Quiz 11: Financial Preparation for Entrepreneurial Ventures

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

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

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

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

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

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

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

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

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

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

Horizontal analysis looks at financial statements and ratios over time.

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.

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

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

The handling questionable costs approach of break-even analysis was specifically designed for firms that have expenses that are difficult to assign.

When using regression analysis, the entrepreneur may draw conclusions about the relationship between product sales and advertising expenditures.

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

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

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

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

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.

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

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

Vertical analysis is the application of ratio analysis to the many sets of financial statements.

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

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.

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.

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.

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.

The last step in preparing the operating budget is to estimate A)current sales. B)operating expenses. C)variable costs. D)R&D costs.

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.

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

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

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)

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

When using trend line analysis, how many periods are required? A)three B)two C)one D)five

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

Break-even analysis is used to assess A)expected capital expenditures. B)revenue. C)expected product profitability. D)future sales.

How many months of the year should be illustrated in the first pro forma income statement? A)3 B)8 C)6 D)12

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.

Comparing financial numbers in order to make decisions is referred to as A)ratio analysis. B)debt reduction. C)comparable fractions. D)descriptive statistics.

One type of budget used by the entrepreneur is a(n) _____ budget. A)operating B)project C)cost D)R&D

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.

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.

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.

A manufacturing firm needs to establish which of the following budgets? A)profit budget B)material purchases budget C)cost budget D)accounting budget

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

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.

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.

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

_____ analysis looks at financial statements and ratios over time. A)Horizontal B)Inventory C)Vertical D)Specific efficiency ratio

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.

The process of preparing a pro forma balance sheet is A)complex. B)optional. C)simple. D)done first.

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.

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

Which of the following balance sheet ratios measures solvency? A)current B)cash C)quick D)debt-to-worth

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.

The cash flow does not come from A)goods purchased on account. B)cash payments received on account. C)cash sales. D)loan proceeds.

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.

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.

Which of the following is not used in balance sheet ratios? A)current liabilities B)cash C)current assets D)sales

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

Loan proceeds are not directly tied to A)sales revenue. B)expenses. C)meeting cash-flow problems. D)planned expansion of a firm.

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.

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.

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.

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

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.

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

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

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.

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.

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.

List the common methods used in capital budgeting, and define the main objective of the capital budget.

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

Name and describe the final step in preparing the operating budget.

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

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