Deck 11: Financial Preparation for Entrepreneurial Ventures

Question 1

The pro forma income statement is prepared before the pro forma balance sheet.

Answer 1

True

Question 2

The set of assumptions on which financial projections are based have little meaning.

Answer 2

False

Question 3

The first step in the preparation of the cash flow budget is the identification and timing of cash outflows.

Answer 3

False

Question 4

After the operating budget has been prepared, an entrepreneur can proceed to the next phase of the budget process, the cash flow budget.

Question 5

Using regression analysis to estimate the relationship between expected sales and another variable is rarely used.

Question 6

The traditional accounting equation is: assets + liabilities = owner's equity.

Question 7

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

Question 8

A budget is one of the most powerful tools that an entrepreneur can use in planning business operations.

Question 9

Break-even analysis is used to tell how many units must be sold in order to break even at a particular selling price.

Question 10

The first step in creating an operating budget is to prepare the sales forecast.

Question 11

Contribution margin is the difference between the selling price and the fixed cost per unit.

Question 12

Capital budgeting is used to help the entrepreneur plan for capital expenditures.

Question 13

The typical business will have cash inflows from three sources: cash sales, cash payments received on account, and loan proceeds.

Question 14

The principal objective of capital budgeting is to maximize the value of the firm.

Question 15

It is typical for a firm to prepare an operating budget but not a cash budget.

Question 16

The cash-flow budget provides an overview of cash inflows and outflows for the budget period.

Question 17

Capital investments or capital expenditures are expected to last beyond one year.

Question 18

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

Question 19

The first type of expense to be estimated when preparing an operating budget is cost of goods sold.

Question 20

An entrepreneur must graph at least two numbers, total sales and total expenses, when using the graphic approach for break-even analysis.

Question 21

After the firm has forecast its sales for the budget period

A) net income is figured.
B) expenses are estimated.
C) ending inventory is figured.
D) labor costs are estimated.

Question 22

The handling questionable costs approach of break-even analysis was specifically designed for entrepreneurship firms.

Question 23

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

A) expected sales.
B) the factor on which sales are dependent.
C) the slope of the line.
D) the vertical intercept.

Question 24

Financial information is important to entrepreneurs because:

A) it pulls together all the information presented in other segments of the business.
B) it quantifies all the assumptions concerning business operations.
C) it answers all questions about the business and the entrepreneur.
D) a and b are both correct.

Question 25

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 the desired ending inventory.
D) an inventory model.

Question 26

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

A) a profit budget
B) a material purchases budget
C) a cost budget
D) an accounting budget

Question 27

A variable cost

A) changes in the same direction and in inverse proportion to changes in operating activity.
B) changes in the opposite direction and in direct proportion to changes in operating activity.
C) changes in the same direction and in direct proportion to changes in operation activity.
D) is synonymous with labor costs

Question 28

For a manufacturing firm, the production budget represents

A) the number of units that must be produced to break even.
B) the number of units that must be produced to achieve the desired profit level.
C) the number of units that must be produced in order to meet the sales forecast.
D) the number of units that must be produced to cover R & D costs.

Question 29

Vertical analysis is the application of ratio analysis to all of the financial statements to find accounting mistakes.

Question 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.

Question 31

One type of budget used by the entrepreneur is

A) an operating budget.
B) a project budget.
C) a cost budget.
D) an R & D budget.

Question 32

Which of the following statements is not True about financial assumptions?

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.

Question 33

The last step in preparing the operating budget is to

A) estimate current sales.
B) estimate operating expenses.
C) estimate variable costs.
D) estimate R & D costs.

Question 34

Horizontal analysis looks at financial statements over time.

Question 35

A gross margin ratio of 38 percent means that for every $1 of sales, a firm produces 62 cents of gross margin.

Question 36

Accounts receivable turnover measures the rate at which accounts receivable are being collected on an monthly basis.

Question 37

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

A) the slope of the line.
B) expected sales.
C) the constant.
D) the factor on which sales are dependent.

Question 38

Production requirements are figured by subtracting the period's beginning inventory from

A) inventory from the previous period.
B) inventory needed for that period.
C) both of the above.
D) fixed costs.

Question 39

A budget that is a statement of estimated income and expenses over a specified period of time is referred to as an

A) anticipated budget.
B) operating budget.
C) entrepreneurial budget.
D) expected results budget.

Question 40

A key concept in developing an expense budget is that of

A) fixed costs.
B) labor costs.
C) taxes.
D) rent.

Question 41

The principle 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.

Question 42

The cash flow budget describes

A) cash inflows/cash outflows.
B) cash outflows/accounts receivables.
C) interest income/interest expense.
D) profits/costs.

Question 43

Cash inflows come from

A) cash sales.
B) cash payouts.
C) debts.
D) short-term liabilities.

Question 44

The first step in the preparation of the cash flow budget is the

A) identification of cash inflows.
B) identification of cash outflows.
C) identification and timing of cash inflows.
D) identification and timing of cash outflows.

Question 45

The traditional accounting equation that verifies the accuracy of the entrepreneur's balance sheet is

A) assets = liabilities + owners' equity.
B) assets + liabilities = owner's equity.
C) assets + owner's equity = liabilities.
D) assets = liabilities - owner's equity.

Question 46

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.

Question 47

When using trend line analysis, how many periods are required?

A) three
B) two
C) one
D) five

Question 48

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

A) internal rate of return.
B) net present value.
C) payback method.
D) break-even point.

Question 49

How many months of the year should be illustrated in the first pro forma income statement?

A) three
B) eight
C) six
D) twelve

Question 50

Contained in the pro forma balance sheet is

A) the profit budget.
B) the cost budget.
C) the cash flow budget.
D) the R & D budget.

Question 51

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.

Question 52

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.

Question 53

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 owner's equity.
C) assets minus (liabilities plus owner's equity).
D) zero.

Question 54

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.

Question 55

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.

Question 56

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.

Question 57

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) does none of the above.

Question 58

Which of the following are forms of pro forma statements?

A) income statements
B) balance sheets
C) costs of goods sold
D) a and b

Question 59

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.

Question 60

Which of the following are needed in preparing a pro forma balance sheet?

A) the last balance sheet prepared before the budget period began
B) assets
C) liabilities
D) owners equity

Question 61

Break-even analysis is a technique commonly used to assess the

A) rate of return on investment.
B) expected product profitability.
C) net present value.
D) total costs.

Question 62

Comparing financial numbers in order to make decisions is referred to as:

A) ratio analysis.
B) debt reduction.
C) comparable fractions.
D) descriptive statistics.

Question 63

In handling questionable costs, the cost in question is substituted first as a _____ and then as a _____.

A) fixed cost; variable cost
B) mixed cost; fixed cost
C) variable cost; total cost
D) total cost; fixed cost

Question 64

List the elements of a capital budget and define its main objective.

Question 65

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

Question 66

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

Question 67

The concept of the net present value method works on the premise that

A) a dollar today is worth less than a dollar in the future.
B) a dollar today is worth the same in the future.
C) a dollar today is worth more than a dollar in the future.
D) a dollar today cannot be measured in future dollars.

Question 68

Break-even analysis is used to assess

A) expected capital expenditures.
B) revenue.
C) expected product profitability.
D) future sales.

Question 69

Contribution margin is the difference between

A) selling price and fixed cost per unit.
B) purchase price and variable cost per unit.
C) selling price and variable cost per unit.
D) purchase price and fixed cost per unit.

Question 70

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.

Question 71

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

Question 72

The contribution margin approach formula is

A) CM = SP (VC - FC) S
B) S = SP (FC - VC)
C) SP = (FC - VC) S
D) FC = (SP - VC) S

Question 73

Loan proceeds are not directly tied to

A) sales revenue.
B) expenses.
C) meeting cash flow problems.
D) planned expansion of a firm.

Question 74

When using the graphic approach to break-even analysis, the entrepreneur must plot which of the following?

A) total revenue and total costs
B) total expenses and total revenue
C) total costs and total income
D) total income and total expenses

Question 75

Many companies continue to use the payback method. 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.

Question 76

Name and describe the final phase of the budget process.

Question 77

Define break-even analysis and identify some useful methods for finding the break-even point.

Question 78

An inventory turnover ratio of 9.80 means that the average dollar volume of inventory is used up almost _____ times during the fiscal year

A) 10
B) 100
C) 1
D) 1.2