Entrepreneurship Starting and Operating A Small Business 4th Edition Mariotti Test Bank

Entrepreneurship Starting and
Operating A Small Business 4th Edition

Mariotti Test Bank
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Entrepreneurship: Starting & Operating a Small Business, 4e (Mariotti)
Chapter 8 Using Financial Statements to Guide a Business
1) Which of the following is not a basic financial document that entrepreneurs use to track their
businesses?
A) income statement
B) cash flow statement
C) balance sheet
D) market share statement
Answer: D
Diff: 1 Page Ref: 252
Learning Object.: 8.1 Understand an income statement.
AACSB Category: Analytical thinking
2) The last line of an income statement shows a business's ________.

A) gross profit or gross loss
B) profit or loss
C) net profit or net loss
D) gross margin
Answer: C
3) In the income statement, EBIT minus interest costs equals ________.

A) gross profit
B) pre-tax profit
C) net profit
D) COGS
Answer: B
4) Jared analyzed the income statement for his independent label and found that for every dollar
of sales, 30 cents were spent on cost of goods sold. The gross profit per dollar was 70 cents. If 20
cents were spent on operating costs and 10 cents on taxes, what is the net profit per dollar?
A) 60 cents
B) 40 cents
C) 30 cents
D) 20 cents
Answer: B
AACSB Category: Application of knowledge
1
Copyright © 2016 Pearson Education, Inc.
5) An income statement shows whether the difference between revenues (sales) and expenses
(costs) is a profit or a ________.
A) loss
B) net profit
C) breakeven
D) semi-loss
Answer: A
AACSB Category: Reflective thinking
6) Ideally, you want to have a positive "double" bottom line. This means ________.
A) you are achieving twice the revenues you expected
B) you have twice the number of customers that you expected
C) you have twice the profit you expected
D) your profit allows you to stay in business and achieve your mission
Answer: D
7) The power of the income statement is that it will tell you whether you are fulfilling the
formula of buying low, selling high, and meeting customer needs.
Answer: TRUE
2
8) Describe the parts of an income statement.
Answer:
1) Revenue. Income from sales of the company's products or services. For companies using the
cash method of accounting, sales are recorded when payments are received.
2) COGS (Cost of Goods Sold)/COSS (cost of services sold). These are the cost of the
materials to make the product (or deliver the service) plus the costs of the direct labor used to
make the product (or deliver the service). An income statement reports total COGS for a period.
3) Gross profit. The results of revenue minus COGS.
4) Other Variable Costs (VC). Costs that vary with sales.
5) Contribution margin. The result of revenues minus COGS and other variable costs, or gross
profit minus other variable costs.
6) Fixed Operating costs. Costs that do not vary with sales. The most common are represented
by USAIIRD: utilities, salaries, advertising, insurance, interest, rent, and depreciation.
7) Earnings before interest and taxes (EBIT). The result of gross profit minus other variable
costs minus fixed costs, except interest and taxes.
8) Pre-Tax Profit. EBIT minus interest costs. This is a business's profit after all costs have been
deducted, but before taxes have been paid. Pre-tax profit is used to calculate how much tax the
business owes.
9) Taxes. The taxes a business must pay on the income it earns.
10) Net profit/loss: The business's profit or loss before any taxes have been paid.
9) Owner's equity is also called ________.

A) debt
B) assets
C) liabilities
D) net worth
Answer: D
Learning Object.: 8.2 Examine a balance sheet to determine a business's financing strategy.
10) Cash itself or items that could be quickly turned into cash or will be used within 1 year are
called ________.
A) liquid assets
B) long-term assets
C) current assets
D) liquid cash
Answer: C
3
11) Liabilities that will be paid over a period of more than one year are ________.
A) long-term assets
B) long-term liabilities
C) equity
D) None of the above.
Answer: B
12) Owner's equity consists of ________.

A) common equity
B) preferred equity
C) retained earnings
D) All of the above.
Answer: D
13) Define debt and equity and explain the difference between them. Where does each appear on
financial statements?
Answer: Debt is money that is borrowed for use by an organization. It is expected to be paid
back, normally with interest. Equity is an asset with a monetary value of cash that is put into an
organization in exchange for ownership or as a gift. Debt is a liability (with short-term and
potentially long-term aspects) while equity is part of the owner's equity, capital, or net worth.
Debt appears in current and long-term liabilities on the balance sheet while equity is part of net
worth. The interest portion of debt repayment appears as an expense on the income statement.
14) What must balance with assets on the balance sheet?

A) liabilities and owner's equity
B) net worth and owner's equity
C) capital and owner's equity
D) liabilities net profit
Answer: A
Learning Object.: 8.3 Use the balance sheet equation for analysis.
4
15) Because different types of assets depreciate at different rates, and because they are purchased
at various points in time businesses keep a(n) ________ to track the valuation of each asset that
is being depreciated.
A) income statement
B) balance sheet
C) depreciation schedule
D) cash flow statement
Answer: C
16) You can create ________ from your income statement that will help you analyze your
business further.
A) financial ratios
B) asset categories
C) comparisons
Answer: A
17) The balance sheet equation tells us that assets - liabilities = net profit.
Answer: FALSE
18) What is the purpose of financial ratio analysis?

Answer: Financial ratio analysis also allows you to compare the income statements from
different months, or years, more easily, even if the sales are different amounts. The percentages
let you compare statements as if they were the "same size." For this reason, financial ratio
analysis is sometimes called "same-size analysis." Relating each element of the income statement
to sales in this fashion will help you notice changes in your costs from month to month and make
adjustments to increase profits.
5
19) To see how costs are affecting net profit, try analyzing the income statement by expressing
each ________.
A) as a percentage of costs
B) as a percentage of profit
C) as a percentage of sales
D) as a percentage of administrative expense
Answer: C
Learning Object.: 8.4 Perform a financial ratio analysis on an income statement.
20) Which of the following is not something that can be invested?

A) energy
B) time
C) expertise
D) money
Answer: C
Learning Object.: 8.5 Calculate return on investment.
21) In a business formula such as Return on Investment, "on" means ________.

A) "divided by"
B) "on top of"
C) "deducted from"
D) "subtracted from"
Answer: A
22) ROI is always calculated for ________.

A) a month
B) a specific time period, such as month or a year
C) the length of a business's fiscal year
D) a period of time
Answer: B
6
23) The return on sales ratio is ________.
A) net income/sales
B) also called the operating ratio
C) revenue/expenses
D) expenses/sales
Answer: A
24) Calculate the return on sales for a business that has net income of $25,000 and sales of
$60,000.
A) 0.52
B) 4.2
C) 42%
D) 4.2%
Answer: C
25) How would you express a ratio as a percentage?

A) add a percentage sign
B) multiply it by 100
C) divide it by 100
Answer: B
26) If you invest $1,525,000 in a business and earn a return of $775,000, what is your ROI?
A) 51%
B) 42%
C) 45%
D) 48%
Answer: A
7
27) In the United Kingdom, the income statement is called the ________.
A) group profit and loss account
B) balance sheet
C) cash flow analysis
Answer: A
28) Return on Sales (ROS) is also called a(n) ________.

A) contribution margin
B) gross margin
C) profit margin
D) operating margin
Answer: C
29) The expression, "What you made over what you paid, times one hundred," is a device to
remember how to compute ________.
A) ROS
B) ROA
C) ROI
Answer: C
30) A business's operating ratios are computed by ________.

A) cost of goods sold/sales
B) expense/sales
C) income/sales
D) income/profit
Answer: B
Learning Object.: 8.6 Perform same-size (common-size) analysis of an income statement.
8
31) To create a same-size analysis, calculate each line item as a percentage of ________.
A) sales
B) income
C) costs
D) profit
Answer: A
32) When the ratio of expenses versus sales is used to express expenses as a percentage of sales,
it is called a(n) ________ ratio.
A) current
B) operating
C) quick
Answer: B
33) What analytic tool allows you to compare income statements from different periods, even if
the dollar figures are very different?
A) income analyses
B) asset analyses
C) financial ratios
D) same-day statements
Answer: C
34) Steve has heard that formulating a common-sized statement for analysis is a good practice.
Explain what he needs to do.
Answer: Steve would need to compare the income statements from different months or years
more easily, even if the sales are different amounts. The percentages let you compare statements
as if they were the "same size."
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35) The ________ ratio tells you whether you have enough cash to cover your current debt.
A) financial
B) operating
C) income
D) quick
Answer: D
Learning Object.: 8.7 Use quick, current, and debt ratios to analyze a balance sheet.
36) If you extend credit, it is critical to minimize this number to keep cash flowing.
A) receivable turnover ratio
B) inventory turnover ratio
C) collection-period ratio
D) debt-to-equity ratio
Answer: C
37) Firms are concerned about liquidity, which means the ability to convert inventory into credit
sales.
Answer: FALSE
38) Debt ratios show the relationship between debts and equity.
Answer: TRUE
39) Operating-efficiency ratios are important to a business. They include collection period, debt
period, and inventory turnover.
Answer: FALSE
10
40) How does a debt-to-equity ratio help describe the financial health of a company?
Answer: Comparing the amount of money a company has borrowed to its equity value indicates
if the amount of borrowing has been high, moderate, or low. A high debt-to-equity ratio means
that the company has higher monthly costs to repay loans and, therefore, lower profits. Higher
fixed costs such as loan payments also mean more risk of bankruptcy.
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Entrepreneurship Starting and

Operating A Small Business 4th Edition

2) The last line of an income statement shows a business's ________.

3) In the income statement, EBIT minus interest costs equals ________.

9) Owner's equity is also called ________.

12) Owner's equity consists of ________.

14) What must balance with assets on the balance sheet?

18) What is the purpose of financial ratio analysis?

20) Which of the following is not something that can be invested?

21) In a business formula such as Return on Investment, "on" means ________.

22) ROI is always calculated for ________.

25) How would you express a ratio as a percentage?

28) Return on Sales (ROS) is also called a(n) ________.

30) A business's operating ratios are computed by ________.

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