Small Business Management Chapter 6

To effectively use operating ratios, a prospective buyer should ______. a. compare them to industry standards b. use them to identify problems that exist and make changes c. use them as a basis for valuing the business d. compare them to the closest competitor

a. compare them to industry standards

What of these is used to indicate whether sales volume is increasing or decreasing? a. financial records b. independent audit c. expense ratio d. working capital statement

a. financial records

When analyzing financial statements, remember that profits can be increased and expenses can be decreased to make the records look better ______. a. in the short run b. in the long run c. for tax purposes d. for bank audits

a. in the short run

Intellectual property is a valuable ______. a. intangible asset b. tangible asset c. goodwill asset d. current asset

a. intangible asset

Assets that have value to a business but are not visible are known as ______. a. intangible assets b. tangible assets c. long-term assets d. current assets

a. intangible assets

Of all the tangible assets of a business, ______ and ______ should be examined most closely because they may be worth less than the seller is asking. a. inventories; equipment b. receivables; inventory c. equipment; receivables d. inventories; receivables

a. inventories; equipment

The capitalization rate when figuring goodwill should be a figure assigned to show ______. a. risk and expected growth rate of future earnings b. risk and profit minus taxes c. expected growth rate and profit d. expected growth rate and the value of tangible assets

a. risk and expected growth rate of future earnings

The financial statements can provide access to ______, a very important piece of information for a prospective buyer to use in determining net profit. a. sales volume b. net assets c. gross assets d. accounts payable

a. sales volume

Expense ratios are useful because they are ______. a. standards or guides b. absolute measures of profitability c. significant in the number that is computed d. error free

a. standards or guides

According to the text, there are ______ thousands of small businesses for sale at any given time. a. tens of b. hundreds of c. thousands of d. a few

a. tens of

An advantage in purchasing an existing business is which of the following? a. Image is difficult to change. b. There is an established customer base at the present location. c. Employees may be loyal only to previous management. d. The business location is unfamiliar.

b. There is an established customer base at the present location

Industry-wide ______ ratios are calculated by most trade associations, many commercial banks, and accounting firms. a. asset b. expense c. quality d. stock

b. expense

To ensure that all back taxes have been paid, a potential buyer should inspect ______. a. unaudited financial documents b. income tax returns c. the seller's books d. loan agreements

b. income tax returns

To determine the financial condition of an existing business, it is necessary to compare ______ with ______ to identify where costs can be reduced or more money is needed. a. operating ratios; fiscal averages b. operating ratios; industry averages c. expense ratios; fiscal averages d. expense ratios; industry averages

b. operating ratios; industry averages

The most practical method of paying for a business is ______. a. paying a lump-sum b. paying in installments c. a loan from the bank d. a loan from the Small Business Administration (SBA)

b. paying in installments

Family, friends, the newspaper, the Small Business Administration (SBA), a local banker, and real estate brokers may all have information on ______. a. possible sources of funding b. possible businesses for sale c. possible businesses soon to be terminated d. possible venture capitalists

b. possible businesses for sale

**Trade names, customer lists, and goodwill are examples of which kinds of assets? a. intangible assets b. tangible assets c. only current assets d. only long-term assets

b. tangible assets

Along with purchasing a successful ice cream shop, Wilma acquired the building, as well as ice cream making equipment and enough inventories to operate for a month. These are best known as what type of assets? a. short-term assets b. tangible assets c. long-term assets d. intangible assets

b. tangible assets

Assets that a business owns that can be seen and examined are known as ______. a. intangible assets b. tangible assets c. long-term equity d. accounts payable

b. tangible assets

Inventory, equipment, and building are examples of what kinds of assets? a. intangible assets b. tangible assets c. only current assets d. only long-term assets

b. tangible assets

A business that brings sellers of their businesses together with potential buyers is known as ______. a. a real estate broker b. the Small Business Administration (SBA) c. a business broker d. the FTC

c. a business broker

A provision that restricts the seller from entering the same type of business within a specified area for a certain amount of time is known as ______. a. due disclosure b. a good cause clause c. a noncompetitive clause d. just disclosure

c. a noncompetitive clause

Aging accounts receivable refers to the process of ______. a. determining their present value b. determining their effect on sales c. determining how many are still collectible and discounting them accordingly d. determining future customer lists

c. determining how many are still collectible and discounting them accordingly

Using installment payments to finance a new business ensures that the business is paid for through ______. a. a loan b. sales c. earnings d. the valuation of tangible assets

c. earnings

When the buyer and the seller have agreed on the terms of the sale, the closing can be handled by ______. a. an accountant b. the buyer and seller themselves c. escrow settlement d. a nonpartial third party

c. escrow settlement

Few businesses that are for sale have a high amount of ______ value. a. current asset b. long-term asset c. goodwill d. equipment

c. goodwill

The difference between the purchase price of a company and the net value of the tangible assets is called ______. a. asset value b. profit c. goodwill d. liquidation value

c. goodwill

A method of determining the value of a business based on its profit potential is known as a/an ______. a. balance sheet method of business valuation b. asset method of business valuation c. income statement method of valuation d. cash-flow method of valuation

c. income statement method of valuation

Before any serious discussion of purchasing a business occurs, a/an ______ should be conducted. a. financial ratio analysis b. income statement analysis c. independent audit d. IRS review

c. independent audit

A list of liabilities of an existing business would include ______. a. a list of accounts receivable b. an inventory of products and materials c. liens by creditors against any assets d. a list of accounts payable

c. liens by creditors against any assets

The most realistic approach for the buyer in determining the value of tangible assets is through ______. a. book value b. replacement value c. liquidation value d. balance sheet valuation

c. liquidation value

When evaluating the worth of the inventory for purchasing purposes, the primary concern should be ______. a. whether enough inventory is currently stocked b. good supplier relationships c. no "dead stock" that is listed at its original value d. fresh inventory

c. no "dead stock" that is listed at its original value

Rob is selling a business with machinery that has been protected from unauthorized use or infringement for the next three years. What type of intangible asset does this involve? a. goodwill b. trademark c. patent right d. copyright

c. patent right

Which of the following by itself could be a reason a business owner wants to sell a business? a. inventory that is fresh and balanced b. accounts receivable that are 60 days old or older c. the outlived usefulness of equipment d. accounts receivable that are 30 days old or older

c. the outlived usefulness of equipment

Many good business opportunities are never formally advertised. Instead, that information is found through which of the following? a. the local banker b. the local college c. word of mouth d. the Small Business Administration (SBA)

c. word of mouth

Samantha was in the final stages of selling her existing business, but she backed out of the deal at the last minute because the buyer asked her to sign a contract stating that she would not enter into a similar business within the state for at least 15 years. This is an example of ______. a. a reasonable intellectual property contract b. an unreasonable intellectual property contract c. a reasonable noncompete clause d. an unreasonable noncompete clause

d. an unreasonable noncompete clause

Within his profession, Alex Wilson serves as an intermediary that brings sellers of businesses together with potential buyers. Alex can best be described as a/an ______. a. real estate manager b. financial broker c. management broker d. business broker

d. business broker

______ is a current value for a company's long-term future cash flows. a. Future value b. Dead value c. Discount value d. Terminal value

a. Future value

A disadvantage to buying an existing business is which of the following? a. Image is difficult to change. b. Customers are familiar with the location. c. The employees are experienced. d. Inventory and equipment is in place.

a. Image is difficult to change

Buying an existing business looks appealing to the potential business owner for which of the following reasons? a. The existing firm is already functioning. b. The existing firm will always make a profit. c. The existing firm will have the best employees. d. The existing firm's owner will always provide financing.

a. The existing firm is already functioning

Patents, copyrights, and trademarks protect against unauthorized use or infringements for which of the following time periods? a. indefinitely b. for an unknown time period c. five to seven years d. for a definite time and usage period

d. for a definite time and usage period

The intangible asset that allows a business to earn a higher return than a comparable business might generate with the same tangible assets is known as ______. a. intangible assets b. tangible assets c. preferred merchandise lines d. goodwill

d. goodwill

Benjamin has recently received a large estate settlement, and he is eager to use the money toward the purchase of a successful business that is already in operation. Which of the following should be discouraged as a source for finding businesses for sale? a. friends b. business owners themselves c. real estate brokers d. phonebook

d. phonebook

The prospective buyer should determine a price for the business by adding the value of tangible and intangible assets with the ______ potential. a. sales b. expenses c. income d. profit

d. profit

Industry averages for expense ratios comparing expenses to ______ exist for every size and type of business. a. profits b. assets c. liabilities d. sales

d. sales

A method of determining the value of a business based on the worth of its assets is called ______. a. balance sheet method of business valuation b. asset method of business valuation c. income statement method of valuation d. cash-flow method of valuation

a. balance sheet method of business valuation

The worth of tangible assets is determined using which of the following methods? a. balance sheet method of business valuation b. asset method of business valuation c. income statement method of valuation d. cash-flow method of valuation

a. balance sheet method of business valuation

Goodwill can be seen as compensation to the seller for which of the following? a. beginner's mistakes that the new owner will not have to make b. tangible assets c. sales potential d. customer lists

a. beginner's mistakes that the new owner will not have to make

Tabitha is considering the purchase of a seemingly successful retail establishment, but first she would like to gain an understanding of why the business is being sold. With whom should she speak? a. the current owner only b. the current owner and customers only c. customers and suppliers only d. the current owner, customers, and suppliers

d. the current owner, customers, and suppliers

Financial information can be sensitive information. In order to allay the fears of the seller, a potential buyer could ______. a. does not ask to see financial information b. only show the information to an accountant c. only show the information to a banker d. write a letter of confidentiality

d. write a letter of confidentiality