Chapter 11 Financial Preparation For Entrepreneurial Ventures

1. Financial information pulls together all the information presented in the other segments of the business.
a. True
b. Fals
e
ANSWER: True
POINTS: 1
REFERENCES: A-Head: 11-1 The Importance of Financial Information for
Entrepreneurs
QUESTION TYPE: True / False
HAS VARIABLES: False
LEARNING OBJECTIVES ENTR.KRTK.20.11.01 - LO: 11-01
:
KEYWORDS: Bloom's: Understand
DATE CREATED: 6/14/2018 9:41 AM
DATE MODIFIED: 8/30/2018 11:49 PM
2. The set of assumptions on which financial projections are based have little meaning.
a. True
b. Fals
e
ANSWER: False
POINTS: 1
Entrepreneurs
:
3. It is typical for a firm to prepare an operating budget but not a cash-flow budget.
a. True
b. Fals
e
ANSWER: False
POINTS: 1
REFERENCES: A-Head: 11-3 Preparing Financial Statements
LEARNING OBJECTIVES: ENTR.KRTK.20.11.02 - LO: 11-02
4. A budget is one of the most powerful tools that an entrepreneur can use in planning business operations.
Copyright Cengage Learning. Powered by Cognero. Page 1
a. True
b. Fals
e
ANSWER: True
POINTS: 1
REFERENCES: A-Head: 11-2 Understanding the Key Financial
Statements
5. The cash-flow budget provides an overview of cash inflows and outflows for the budget period.
a. True
b. Fals
e
ANSWER: True
POINTS: 1
REFERENCES: A-Head: 11-3 Preparing Financial Budgets
KEYWORDS: Bloom's: Remember
6. The first type of expense to be estimated when preparing an operating budget is cost of goods sold.
a. True
b. Fals
e
ANSWER: True
POINTS: 1
7. The first step in creating an operating budget is to prepare the sales forecast.
a. True
b. Fals
e

ANSWER: True
POINTS: 1
8. When using regression analysis, the entrepreneur may draw conclusions about the relationship between product sales
and advertising expenditures.
a. True
b. Fals
e
ANSWER: True
POINTS: 1
9. After the operating budget has been prepared, an entrepreneur can proceed to the next phase of the budget process,
which is the cash-flow budget.
a. True
b. Fals
e
ANSWER: True
POINTS: 1
10. The first step in the preparation of the cash-flow budget is the identification and timing of cash outflows.
a. True
b. Fals
e
ANSWER: False
POINTS: 1

11. The typical business will have cash inflows from three sources: cash sales, cash payments received on account, and
loan proceeds.
a. True
b. Fals
e
ANSWER: True
POINTS: 1
12. Pro forma statements show the firm's present financial position.

a. True
b. Fals
e
ANSWER: False
POINTS: 1
REFERENCES: A-Head: 11-4 Pro Forma Statements
13. The pro forma income statement is prepared before the pro forma balance sheet.
a. True
b. Fals
e
ANSWER: True
POINTS: 1

14. The traditional accounting equation is: Assets + Liabilities = Owners' Equity.

a. True
b. Fals
e
ANSWER: False
POINTS: 1
DATE MODIFIED: 8/31/2018 12:48 AM
15. Capital investments or capital expenditures are expected to last beyond one year.
a. True
b. Fals
e
ANSWER: True
POINTS: 1
REFERENCES: A-Head: 11-5 Capital Budgeting
16. Capital budgeting is used to help the entrepreneur plan for capital depreciation.
a. True
b. Fals
e
ANSWER: False
POINTS: 1
17. The principal objective of capital budgeting is to maximize the value of the firm.
a. True
b. Fals
e
ANSWER: True
POINTS: 1
18. Break-even analysis is used to tell how many units must be sold in order to break even at a particular selling price.
a. True
b. Fals
e
ANSWER: True
POINTS: 1
REFERENCES: A-Head: 11-6 Break-Even Analysis
19. Contribution margin is the difference between the selling price and the fixed cost per unit.
a. True
b. Fals
e
ANSWER: False
POINTS: 1
20. An entrepreneur must graph at least two numbers—total sales and total expenses—when using the graphic approach
for break-even analysis.
a. True
b. Fals
e
ANSWER: False
POINTS: 1
21. The handling questionable costs approach of break-even analysis was specifically designed for firms that have
expenses that are difficult to assign.
a. True
b. Fals
e
ANSWER: True
POINTS: 1
22. Horizontal analysis looks at financial statements and ratios over time.

a. True
b. Fals
e
ANSWER: True
POINTS: 1
REFERENCES: A-Head: 11-7 Ratio Analysis
23. Vertical analysis is the application of ratio analysis to the many sets of financial statements.
a. True
b. Fals
e
ANSWER: False
POINTS: 1

24. Sales-to-assets measures the efficiency of total assets in generating net profit: the number of dollars in net profit
produced for every $1 invested in net assets.
a. True
b. Fals
e
ANSWER: False
POINTS: 1
25. Accounts receivable turnover measures the rate at which accounts receivable are being collected on a monthly basis.
a. True
b. Fals
e
ANSWER: False
POINTS: 1
Entrepreneurs
:
26. Financial information is important to entrepreneurs because it

a. pulls together all the information presented in other segments of the
business.
b. doesn't follow any clear process about the financial operations.
c. answers all questions about the business and the entrepreneur.
d. takes away the assumptions concerning business operations.
ANSWER: a
POINTS: 1
Entrepreneurs
QUESTION TYPE: Multiple Choice
:
KEYWORDS: Bloom's: Analyze
27. Which of the following statements about financial assumptions is not true?

a. They explain how the numbers are derived.
b. They should be clear and precise.
c. They are the most integral part of the financial segment.
d. They do not necessarily correlate with information from other parts of the
business.
ANSWER: d
POINTS: 1
Statements
28. One type of budget used by the entrepreneur is a(n) _____ budget.

a. operating
b. project
c. cost
d. R&D
ANSWER: a
POINTS: 1
29. A budget that is a statement of estimated income and expenses over a specified period of time is referred to as a(n)
_____ budget.
a. anticipated
b. operating

c. entrepreneurial
d. cash-flow
ANSWER: b
POINTS: 1
30. The first step in constructing an operating budget is

a. preparation of the sales forecast.
b. a cost preparation.
c. a cash-flow estimate.
d. estimating fixed costs.
ANSWER: a
POINTS: 1
31. In the simple linear regression analysis equation, Y = a + bx, Y represents

a. expected sales.
b. the dependent variable.
c. the slope of the line.
d. the vertical intercept.
ANSWER: b
POINTS: 1
32. A manufacturing firm needs to establish which of the following budgets?

a. profit budget
b. material purchases budget

c. cost budget
d. accounting budget
ANSWER: b
POINTS: 1
33. A cost that changes in the same direction and proportion to changes in operating activity is a
a. fixed cost.
b. proportional
cost.
c. variable cost.
d. variable receipt.
ANSWER: c
POINTS: 1
34. For a manufacturing firm, the production budget represents the number of units that must be produced
a. to break even.
b. achieve the desired profit level.
c. in order to meet the sales forecast.
d. to cover R&D costs.
ANSWER: c
POINTS: 1
35. In the simple linear regression analysis equation, Y = a + bx, which of the following variables represents expected
sales?
a. Y
b. a
c. b
d. x
ANSWER: a
POINTS: 1
36. In the production budget for a manufacturing firm, the number of units needed in inventory is determined by
a. the sum of beginning inventory and expected sales.
b. the sum of the desired ending inventory and the number of units to be
sold.
c. the sum of beginning inventory and desired ending inventory.
d. an inventory model.
ANSWER: b
POINTS: 1
37. The last step in preparing the operating budget is to estimate

a. current sales.
b. operating expenses.
c. variable costs.
d. R&D costs.
ANSWER: b
POINTS: 1
38. Which of the following is not a common characteristic of financial statements?

a. They are holistic.
b. They are realistic.
c. They are accurate.
d. They are complex.
ANSWER: d
POINTS: 1
39. The process of preparing a pro forma balance sheet is

a. complex.
b. optional.
c. simple.
d. done
first.
ANSWER: a
POINTS: 1
40. Which of the following is not used in balance sheet ratios?

a. current liabilities
b. cash
c. current assets
d. sales
ANSWER: d
POINTS: 1
41. When using trend line analysis, how many periods are required?
a. three
b. two
c. one
d. five
ANSWER: d
POINTS: 1
42. More established ventures will use a sales forecast model where the estimation of current sales will increase a certain
percentage over the prior period's sales. This percentage is based upon
a. newly established sales only.
b. an inventory analysis.
c. a trend line analysis.
d. past experience.
ANSWER: c
POINTS: 1
43. Which of the following works on the premise that a dollar today is worth more than a dollar in the future?
a. net present value
b. internal rate of return
c. net profit margin
d. payback period
ANSWER: a
POINTS: 1
44. The cash flow does not come from

a. goods purchased on account.
b. cash payments received on account.
c. cash sales.
d. loan proceeds.
ANSWER: a
POINTS: 1
45. A fixed cost

a. changes in response to changes in activity for a given period of time.
b. does not change in response to changes in activity for a given period of
time.
c. changes inversely to changes in activity for a given period of time.
d. never changes.
ANSWER: b
POINTS: 1
46. Which of the following is the first step in the preparation of the cash-flow budget?
a. identification of cash inflows
b. identification of cash outflows
c. identification and timing of cash inflows
d. identification and timing of cash
outflows
ANSWER: c
POINTS: 1
47. Which of the following is needed to prepare a pro forma balance sheet?

a. the last balance sheet prepared before the budget period
began
b. assets
c. liabilities
d. owners' equity
ANSWER: a
POINTS: 1
48. Which of the following is the traditional accounting equation that verifies the accuracy of the entrepreneur's balance
sheet?
a. Assets = Liabilities + Owners' Equity
b. Assets + Liabilities = Owners' Equity
c. Assets + Owners' Equity = Liabilities
d. Assets = Liabilities – Owners' Equity
ANSWER: a
POINTS: 1
Statements
49. Which of the following is not one of the most common methods used in capital budgeting?
a. payback method
b. internal rate of return method
c. net present value method
d. anticipated change in net income method
ANSWER: d
POINTS: 1
50. How many months of the year should be illustrated in the first pro forma income statement?
a. 3
b. 8
c. 6
d. 12
ANSWER: d
POINTS: 1
51. From an entrepreneur's standpoint, financial statement analysis is useful because it

a. is a way to anticipate conditions.
b. only displays a series of various
ratios.
c. is good for predicting the future.
d. is helpful in creating the R&D budget.
ANSWER: a
POINTS: 1
52. When using the internal rate of return method, the future cash flows are discounted at a rate that makes the net present
value equal to
a. assets minus liabilities.
b. assets minus owners' equity.
c. assets minus (liabilities plus owners'
equity).
d. zero.
ANSWER: d
POINTS: 1
53. The principal objective of capital budgeting is to

a. minimize the risks of the firm.
b. maximize the value of the firm.
c. maximize the assets of the firm.
d. optimize the number of project requests.
ANSWER: b
POINTS: 1
54. The net present value method is a capital budgeting technique that helps to minimize some of the shortcomings of the
payback method by
a. discounting all future projects.
b. recognizing past cash flows of projects.
c. recognizing future cash flows beyond the payback period.
d. recognizing the payback dollars over again.
ANSWER: c
POINTS: 1
55. A method that discounts future cash flows at a rate that makes the net present value of the project equal to zero is
known as the
a. internal rate of return.
b. net present value.
c. payback method.
d. break-even point.
ANSWER: a
POINTS: 1
56. Capital budgeting is designed to show

a. how many projects, in total, should be selected.
b. which project is most profitable.
c. which of several mutually exclusive projects should be
selected.
d. how to evaluate projects based on rates of return.
ANSWER: a
POINTS: 1
57. Despite the drawbacks of the payback method, the entrepreneur should continue to use it because
a. it is very simple to use in comparison with other methods.
b. projects with a faster payback period normally have more favorable long-term effects
on earnings.
c. it provides a faster return of funds over time.
d. it is inexpensive.
ANSWER: a
POINTS: 1
58. The rate used to adjust future cash flows to determine their value in present period terms is the
a. current interest rate.
b. cost of capital.
c. rate determined by the ratio of assets to liabilities.
d. present value.
ANSWER: b
POINTS: 1
59. Investments in which returns are expected to extend beyond one year are referred to as
a. capital investments.
b. stocks.
c. bonds.
d. mutual funds.
ANSWER: a
POINTS: 1
60. One of the easiest capital budgeting methods to understand is

a. net present value.
b. the internal rate of return.
c. the payback method.
d. the strategic analysis approach.
ANSWER: c
POINTS: 1
61. Many companies continue to use the payback method because it is

a. inexpensive to use.
b. more favorable in its short-term effects on earnings.
c. an immediate cash payment.
d. a longer loan program.
ANSWER: b
POINTS: 1

62. The net present value method works on the premise that a dollar today
a. is worth less than a dollar in the future.
b. is worth the same in the future.
c. is worth more than a dollar in the future.
d. cannot be measured in future dollars.
ANSWER: c
POINTS: 1
63. Loan proceeds are not directly tied to

a. sales revenue.
b. expenses.
c. meeting cash-flow problems.
d. planned expansion of a firm.
ANSWER: a
POINTS: 1
64. Break-even analysis is used to assess

a. expected capital expenditures.
b. revenue.
c. expected product profitability.
d. future sales.
ANSWER: c
POINTS: 1

65. _____ analysis looks at financial statements and ratios over time.

a. Horizontal
b. Inventory
c. Vertical
d. Specific efficiency
ratio
ANSWER: a
POINTS: 1
66. Which of the following is the contribution margin approach formula?

a. (SP – VC)S – FC
b. SP(FC – VC)S
c. (FC – VC)S – SP
d. FC = (SP – VC)
ANSWER: a
POINTS: 1
67. When using the graphic approach to break-even analysis, the entrepreneur must plot total _____ and total _____.
a. revenue; costs
b. expenses; revenue
c. costs; income
d. income; expenses
ANSWER: a
POINTS: 1
68. Which of the following is a decision rule for handling questionable costs?

a. If expected sales are between the two break-even points, the questionable costs
behavior needs to be dropped.
b. If expected sales don't exceed the higher break-even point, the product should be
profitable.
c. The product should not be profitable if expected sales do not exceed the lower break-
even point.
d. Decide which questionable costs to ignore.
ANSWER: c
POINTS: 1
69. Which of the following balance sheet ratios measures solvency?

a. current
b. cash
c. quick
d. debt-to-worth
ANSWER: a
POINTS: 1
70. In handling questionable costs, the cost in question is substituted first as a _____ cost and then as a _____ cost.
a. fixed; variable
b. mixed; fixed
c. variable; total
d. total; fixed
ANSWER: a
POINTS: 1
71. Comparing financial numbers in order to make decisions is referred to as

a. ratio analysis.
b. debt reduction.
c. comparable fractions.
d. descriptive statistics.
ANSWER: a
POINTS: 1
72. Ratio analysis can be applied from which of the following directions?

a. vertical only
b. vertical and horizontal
c. horizontal only
d. external and internal
ANSWER: b
POINTS: 1
73. An inventory turnover ratio of 9.81 means that the average dollar volume of inventory is used up almost _____ time(s)
during the fiscal year
a. 10
b. 100
c. 1
d. 1.2
ANSWER: a
POINTS: 1
KEYWORDS: Bloom's: Apply
74. What is included in an operating budget, and how is this helpful?

ANSWER: The operating budget includes a sales forecast. A forecast can be acquired from a
linear regression analysis or a trend line analysis. This is a good place to start
because a manager must look at past months' sales figures. It usually gives an
idea of what to expect in the upcoming year. This type of budget also includes an
estimation of expenses. A layout of the groundwork helps the manager to get a
clear picture of the costs involved in keeping up the business. The layout will also
help estimate the number of sales needed each month.
POINTS: 1
REFERENCES A-Head: 11-3 Preparing Financial Budgets
:
QUESTION TY Subjective Short Answer
PE:
HAS VARIABL False
ES:
LEARNING O ENTR.KRTK.20.11.02 - LO: 11-02
BJECTIVES:
DATE CREAT 6/14/2018 9:41 AM
ED:
DATE MODIF 8/31/2018 1:29 AM
IED:
75. Explain what a cash-flow budget tells a manager/owner.

ANSWER: A cash-flow budget is an accurate statement of estimated cash receipts and
expenditures during a specific time period. It indicates where a cash-flow
problem may occur. Cash comes from essentially three forms in a business: cash
sales, cash payments, and loan proceeds.
POINTS: 1
REFERENCES A-Head: 11-3 Preparing Financial Budgets
:
PE:
HAS VARIABL False
ES:
BJECTIVES:
DATE CREAT 6/14/2018 9:41 AM
ED:
DATE MODIF 8/31/2018 1:30 AM
IED:
76. Name and describe the final step in preparing the operating budget.
ANSWER: The final step in the budget process is the preparation of pro forma statements,
which are projections of a firm's financial position during a future period (pro
forma income statement) or on a future date (pro forma balance sheet). In the
normal accounting cycle, the income statement is prepared first, followed by the
balance sheet. Similarly, in the preparation of pro forma statements, the pro
forma income statement is followed by the pro forma balance sheet.
In the process of preparing the operating budget, the firm already will have
prepared the pro forma income statements for each month in the budget period.
Each month presents the anticipated income and expense for that particular
period, which is what the monthly pro forma income statements do. To prepare
an annual pro forma income statement, the firm combines all months of the year.
The process for preparing a pro forma balance sheet is more complex: The last
balance sheet prepared before the budget period began, the operating budget, and
the cash-flow budget are needed to prepare it. Starting with the beginning balance
sheet balances, the projected changes as depicted on the budgets are added to
create the projected balance sheet totals.
POINTS: 1
REFERENCES A-Head: 11-4 Pro Forma Statements
:
PE:
HAS VARIABL False
ES:
BJECTIVES:
DATE CREAT 6/14/2018 9:41 AM
ED:
DATE MODIF 8/31/2018 1:32 AM
IED:
77. List the common methods used in capital budgeting, and define the main objective of the capital budget.
ANSWER: A capital budget is used to help plan for investments and expenditures. It also
helps to decide which investment or purchase to make. Three methods help make
this decision, and they include: payback method, net present value method, and
internal rate of return method. Capital budgeting is used to maximize the worth of
the firm.
POINTS: 1
REFERENCES A-Head: 11-5 Capital Budgeting
:
PE:
HAS VARIABL False
ES:
BJECTIVES:
DATE CREAT 6/14/2018 9:41 AM
ED:
DATE MODIF 8/31/2018 1:34 AM
IED:
78. Define break-even analysis, and identify some useful methods for finding the break-even point.
ANSWER: Break-even analysis is the point in production when the firm has no losses or
gains. A firm makes or sells enough of its product to break even. Some popular
applications include graphing total costs and total revenues. The point at which
these two lines cross is the break-even point. Another is the contribution margin
approach or the unknown-cost approach. Each method uses the selling price,
variable cost, fixed costs, and the unknown cost (number of units to sell).
POINTS: 1
REFERENCES A-Head: 11-6 Break-Even Analysis
:
PE:
HAS VARIABL False
ES:
BJECTIVES:
DATE CREAT 6/14/2018 9:41 AM
ED:
DATE MODIF 8/31/2018 1:35 AM
IED:

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1. Financial information pulls together all the information presented in the other segments of the business.

Copyright Cengage Learning. Powered by Cognero. Page 2

Copyright Cengage Learning. Powered by Cognero. Page 3

12. Pro forma statements show the firm's present financial position.

Copyright Cengage Learning. Powered by Cognero. Page 4

14. The traditional accounting equation is: Assets + Liabilities = Owners' Equity.

22. Horizontal analysis looks at financial statements and ratios over time.

Copyright Cengage Learning. Powered by Cognero. Page 7

26. Financial information is important to entrepreneurs because it

27. Which of the following statements about financial assumptions is not true?

28. One type of budget used by the entrepreneur is a(n) _____ budget.

Copyright Cengage Learning. Powered by Cognero. Page 9

30. The first step in constructing an operating budget is

31. In the simple linear regression analysis equation, Y = a + bx, Y represents

32. A manufacturing firm needs to establish which of the following budgets?

Copyright Cengage Learning. Powered by Cognero. Page 10

37. The last step in preparing the operating budget is to estimate

38. Which of the following is not a common characteristic of financial statements?

39. The process of preparing a pro forma balance sheet is

40. Which of the following is not used in balance sheet ratios?

44. The cash flow does not come from

45. A fixed cost

47. Which of the following is needed to prepare a pro forma balance sheet?

51. From an entrepreneur's standpoint, financial statement analysis is useful because it

53. The principal objective of capital budgeting is to

56. Capital budgeting is designed to show

60. One of the easiest capital budgeting methods to understand is

61. Many companies continue to use the payback method because it is

Copyright Cengage Learning. Powered by Cognero. Page 20

63. Loan proceeds are not directly tied to

64. Break-even analysis is used to assess

Copyright Cengage Learning. Powered by Cognero. Page 21

65. _____ analysis looks at financial statements and ratios over time.

66. Which of the following is the contribution margin approach formula?

68. Which of the following is a decision rule for handling questionable costs?

69. Which of the following balance sheet ratios measures solvency?

71. Comparing financial numbers in order to make decisions is referred to as

72. Ratio analysis can be applied from which of the following directions?

74. What is included in an operating budget, and how is this helpful?

75. Explain what a cash-flow budget tells a manager/owner.

Copyright Cengage Learning. Powered by Cognero. Page 27

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