Deck 10: The Power of Numbers

Question 1

Which of the following would be used on an income statement?

A) current fixed assets
B) operating expenses
C) liquid assets
D) loans from shareholders

Answer 1

operating expenses

Question 2

Which of the following processes is facilitated by a yearly pro forma income statement?

A) predicting cash flow
B) hiring seasonal help
C) estimating projected profits
D) predicting current assets

Answer 2

estimating projected profits

Question 3

Which of the following is most important when you start a new business?

A) Have a clear vision of your financial future.
B) Figure out your tax write-offs.
C) Figure out your owner's draw.
D) Buy your start-up inventory.

Answer 3

Have a clear vision of your financial future.

Question 4

Which of the following can be predicted by an income projection?

A) when you'll need to ask the bank for a loan
B) whether you'll have enough cash to pay the bills
C) when you should send out your invoices
D) when you'll make a profit on paper

Question 5

Which of the following best defines working capital?

A) current liabilities divided by current assets
B) the required cash to run your business
C) assets minus liabilities
D) current assets minus current liabilities

Question 6

What is determined in a break-even analysis?

A) your debt-to-equity ratio
B) your required equity investment
C) the point at which your sales revenue equals total expenses
D) your solvency ratio

Question 7

Which of the following do an ice cream parlour, a ski shop, and a snow blower repair business have in common?

A) They are easy businesses in which to get started.
B) They are cash flow businesses.
C) None are well regulated.
D) They have seasonal sales.

Question 8

What amount of net profit would an owner require if he or she wanted to achieve a profit margin of 45 percent of every $100 worth of sales?

A) $35
B) $45
C) $55
D) $65

Question 9

Which statement is used to project money coming in (receipts) and how and when it is spent (disbursements)?

A) profit and loss statement
B) cash flow statement
C) pro forma balance sheet
D) pro forma income statement

Question 10

Which of the following would you use on an application of funds statement?

A) how much you need to borrow
B) cash reserve fund amount
C) liabilities
D) owner's equity

Question 11

What is the term for the money owed to the business by its customers who have purchased goods and services on credit, as shown on a balance sheet?

A) accounts payable
B) accounts receivable
C) deferred sales
D) deferred liabilities

Question 12

Which of the following is the best definition of owner's equity?

A) the amount of cash the owner invests into the business
B) the total value of what the business owns
C) what the business owes the owner
D) the profit earned by the owner

Question 13

What is the term for the ability of a company to pay its short-term obligations?

A) liquidity
B) net equity
C) solvency
D) short-term equity

Question 14

What is the term for the ability of a company to meet its long-term debt obligations?

A) equity
B) liquidity
C) solvency
D) working capital

Question 15

Which of the following is included on a balance sheet?

A) gross profit
B) cash disbursements
C) depreciation
D) cost of goods sold

Question 16

In which area should seasonality be a major consideration when preparing a report?

A) projected cash flow
B) gross profit margins
C) cost of goods sold
D) solvency ratios

Question 17

Which of the following costs depends on the level of sales?

A) operating
B) overhead
C) floating
D) variable

Question 18

Which of the following records includes the cost of goods sold?

A) cash flow statement
B) operating expense report
C) income statement
D) balance sheet

Question 19

Some service businesses receive cash deposits well in advance of when a service is provided. Which of the following situations would these businesses tend to have?

A) a better equity position
B) fewer cash flow problems
C) lower working capital
D) increased working capital

Question 20

Forecasting sales, collection timeliness, and seasonality are major issues in preparing some business documents. Which of the following requires you to take these items into consideration?

A) pro forma balance sheet
B) equity statement
C) projected cash flow statement
D) pro forma income statement

Question 21

According to the text, which statement best describes inventory turnover?

A) the number of times each month that a company replaces its inventory
B) total costs divided by average sales
C) a higher inventory turnover does not necessarily lead to higher profits
D) turnover that is greater than two means the business is being run effectively

Question 22

Which of the following is recommended by the author when building a risk management strategy?

A) ask for advice from your bank
B) find a financial advisor from the Financial Planning Standards Council
C) create four projected cash flow statements
D) obtain risk management insurance

Question 23

What is the inventory turnover if cost of sales was $90,000, beginning inventory was $50,000, and end of year inventory was $42,055?

A) 1
B) 2
C) 2.5
D) 3

Question 24

A company's balance sheet shows that its current assets equal $100, current liabilities equal $60, and cash on hand equals $25. What is the working capital for this company?

A) $25
B) $35
C) $40
D) $75

Question 25

A company has fixed costs of $40, variable costs of $20, and current liabilities of $15. What is the total cost for this company?

A) $35
B) $55
C) $60
D) $75

Question 26

As described in the Chapter 10 case study, what represented the first step to financial freedom for Ray and Joan Stewart?

A) doing their opening balance sheet
B) seeking the advice of a small-business consultant
C) preparing a financial plan
D) forming a financial advisory team

Question 27

What type of expenses are equipment, inventory, and carpeting?

A) cash reserve
B) prepaid
C) short term
D) application of funds

Question 28

After which time period is a holding considered a fixed asset?

A) more than 1 year
B) more than 3 years
C) more than 5 years
D) more than 10 years

Question 29

As a rule of thumb, what number should debt-to-equity ratios be less than?

A) 3
B) 2
C) 1
D) 0

Question 30

Which of the following resources recommended by the author provides inventory turnover results for similar businesses by industry category?

A) Statistics Canada
B) Financial Planning Standards Council
C) Industry Canada SME Benchmarking Tool
D) Bank of Canada

Question 31

How many ways are there to calculate the break-even?

A) 1
B) 2
C) 3
D) 4

Question 32

Which of the following represent the two most important ratios?

A) ROI and return on owner investment
B) current and debt-to-equity
C) ROI and current
D) debt-to-equity and return on owner investment

Question 33

A financial vision will not guarantee the success of your business.

Question 34

On an opening balance sheet, prepaid expenses are a current liability.

Question 35

To find out how much money you will need for a new business, you begin by completing an application-of-funds table.

Question 36

A balance sheet is an indicator of the financial health of your business over a period of time.

Question 37

A bed-and-breakfast inn has a much different cash flow situation than a service trade business like plumbing or carpentry.

Question 38

Your financial plan will begin with you and your financial fitness and vision.

Question 39

The desire to be financially independent or to own a half million dollar house are examples of financial objectives.

Question 40

Assets are the dollar value of what the business owns.

Question 41

A pro forma income statement will tell you how much cash you have to operate your business.

Question 42

You prepare a sales forecast after you have completed your pro forma income statement.

Question 43

Equity is the owner's cash investment.

Question 44

Liabilities are what the business owes to parties other than the owner.

Question 45

On a balance sheet, current assets are recorded in order of liquidity.

Question 46

Liabilities equal assets plus equity.

Question 47

Profits are a form of equity.

Question 48

The equity-to-debt ratio is calculated by dividing current assets by current liabilities.

Question 49

Working capital is defined as current liabilities minus current assets.

Question 50

Solvency ratios measure the ability of a company to meet its long-term obligations.

Question 51

A cash flow projection tells you whether you can pay the bills and when you might have to borrow money from the bank.

Question 52

When forecasting sales, you should consider high, low, and medium sales projections.

Question 53

On an income statement, all revenue is recorded, even though you may not yet have received the actual cash.

Question 54

Depreciation is part of your cash flow projection.

Question 55

Cost of goods sold is the operating expenses you incur in the day-to-day operations of your business.

Question 56

Profit margin is your net profit (before taxes) divided by total expenses.

Question 57

Inventory is recorded on a pro forma income statement.

Question 58

According to the text, your balance sheet is the most important financial statement for a small business financial plan.

Question 59

Principal payments on a bank loan are not recorded as an operating expense in the income statement.

Question 60

Your break-even ratio is calculated by dividing your total sales by your fixed costs.

Question 61

To calculate your break-even point, you need to know the value of your fixed and variable costs and your output capacity.

Question 62

A financial statement that helps you control the money that comes into your business and the money that is spent is known as a projected (pro forma) ______________.

Question 63

Total sales minus cost of goods sold is called __________ __________.

Question 64

The point at which your sales revenue equals your total costs is your _______________ ______________.

Question 65

An expense that does not depend on sales is called a __________ _________.

Question 66

Current assets divided by current liabilities is called the __________ ________________.

Question 67

The number of times each year that a company turns over or replaces its inventory is called ________ ___________.

Question 68

The gross margin return on inventory investment (GMROI) measures the gross margin earned on the invested inventory. This ratio takes into consideration both gross profit and __________________.

Question 69

A statement of what the business owes and what the business owns at a point in time is called a ____________ _______________.

Question 70

A balance sheet balances because assets equal ______ plus __________.

Question 71

Explain why a fast-growing company is more likely to experience cash flow difficulties than a slow-growing company.

Question 72

How would you calculate cash on hand at the end of the month in a cash flow statement?

Question 73

Why should you develop pro forma balance sheets, income statements, and cash flow projections?

Question 74

Your income statement shows that, as of this month, your business is profitable. However, you are unable pay all of your bills because of a lack of cash. Is your income statement wrong? What might be the problem?

Question 75

Please explain why working capital is not necessarily cash.

Question 76

Why does a balance sheet balance?

Question 77

Why is it important to understand the concept of inventory turnover?