Chapter 8 Multiple Choice Questions
According to the textbook, the three numbers that receive the most attention when evaluating an income statement are ________.
net sales, cost of sales, and operating expenses
________ financial statements reflect past performance and are usually prepared on a quarterly and annual basis.
Historical
Money owed to a company by its customers is referred to as ________.
accounts receivable
A firm's profit margin, or return on sales, is computed by dividing ________.
net income by net sales
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 partnership that bands small businesses together to attain volume discounts on common products and services that they buy
Which of the following statements is incorrect regarding how balance sheets are prepared?
Assets are recorded at fair market value rather than cost.
Match the financial term with its proper definition
Budget — itemized forecasts of a company's income, expenses, and capital needs
________ are itemized forecasts of a company's income, expenses, and capital needs and are also an important tool for financial planning and control.
Budgets
In regard to budgets, which of the following statements is NOT true?
Budgets are a poor tool for financial control.
________ depict relationships between items on a firm's financial statements.
Financial ratios
________ are an estimate of a firm's future income and expenses, based on its past performance, its current circumstances, and its future plans.
Forecasts
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?
Income statement
Which of the following selections correctly matches the financial statement with its description?
Income statement — tells how much a firm is making or losing.
________ is a company's ability to meet its short-term financial obligations.
Liquidity
________ financial statements are projections for future periods based on forecasts and are typically completed for two to three years into the future.
Pro forma
Which of the following statements about pro forma financial statements is incorrect?
Pro forma financial statements are required by the SEC.
Which of the following is an example of a long-term liability?
Real estate mortgage
Match the financial objective with its correct definition.
Stability — the overall health of the financial structure of the firm, particularly as it relates to its debt-to-equity ratio
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?
Statement of cash flows
Which of the following was NOT identified as one of the four main financial objectives of a firm?
Timeliness
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 ________.
accounts receivable
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) ________.
assumption sheet
A(n) ________ is a snapshot of a company's assets, liabilities, and owners' equity at a specific point in time.
balance sheet
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.
balance sheet
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.
financing
Real estate, buildings, equipment and furniture are classified as ________ assets on a company's balance sheet.
fixed
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 ________.
grew too quickly, which overwhelmed its cash flow
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.
income statement
A company's merchandise, raw materials, and products waiting to be sold are called its ________.
inventory
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 ________.
inventory
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).
investing
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 ________.
look at multiple years of an income statement rather than a single year to fairly assess how well a firm is performing financially
A firm's pro forma financial statements are similar to its historical financial statements except that they ________.
look forward rather than back
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 ________.
net sales
The statement of cash flows is divided into three separate activities — ________.
operating, investing, and financing
For Essentium Materials, the company profiled in the opening feature in Chapter 8, an essential financial metric is to work to grow its monthly revenues faster than its monthly ________ rate.
burn
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 ________.
cash to meet its needs
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 ________.
constant ratio method of forecasting
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.
current
A firm's working capital is its ________.
current assets minus its current liabilities
A firm's ________ is its current assets divided by its current debt.
current ratio
A company's ability to productively utilize its assets relative to its revenue and its profits is referred to as ________.
efficiency
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 ________.
efficiency
The four main financial objectives of a firm are ________.
profitability, liquidity, efficiency, and stability
Financial management deals with two things—managing a company's finances and ________.
raising money
According to the textbook, the most practical way to interpret or make sense of a firm's historical financial statements is through ________.
ratio analysis
The strength and vigor of a firm's overall financial posture is referred to as ________.
stability
On a firm's income statement, net sales consists of ________.
total sales minus allowances for returned goods and discounts
When evaluating a balance sheet, the two primary questions are ________.
whether a firm has sufficient short-term assets to cover its short-term debts and whether it is financially sound
A financial statement is a(n) ________.
written report that quantitatively describes a firm's financial health