ENT 396 Chapter 11
18. Cash inflows come from a. cash sales. c. debts. b. cash payouts. d. earnings.
a
20. The entrepreneur must graph at least two numbers, total sales and total expenses, when using the graphic approach for break-even analysis.
f
3. It is typical for a firm to prepare an operating budget but not a cash budget.
f
8. Using regression analysis to estimate the relationship between expected sales and another variable is rarely used.
f
4. A budget that is a statement of estimated income and expenses over a specified period of time is referred to as an a. anticipated budget. c. entrepreneurial budget. b. operating budget. d. expected results budget.
b
40. Contribution margin is the difference between a. selling price and fixed cost per unit. c. selling price and variable cost per unit. b. purchase price and variable cost per unit. d. purchase price and fixed cost per unit.
c
46. The key steps in comparing financial numbers in order to make decisions are referred to as: a. ratio analysis. c. comparable fractions. b. debt reduction. d. descriptive statistics
a
2. The set of assumptions on which financial projections are based have little meaning.
f
10. In the simple linear regression analysis equation, Y = a + bx, b represents a. the slope of the line. c. the constant. b. expected sales. d. the factor on which sales are dependent.
a
14. A key concept in developing an expense budget is that of a. fixed costs. c. taxes. b. labor costs. d. rent.
a
19. The cash flow budget describes a. cash inflows/cash outflows. c. interest income/interest expense. b. cash outflows/accounts receivables. d. profits/costs.
a
22. Which of the following are needed in preparing a pro forma balance sheet? a. the last balance sheet prepared before the budget period began b. assets c. liabilities d. owners equity
a
23. The traditional accounting equation that verifies the accuracy of the entrepreneur's balance sheet is a. assets = liabilities + owners' equity. c. assets + owner's equity = liabilities. b. assets + liabilities = owner's equity. d. assets = liabilities - owner's equity.
a
3. One type of budget used by the entrepreneur is a. an operating budget. c. a cost budget. b. a project budget. d. an R & D budget.
a
18. Break-even analysis is used to tell how many units must be sold in order to break even at a particular selling price.
t
11. 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 the desired ending inventory. d. an inventory model.
b
12. The last step in preparing the operating budget is to a. estimate current sales. c. estimate variable costs. b. estimate operating expenses. d. estimate R & D costs.
b
35. One of the easiest capital budgeting methods to understand is the a. net present value. c. payback method. b. internal rate of return. d. strategic analysis approach.
c
37. The concept of the net present value method works on the premise that a. a dollar today is worth less than a dollar in the future. b. a dollar today is worth the same in the future. c. a dollar today is worth more than a dollar in the future. d. a dollar today cannot be measured in future dollars.
c
39. Break-even analysis is used to assess a. expected capital expenditures. c. expected product profitability. b. revenue. d. future sales.
c
13. The pro forma income statement is prepared before the pro forma balance sheet.
t
15. Capital investments or capital expenditures are expected to last beyond one year.
t
17. The principal objective of capital budgeting is to maximize the value of the firm.
t
21. The handling questionable costs approach of break-even analysis was specifically designed for entrepreneurship firms.
t
22. Horizontal analysis looks at financial statements over time.
t
23. Vertical analysis is the application of ratio analysis to all of the financial statements to find accounting mistakes.
t
15. After the firm has forecast its sales for the budget period a. net income is figured c. ending inventory is figured. b. expenses are estimated. d. labor costs are estimated.
b
20. 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. does none of the above.
b
17. More established ventures will use a sales forecast 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. c. a trend line analysis. b. an inventory analysis. d. past experience.
c
21. The first step in the preparation of the cash flow budget is the a. identification of cash inflows. c. identification and timing of cash inflows. b. identification of cash outflows. d. identification and timing of cash outflows.
c
29. 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.
c
43. 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.
c
26. Contained in the pro forma balance sheet is a. the profit budget. c. the cash flow budget. b. the cost budget. d. the R & D budget.
b
19. Contribution margin is the difference between the selling price and the fixed cost per unit.
f
47. Ratio analysis can be applied from which of the following directions? a. vertical only c. horizontal only b. vertical and horizontal d. external and internal
b
1. Financial information pulls together all the information presented in the other segments of the business.
t
11. The typical business will have cash inflows from three sources: cash sales, cash payments received on account, and loan proceeds.
t
30. 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 a. internal rate of return. c. payback method. b. net present value. d. break-even point.
a
31. 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. evaluate projects based on rates of return.
a
32. Despite the drawbacks of the payback method, the entrepreneur should continue to use it because a. it is very simple to use in comparison to 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.
a
34. Investments in which returns are expected to extend beyond one year are referred to as a. capital investments. c. bonds. b. stocks. d. mutual funds.
a
38. Loan proceeds are not directly tied to a. sales revenue. c. meeting cash flow problems. b. expenses. d. planned expansion of a firm.
a
42. When using the graphic approach to break-even analysis, the entrepreneur must plot which of the following? a. total revenue and total costs c. total costs and total income b. total expenses and total revenue d. total income and total expenses
a
45. In handling questionable costs, the cost in question is substituted first as a _____ and then as a _____. a. fixed cost; variable cost c. variable cost; total cost b. mixed cost; fixed cost d. total cost; fixed cost
a
5. The first step in constructing an operating budget is a. preparation of the sales forecast. c. a cash flow estimate. b. a cost preparation. d. estimating fixed costs.
a
9. For a manufacturing firm, the production budget represents a. the number of units that must be produced to break even. b. the number of units that must be produced to achieve the desired profit level. c. the number of units that must be produced in order to meet the sales forecast. d. the number of units that must be produced to cover R & D costs.
c
1. Financial information is important to entrepreneurs because: a. it pulls together all the information presented in other segments of the business. b. it quantifies all the assumptions concerning business operations. c. it answers all questions about the business and the entrepreneur. d. a and b are both correct.
d
16. When using trend line analysis, how many periods are required? a. three c. one b. two d. five
d
2. Which of the following are not true about financial assumptions? 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.
d
24. Which of the following are forms of pro forma statements? a. income statements c. cost of goods sold b. balance sheet d. a and b
d
25. How many months of the year should be illustrated in the first pro forma income statement? a. three c. six b. eight d. twelve
d
27. 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 owner's equity. c. assets minus (liabilities plus owner's equity). d. zero.
d
41. The contribution margin approach formula is a. CM = SP (VC - FC) S c. SP = (FC - VC) S b. S = SP (FC - VC) d. FC = (SP - VC) S
d
10. The first step in the preparation of the cash flow budget is the identification and timing of cash outflows.
f
12. Pro forma statements show the firm's present financial position.
f
8. A variable cost a. changes in the same direction and in inverse proportion to changes in operating activity. b. changes in the opposite direction and in direct proportion to changes in operating activity. c. changes in the same direction and in direct proportion to changes in operation activity. d. is the same as labor costs
c
14. The traditional accounting equation is: assets + liabilities = owner's equity.
f
13. Production requirements are figured by subtracting the period's beginning inventory from a. inventory from the previous period. c. both of the above. b. inventory needed for that period. d. fixed costs.
b
28. The principle objective of capital budgeting is to a. minimize the value of the firm. c. maximize the costs to the firm. b. maximize the value of the firm. d. minimize the number of project requests.
b
33. 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.
b
36. Many companies continue to use the payback method. It is a. it is inexpensive to use. b. more favorable in its short-term effects on earnings. c. an immediate cash payment. d. a longer loan program.
b
44. Break-even analysis is a technique commonly used to assess the a. rate of return on investment. c. net present value. b. expected product profitability. d. total costs.
b
6. In the simple linear regression analysis equation, Y = a + bx, x represents a. expected sales. c. the slope of the line. b. the factor on which sales are dependent. d. the vertical intercept.
b
7. A manufacturing firm needs to establish which of the following budgets? a. a profit budget c. a cost budget b. a material purchases budget d. an accounting budget
b
16. Capital budgeting is used to help the entrepreneur plan for capital expenditures.
t
4. A budget is one of the most powerful tools that the entrepreneur can use in planning business operations.
t
5. The cash-flow budget provides an overview of cash inflows and outflows for the budget period.
t
6. The first type of expense to be estimated when preparing an operating budget is cost of goods sold.
t
7. The first step in creating an operating budget is to prepare the sales forecast.
t
9. After the operating budget has been prepared, the entrepreneur can proceed to the next phase of the budget process, the cash flow budget.
t
