Deck 8: Assessing a New Venture's Financial Strength and Viability

Question 1

A company's merchandise, raw materials, and products waiting to be sold are called its ________.

A) set aside
B) accumulation
C) reserve
D) inventory
E) stock

Answer 1

D

Question 2

Financial management deals with two things-managing a company's finances and ________.

A) operations management
B) inventory control
C) raising money
D) production management
E) supply chain management

Answer 2

C

Question 3

Peggy Owens owns a store that sells exercise equipment. Each January 1, she makes a very accurate account of all her merchandise and products waiting to be sold that are in her store. On January 1, Peggy is taking account of her store's ________.

A) long-term assets
B) owners' equity
C) accounts payable
D) accounts receivable
E) inventory

Answer 3

E

Question 4

Stability is a company's ability to meet its short-term financial obligations.

Question 5

If a firm's debt-to-equity ratio gets too high, it may have trouble meeting its obligations and securing the level of financing needed to fuel its growth.

Question 6

The four main financial objectives of a firm are _________.

A) efficiency, effectiveness, strength, and flexibility
B) power, success, efficiency, and effectiveness
C) control, effectiveness, liquidity, and power
D) success, strength, liquidity, and profitability
E) profitability, liquidity, efficiency, and stability

Question 7

A company's ability to productively utilize its assets relative to its revenue and its profits is referred to as ________.

A) efficiency
B) effectiveness
C) stability
D) liquidity
E) profitability

Question 8

GymFlow, the company profiled in the opening feature in Chapter 8, created a mobile app that shows how busy a gym is at any given point in time. According to the case, in regard to financial management, the cofounders of GymFlow found that ________ was one of their most difficult challenges.

A) managing accounts payable
B) managing accounts receivable
C) projecting future income
D) projecting future expenses
E) completing financial statements

Question 9

Financial management deals with raising money and managing a company's finances in a way that achieves the highest rate of return.

Question 10

Efficiency is the ability to earn a profit.

Question 11

Susan Howard owns a seafood restaurant in Naples, Florida. She is currently owed $21,000 by a corporation that she catered a series of meetings for and $3,000 on an overdue account. Amanda has $24,000 in ________.

A) accounts receivable
B) inventory
C) accounts collectable
D) accounts obtainable
E) accounts payable

Question 12

A financial statement is a(n) ________.

A) set of ratios which depict relationships between a firm's financial items
B) estimate of a firm's future income and expenses
C) hybrid statement of cash flows
D) itemized forecast of a company's income, expenses, and capital needs
E) written report that quantitatively describes a firm's financial health

Question 13

A company's accounts receivable is money owed to it by its customers.

Question 14

________ are an estimate of a firm's future income and expenses, based on its past performance, its current circumstances, and its future plans.

A) Calculation statements
B) Forecasts
C) Statements of cash flow
D) Financial statements
E) Prediction statements

Question 15

________ is a company's ability to meet its short-term financial obligations.

A) Liquidity
B) Profitability
C) Effectiveness
D) Stability
E) Efficiency

Question 16

Match the financial objective with its correct definition.

A) stability - the overall health of the financial structure of the firm, particularly as it relates to its debt-to-equity ratio
B) profitability - how productively a firm utilizes its assets
C) liquidity - a company's ability to make a profit
D) efficiency - a company's ability to meet its short-term obligations
E) profitability - the overall health of the financial structure of the firm, particularly as it relates to its debt-to-equity ratio

Question 17

Which of the following was not identified as one of the four main financial objectives of a firm?

A) Stability
B) Efficiency
C) Timeliness
D) Liquidity
E) Profitability

Question 18

Money owed to a company by its customers is referred to as ________.

A) accounts obtainable
B) accounts payable
C) accounts receivable
D) inventory
E) accounts collectable

Question 19

The strength and vigor of a firm's overall financial posture is referred to as ________.

A) liquidity
B) effectiveness
C) stability
D) profitability
E) efficiency

Question 20

Southwest Airlines uses its assets very productively. Its turnaround time, or the time that its airplanes sit on the ground while they are being loaded and unloaded, is the lowest in the airline industry. In terms of the primary financial objectives of a firm, this attribute is a measure of Southwest's ________.

A) efficiency
B) effectiveness
C) stability
D) liquidity
E) profitability

Question 21

A firm's ________ reflects the results of its operations over a specified period and shows whether it is making a profit or is experiencing a loss.

A) statement of cash flows
B) income statement
C) forecast
D) balance sheet
E) operating budget

Question 22

A firm's profit margin, or return on sales, is computed by dividing ________.

A) net income by net sales
B) gross profit by net sales
C) net income by gross profit
D) net income by cost of sales
E) operating income by gross profit

Question 23

Describe the difference between historical and pro forma financial statements.

Question 24

Historical financial statements reflect past performance and are usually prepared on a quarterly and annual basis.

Question 25

In regard to budgets, which of the following statements is not true?

A) Budgets include an itemized forecast of a company's expenses.
B) Budgets are a poor tool for financial control.
C) Budgets are an important tool for financial planning.
D) Budgets include an itemized forecast of a company's capital needs.
E) Budgets include an itemized forecast of a company's income.

Question 26

A(n) ________ is a snapshot of a company's assets, liabilities, and owners' equity at a specific point in time.

A) income statement
B) statement of cash flows
C) effectiveness statement
D) balance sheet
E) efficiency statement

Question 27

Pro forma financial statements are projections for future periods based on forecasts and are typically completed for 2 to 3 years into the future.

Question 28

________ financial statements are projections for future periods based on forecasts and are typically completed for two to three years into the future.

A) Chronological
B) Pro forma
C) Ad-hoc
D) Concurrent
E) Historical

Question 29

Budgets are itemized forecasts of a company's income, expenses, and capital needs and are also an important tool for financial planning and control.

Question 30

Which financial statement records all of a firm's revenues and expenses for a given period and shows whether the firm is making a profit or experiencing a loss?

A) Balance sheet
B) Owner's equity statement
C) Statement of cash flows
D) Forecast
E) Income statement

Question 31

________ depict relationships between items on a firm's financial statements.

A) Financial proportions
B) Fiscal relations
C) Fiscal projections
D) Monetary balances
E) Financial ratios

Question 32

According to the textbook, the three numbers that receive the most attention when evaluating an income statement are ________.

A) depreciation, interest income, and income tax expense
B) cost of sales, gross profit, and operating expenses
C) net sales, cost of sales, and operating expenses
D) gross profit, net sales, and incomes tax expense
E) gross profit, other income, and net income

Question 33

Which of the following statements about pro forma financial statements is incorrect?

A) Pro forma financial statements are projections for future periods based on forecasts.
B) Pro forma financial statements are typically completed for two to three years into the future.
C) Pro forma financial statements are required by the SEC.
D) Most companies consider their pro forma financial statements to be confidential and reveal them to outsiders only on a "need to know basis."
E) Pro forma financial statements are strictly planning tools.

Question 34

Which of the following selections correctly matches the financial statement with its description?

A) Income statement - tells how much a firm is making or losing
B) Income statement - depicts the structure of a firm's assets and liabilities
C) Balance sheet - shows where a firm's cash is coming from
D) Balance sheet - tells how much a firm is making or losing
E) Statement of cash flows - depicts the structure of a firm's assets and liabilities

Question 35

Which of the following statement is incorrect regarding how balance sheets are prepared?

A) The left-hand side of a balance sheet shows a firm's assets.
B) The assets on a balance sheet are shown in order of liquidity.
C) Assets are recorded at fair market value rather than cost.
D) The right-hand side of a balance sheet shows a firm's liabilities and its owners' equity.
E) Intellectual property receives value in some cases and in some cases it does not.

Question 36

On a firm's income statement, net sales consists of ________.

A) operating expenses minus cost of sales
B) total sales minus allowances for returned goods and discounts
C) cost of sales minus allowances for returned goods and discounts
D) cost of sales minus operating expenses
E) total sales minus operating expenses

Question 37

________ are itemized forecasts of a company's income, expenses, and capital needs and are also an important tool for financial planning and control.

A) Profitability statements
B) Financial statements
C) Owners' equity statements
D) Budgets
E) Statements of cash flows

Question 38

The Partnering for Success feature in Chapter 8 focuses on buying groups, and recommends that small businesses seek out buying groups to participate in. What is a "buying group" in the context of the feature?

A) A partnership that bands small businesses together to attain volume discounts on common products and services that they buy
B) A partnership that bands small businesses together to collectively make the commitment to "buy local" at every available opportunity
C) A partnership that bands small businesses together to get the best prices possible from foreign importers and manufacturers
D) A partnership that bands small businesses together to get the best possible terms from finance companies
E) A partnership that bands small businesses together to get the best possible rates on property and liability insurance

Question 39

________ financial statements reflect past performance and are usually prepared on a quarterly and annual basis.

A) Chronological
B) Ad-hoc
C) Historical
D) Concurrent
E) Pro forma

Question 40

Match the financial term with its proper definition.

A) Forecasts - depict relationships between items on a firm's financial statements
B) Forecasts - written reports that quantitatively describe a firm's financial health
C) Budget - itemized forecasts of a company's income, expenses, and capital needs
D) Financial ratios - written report that quantitatively describes a firm's financial health
E) Financial statements - an estimate of a firm's future income and expenses

Question 41

The Savvy Entrepreneurial Firm feature in Chapter 8 focuses on a scenario involving the selection of a new CEO for New Venture Fitness Drinks. The lesson learned from the feature was ________.

A) compare a firm's financial ratios against its primary competitors and industry norms to fairly assess how well a firm is performing financially
B) income statements are more effective in assessing how well a firm is performing financially than are balance sheets and statements of cash flow
C) the most powerful instrument for understanding how well a firm is performing financially is the statement of cash flows
D) ratio analysis is ineffective
E) look at multiple years of an income statement rather than a single year to fairly assess how well a firm is performing financially

Question 42

The major categories of assets listed on a balance sheet include current, fixed, and other assets.

Question 43

The income statement records all the revenues and expenses for a given period and shows whether the firm is making a profit or is experiencing a loss.

Question 44

Which of the financial statements used by businesses to keep track of their financial affairs is the most similar to an ordinary person's end-of-the month bank statement?

A) Income statement
B) Balance sheet
C) Statement of cash flows
D) Statement of ratio analysis
E) Statement of owners' equity

Question 45

When evaluating a balance sheet, the two primary questions are ________.

A) whether a firm has sufficient short-term assets to cover its short-term debts and whether it is profitable
B) whether a firm is profitable and whether a firm is financially sound
C) whether a firm's cost of sales is going up and whether it is generating excess cash that could be used to pay down debt or pay dividends
D) whether a firm has sufficient short-term assets to cover its short-term debts and whether it is financially sound
E) whether a firm is profitable and whether it is generating excess cash that could be used to pay down debt or pay dividends

Question 46

A firm's profit margin, or return on sales, is computed by dividing net income by net sales.

Question 47

The statement of cash flows summarizes the changes in a firm's cash position for a specified period of time and details why the change occurred.

Question 48

A firm's ________ is its current assets divided by its current debt.

A) working share
B) present share
C) working capital
D) owners' equity
E) current ratio

Question 49

Cash plus items that are readily convertible to cash, such as accounts receivable, marketable securities, and inventories are classified as ________ assets on a firm's balance sheet.

A) other
B) intermediate term
C) temporary
D) current
E) fixed

Question 50

In the context of a firm's statement of cash flows, ________ activities include the purchase, sale, or investment in fixed assets (e.g., real estate, equipment, and buildings).

A) operating
B) investing
C) capital
D) financing
E) liquidity

Question 51

A firm's working capital is its ________.

A) inventory and accounts receivable minus its current liabilities
B) current assets minus its current liabilities
C) total assets minus its total liabilities
D) cash and cash equivalents minus its current liabilities
E) accounts receivable minus its total accounts payable

Question 52

The statement of cash flows is divided into three separate activities ________.

A) profitability activities, stability activities, and investing activities
B) stability activities, earning activities, and financing activities
C) operating activities, capital activities, and liquidity activities
D) spending activities, earning activities, and capital activities
E) operating activities, investing activities, and financing activities

Question 53

The balance sheet reflects the results of the operations of a firm over a specified period of time.

Question 54

In the context of a firm's statement of cash flows, ________ activities include cash raised during the period by borrowing money or selling stock and/or cash used during the period by paying dividends, buying back outstanding stock, or buying back outstanding bonds.

A) investing
B) financing
C) operating
D) liquidity
E) capital

Question 55

According to the textbook, the most practical way to interpret or make sense of a firm's historical financial statements is through ________.

A) profit analysis
B) regression analysis
C) the preparation of pro forma financial statements
D) ratio analysis
E) percentage analysis

Question 56

In the context of a firm's statement of cash flows, operating activities include the purchase, sale, or investment in fixed assets (e.g., real estate, equipment, and buildings).

Question 57

A firm's working capital is defined as its fixed assets minus its long-term liabilities.

Question 58

A statement of cash flows is a snapshot of a company's assets, liabilities, and owners' equity at a specific point in time.

Question 59

Which of the following is an example of a long-term liability?

A) Accounts payable
B) Real estate mortgage
C) Accrued expenses
D) Current portion of real estate mortgage
E) Owners' equity

Question 60

Real estate, buildings, equipment and furniture are classified as ________ assets on a company's balance sheet.

A) intermediate term
B) fixed
C) other
D) permanent
E) current

Question 61

What is ratio analysis? Why is it important?

Question 62

Describe each of the four primary financial objectives of firms.

Question 63

A firm's pro forma financial statements are similar to its historical financial statements except that they ________.

A) do not include the income statement
B) are required by the SEC in all cases
C) look back rather than forward
D) look forward rather than back
E) do not include the statement of cash flows

Question 64

The pro forma income statement shows the projected flow of cash into and out of the company during a specified period.

Question 65

The break-even point for a new restaurant or product is the point where the total revenue received equals total costs associated with the output of the restaurant or the sale of the product.

Question 66

The pro forma ________ provides a firm a sense of how its activities will affect its ability to meet its short-term liabilities and how its finances will evolve over time.

A) balance sheet
B) statement of cash flows
C) income statement
D) expense statement
E) statement of owners' equity

Question 67

The pro forma balance sheet provides a firm a sense of how its activities will affect its ability to meet its short-term liabilities and how its finances will evolve over time.

Question 68

The same financial ratios used to evaluate a firm's historical financial statement should be used to evaluate the pro forma financial statements.

Question 69

Describe the purpose of the income statement, the balance sheet, and the statement of cash flows.

Question 70

Shawn Jones was reading the business plan of New Venture Fitness Drinks, and noticed that prior to its financial forecasts, New Venture Fitness Drinks placed an explanation of the sources of the numbers for the forecast and the assumptions used to generate them. This explanation is called a(n) ________.

A) forecast sheet
B) forecast hypothesis
C) estimate statement
D) assumption sheet
E) hypothesis sheet

Question 71

The What Went Wrong? feature for Chapter 8 focuses on Wise Acre Frozen Treats, a company that made organic popsicles from unrefined sweeteners. According to the feature, Wise Acre Frozen Treats failed largely because it ________.

A) grew too quickly, which overwhelmed its cash flow
B) was not careful enough in preparing its pro forma financial statements
C) was not efficient in the way it utilized its assets
D) spent too much money on marketing
E) did not compare its financial ratios to industry peers

Question 72

What are forecasts? What role do they play in the preparation of pro forma financial statements?

Question 73

In the context of computing the cost of sales, the common way to do this is to use the percent-of-sales method, which is a method for expressing each expense item as a percentage of ________.

A) net sales
B) gross profit
C) net income
D) operating income
E) cost of sales

Question 74

According to the textbook, the most important function of the pro forma statement of cash flows is to project whether the firm will have sufficient ________.

A) income to meet its payroll on a weekly or monthly basis
B) income to exceed industry norms
C) cash to meet its needs
D) inventory to meet its sales and production forecasts
E) short-term assets to cover its short-term liabilities

Question 75

If a firm determines it can use the percentage-of-sales method and it follows the procedure described in the textbook, then the net result is that each expense item on its income statement (with the exception of those items that can be individually forecast) will grow at the same rate as sales. This approach is called the ________.

A) continuous percentage method of forecasting
B) stable fraction method of forecasting
C) regular proportion method of forecasting
D) constant ratio method of forecasting
E) steady percentage method of forecasting