Chapter 10 The Financial Plan

True/False Questions

1. When developing operating and capital budgets, the entrepreneur can seek advice
from experts, but should retain the final say so.

Answer: True Page: 291 Difficulty: Medium

2. An entrepreneur focuses on the operating costs only on completion of the sales budget.

Answer: True Page: 292 Difficulty: Medium

3. Capital budgets project expenditures on new equipment, vehicles, computers, or new

facilities.

Answer: True Page: 292 Difficulty: Easy

4. The first step in preparing a pro forma income statement is to separate fixed and
variable costs.

Answer: False Page: 293 Difficulty: Medium

5. In an Internet start-up, advertising costs will be extensive to create awareness of the

website.

Answer: True Page: 293 Difficulty: Medium

6. Costs of goods sold should be calculated using actual cost figures; using industry
standard figures is too inaccurate.

Answer: False Page: 294 Difficulty: Medium

7. To satisfy outside investors, the financial plan will need three years of projected
financial data.

Answer: True Page: 294 Difficulty: Easy

8. Selling expense is an expense that can be expected to remain stable over time.

Answer: False Page: 294 Difficulty: Medium

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Chapter 10 The Financial Plan

9. In projecting the operating expenses for the send and third year, it is helpful to first
look at those expenses that will likely change over time.

Answer: False Page: 295 Difficulty: Hard

10. When estimating expenses for the pro format income statement, it is best to be
conservative.

Answer: True Page: 295 Difficulty: Medium

11. A reasonable profit that is earned with conservative estimates is not considered to be
an initial success for a new venture.

Answer: False Page: 295 Difficulty: Easy

12. Cash flow is the result of subtracting expenses from sales.

Answer: False Page: 297 Difficulty: Hard

13. Cash flow is the same thing as profit.

Answer: False Page: 297 Difficulty: Medium

14. Many profitable firms fail because of lack of cash.

Answer: True Page: 297 Difficulty: Medium

15. The indirect method of projecting cash flow uses a simple determination of cash in
less cash out.

Answer: False Page: 297 Difficulty: Hard

16. Large positive cash flows usually occur in the first months of a new venture.

Answer: False Page: 297 Difficulty: Medium

17. When projecting cash flows for the pro forma cash flow statement, it is important to
avoid being conservative in the estimates.

Answer: False Page: 298 Difficulty: Medium

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Chapter 10 The Financial Plan

18. The pro forma balance sheet depicts the condition of the business at one point in time.

Answer: True Page: 300 Difficulty: Easy

19. Assets represent the net worth of the firm.

Answer: False Page: 300 Difficulty: Medium

20. Cash is a fixed asset.

Answer: False Page: 300 Difficulty: Medium

21. Profit from the business will be included on the balance sheet in the assets section.

Answer: False Page: 302 Difficulty: Hard

22. Owner equity is the excess of all assets over all liabilities.

Answer: True Page: 302 Difficulty: Easy

23. Break-even analysis is a technique to determine the total liabilities of the firm.

Answer: False Page: 302 Difficulty: Medium

24. Break-even is that volume of sales at which there are neither profits nor losses.

Answer: True Page: 302 Difficulty: Easy

25. As long as the selling price is greater than the variable cost per unit, some contribution
will be made to cover fixed costs.

Answer: True Page: 302 Difficulty: Hard

26. Sales in excess of the break-even point will result in a profit, as long as the selling
price remains above the cost to produce each unit.

Answer: True Page: 303 Difficulty: Hard

27. Rent and insurance are examples of fixed costs.

Answer: True Page: 302 Difficulty: Medium

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Chapter 10 The Financial Plan

28. The purpose of the pro forma sources and applications of funds statement is to show
the relationship between revenue and expenses.

Answer: False Page: 304 Difficulty: Hard

29. Depreciation is considered a source of funds because it does not represent an out-of-
pocket expense.

Answer: True Page: 304 Difficulty: Hard

30. Using a spreadsheet software package is helpful when developing budgets as it helps
to gauge the impact of different financial scenarios.

Answer: True Page: 305 Difficulty: Easy

31. Microsoft Excel is a software package that includes manufacturing, order entry, and
billing functions it is usually too expensive for start-up firms.

Answer: False Page: 305 Difficulty: Medium

Multiple Choice Questions

32. The sales budget:

A) should be prepared before developing the pro forma income statement.
B) must be prepared by the venture's accounting firm.
C) must be based on actual sales figures for the last month.
D) needs to be prepared only in case of a manufacturing firm.

Answer: A Page: 291 Difficulty: Medium

33. The _____ budget is used to project cash flows for the cost of goods produced.
A) production
B) operating
C) capital
D) depreciation

Answer: A Page: 291 Difficulty: Hard

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Chapter 10 The Financial Plan

34. Fixed expenses:

A) are incurred regardless of sales volume.
B) can be estimated by taking into consideration the production.
C) includes labor, raw materials, and commissions.
D) must be linked to strategy in the business plan.

Answer: A Page: 292 Difficulty: Medium

35. Which of the following would be considered a variable expense?

A) Rent
B) Raw materials
C) Interest
D) Insurance

Answer: B Page: 292 Difficulty: Easy

36. The _____ budget is used to evaluate expenditures that will impact the business for
more than one year.
A) production
B) operating
C) depreciation
D) capital

Answer: D Page: 292 Difficulty: Medium

37. ______ is (are) the major source of revenue.

A) Borrowing from banks
B) Outside investors' contributions
C) Sales
D) Dividends

Answer: C Page: 293 Difficulty: Medium

38. As the business grows:

A) selling expenses should go down.
B) salaries and wages will go up as output increases.
C) the pro forma income statement becomes unimportant.
D) advertising expenses should go down.

Answer: B Page: 294 Difficulty: Medium

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Chapter 10 The Financial Plan

39. Cash flow:

A) is the same as profit.
B) is the result of subtracting expenses from sales.
C) results from the differences between cash receipts and cash payments.
D) is the sum total of all sales at a point in time.

Answer: C Page: 297 Difficulty: Medium

40. Selling expenses, advertising, salaries and wages, and taxes may be represented as a
percentage of the__________.
A) net profit
B) total operating expenses
C) gross profit
D) projected net sales

Answer: D Page: 2 Difficulty: Hard

41. Negative cash flow:

A) results when cash receipts exceed cash payments.
B) is included in the pro forma income statement.
C) can cause a firm to fail.
D) is common for a business during its phase of expansion.

Answer: C Page: 297 Difficulty: Medium

42. Using the ________ method of projecting cash flow, adjustments are made to net
income based on the fact that cash may not actually be received or disbursed.
A) direct
B) breakeven
C) indirect
D) pro forma

Answer: C Page: 297 Difficulty: Medium

43. Pro forma cash flow is

A) cash flow based on the actual.
B) calculated from subtracting assets from liabilities.
C) cash flow calculated on past receipts and expenses.
D) projected cash inflow and outflow.

Answer: D Page: 298 Difficulty: Medium

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Chapter 10 The Financial Plan

44. The pro forma cash flow, like the __________, is based on best estimates.
A) business cash flow at a certain point of time
B) expense statement
C) income statement
D) actual cash flow statement

Answer: C Page: 299 Difficulty: Medium

45. The basic balance sheet relationship is:

A) assets plus owner's equity equal liabilities.
B) assets equal liabilities plus owner's equity.
C) assets plus liabilities equal owner's equity.
D) assets equal owner’s equity minus liabilities.

Answer: B Page: 300 Difficulty: Medium

46. Which of the following would not be a current asset?

A) Certificates of deposit that mature in six months
B) Customer receivables
C) Cash
D) Supplier bills payable in thirty days

Answer: D Page: 300-301 Difficulty: Medium

47. Fixed assets are those that:

A) are intangible.
B) will be used over a long period of time.
C) include cash.
D) are similar to loans and advances.

Answer: B Page: 301 Difficulty: Medium

48. ________ represent(s) money that is owed to creditors.

A) Assets
B) Cash flow
C) Owner equity
D) Liabilities

Answer: D Page: 301 Difficulty: Medium

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Chapter 10 The Financial Plan

49. Current liabilities are:

A) those liabilities due for payment within a year.
B) everything owed to creditors.
C) everything of value owned by the company.
D) those liabilities that represent the excess over all assets.

Answer: A Page: 301 Difficulty: Medium

50. Owner's equity represents:

A) only capital invested by the entrepreneur.
B) the net worth of the business.
C) everything of value owned by the firm.
D) all assets owned by the entrepreneur.

Answer: B Page: 302 Difficulty: Medium

51. Profit from the business would be included on the balance sheet in which section?
A) Assets
B) Liabilities
C) Owners equity
D) Assets or liabilities

Answer: C Page: 302 Difficulty: Medium

52. The formula for break-even analysis is:

A) total fixed costs divided by selling price minus variable cost per unit.
B) total variable costs divided by marginal contribution.
C) total sales divided by selling price plus variable cost per unit.
D) total fixed costs divided by selling price plus marginal contribution.

Answer: A Page: 302 Difficulty: Medium

53. ______ is the volume of sales needed to cover total variable and fixed costs.
A) Cash flow
B) Breakeven
C) Revenue
D) Depreciation

Answer: B Page: 302 Difficulty: Medium

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Chapter 10 The Financial Plan

54. As long as the selling price is greater than the _______________cost per unit, some
contribution can be made to cover _________________.
A) fixed, variable costs
B) variable, fixed costs
C) total, expenses
D) fixed, negative cash flow

Answer: B Page: 302 Difficulty: Medium

55. Which of the following are likely to be fixed costs?

A) Depreciation
B) Commissions
C) Materials
D) Direct labor

Answer: A Page: 302 Difficulty: Medium

56. If the total fixed costs are $850,000, the sale price is $110 and the variable cost per
unit is 25, what is the breakeven volume?
A) 17,000
B) 10,000
C) 7,000
D) 1,000

Answer: B Page: 302 Difficulty: Hard

57. Which of the following would be an application of funds?

A) Decrease in assets.
B) Increase in turnover
C) Paying dividends
D) Increase in liabilities

Answer: C Page: 288 Difficulty: Hard

58. Financial projections to assess the impact of different scenarios are calculated using:
A) a spreadsheet program.
B) an inventory management program.
C) the Internet.
D) a graphics program.

Answer: A Page: 305 Difficulty: Medium

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Chapter 10 The Financial Plan

59. Which of the following software programs could be used for inventory, order entry,
and billing?
A) Quickbooks
B) Peachtree
C) Vision Point
D) all of the above.

Answer: C Page: 305-306 Difficulty: Hard

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