Test Bank For Entrepreneurship 3rd Edition by Bamford

Test Bank for Entrepreneurship 3rd Edition By Bamford
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Entrepreneurship, 3e (Bamford)
Chapter 6 Analyzing Cash Flow and Other Financial Information
1) In a business, the actual cash that flows into the firm minus the cash that goes out of it is known
as cash flow.
Answer: TRUE
Explanation: Cash flow is the actual cash that flows into a firm minus the cash that goes out of the
firm. It is important to understand that cash flow in a business is not the same as profit.
Difficulty: 1 Easy
Topic: Importance of Cash Flow Analysis
Learning Objective: 06-01 Recognize the fundamental importance of cash flow analysis.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
2) Cash flow in a business is the same as profit.
Answer: FALSE
Explanation: Cash flow in a business is not the same as profit.
Difficulty: 1 Easy
Bloom's: Remember
3) A firm obtains profits when its sales revenue is higher than its expenses.
Answer: TRUE
Explanation: A firm obtains profits when its sales revenue is higher than its expenses.
Difficulty: 2 Medium
Bloom's: Understand
1
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written consent of McGraw-Hill Education.
4) It is possible to sell products and have no cash coming into a company.
Answer: TRUE
Explanation: It is quite common to have high levels of products or services "sold" with no cash
coming into a firm.
Bloom's: Understand
5) When there is a doubling in orders for a new business's products or services in a single month, it
leads to an immediate increase in the cash flowing into the business.
Answer: FALSE
Explanation: In theory, a doubling in orders for a new business's products or services in a single
month sounds desirable. However, it means that twice the inputs must be ordered and paid for
while there is no cash coming into the firm to pay for the dramatic increase of inputs needed until
those goods are paid for by the customer.
Bloom's: Understand
6) If a small firm is making a profit, then the firm must have a positive cash flow.
Answer: FALSE
Explanation: While many new firms appear to be making a profit, they can be suffering from a
negative cash flow.
Bloom's: Understand
2
7) To prevent a cash crunch, a company must accurately forecast its actual cash flow.
Answer: TRUE
Explanation: To prevent a cash crunch, it is important for a new entrepreneurial business to
carefully, thoughtfully, and accurately forecast its real cash flow.
Bloom's: Understand
8) For a proposed new business, a financial analysis focuses exclusively on its ability to generate
positive cash flow in the shortest time possible.
Answer: TRUE
Explanation: For a proposed business, the financial analysis focuses almost exclusively on its
ability to generate positive cash flows in the shortest time possible.
Difficulty: 1 Easy
Bloom's: Remember
9) In a large firm, when there is a separation between managers and ownership, profits are a useful
measure to evaluate a manager's performance.
Answer: TRUE
Explanation: When there is a separation between managers and ownership, profits are a useful
measure as a means to evaluate a manager's performance, inasmuch as such firms are typically
larger and have numerous slack, or excess, resources.
Difficulty: 1 Easy
Bloom's: Remember
3
10) In a small business, profits will demonstrate to the owner if the business is viable over the long
term.
Answer: FALSE
Explanation: Profits have little to do with whether the business will be viable over the long term.
Bloom's: Understand
11) A general rule of thumb when examining the initial equity needs of a new venture is to base it
on equity investments competitors have made into their businesses.
Answer: FALSE
Explanation: A general rule of thumb when examining the initial equity needs of a new venture is
to first calculate the cash flow projection without adding in any equity investment and to then look
for the point where the ending balance is at its lowest point. The lowest point figure should be
multiplied by 150 percent, which gives the recommended initial equity.
Bloom's: Understand
12) One of the fundamental realities of starting a new business is that it takes a period of time for
the new venture to ramp up sales and then to obtain cash from those sales.
Answer: TRUE
Explanation: One of the fundamental realities of starting a new business is that it takes a period of
time for the new venture to ramp up sales and then to obtain cash from those sales. High number of
initial sales does not guarantee sustainable revenue for the company.
Bloom's: Understand
4
13) A new small business must pay its vendors by using purchase orders.
Answer: FALSE
Explanation: A new entrepreneurial business will have to pay its vendors in cash.
Difficulty: 1 Easy
Bloom's: Remember
14) Float is the difference between the money going out and the money coming in.
Answer: TRUE
Explanation: Float is the difference between the money going out and the money coming in.
Difficulty: 1 Easy
Bloom's: Remember
15) A budget details all the expenses incurred by a company within a specified period.
Answer: FALSE
Explanation: A budget projects all the costs that will be incurred by an organization over some
period of time.
Difficulty: 1 Easy
Bloom's: Remember
16) A cash flow statement is the same as a budget.
Answer: FALSE
Explanation: A cash flow statement is not a budget and should not be confused with a budget.
Difficulty: 1 Easy
Bloom's: Remember
5
17) A budget does the exact opposite of a cash flow statement.
Answer: TRUE
Explanation: A cash flow statement does the exact opposite of a budget.
Bloom's: Understand
18) In order to determine a firm's cash flow, the firm's owner must calculate the entire cash flow
projection and multiply that by 150 percent to determine if the firm can meet its financial
obligations.
Answer: TRUE
Explanation: An owner calculates the entire cash flow projection without adding in any equity
investment and looks for the point where the ending balance is at its lowest point. Then, he or she
takes that number and multiplies it by 150 percent.
Bloom's: Understand
19) A deviation analysis is a review of the differences between the predicted and the actual
performance of cash flows.
Answer: TRUE
Explanation: A deviation analysis is an analysis of the differences between the predicted and the
actual performance of cash flows.
Bloom's: Understand
6
20) Everything in cash flow in a small business is related to one activity: operations.
Answer: TRUE
Explanation: New entrepreneurial ventures typically have only one type of activity: operations.
Everything that involves cash in or cash out is related to the operation of the business.
Topic: Developing Cash Flow Statements and Budgets
Learning Objective: 06-02 Prepare a cash flow statement and a budget.
Bloom's: Understand
21) When used effectively, a cash flow statement provides a small business owner with a
well-respected and accepted means of displaying the ability of the company to meet its financial
obligations.
Answer: TRUE
Explanation: The cash flow statement is used to describe all of the activities that provide and use
cash during the period being examined. Used effectively, this statement helps owners to accurately
keep track of the overall cash position of a business and provides a well-respected and accepted
means of displaying the ability of the company to meet its obligations.
Bloom's: Understand
22) All the expenses of a firm need to be included in the cash flow statement.
Answer: TRUE
Explanation: All actual expenses must be accounted for in the cash flow statement of any
business.
Difficulty: 1 Easy
Bloom's: Remember
7
23) Revenues should be separated into as few categories as possible to provide the maximum
insight to the owner.
Answer: FALSE
Explanation: Revenues (cash inflows) should be separated into as many categories as possible in
order to provide the maximum insight to a business owner.
Bloom's: Understand
24) A sensitivity analysis of cash flows should show the best-case and the worst-case scenarios.
Answer: TRUE
Explanation: A sensitivity analysis is an examination of the best-case and the worst-case cash
flow scenarios.
Difficulty: 1 Easy
Bloom's: Remember
25) A cash flow statement is used to describe all of the activities that generate cash and use cash
during the period being examined.
Answer: TRUE
Explanation: A cash flow statement is used to describe all of the activities that provide and use
cash during the period being examined.
Bloom's: Understand
8
26) A cash flow statement should be tailored to the information needs of a new business.
Answer: TRUE
Explanation: Generating a cash flow statement should be tailored to the information needs of a
new venture.
Bloom's: Understand
27) In the context of business tools, a sensitivity analysis examines a new firm's vulnerability to its
competitors.
Answer: FALSE
flow scenarios for a business. It is a judgment call by a new business owner about whether the
business could survive the worst-case or successfully carry out the best-case scenario.
Difficulty: 1 Easy
Bloom's: Remember
28) In the context of financial activities, new firms typically have only investing activities and
financial activities.
Answer: FALSE
Explanation: New businesses, unlike established companies, are unlikely to have either investing
activities or financing activities. New entrepreneurial ventures typically have only one type of
activity: operations.
Difficulty: 1 Easy
Bloom's: Remember
9
29) In the context of financial tools, a commonly held view is that cash is king in an
entrepreneurial business.
Answer: TRUE
Explanation: Cash is king in an entrepreneurial business.
Difficulty: 1 Easy
Topic: Other Financial Tools
Learning Objective: 06-03 Identify other financial tools.
Bloom's: Remember
30) Pro forma is a term that describes estimates of what a firm's balance sheets and income
statements will look like in the future.
Answer: TRUE
Explanation: The term pro forma simply means that the entrepreneur estimates what the balance
sheets and income statements will look like in the future, in order to plan well.
Difficulty: 1 Easy
Bloom's: Remember
31) A pro forma is a summary of assets and liabilities.
Answer: FALSE
Explanation: A balance sheet is a summary of assets and liabilities.
Difficulty: 1 Easy
Bloom's: Remember
10
32) In the context of financial tools, the values of fixed assets of new firms tend to be quite vague
and ballpark estimates of their values are acceptable when calculating balance sheets.
Answer: FALSE
Explanation: The estimate of a new firm's fixed assets and liabilities can be exact and should be
estimated with some care. This is because the cost of items can be reasonably estimated and issues
such as debt should be well known.
Bloom's: Understand
33) In the context of financial tools, a sensitivity analysis is a summary of the assets and liabilities
of an entrepreneurial business.
Answer: FALSE
flow scenarios of an organization. The sensitivity analysis is a judgment call by the new business
owner about whether the business could survive the worst-case or successfully carry out the
best-case scenario.
Difficulty: 1 Easy
Bloom's: Remember
34) Fixed assets are assets that have a physical presence, such as buildings and office equipment.
Answer: TRUE
Explanation: Fixed assets have a physical presence, including land, buildings, office equipment,
machinery, and vehicles. There are two basic types of assets that should be included as separate
items in the balance sheet: current assets and fixed assets.
Difficulty: 1 Easy
Bloom's: Remember
11
35) Current liabilities are all those debts and liabilities that a firm must pay to its investors and
shareholders over a long period.
Answer: FALSE
Explanation: Current liabilities are liabilities or debts that a business has to pay within a year.
These include accounts payable, notes payable such as bank notes, and accrued payroll.
Difficulty: 1 Easy
Bloom's: Remember
36) Long-term liabilities are debts and liabilities owed by a business that are ultimately due more
than a year from the current date.
Answer: TRUE
Explanation: Long-term liabilities are owed by a business and are ultimately due more than a
year from the current date. These include mortgages payable, owners' equity, and stockholders'
equity.
Difficulty: 1 Easy
Bloom's: Remember
37) Current liabilities that are owed by a company need to be paid in 18 months.
Answer: FALSE
Explanation: Current liabilities are liabilities or debts that the business has to pay within a year.
These include accounts payable, notes payable such as bank notes, and accrued payroll.
Difficulty: 1 Easy
Bloom's: Remember
12
38) On a balance sheet, the assets minus the liabilities of a company reflected in the balance sheet
should total zero.
Answer: TRUE
Explanation: The assets minus the liabilities of a firm reflected in the balance sheet should total
to zero.
Bloom's: Understand
39) A cash flow statement measures cash flow on

A) an annual basis.
B) an accrual basis.
C) a cash basis.
D) a normalized basis.
Answer: A
Explanation: A cash flow statement measures cash flow on an annual basis.
Difficulty: 1 Easy
Bloom's: Remember
40) In the context of cash flow analysis, ________ are a useful measure as a means to evaluate
performance when there is a separation between managers and owners.
A) contracts
B) fixed assets
C) profits
D) balance sheets
Answer: C
Explanation: When there is a separation between management and ownership, profits are a useful
measure to evaluate performance. This generally applies to firms that are typically large and have
numerous slack, or excess, resources.
Bloom's: Understand
13
41) An investment in a firm by the owner is called ________.
A) equity
B) intervention
C) severance
D) variability
Answer: A
Explanation: Equity is investment into an entrepreneurial business by the owners of the firm.
Difficulty: 1 Easy
Bloom's: Remember
42) ________ is the difference between when the money goes out and when it comes in.
A) Accounts payable
B) Difference gap
C) Equity
D) Float
Answer: D
Explanation: Float is the difference between when the money goes out and when it comes in.
Bloom's: Remember
14
43) In the context of cash flow analysis, why is a period of rapid growth considered to be one of the
most dangerous times for an entrepreneurial business?
A) Because it can result in the business ordering and paying for additional orders while there is no
cash coming into the firm
B) Because it is difficult to accurately forecast the cash flow of the firm in this situation
C) Because a rapid slump in sales almost always comes after a rapid and unexpected growth
D) Because the employees of small firms are rarely equipped to cope with a rise in their workload
Answer: A
Explanation: Rapid growth by a new entrepreneurial business is actually one of the most
dangerous times for that business. It means that twice the inputs must be ordered and paid for while
there is no cash coming into the firm to pay for the dramatic increase of inputs needed until those
goods are paid for by the customer.
Bloom's: Understand
44) A ________ projects all the expenses incurred by a business over a specified period of time.
A) cash flow statement
B) float
C) financial map
D) budget
Answer: D
Explanation: A budget projects all the expenses incurred by a business over a period of time.
Difficulty: 1 Easy
Bloom's: Remember
15
45) A cash flow statement is the exact opposite of a ________.
A) float
B) budget
C) cash plan
D) cash flow
Answer: B
Explanation: A cash flow statement is the exact opposite of a budget.
Bloom's: Understand
46) Sarah is the founder of a small business. At the start of the business year, she makes a list of all
the possible expenses that the business might incur over the following year. She totals the expenses
and spreads out the expenses evenly across the following 12 months. In this context of cash flow
analysis, Sarah is determining the ________ for her business.
A) budget
B) cash flow statement
C) profit margins
D) equity
Answer: A
Explanation: In this scenario, Sarah is determining the budget for her business. A budget projects
all the costs that will be incurred by the organization over some period of time (a year, for instance)
and allocates that expense evenly over the relevant time period.
Difficulty: 3 Hard
Bloom's: Apply
16
47) When the owner of a new firm is developing a ________, the individual should contact
vendors and suppliers to ask about payment terms.
A) cash flow projection
B) cash flow statement
C) margin profit analysis
D) gap deficiency analysis
Answer: A
Explanation: In developing a cash flow projection, the new business owner should contact
vendors and suppliers to ask about payment terms.
Bloom's: Understand
48) A ________ is the analysis of the differences between the predicted and the actual
performance of a business.
A) deviation analysis
B) gap analysis
C) margin analysis
D) profit analysis
Answer: A
Explanation: A deviation analysis is the analysis of the differences between the predicted and the
actual performance of a business.
Difficulty: 1 Easy
Bloom's: Remember
17
49) Mariana wants to analyze the potential viability of a new business idea. She does this by
researching the sales levels of existing businesses similar to her projected business. She analyzes
the information to predict sales levels that can be expected for her business at various stages of its
growth. In this scenario, Mariana develops a
A) pro forma income statement.
B) break-even analysis.
C) sensitivity analysis.
D) pro forma balance sheet.
Answer: A
Explanation: In this scenario, Mariana develops a pro forma income statement. The focus of the
income statement is profit rather than cash flow.
Difficulty: 3 Hard
Bloom's: Apply
AACSB: Reflective Thinking
50) For a new business owner, what are the benefits of using a deviation analysis?
A) It helps develop realistic forecasts.
B) It identifies the differences between actual performances and predicted performances.
C) It allows the maximum flexibility in making changes to a new business.
D) All of these
Answer: D
Explanation: A deviation analysis assists an entrepreneur in developing realistic forecasts for the
business in the future. It also points out the differences between the actual performance and
predicted performance at a point in time.
Bloom's: Understand
18
51) In the Numi Organic Tea case study, Numi Organic Tea was founded based on the principles
of
A) justice.
B) fair trade.
C) equality.
D) none of these.
Answer: B
Explanation: Numi sought to differentiate their teas by using super-premium inputs that are
organic and Fair Trade Certified.
Bloom's: Understand
52) In the Friend's Home Health case study, the cash flow statement reflected receipts from
A) actual expenses.
B) projected expenses.
C) estimated expenses.
D) all of these.
Answer: C
Explanation: The founders tried to include every actual expense that would be incurred in the
first six months of operation. The receipts were estimated by observing their competitors.
Bloom's: Understand
19
53) In the context of developing cash flow statements and budgets, what company activities are
typically categorized as operations?
A) Activities related to cash flowing either in or out of a company
B) Activities related to managing a company's equity capital
C) Activities related to forecasting a company's performance
D) Activities related to developing new strategies for a company to implement
Answer: A
Explanation: Everything that involves cash in or cash out is related to the operation of a business.
This includes various expenses, such as salaries, cost of goods sold, and office supplies.
Bloom's: Understand
54) Identify a long-term benefit of developing accurate cash flow statements.

A) They assist a company in securing loans and credit lines in the future.
B) They reduce a company's vulnerability to competition within its market niche.
C) They improve the long-term profitability of a company.
D) They provide a significant float that allows a company great financial flexibility.
Answer: D
Explanation: A well-developed, accurate long-term track record of cash flow statements and the
comparison of the planned cash flows to reality will go a long way toward assisting a company
with loans and credit lines. Further, accurate long-term cash flow statements will aid in infusions
of equity capital to a company and even improve its valuation, should the businessperson want to
sell the company.
Bloom's: Understand
20
55) In the context of cash flow statements and budgets, for a new entrepreneurial firm, what is a
benefit of separating cash inflows on a cash flow statement into as many categories as possible?
A) It aids in analyzing the actual revenue sources for the firm.
B) It reduces the firm's taxable income on paper.
C) It identifies weaknesses in the firm's supply chains.
D) It reduces the firm's vulnerability to undesirable market conditions.
Answer: A
Explanation: Separating out revenue lines aids a new firm in predicting where the firm's revenues
will come from. It also aids in analyzing the actual revenue sources for the new entrepreneurial
firm.
Bloom's: Understand
56) A ________ is an analysis by a small business owner of the best-case and the worst-case
financial scenarios.
A) gap analysis
B) deficit analysis
C) sensitivity analysis
D) forecast analysis
Answer: C
Explanation: A sensitivity analysis is an analysis of the best-case and the worst-case cash flow
scenarios.
Difficulty: 1 Easy
Bloom's: Remember
21
57) Mark, a new business owner, creates two cash flow statements for his firm. The first increases
the monthly revenue of his firm by 40 percent, while the other reduces the monthly revenue by 40
percent. He compares the effect of each scenario on his firm's business to understand its financial
situation. In this scenario, Mark is developing a ________.
A) gap analysis
B) balance sheet
C) sensitivity analysis
D) break-even analysis
Answer: C
Explanation: In this scenario, Mark is developing a sensitivity analysis. A sensitivity analysis is
an examination of the best-case and the worst-case cash flow scenarios for a firm and the
sensitivity of the potential cash flow to dramatic changes in the revenue or cost stream.
Difficulty: 3 Hard
Bloom's: Apply
58) In the context of financial tools, identify a difference between how traditional Fortune 500
firms and entrepreneurial ventures approach break-even analysis.
A) Traditional Fortune 500 firms calculate breakeven using profit, whereas entrepreneurial
ventures calculate breakeven using cash flow.
B) Traditional Fortune 500 firms estimate breakeven based on gross profits, whereas
entrepreneurial ventures estimate breakeven using net profits.
C) Traditional Fortune 500 firms calculate breakeven from returns on initial investments, whereas
entrepreneurial ventures calculate breakeven from the profit margin from each sale.
D) Traditional Fortune 500 firms estimate breakeven as the point where costs equal sales, whereas
entrepreneurial ventures estimate breakeven as the point where cash flow becomes positive.
Answer: A
Explanation: A difference between how traditional Fortune 500 firms and entrepreneurial
ventures approach break-even analysis is that traditional Fortune 500 firms calculate breakeven
using profit, whereas entrepreneurial ventures calculate breakeven using cash flow.
Bloom's: Understand
22
59) A ________ describes estimates by a small business owner of what the balance sheets and
income statements will look like in the future.
A) pro forma
B) balance sheet
C) current asset
D) cash flow
Answer: A
Explanation: A pro forma describes estimates by a small business owner of what the balance
sheets and income statements will look like in the future.
Difficulty: 1 Easy
Bloom's: Remember
60) A ________ is a summary of the assets and liabilities of a small business.

A) pro forma
B) balance sheet
C) current asset
D) cash flow
Answer: B
Explanation: A balance sheet is a summary of the assets and liabilities of an entrepreneurial
business.
Difficulty: 1 Easy
Bloom's: Remember
23
61) A ________ can easily be converted to cash, such as accounts receivable and notes receivable.
A) pro forma
B) balance sheet
C) current asset
D) cash flow
Answer: C
Explanation: Current assets can easily be converted to cash, such as accounts receivable and
notes receivable.
Difficulty: 1 Easy
Bloom's: Remember
62) Marcus performs an analysis of his new business to anticipate its future requirements. He
makes a list of the various assets the firm must account for. He categorizes each asset in two lists:
one for assets that can be easily converted into cash and the other for assets that have a physical
presence. In this scenario, Marcus is analyzing his new business by
A) creating a balance sheet.
B) compiling an income statement.
C) compiling a break-even analysis.
D) creating a cash flow statement.
Answer: A
Explanation: In this scenario, Marcus is creating a balance sheet. A balance sheet is a summary of
the assets and liabilities of the entrepreneurial business, and it is useful for the new business to
analyze and understand the types of assets and liabilities the business can expect.
Difficulty: 3 Hard
Bloom's: Apply
24
63) In the context of balance sheets, the current assets of a firm minus its current liabilities are
referred to as the ________.
A) organizational budget
B) variable costs
C) working capital
D) break-even point
Answer: C
Explanation: In the context of balance sheets, the current assets of a firm minus its current
liabilities are referred to as the working capital. The working capital is, in effect, the liquid assets a
firm can call upon quickly to meet needs that arise.
Difficulty: 1 Easy
Bloom's: Remember
64) ________ are owed by a business and are ultimately due more than a year from the current
date.
A) Current assets
B) Long-term liabilities
C) Current balance liabilities
D) Pro forma liabilities
Answer: B
Explanation: Long-term liabilities are owed by a business and are ultimately due more than a
year from the current date.
Difficulty: 1 Easy
Bloom's: Remember
25
65) The assets minus the liabilities of a firm reflected on the balance sheet should total
A) to half of the profits.
B) the number predicted by the pro forma balance sheet.
C) to zero.
D) the sum of current liabilities.
Answer: C
Explanation: The assets minus the liabilities of a firm reflected on the balance sheet should total
to zero.
Difficulty: 1 Easy
Bloom's: Remember
66) Ingrid is the owner of an entrepreneurial firm. She makes an estimate of the assets and
liabilities of the firm. She then uses these estimates to plan the future activities of the firm. In this
scenario, Ingrid creates a
A) time value of money graph.
B) deviation analysis.
C) cash flow statement.
D) pro forma balance sheet.
Answer: D
Explanation: In this scenario, Ingrid creates a pro forma balance sheet. The term pro forma
simply means that the entrepreneur estimates what the balance sheets and income statements will
look like in the future, in order to plan well.
Difficulty: 3 Hard
Bloom's: Apply
26
67) The focus of an income statement is on
A) profits.
B) assets.
C) liabilities.
D) cash.
Answer: A
Explanation: The focus of an income statement is on profit rather than cash flow.
Difficulty: 1 Easy
Bloom's: Remember
68) An income statement provides both the ________ and the ________ profit figures for a firm.
A) current; long-term
B) gross; net
C) fixed; varied
D) goods; services
Answer: B
Explanation: An income statement provides both the gross and the net profit figures for a firm.
Difficulty: 1 Easy
Bloom's: Remember
69) In the context of financial tools, identify a true statement about income statements.
A) Income statements summarize a firm's assets and liabilities.
B) For an entrepreneurial firm, predicting sales is key to developing income statements.
C) Income statements only estimate the net profit figures for a firm during each financial quarter.
D) When creating income statements, entrepreneurs must be liberal when estimating demand for
their firms' products.
Answer: B
Explanation: For an entrepreneurial firm, predicting sales is key to developing income
statements. The firms should initially look to similar enterprises and attempt to estimate or
research their sales levels.
Bloom's: Understand
27
70) The ________ of money is calculated on the value of an investment in time and money, if the
owner did not do the proposed venture.
A) expected inflow
B) accurate rate
C) future value
D) time value
Answer: D
Explanation: The time value of money is the value of money over time at a given rate of inflation
or other type of return. It is calculated as the value of your investment in time and money, if you
did not do the proposed venture.
Difficulty: 1 Easy
Bloom's: Remember
71) ________ is a tool for the estimation of when a business's income exceeds its expenses.
A) Gap deficit analysis
B) Long-term analysis
C) Cash flow analysis
D) Break-even analysis
Answer: D
Explanation: Break-even analysis is a tool for the estimation of when a business's income
exceeds its expenses.
Difficulty: 1 Easy
Bloom's: Remember
28
72) ________ costs must be paid regardless of how many products or services are sold.
A) Expected
B) Current
C) Fixed
D) Variable
Answer: C
Explanation: Fixed costs must be paid regardless of the sales level.
Difficulty: 1 Easy
Bloom's: Remember
73) ________ costs change according to how many goods are produced.
A) Expected
B) Current
C) Fixed
D) Variable
Answer: D
Explanation: Variable costs fluctuate according to how many goods are produced.
Difficulty: 1 Easy
Bloom's: Remember
29
74) In the context of financial tools, when a new venture's net cash flow exceeds the initial
investment plus the time value of the money invested, the venture is said to have achieved
________.
A) positive equity
B) entrepreneurial breakeven
C) long-term sustainability
D) positive float
Answer: B
Explanation: When a new venture's net cash flow exceeds the initial investment plus the time
value of the money invested, the venture is said to have achieved entrepreneurial breakeven. This
is the point a successful business turns the corner and begins producing positive cash flows.
Difficulty: 1 Easy
Bloom's: Remember
75) Which of the following terms is used to describe assets that can be easily converted to cash?
A) Fixed liabilities
B) Fixed assets
C) Current assets
D) Current profits
Answer: C
Explanation: Current assets can be easily converted to cash.
Difficulty: 1 Easy
Bloom's: Remember
76) An investment into a small business by owners is called ________.
Answer: equity
Explanation: An investment into a small business by owners is called equity.
Difficulty: 1 Easy
Bloom's: Remember
30
77) A ________ projects all the costs that will be incurred by an organization over a specified
period of time.
Answer: budget
Explanation: A budget is a statement that projects all the costs that will be incurred by an
organization over a period of time.
Difficulty: 1 Easy
Bloom's: Remember
78) ________ is the situation where there is a difference between when the money goes out to pay
business expenses and when it comes in from sales.
Answer: Float
Explanation: Float is the difference between when the money goes out and when it comes in.
Difficulty: 1 Easy
Bloom's: Remember
79) A ________ is an examination of the best-case and the worst-case cash flow scenarios.
Answer: sensitivity analysis

flow scenarios.
Difficulty: 1 Easy
Bloom's: Remember
80) A ________ analysis is an analytic tool that identifies the differences between the predicted
and the actual performance of a company over time.
Answer: deviation
Explanation: A deviation analysis is an analysis of the predicted and actual performance of a
business at a point in time.
Difficulty: 1 Easy
Bloom's: Remember
31
81) An example of a(n) ________ asset is a delivery truck used by a florist to deliver flowers to
customers.
Answer: fixed
Explanation: Fixed assets have a physical presence such as land, buildings, office equipment,
machinery, and vehicles.
Difficulty: 1 Easy
Bloom's: Remember
82) The focus of an income statement is on ________ rather than on cash.
Answer: profit
Explanation: The focus of an income statement is on profit rather than on cash.
Difficulty: 1 Easy
Bloom's: Remember
83) Rent is an example of a(n) ________.
Answer: fixed cost

Explanation: Rent is an example of a fixed cost.
Difficulty: 1 Easy
Bloom's: Remember
84) The term ________ simply mean that an entrepreneur estimates what the balance sheets and
income statements will look like in the future.
Answer: pro forma

Explanation: The term pro forma simply mean that an entrepreneur estimates what the balance
sheets and income statements will look like in the future.
Difficulty: 1 Easy
Bloom's: Remember
32
85) Explain why cash flow is important to a new business owner.
Answer: It is an actionable financial plan for a business. It determines whether there is an actual
financial opportunity for the business. In its simplest form, a cash flow statement is a comparison
of cash inflow and cash outflow.
Bloom's: Understand
86) How is an income statement used by a new business?
Answer: An income statement projects the future income of an organization. It focuses on profit
rather than cash flow. It predicts sales for the organization.
Bloom's: Understand
87) Why is a break-even analysis important to a new business?
Answer: A break-even analysis is important to a new business because it projects the position of
a company to determine not only the viability of the new venture but also a realistic assessment of
whether this is the best path for the entrepreneur to take.
Bloom's: Understand
88) Explain the purpose of a cash flow statement, and list five of the basic elements.
Answer: A cash flow statement is used to describe all of the activities that provide and use cash
during the period being examined. This includes salaries, basic benefits, taxes and fees, cost of
goods sold, tools and machinery, and travel expenses.
Bloom's: Understand
33
89) In the context of cash flow statements and budgets, what is a sensitivity analysis? Why is it
important when developing a new business idea?
Answer: A sensitivity analysis is examination of the best-case and the worst-case cash flow
scenarios. It is quite prudent to look at a worst-case and a best-case scenario to examine the
sensitivity of the potential cash flow to dramatic changes in the revenue or cost stream when
conducting due diligence on a business idea.
Bloom's: Understand
90) What is a balance sheet? How can it be used by businesses?
Answer: A balance sheet is a summary of the assets and liabilities of an entrepreneurial business.
It is useful for the new business to analyze and understand the types of assets and liabilities the
business can expect. Once the firm is up and running, a pro forma balance sheet is also useful as a
comparison in order to understand how assets are being used.
Bloom's: Understand
91) Name the two liabilities a balance sheet must account for and give examples of both.
Answer: Two forms of liabilities are as follows: current liabilities, which include accounts
payable, notes payable, bank notes, and accrued payroll, and long-term liabilities, which include
mortgage payable, owners' equity, and stockholders' equity.
Bloom's: Understand
92) Describe fixed costs and variable costs. Give one example of each type of cost.
Answer: Fixed costs must be paid no matter how many goods are sold. An example of fixed costs
is rent. Variable costs vary according to how many goods are produced. An example of variable
costs is inventory.
Bloom's: Understand
34
Test Bank for Entrepreneurship 3rd Edition By Bamford
93) What is a balance sheet? Why is it called a snapshot of a firm?
Answer: A balance sheet is the summary of a firm's assets and liabilities. It is called a snapshot
because it lists the financial condition of the firm as of a specific date.
Bloom's: Understand
35
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2) Cash flow in a business is the same as profit.

16) A cash flow statement is the same as a budget.

31) A pro forma is a summary of assets and liabilities.

39) A cash flow statement measures cash flow on

54) Identify a long-term benefit of developing accurate cash flow statements.

60) A ________ is a summary of the assets and liabilities of a small business.

76) An investment into a small business by owners is called ________.

Answer: sensitivity analysis

82) The focus of an income statement is on ________ rather than on cash.

83) Rent is an example of a(n) ________.

Answer: fixed cost

Answer: pro forma

86) How is an income statement used by a new business?

87) Why is a break-even analysis important to a new business?

90) What is a balance sheet? How can it be used by businesses?

93) What is a balance sheet? Why is it called a snapshot of a firm?

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