of employment based on race, color,
sex, religion, or national origin.
C. prohibits employment discrimination based on national origin or citizenship status.
D. prohibits employers from using polygraph results as basis for employment action.
The Americans with Disabilities Act requires that employers have nondiscriminatory application
procedures, qualification standards, selection criteria, terms and conditions of employment. Refer
Table 19.1

Bloom's: Knowledge
Difficulty: Medium
32. (p. 610) The Family and Medical Leave Act requires employers to give employees up to
_____weeks leave, paid or unpaid, without loss of position, seniority, or benefits, for a
qualifying condition or event.
A. 4
B. 6
C. 8
D. 12
The Family and Medical Leave Act requires is applicable to employers with 50 or more
employees (within a 75-mile radius) each working day for 20 weeks in the current or preceding
calendar year. Refer Table 19.1

Bloom's: Knowledge
Difficulty: Medium
33. (p. 610) Which among the following federal employment laws requires employers to give 60
days advance notice prior to a plant shutdown or layoff of 50 or more employees?
A. Executive Order No. 11246
The Worker Adjustment and Retraining Notification Act is applicable to employers with 100 or
more employees. Refer Table 19.1

Bloom's: Knowledge
Difficulty: Medium
34. (p. 610) Which among the following federal employment laws requires employers to implement
an affirmative action plan for hiring and promoting females and minorities?
A. Executive Order No. 11246
Executive Order No. 11246 is applicable to employers with 50 or more employees and contracts
or subcontracts of $50,000 plus. Refer Table 19.1

Bloom's: Knowledge
Difficulty: Medium
35. (p. 612) Which among the following is a method that has traditionally been used by businesses
to hire employees?
A. Employee referral
B. Internet recruitment
C. Help wanted ads
D. Career service offices
To attract and hire new talent into a medium to large growing organization, help wanted ads in
regional newspapers or the use of an employment service have been traditional methods. For
small business owners, these methods tend to be expensive and have a long turnaround time.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
36. (p. 612) A relatively low-cost, although time-intensive method of recruiting that can include
colleagues, business professionals, vendors, alumni, and advisory board members is referred to
as
A. internal job postings.
B. internet recruiting.
C. networking.
D. outsourcing.
Networking offers many benefits such as receiving a credible critique of a potential candidate's
work experience and personal character.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
37. (p. 612) _____ allows you to search a resume database or post a job description on the web.
A. Networking
B. Employee referral
C. Internet recruiting
D. Outsourcing
The main contribution of a recruiting Web site has been to speed up hiring and vastly increase
the accuracy of the job-search process.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
38. (p. 612) _____ is an underused, low-cost method which rewards your employees for
recommending potential candidates that would be a great fit.
A. Networking
B. Employee referral
D. Outsourcing
Even for small businesses, to work successfully, referrals should be handled formally with
guidelines.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
39. (p. 612) A small business owner who knows exactly what he or she wants can use filters to
search vast numbers of rsums with pinpoint accuracy using this.
A. Employee referrals
B. Internet recruiting
C. Networking
D. Outsourcing
Internet recruiting allows you to search a rsum database or post a job description to the Web.
AACSB: Analytic
Difficulty: Medium
40. (p. 612) These should be handled formally with guidelines such as following-up on leads within
24 hours even by small businesses.
A. Employee referrals
B. Internet recruiting
C. Networking
D. Outsourcing
Employee referral is an underused, low-cost method which rewards your employees for
recommending potential candidates that would be a great fit.
AACSB: Analytic
Difficulty: Medium
41. (p. 612) These encourage companies to post openings to their job bank to recruit at both the
undergraduate and the graduate levels.
A. Professional groups
B. Company Web sites
D. Career service offices
This service is commonly offered at no cost to companies and allows businesses to set up an
account to manage rsum selection.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
42. (p. 612) _____ are jobs in businesses offered to students, arranged through universities.
A. Assignments
B. Careers
C. Internships
D. Referrals
Some internships are paid by the employer, some are not.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
43. (p. 613) Which of these refers to contracting with others outside your firm to do work that
would otherwise be done within your firm?
A. Networking
B. Employee referrals
D. Outsourcing
Outsourcing may be the answer for a small business that is not ready to hire employees, but has a
growing need to meet workload demand.
AACSB: Analytic
Difficulty: Medium
44. (p. 613) Independent contractors who provide specialized business services or support from a
distance, through different methods of communication are known as
A. virtual employees.
B. temporary employees.
C. job share employees.
D. leased employees.
Virtual employees provide specialized business services or support from a distance, through the
Internet, telephone, fax, or another method of communication.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
45. (p. 613) Which among the following statements is true regarding virtual employees in small
businesses?
A. In the small business, virtual employees are not hired as full-time employees.
B. Small business owners who work with virtual employees have to deal with taxes,
unemployment insurance, sick leave, vacation pay, and benefits.
C. Small business owners are required to provide additional office space for their virtual
employees.
D. Small business owners are responsible for the development and supervision of their virtual
employees.
Small business owners who work with a virtual employee have the distinct advantage of not
having to deal with taxes, unemployment insurance, sick leave, vacation pay, or benefits. Rather
than having to provide additional office space and be responsible for the development and
supervision of an employee, they can enjoy the support and assistance of a professional without
the headaches of hiring and managing employees. Refer Small Business Insight - Go Virtual.
AACSB: Analytic
Difficulty: Medium
46. (p. 613) In order to manage and foster productivity among virtual employees, small business
owners
A. should regularly communicate with them via e-mail.
B. should attempt to micromanage them.
C. should consistently review status reports with them.
D. should hire students as interns.
E-mail is too easy to misinterpret or misunderstand. Micromanagement is nearly impossible with

a remote staff. It is better to hire virtual employees who have experience with being self-
motivated and disciplined. Refer Small Business Insight - Go Virtual.
AACSB: Analytic
Difficulty: Medium
47. (p. 614) Consider these alternative methods to hire an employee at no cost if your budget does
not allow for a paid employee EXCEPT
A. volunteers.
B. barter.
C. virtual employees.
D. internships.
The three alternative methods to hire employees at no cost are volunteers, internships, and barter
of products and services. See The Thoughtful Entrepreneur - Low-Cost and No-Cost Employees.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
48. (p. 614) Which of these defines and discusses all the essential knowledge, skills, and abilities
that are needed to fill a position?
A. Job analysis
B. Job prospects
C. On-the-job training
D. Job description
A job analysis can help identify the essential knowledge, skills, and abilities that are needed to
create a job description.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
49. (p. 616) Which of these is the last step in crafting a job description?
A. Job overviews
B. Special requirements
C. Credentials and experiences
D. Duties and responsibilities
Mentioning the special requirements of a job is the last step in crafting a job description.
Anything information that may not have been covered up until this point should go here. Refer
Skill Module 19.1
AACSB: Analytic
Difficulty: Medium
50. (p. 616) Which of these is the first step in crafting a job description?
A. Job overview
B. Duties and responsibilities
C. Job title
D. Credentials and experience
The job title can be two-three words long. Beneath the title, you want to include important
information related to the job such as the status and to whom the employee reports. Refer Skill
Module 19.1
AACSB: Analytic
Difficulty: Medium
51. (p. 616) Which of the following steps in writing a job description specifies the basic qualities
that an employee should possess to perform the job?
A. Give a job overview
B. Define the duties and responsibilities
C. Knowledge, skills, and abilities
D. Special requirements
Knowledge, skills, and abilities are the basic qualities that an employee should possess to
perform the job. Refer Skill Module 19.1
AACSB: Analytic
Difficulty: Medium
52. (p. 616) The level of education required to perform a particular job would be mentioned under
which section of the job description?
A. Special requirements
B. Define the duties and responsibilities
C. Knowledge, skills, and abilities
D. Credentials and experience
Credentials and experience lists the level of educational and professional experience the person
should have. Refer Skill Module 19.1
AACSB: Analytic
Difficulty: Medium
53. (p. 617) When recruiting, once a job description is prepared, the next step is to
A. develop questions for interviewing.
B. create a job analysis.
C. prepare a training module for employees.
D. create a Web site.
Create specific questions that you will ask of all candidates that will clearly and behaviorally
demonstrate that they have the necessary knowledge, skills, and abilities to do the job.
AACSB: Analytic
Difficulty: Medium
54. (p. 617) In evaluating potential employees, a small business owner
A. should hire a moderately qualified person in case filling the position is an urgent requirement.
B. should ensure that only a single interviewer meets with a candidate in order to avoid
conflicting evaluations.
C. should design interview questions such that "yes" or "no" answers are not applicable.
D. should accept the candidate's word that he or she possesses a certain skill or knowledge base.
Questions designed such that "yes" or "no" answers are not applicable allow an interviewer to
observe how the candidate analyzes situations, how rationally or logically the situation is
presented, and whether or not the person is being truthful.
AACSB: Analytic
Difficulty: Medium
55. (p. 619) There are two broad types of training:

A. on-the-job and off-the-job methods.
B. free and paid methods.
C. online and offline methods.
D. in-house and outsourced methods.
Individual circumstances and the where, what, and who of your training program determine
whether on-the-job or off-the-job methods should be used.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
56. (p. 619) _____ training is delivered to employees while they perform their regular jobs.
A. Online
B. On-the-job
C. Paid
D. Off-the-job
With on-the-job training, employees can learn without losing time.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
57. (p. 619) Which among the following is an on-the-job training method?
A. Lectures
B. Case studies
C. Coaching
D. Role playing
Lectures, case studies, and role playing are off-the-job training methods.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
58. (p. 620) Which of these is an off-the-job training method?

A. Orientations
B. Apprenticeships
C. Case studies
D. Coaching
Orientations, apprenticeships, and coaching are off-the-job training methods.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
59. (p. 620) In designing on-the-job instruction that gives an employee a method to complete a
certain task in a job, it is important to
A. use a bulleted list when the order in which tasks are to be performed is important.
B. put notes, warnings, and prerequisite conditions after the list item to which they refer.
C. present any necessary background information after the instructions.
D. use a level of detail that is appropriate to the employees' skill level.
In designing on-the-job instruction that gives an employee a method to complete a certain task in
a job, it is important to use a bulleted list when the order in which tasks are to be performed is
not important, put notes, warnings, and prerequisite conditions before the list item to which they
refer, and present any necessary background information before the instructions. Refer Skill
Module 19.2
AACSB: Analytic
Difficulty: Medium
60. (p. 620) Which of these is a suggested guideline for training?

A. It should be provided only at the initial stage of employment.
B. Employees should practice what they have learned on their own time.
C. Have employees sign long-term contracts so they do not leave after receiving training.
D. Think of it as an investment.
Training should be an ongoing process. Owners may argue that employees will take the
knowledge and leave for a higher-paying job at another firm. While this may happen, small
business owners can help prevent it. Once your employees are trained, give them opportunities to
use their new skills.
AACSB: Analytic
Difficulty: Medium
61. (p. 621) These beliefs are based on the perception that promises have been made in
exchange for certain employee obligations such as giving of their energy, time, and
technical skills.
A. Open-book policy
B. Work facilitation
C. Psychological contract
D. Autonomy
Small business owners often implicitly or explicitly communicate conflicting terms when
making psychological contracts with employees.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
62. (p. 621) According to Jill Kickul's research, which of these factors is most important to
employees?
A. Autonomy and growth
B. Benefits
C. Rewards and opportunities
D. Job security
According to Jill Kickul's research, salary rewards, bonuses, and perks were not as important to
employees as autonomy and personal growth; job security and responsibility were less important
than benefits.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
63. (p. 621) Which of these factors was least important to employees, according to Jill Kickul's
research?
A. Work facilitation
B. Benefits
D. Autonomy and growth
In order of most important to least important to employees, the factors are: autonomy and
personal growth, rewards/opportunities, job security/responsibilities, benefits, and facilitating
work.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
64. (p. 621) Which of these refer to employees' beliefs about the promises between the employee
and the firm?
A. Open-book policy
B. Autonomy
C. Work facilitation
D. Psychological contract
Psychological contract refers to employees' beliefs about the promises between the employee and
the firm. These beliefs are based on the perception that promises have been made in exchange for
certain employee obligations such as giving of their energy, time, and technical skills.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
65. (p. 621) _____ refers to the concept that key employees should be able to see and
understand a firm's financials, that they should have a part in moving the numbers in the right
direction, and that they should have a direct stake in the strategy and success of the firm.
A. Open-book policy
B. Autonomy
C. Work facilitation
D. Psychological contract
Entrepreneurs need to make job offers and manage based on an open-book policy.
AACSB: Analytic
Difficulty: Medium
66. (p. 621) Which of the following is a psychological contract item that comes under the factor of
job security and work responsibilities?
A. Challenging and interesting work
B. Freedom to be creative
C. Career guidance and mentoring
D. Well-defined job responsibilities
Challenging and interesting work, freedom to be creative, and career guidance and mentoring are
psychological contract items that come under the factor of autonomy and growth. Refer Table
19.3
AACSB: Analytic
Difficulty: Medium
67. (p. 621) Meaningful work is a psychological contract item described under which factor by Jill
Kickul?
A. Job security and work responsibilities
Autonomy and growth is most important to employees according to research by Jill Kickul.
Refer Table 19.3
AACSB: Analytic
Difficulty: Medium
68. (p. 621) Which of the following psychological contract item comes under benefits?
A. Job security
B. Tuition reimbursement
C. Adequate equipment to perform job
D. Increasing responsibilities
Psychological contract items under benefits include health care benefits, vacation benefits,
retirement benefits, and tuition reimbursements. Refer Table 19.3
AACSB: Analytic
Difficulty: Medium
69. (p. 621) Which among the following is a psychological contract term related to work
facilitation?
A. Career guidance and training.
B. Continual professional training.
C. A reasonable workload.
D. Adequate equipment to perform the job.
Career guidance and training are related to autonomy and growth while continual professional
training is related to rewards and opportunities. A reasonable work load is related to job security
and work responsibilities. Refer Table 19.3
AACSB: Analytic
Difficulty: Medium
70. (p. 621) Sharing ideas, working toward a common goal, analyzing one another's work, and
communicating cross functionally are related to
A. training.
B. teamwork.
C. recognition.
D. work facilitation.
Fostering a sense of teamwork allows people to interact with one another on a professional level.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
71. (p. 621) Job training is a psychological contract item described under which factor category
by Jill Kickul?
A. Job security and work responsibilities
Providing learning opportunities at every level of the organization through on-the-job training or
professional training will increase your employees' capabilities, allow them to expand their job
responsibility, and help to increase job satisfaction.
AACSB: Analytic
Difficulty: Medium
72. (p. 622) _____ means letting employees make on-the-spot decisions for the companies' best
interest. It requires giving employees permission to act, the knowledge to act, and the skill to
act.
A. Recognition
B. Training
C. Empowerment
D. Teamwork
Empowerment increases employees' personal feelings of responsibility and their commitment to

the company.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
73. (p. 622) There are two parts to a formal performance appraisal:
A. the self-appraisal and the review by the supervisor.
B. the internal review and the external review.
C. the review of past accomplishments and the setting of future objectives.
D. the performance review and the pay review.
The performance review and the pay review should be held at different times of the year.
AACSB: Analytic
Difficulty: Medium
74. (p. 623) A(n) _____ should be filled out and returned to you before the scheduled performance
review so that you can learn the employees' goals, interests, and self-evaluation when you are
crafting your comments.
A. appraisal form
B. application form
C. enrollment form
D. online form
Increasingly, small entrepreneurial companies are implementing formal performance appraisals.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
75. (p. 623) One of the first steps in developing a compensation plan is
A. to determine your organization's salary philosophy.
B. to develop a job description.
C. to create job analysis.
D. to pay an above-market salary to create loyalty.
Determining an organization's salary philosophy involves identifying whether the organization

believes in raising the level of base salaries or appreciates the flexibility of variable pay.
AACSB: Analytic
Difficulty: Medium
76. (p. 623) After determining an organization's compensation philosophy, the next step in
developing a compensation plan is
A. to develop a job description.
B. to find comparison factors for salary.
C. to establish a total reward system.
D. to structure the compensation plan.
The next step is to find comparison factors for salary. Research the salary range for similar
positions and job descriptions. Determine whether the business is competitive with organizations
of similar size, sales, and markets.
AACSB: Analytic
Difficulty: Medium
77. (p. 624) This is the amount needed for a person to meet the basic necessities of life from a
single job.
A. Fair wage
B. Employee benefits
C. Living wage
D. Benefit plans
Living wage refers to the amount needed for a person (or family of a particular size) to meet the
basic necessities of life from a single job.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
78. (p. 625) All of the following are examples of long term incentives to employees that help
retain valuable team members EXCEPT
A. profit-sharing plans.
B. stock options.
C. stock grants.
D. employee bonuses.
Employee bonuses are usually paid in a single lump at the end of the year.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
79. (p. 626) Identify the term that refers to the privileges, services or even tangible items given
to employees as part of the overall compensation and benefits package.
A. Bonuses
B. Long-term incentives
C. Perks
D. Health insurance
Perks is a great way to provide short-term boosts in motivation.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
80. (p. 626) 401(k) plans are relatively _____ to administer and are _____ expensive than
traditional pension plans.
A. difficult; more
B. easy; less
C. complex; less
D. easy; more
401(k) plans have become popular because they are relatively easy to administer and are less
expensive than traditional pension plans. Many employees like these plans because they maintain
some control over the amount of their contribution and how the money is invested.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
81. (p. 626) Making no distinction between sick, vacation, and personal days and allowing
employees a set number of days off each year to be used at their discretion
A. prevents employees from abusing sick days.
B. causes employees to lie more often when they need to take the day off.
C. increases absenteeism in the workplace.
D. reduces workplace satisfaction.
Some employers make no distinction between sick, vacation, and personal days and allow
employees a set number of days off each year to be used at their discretion. This prevents
employees from abusing sick days and keeps employees from feeling that they need to lie when a
child is ill or a personal emergency arises.
AACSB: Analytic
Difficulty: Medium
82. (p. 626) The rule of thumb is that perks like these should take no more than _____of the annual
personnel budget.
A. 3 percent
B. 5 percent
C. 7 percent
D. 10 percent
Good perks do not have to cost a lot; in fact, some perks can be powerful, even if free.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
83. (p. 627) Which among the following are the three key components of entrepreneurial
leadership?
A. Inspiration, vision, and innovation.
B. Innovation, opportunities, and operations.
C. Innovation, operation, and inspiration.
D. Operations, vision, and opportunities.
Innovation is the idea that we look to the leader of a small business as its key visionary.
Operation refers to the ability to manage the business as it grows. Inspiration stems from the
expectation that the entrepreneur should be the business's biggest booster and champion.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
84. (p. 628) Identify the management philosophy of selecting and promoting people based on
family ties.
A. Nepotism
B. Capitalism
C. Meritocracy
D. Democracy
Nepotism's advantages are involving people you know and hopefully trust in your business,
being able to involve the person more completely in the business, and having loyalty and support
from your worker and their family in return.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
85. (p. 628) Which of the following is a management philosophy of selecting and promoting people
based solely on their being the most capable person for the job?
A. Nepotism
B. Capitalism
C. Meritocracy
D. Democracy
When a family member is also the most capable person for the job, the two philosophies of
nepotism and meritocracy live in harmony.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
86. (p. 629) To treat family and nonfamily as similarly as possible, it is important to
A. have separate personnel policies for family and nonfamily members.
B. create career ladders for nonfamily members.
C. provide favorable treatment to nonfamily members.
D. guarantee the possibility of employee ownership.
To treat family and nonfamily as similarly as possible, it becomes especially important to create
career ladders for nonfamily members. These may not lead to ownership, but can lead to
increased skills, responsibilities, and income. Having career ladders for all employees is a way to
help minimize the differences, and show how important every employees' contribution is seen to
be.
AACSB: Analytic
Difficulty: Medium
87. (p. 630) The term associated with objectively evaluating how well someone is doing their job is
called
A. line of appeal.
B. job metrics.
C. transparent procedures.
D. job basics.
The job metric should be clear enough for employees to be certain that they did the job well or
poorly.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
88. (p. 631) Which of these is NOT a suggested fair personnel policy guideline across family and
non-family members?
A. Hiring the best possible candidate for the position.
B. Having clear performance expectations.
C. Having clearly differentiated personnel policies for family and non-family members.
D. Having clearly defined boundaries for each role.
Family and non-family members should be treated the same.
AACSB: Analytic
Difficulty: Medium
89. (p. 631) _____ means having a way for the person who has failed to meet a metric, or made a
mistake, or is facing firing to have their side of the story heard.
A. Job basics
B. Transparent procedures
C. Lines of communication
D. Line of appeal
In small businesses having an appeal process can be tough since the owner might be the
disciplinarian. In such cases, having a trusted employee (or even an entrepreneur outside the
business who knows the business and people and is trusted by the owner) serve as the go-
between can help.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Scenario: Handy Hardware

Uncle Bob has been running the Handy Hardware Store for a few years now. As the business
grew, he had been thinking about getting help. So far he had run the business by himself but now
he feels that it might be time to bring other people onboard to help.
90. (p. 609) Uncle Bob can hire an individual with a probationary period. This probationary period
typically lasts
A. 30 days.
B. one year.
C. six weeks.
D. 90 days.
Probationary period is a trial period in which an employee has temporary status before a formal
offer to work full time is presented.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
91. (p. 614) To really understand what he wants the person hired to do, Uncle Bob needs to develop
a _____ which defines and discusses all the essential knowledge, skills, and abilities that are
needed to fill the position.
A. job description
B. job analysis
C. job prospect
D. job training
A job description needs to define and discuss all the essential knowledge, skills, and abilities that
are needed to fill a position. In addition, it should describe what kind of personality, experience,
and education a person who performs the job should have.

Difficulty: Medium
92. (p. 616) Which of these is the first step Uncle Bob needs to start with, in crafting a job
description?
A. Duties and responsibilities
B. Job training
C. Job overview
D. Job title
The job title can be two-three words long. Beneath the title, you want to include important
information related to the job such as the status and to whom the employee reports.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Essay Questions
Chapter 20 Achieving Success in the Small Business Answer Key

1. (p. 638) All models for the life cycle of the small business firm have multiple stages.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
2. (p. 638 (Figure 20.1)) Managerial role needs to be focused during the emergence and existence stage
of the small business life cycle.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
3. (p. 638) Survival is the second riskiest period after emergence.

FALSE
AACSB: Analytic
Difficulty: Medium
4. (p. 639) For most small businesses existence will follow the success stage.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
5. (p. 639) The resource maturity stage is characterized by a stable level of sales and profits over
several years.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
6. (p. 639) Recency, frequency, urgency, and potency are four key recommendations for staving off
customer complacency.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
7. (p. 640) Most small businesses never go through the takeoff stage.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
8. (p. 641) High-growth ventures aim to achieve growth rates of 5-10 percent a year, with sales of
$100,000.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
9. (p. 641) Lifestyle firms are the smallest full-time businesses.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
10. (p. 642) For the owners, a central goal of a harvest is to get the maximum value they can for
their business.
TRUE
AACSB: Analytic
Difficulty: Medium
11. (p. 643) When one firm absorbs another, it is called a merger.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
12. (p. 643) Successions and business sales generally occur only among the largest small
businesses.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
13. (p. 643 (Figure 20.3)) In the hierarchy of business outcomes, the worst possible outcome is leaving
the firm with no debt.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
14. (p. 644) Terminations are more likely for young firms, who are four years old or less.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
15. (p. 644) The single most typical way businesses close down is by a walkaway.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
16. (p. 645) Bankruptcy is the legal form of insolvency, where liabilities are greater than assets.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
17. (p. 646) People who open multiple businesses throughout their career are called unsatisfied
entrepreneurs.
FALSE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
18. (p. 647) Businesses starting with no start-up capital and those starting with more than $50,000
are among those most likely to survive long-term.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
19. (p. 648) For start-ups, the short-term measure of success is profits and the long-term measure of
success is survival.
FALSE
AACSB: Analytic
Difficulty: Medium
20. (p. 651) In every small business effort, there is always an element of risk.
TRUE
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy

21. (p. 638) Which of these is a common idea among the different models for the life cycle of the
small business firm?
A. There are multiple stages.
B. Each stage has predetermined profit levels.
C. The level of risk the business faces is constant from stage to stage.
D. Businesses spend a fixed amount of time in each stage.
All models for the life cycle of the small business firm have the same general ideas: (1) there are
multiple stages, (2) the key issues, actions, and lessons at each stage are different from the other
stages, and (3) the level of risk the business faces changes from stage to stage.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
22. (p. 638) For most small businesses, which of these represent the usual sequence of stages in the
business life cycle?
A. Emergence, existence, survival, success, and resource maturity
B. Existence, survival, financing, success, and maturity
C. Emergence, success, financing, marketing, and maturity
D. Existence, growth, survival, and decline
The lesson of the life cycle model of business is that much of a firm's development as a business
is predictable within some broad terms.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
23. (p. 638) Entrepreneurial role is most needed or focused upon during which stage of the small
firm life cycle?
A. Success
B. Resource maturity
C. Takeoff
D. Emergence
Getting from entrepreneurial thinking to entrepreneurial action is the challenge of the emergence
stage.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
24. (p. 638) The challenges of the emergence stage is

A. getting the necessary financing.
B. getting from entrepreneurial thinking to entrepreneurial action.
C. getting the external help to start the business.
D. getting the family support and proper location.
Two techniques can be used to move from entrepreneurial thought to actionthe BRIE
behaviors and getting into business part time as a way to lay a foundation for future
entrepreneurial action.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
25. (p. 638) Which of these techniques can help an individual move from entrepreneurial thought to
actions?
A. High-growth venture
B. BRIE
C. Walkaway and workouts
D. CSFs
Two techniques can be used to move from entrepreneurial thought to actionthe BRIE
behaviors and getting into business part time as a way to lay a foundation for future
entrepreneurial action.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
26. (p. 638) _____ is the second riskiest period after emergence.
A. Success
B. Resource maturity
C. Existence
D. Takeoff
The reason risk is so high in the existence stage is because many business owners lack the key
information or experiences they need in marketing, production, and management.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
27. (p. 638) The existence stage is defined by
A. a period of exceptional growth.
B. a stable level of sales and profits.
C. thoughts about starting a firm.
D. a lack of stability in terms of markets, operations, or finances.
In the existence stage, the business is in operation, but is not yet stable in terms of markets,
operations, or finances. Firms face the liabilities of newness in this stage.
AACSB: Analytic
Difficulty: Medium
28. (p. 639) The solutions for liabilities of newness come from getting _____ as quickly as
possible.
A. financing
B. expertise
C. slack resources
D. potency
For most owners of firms, personally getting more experience is risky because it takes too long.
The safer way is to obtain help from others.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
29. (p. 639) Which of the following statements is true regarding success stage of the small firm life
cycle?
A. Firms develop the information, skills, and the routines to grow the business's profits.
B. Profits are always taken in the form of money.
C. For most small business owners, this stage lasts for a very brief period.
D. Firms face the liabilities of newness in this stage.
In this stage, profits aren't always taken in the form of money. For most small business owners,
this is a stage that lasts a long time. Firms face the liabilities of newness in the existence stage.
AACSB: Analytic
Difficulty: Medium
30. (p. 639) The main challenge of the resource maturity stage is to avoid
A. overspending.
B. legal problems.
C. cost fluctuations.
D. customer complacency.
After years of consistency, customers and businesses can begin to take each other for granted.
For a business, this can be deadly, because a competitor can come to your customer, show
personal interest and competitive products or services or prices, and take your customer away.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
31. (p. 639) For most owners these profits are called flexibility.
A. Slack resources
B. Marginal profits
C. Resource maturity
D. Takeoff
Slack resources are profits that are available to be used to satisfy the preferences of the owner in
how the business is run.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
32. (p. 639) Staying in touch with customers on a regular basis via visits, phone calls, e-mails,
newsletters, and so on refers to which of these components from Zig Ziglar?
A. Urgency
B. Frequency
C. Potency
D. Recommendations
To make recency work, you have to stay in touch with customers on a frequent basis. This might
be on a quarterly or monthly basis in cases where customers buy only a few times a year, but
contacts can even be on a daily basis if that is how often customers buy from you.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
33. (p. 639) According to the components from Zig Ziglar, a message that is remembered and
remembered for the right reasons is said to be
A. relevant.
B. recent.
C. frequent.
D. potent.
To be potent, a message has to remind customers that their business is valued.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
34. (p. 639) The set of risks faced by firms early in their life cycles that come from a lack of
knowledge by the owners about the business they are in and by customers about the new
business is called the
A. slack resource.
B. walkaway and workout.
C. liability of newness.
D. CSF.
The solutions for liabilities of newness come from getting expertise as quickly as possible.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
35. (p. 639) Profits that are available to be used to satisfy the preferences of the owner in how the
business is run refers to
A. slack resources.
B. liability of newness.
C. takeoff.
D. high-growth ventures.
For most owners, these profits (slack resources) are called flexibility.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
36. (p. 639) For most businesses, _____ will follow the success stage.
A. takeoff
B. resource maturity
C. existence
D. survival
The resource maturity stage is characterized by a stable level of sales and profits over several
years.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
37. (p. 639) Profits which are not taken in the form of money are known as
A. liabilities of newness.
B. slack resources.
C. takeoffs.
Slack resources are extra profits which can be used to make the owner's life easier, for example,
by hiring additional personnel to take on more of the tasks of the owner.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
38. (p. 639) Being among the people your customers have seen in the past few days refers to which
of these components from Zig Ziglar?
A. Recency
B. Urgency
C. Frequency
D. Potency
To make recency work, you have to stay in touch with customers on a frequent basis.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
39. (p. 640) Most small businesses never go through the _____ stage.
A. takeoff
C. emergence
D. survival
Takeoff happens if a business embarks on a period of exceptional growth.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
40. (p. 640) Managing _____ involves working extensively with potential sources of funding and
other key resources, as well as working with markets outside and employees within the firm. It
also often entails relearning the processes that led to this level of success.
A. takeoff
C. existence
D. survival
Takeoff happens if a business embarks on a period of exceptional growth.
AACSB: Analytic
Difficulty: Medium
41. (p. 641) Of the four generic growth strategies, most small businesses are
A. traditional small businesses.
B. lifestyle or part-time firms.
C. high-performing small businesses.
About 53 percent of all small businesses are lifestyle or part-time firms.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
42. (p. 641) Of the four generic growth strategies, _____ represents the smallest category.
A. traditional small businesses.
B. lifestyle or part-time firms.
C. high-performing small businesses.
High-growth ventures represent about 5 percent of all businesses.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
43. (p. 641) High-performing small businesses

A. often grow through multiple locations and higher levels of professionalization.
B. aim to achieve growth rates of 25 percent or more a year.
C. have sales of more than $1 million.
D. have schedules defined by customer needs.
High-growth ventures aim to achieve growth rates of 25 percent or more a year, with sales of
more than $1 million. In traditional small businesses schedules are defined by customer, not
owner, needs.
AACSB: Analytic
Difficulty: Medium
44. (p. 641) _____ are the smallest full-time businesses.
A. Lifestyle firms
B. Traditional small businesses
C. High-performing small businesses
D. High-growth ventures
Lifestyle firms are part-time firms. Traditional small businesses are one-site businesses with
sales of between $25,000 and $100,000. High-performing small businesses tend to have sales
between $100,000 and $1,000,000, depending on the industry. High-growth ventures aim to
achieve growth rates of 25 percent or more a year, with sales of more than $1 million.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
45. (p. 641) A _____ is a firm started with the intent of eventually going public, following the
pattern of growth and operations of a big business.
A. lifestyle firm
B. traditional small business
C. high-performing small business
D. high-growth venture
High-growth aim to become big businesses and pursue high levels of professionalization and
external funding.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
46. (p. 641) Lifestyle firms are also known as
A. high-performing small businesses.
B. high-growth ventures.
C. traditional small businesses.
D. part-time firms.
A lifestyle or part-time firm is a small business primarily intended to provide partial or

subsistence financial support for the existing lifestyle of the owner, most often through
operations that fit the owner's schedule and way of working.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
47. (p. 641) Identify the businesses that start and stay very small, often operating seasonally or
when the owner wants to work in the business.
A. Lifestyle firms
B. High-performing small businesses
C. High-growth ventures
D. Traditional small businesses
A lifestyle or part-time firm is a small business primarily intended to provide partial or

subsistence financial support for the existing lifestyle of the owner, most often through
operations that fit the owner's schedule and way of working.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
48. (p. 641) These businesses typically go through all the stages, but include takeoff before going
through resource maturity.
A. Lifestyle firms
C. High-growth ventures
D. Traditional small businesses
High-growth ventures aim to achieve growth rates of 25 percent or more a year, with sales of
more than $1 million. They aim to become big businesses and pursue high levels of
professionalization and external funding.
AACSB: Analytic
Difficulty: Medium
49. (p. 641) _____ aim to achieve growth rates of 25 percent or more a year, with sales of more than
$1 million.
A. Traditional small businesses
B. High-growth ventures
C. Lifestyle firms
D. High-performing small businesses
High-growth ventures aim to become big businesses and pursue high levels of
professionalization and external funding.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
50. (p. 641) Which of these grow at rates more like 5 to 15 percent a year, adding employees and
often gaining through multiple locations?
A. Traditional small business
B. High-growth ventures
C. Lifestyle firm
D. High-performing small business
A high-performing small business is a firm that is intended to provide the owner with a high
income through sales or profits superior to those of the traditional small business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
51. (p. 641) Which of these are the smallest full-time businesses with schedules defined by
customer, not owner, needs?
A. High-growth ventures
C. Traditional small businesses
D. Lifestyle businesses
A traditional small business is a firm that is intended to provide a living income to the owner,
and operating in a manner and on a schedule consistent with other firms in the industry and
market.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
52. (p. 641) _____ are firms intended to provide a living income to the owner, and operating in a
manner and on a schedule consistent with other firms in the industry and market.
D. Lifestyle businesses
Traditional small businesses are the smallest full-time businesses, with schedules defined by
customer, not owner, needs.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
53. (p. 641) Which of these businesses typically have sales of $25,000 a year or less and are
intended to provide partial or subsistence financial support for the existing lifestyle of the
owner?
D. Lifestyle firms
Lifestyle or part-time firms start and stay very small, often operating seasonally or when the
owner wants to work in the business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
54. (p. 642) The most straightforward way to achieve sales growth
A. is to count on established customers to help improve sales through word-of-mouth.
B. is to expand into areas where you may have a small customer base.
C. is to convert occasional customers into steady customers.
D. is by increasing sales to existing steady customers.
The most straightforward is to achieve sales growth is by increasing sales to existing steady
customersby selling more of the same or by expanding your offerings. If you have a good
relationship with your customers, they may well tell you what other items they would like to buy
from you instead of other vendors.
AACSB: Analytic
Difficulty: Medium
55. (p. 642) _____ refers to the recovery of value through the sale of a firm or its assets.
A. Harvest
B. Invest
C. Transfer
D. Terminate
For the owners of business, a central goal of a harvest is to get the maximum value they can for
their business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
56. (p. 642) This represents the owner's last major return from the firm and a key pool of money for
retirement or further businesses.
A. Transfer
B. Harvest
C. Termination
D. Consolidation
Harvest refers to the recovery of value through the sale of a firm or its assets.
AACSB: Analytic
Difficulty: Medium
57. (p. 643) When one firm absorbs another through purchase, it is called a(n)
A. merger.
B. acquisition.
C. transfer.
D. termination.
Mergers and acquisitions are where one firm combines (i.e., merges) or absorbs (acquires)
another through a purchase. In a transfer, ownership is moved from one person or group to
another while in the case of a termination the owner closes down the business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
58. (p. 642) A transfer method describing the first-time public sale of a stock listed on a public
stock exchange is called a(n)
A. IPO.
B. ESOP.
C. consolidation.
D. termination.
An IPO is one of the methods of harvesting a business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
59. (p. 643) A transfer method in which a small firm is bought by a larger firm for the purpose of
quickly growing the larger firm refers to
A. IPO.
B. ESOP.
C. consolidation.
D. termination.
Consolidations account for only a few thousand purchases all year.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
60. (p. 643) A(n) _____ is a formalized legal method to transfer some or all of the ownership of a
business to its employees.
A. IPO
B. ESOP
C. consolidation
D. termination
An employee stock ownership plan (ESOP) is a special tax-protected way to sell a firm to its
employees.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
61. (p. 643) An endgame strategy in which the owner closes down a business is called
A. IPO.
B. ESOP.
C. consolidation.
D. termination.
Termination refers to the closing down of a business and includes three major methods
walkaways, workouts, and bankruptcies.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
62. (p. 643) In the hierarchy of business outcomes, the worst possible outcome is
A. sell off.
B. pass off.
C. walkaway.
D. bankruptcy.
The top of the hierarchy of business outcomes describes situations in which the owner leaves the
firm with substantial funding, while the other extreme has situations of bankruptcy. Refer figure
20.3
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
63. (p. 643) _____ is an estate planning strategy which focuses on generating cash to cover likely
estate taxes.
A. Liquidity enhancement
B. Tax management
C. Estate freeze
D. Transfer
Liquidity enhancement is a strategy for managing transfers within a family.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
64. (p. 643) Tax management
A. focuses on generating cash to cover likely estate taxes.
B. focuses on minimizing estate tax payments.
C. focuses on transferring assets to heirs when the asset costs are low.
D. focuses on giving the firm as a gift to someone who will keep the business a going concern.
Tax management is a strategy for managing transfers within a family.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
65. (p. 643) Which of these is a type of transfer?

A. Liquidation
B. Workout
C. Walkaway
D. Pass off
Workouts and walkaways are types of terminations while liquidation is the popular name for
Chapter 7 bankruptcy which is also a termination method. Refer figure 20.3
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
66. (p. 643) Which of these is a type of termination?

A. IPO.
B. Workout.
C. Pass off.
D. Sell off.
Pass off, sell off, and an IPO are transfer methods. Refer figure 20.3
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
67. (p. 644) Which is the form of business termination that uses a legal method for closing a
business and paying off creditors when debts are substantially greater than assets?
A. Bankruptcy
B. Sell off
C. Walkaways
D. Workout
Bankruptcy is the most extreme business closing situation, which occurs when the business has
such high debt that it cannot reasonably expect to earn back the funds required by its creditors. A
lawyer's involvement can help owners protect as much of their personal assets as possible
throughout the process and eventually recover their financial standing.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
68. (p. 644) Business terminations in which the entrepreneur ends the business with its obligations
met is called a
A. sell off.
B. workout.
C. pass off.
D. walkaway.
A walkaway is the single most typical way businesses close down.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
69. (p. 644) Grantor retained annuity trusts can be used in
A. tax management.
B. liquidity enhancements.
C. estate freezes.
D. walkways.
An estate freeze is an estate planning strategy which focuses on transferring assets to heirs when
the asset costs are low.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
70. (p. 644) A _____ happens when the owner realizes there is little chance of being able to sell the
firm and gives the firm to someone as a gift, without compensation.
A. workout
B. sell off
C. pass off
D. succession
In the interest of keeping the firm going, or providing employees with a source of income, the
owner gives the firm to someone as a gift, without compensation.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
71. (p. 644) In a _____ the assets of a firm are sold to another business, with the proceeds used to
pay off the firm's remaining debts, and perhaps leaving the owner some small profit.
A. workout
B. sell off
C. pass off
D. succession
The key to a successful sell off is finding customers for the assets and determining a price for the
different assets.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
72. (p. 645) In a successful walkaway

A. contracts, leases, and the like are in effect.
B. employees are let go as they find other jobs.
C. insurance is discontinued after the firm closes.
D. assets or inventory are available.
In a successful walkaway, contracts, leases, and the like are fulfilled or formally terminated,
assets or inventory are depleted, and insurance is continued to cover unexpected claims after the
firm closes.
AACSB: Analytic
Difficulty: Medium
73. (p. 645) Identify the type of termination that is employed when the entrepreneur feels that the
business was less than successful, usually because of the result of poor use of the firms' assets
combined with an unsatisfying business experience.
A. Bankruptcy
B. Walkaway
C. Sell off
D. Workout
A workout is a form of business termination in which the firm's legal or financial obligations are
not fully met at closing.
AACSB: Analytic
Difficulty: Medium
74. (p. 645) _____ refers to a form of business termination in which the firm's legal or financial
obligations are not fully met at closing.
A. Workout
B. Walkway
C. Pass off
D. Sell off
In a workout the entrepreneur arranges to pay off all debts, often doing this after the business is
officially closed.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
75. (p. 646) _____ is the popular name for a_____ bankruptcy in which a bankrupt firm's assets are
sold by the bankruptcy trustee and the proceeds used to pay the firm's debts.
A. Liquidation; Chapter 11
B. Reorganization; Chapter 13
C. Liquidation; Chapter 7
D. Reorganization; Chapter 11
Chapter 11 bankruptcy allows a firm to reorganize its operations and renegotiate with creditors.
Reorganization is the popular name for a Chapter 13 bankruptcy in which a bankrupt firm
continues to operate while paying off debts identified by the bankruptcy trustee.
AACSB: Analytic
Difficulty: Medium
76. (p. 646) People who open multiple businesses throughout their career are called
A. serial entrepreneurs.
B. unsatisfied business owners.
C. terminal venturers.
D. workout specialists.
For serial entrepreneurs who are determined to survive and do well, the key is recognizing and
building a firm along the lines of the critical success factors for small business.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
77. (p. 646) These are processes, benchmarks, or components of the business that are essential for
the business to be profitable and competitive in its market.
A. IPOs
B. CSFs
C. ESOPs
D. BRIE
Critical success factors (CSF) are by definition best practices for a given industry.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
78. (p. 646) The two broad types that CSFs fall into are outside help and
A. entrepreneurial experience.
B. start-up capital.
C. brand name affiliation.
D. serial entrepreneurs.
CSFs are by definition best practices for a given industry.
AACSB: Analytic
Difficulty: Medium
79. (p. 647) Which of these is NOT a CSF that can help identify those businesses more likely to
survive?
A. Being incorporated
B. Moderate start-up capital
C. Protectable intellectual property
D. Brand name affiliation
Businesses starting with no start-up capital and those starting with more than $50,000 are among
those most likely to survive long term. Businesses with moderate start-up capital are most likely
to be undercapitalized for their industry and start-up situation.
AACSB: Analytic
Difficulty: Medium
80. (p. 648) Entrepreneurial success is measured with all of these bottom lines EXCEPT
A. the firm.
B. the family.
C. the community.
D. the government.
The four bottom lines of business are the firm, the community, the family, and the entrepreneur.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
81. (p. 648) This refers to the profitability of the business, figured from the financial statements.
A. The resource maturity
B. Sell off
C. The bottom line
D. Pass off
Today entrepreneurs and consultants realize that success can no longer be measured solely in
terms of the bottom line i.e. profits. There are four domains in which balanced entrepreneurs
need to achieve success to be truly happy: the firm, the community, the family, and their own
life.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
82. (p. 648) Returns at levels higher than the entrepreneur could make working for others is known
as
A. substitution profits.
B. marginal profits.
C. supplemental profits.
D. success profits.
Supplemental profits are intended as a secondary income for the entrepreneur, who has another
job which provides his or her main income; substitution profits are intended to equal and replace
the salary or wages the entrepreneur could draw working for someone else. Marginal profit is not
one of the three levels of profit.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
83. (p. 648) Returns above costs intended as a secondary income for entrepreneurs refers to _____
profits.
A. substitution
B. supplemental
C. success
D. marginal
Substitution profits are intended to equal and replace the salary or wages the entrepreneur could
draw working for someone else; success profits represent income levels higher than the person
could make working for others. Marginal profit is not one of the three levels of profit.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
84. (p. 648) Returns intended to equal and replace the salary or wages the entrepreneur could draw
working for someone else refers to _____ profits.
A. substitution
B. supplemental
C. success
D. marginal
Supplemental profits are intended as a secondary income for the entrepreneur, who has another
job which provides his or her main income. Success profits represent income levels higher than
the person could make working for others. Marginal profit is not one of the three levels of profit.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
85. (p. 648) Returns at levels higher than the entrepreneur could make working for others refers to
_____ profits.
A. substitution
B. supplemental
C. success
D. marginal
Substitution profits are intended to equal and replace the salary or wages the entrepreneur could
draw working for someone else. Supplemental profits are intended as a secondary income for the
entrepreneur, who has another job which provides his or her main income. Marginal profit is not
one of the three levels of profit.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Scenario: Quality Air

Kevin has been running "Quality Air, Inc.", a heating and air conditioning business for about 20
years. The business has been growing about 15 percent a year with sales of $250,000 per year
and is profitable generating slack resources. Now approaching his 50s, Kevin is seriously
considering recovering the value from his business investment.
86. (p. 639) Identify the small firm life cycle stage that Quality Air Inc. is at.
A. Existence
B. Emergence
C. Survival
D. Success
Success stage firms show consistently growing financial performance, usually with slowly rising
sales. Firms that are in the success stage generate slack resources.

Difficulty: Medium
87. (p. 641) From a growth strategy perspective, Quality Air can be described as a
A. high-growth venture.
B. high-performing small business.
C. traditional small business.
D. lifestyle firm.
High-performing small businesses tend to level off after the success stage, with sales of between
$100,000 and $1,000,000, depending on the industry. These firms grow at rates more like 5 to 15
percent a year.

Difficulty: Medium
88. (p. 642) Kevin's goal appears to be one where he is able to

A. harvest.
B. invest.
C. terminate.
D. sell off.
Harvesting refers to the recovery value through a sale of a firm or its assets.

Difficulty: Medium
89. (p. 643) If Kevin wants to explore transfer, he should consider a

A. liquidation.
B. sell off.
C. walkaway.
D. workout.
Workouts and walkaways are types of terminations while liquidation is the popular name for
Chapter 7 bankruptcy which is also a termination method. Refer figure 20.3

Difficulty: Medium
90. (p. 643) If Kevin decides to terminate his business, a possible methods is a(n)
A. sell off.
B. pass off.
C. workout.
D. IPO.
A sell off, pass off and an IPO are transfer methods.

Difficulty: Medium
Essay Questions

ETR401 Test Bank

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

ETR401 Test Bank

Uploaded by

Copyright:

Available Formats

Chapter 01 Small Business: Its Opportunities and Rewards Answer Key

True / False Questions

5. (p. 6) Truly entrepreneurial businesses are characterized by imitativeness in their products,

6. (p. 7) Small businesses focus on effectiveness whereas high-growth ventures focus on

AACSB: Reflective Thinking

AACSB: Reflective Thinking

Multiple Choice Questions

still going at four years

30. (p. 5) A business owned by an individual or small group is referred to as a(n)

Owner-management refers to constant or at least daily management of a business by its owner.

Novelty means something characterized by being different or new.

34. (p. 6) Small businesses are

AACSB: Reflective Thinking

A franchise is a prepackaged business you buy or lease from a franchisor.

37. (p. 7) People starting high-growth ventures

AACSB: Reflective Thinking

AACSB: Reflective Thinking

39. (p. 7) Which of the following is a characteristic of a small business?

Small businesses focus on efficiency whereas high-growth ventures focus on effectiveness.

AACSB: Reflective Thinking

AACSB: Reflective Thinking

41. (p. 7) Identify the characteristic of a small business.

AACSB: Reflective Thinking

42. (p. 7) Identify the characteristic of a high-tech venture.

AACSB: Reflective Thinking

Potential for growth refers to the potential market size.

Dynamic Capitalism Typology is a model of an economy categorizing businesses based on their

AACSB: Reflective Thinking

AACSB: Reflective Thinking

48. (p. 8) Which of the following is an example of the glamorous sector?

AACSB: Reflective Thinking

50. (p. 8) The resource constrained sector

AACSB: Reflective Thinking

AACSB: Reflective Thinking

A boundary can be something as simple as a business name or government registration, a phone

The occupational structure results in your becoming a small business owner.

In factor-driven economies, entrepreneurship is essential to helping build personal wealth and

As economies develop and go beyond basic manufacturing to a more industrialized economy, it

74. (p. 18) Innovation-driven economies

Innovation-driven economies are focused on high-value-added manufacturing but are marked by

Innovation-driven economies are focused on high-value-added manufacturing but are marked by

AACSB: Use Of Information Technology

Innovation looks at a new thing or a new way of doing things.

81. (p. 20) Public entrepreneurship

Public entrepreneurship involves revitalizing government agencies, so it tends to focus on the

In corporate entrepreneurship, the focus is typically on customer-focus and innovation, bringing

In corporate entrepreneurship, the focus is typically on customer-focus and innovation, bringing

AACSB: Reflective Thinking

Scenario: Jamie Johnson and "For Kidz"

A franchise is a prepackaged business you buy or lease from a franchisor.

Options a, b, and d pertain to high-growth ventures.

AACSB: Reflective Thinking

AACSB: Reflective Thinking

True / False Questions

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Ethical Understanding/Reasoning Abilities

AACSB: Ethical Understanding/Reasoning Abilities

AACSB: Ethical Understanding/Reasoning Abilities

AACSB: Ethical Understanding/Reasoning Abilities

AACSB: Ethical/Legal Responsibilities

22. (p. 58) Unlike _, _ are actually risk-averse.