Question 1

The principle objective of capital budgeting is to

Accepted Answer

The principle objective of capital budgeting is to maximize the value of the firm by selecting the best investment opportunities that will generate the highest return on investment. The other options, such as minimizing risk, maximizing assets, or optimizing project requests, may be important considerations, but they are not the primary objective of capital budgeting.

Question 2

The cash flow budget describes

Accepted Answer

The cash flow budget is a forecast of a company's cash inflows and cash outflows. It helps to determine if there will be any future cash shortfalls or if there will be excess cash available to invest. Therefore, option A is the best choice. Option B is incorrect because accounts receivables are not included in the budget as they are recorded in the balance sheet. Option C is incorrect because interest income and interest expense are part of the income statement, not the cash flow budget. Option D is incorrect because profits and costs are components of the income statement, not the cash flow budget.

Question 3

Cash inflows come from

Accepted Answer

Cash inflows come from sources such as cash sales, investments, and loans received. Cash payouts refer to cash outflows, which include payments made to suppliers, operating expenses, and debt repayments. Short-term liabilities and debts may also result in cash inflows if they are obtained through loans or investments. However, they are not the primary source of cash inflows.

Question 4

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

Accepted Answer

The first step in preparing a cash flow budget is to identify and time the cash inflows, as it helps in understanding when cash will be available to meet obligations.

Question 5

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

Accepted Answer

The traditional accounting equation is Assets = Liabilities + Owners' Equity. This means that the total assets owned by the company must always be equal to the sum of its liabilities and owner's equity. This equation is also known as the balance sheet equation and is a fundamental concept in accounting.

Question 6

One of the easiest capital budgeting methods to understand is

Accepted Answer

The payback method is the easiest capital budgeting method to understand. It simply calculates the length of time it takes for a project to recover its initial investment. It does not take into account the time value of money or long-term profitability, but it can be a useful tool for quickly assessing the feasibility of a project.

Question 7

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

Accepted Answer

The answer of When using trend line analysis, how many...

Question 8

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

Accepted Answer

The method described in the question is the definition of internal rate of return (IRR), which is the rate at which the present value of future cash flows equals the initial investment. Therefore, the correct answer is A, internal rate of return.

B) Net present value is calculated by discounting future cash flows at a given rate, but not necessarily at a rate that makes the NPV equal to zero.

C) Payback method measures the time it takes for an investment to recover its initial cost, and does not take into account the timing or magnitude of cash flows beyond the payback period.

D) Break-even point is the level of sales or production at which total revenues equal total costs, and does not involve discounting future cash flows.

Question 9

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

Accepted Answer

The pro forma income statement should illustrate all twelve months of the year. This allows for a comprehensive view of the projected income and expenses for the entire year, which is important for financial planning and decision-making.

Question 10

Contained in the pro forma balance sheet is

Accepted Answer

The answer of Contained in the pro forma balance sheet...

Question 11

Net present value method is a capital budgeting technique that helps to minimize some of the shortcomings of the payback method by

Accepted Answer

The net present value method recognizes all future cash flows beyond the payback period by discounting them to their present value. This helps to provide a more accurate picture of the project's profitability over its entire life span and is therefore a significant improvement over the payback method. Option A and D are incorrect as they do not completely address the shortcomings of the payback method. Option B is incorrect as it is not related to the net present value method.

Question 12

Despite the drawbacks of the payback method, the entrepreneur should continue to use it because

Accepted Answer

The payback method is favored for its simplicity, making it easy to understand and apply compared to more complex financial analysis methods.

Question 13

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

Accepted Answer

The internal rate of return (IRR) method is used to calculate the discount rate at which the present value of future cash flows equals the initial investment. In other words, the net present value (NPV) is zero when using the IRR method. Therefore, the correct answer is D- zero.

Question 14

Capital budgeting is designed to show

Accepted Answer

The answer of Capital budgeting is designed to show
...

Question 15

The rate used to adjust future cash flows to determine their value in present-period terms is the

Accepted Answer

The rate used to adjust future cash flows to determine their value in present-period terms is the cost of capital. This rate reflects the minimum return an investor expects to earn on their investment and takes into account the time value of money and the risk associated with the investment. The current interest rate may be used as a component in calculating the cost of capital, but it is not the primary factor. The ratio of assets to liabilities is not directly related to determining the value of future cash flows in present terms. Present value is a calculation derived from using the cost of capital to adjust future cash flows.

Question 16

Investments in which returns are expected to extend beyond one year are referred to as

Accepted Answer

Capital investments, such as purchasing real estate, equipment, or inventory, typically require a longer holding period and are expected to generate returns beyond one year. Stocks, bonds, and mutual funds can be short-term or long-term investments, but they do not necessarily have a guaranteed return beyond one year.

Question 17

A fixed cost

Accepted Answer

Fixed costs do not change with changes in activity for a given period of time. They remain constant regardless of production levels, such as rent or insurance.

Question 18

Which of the following are forms of pro forma statements?

Accepted Answer

Both income statements and balance sheets can be presented as pro forma statements, which are financial statements that project future performance based on assumptions and projections. Costs of goods sold, on the other hand, is an expense category on the income statement and is not necessarily a form of a pro forma statement.

Question 19

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

Accepted Answer

The answer of More established ventures will use a sales...

Question 20

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

Accepted Answer

The answer of Which of the following are needed in...

Quiz 11: Financial Preparation for Entrepreneurial Ventures