BUSMRH 2500 Chapter 10

Stella, the entrepreneur of a firm, determines that the average selling price of the firm's products is $10.00 per unit. The fixed costs in year 1 are $980,500, and the variable cost per unit is $5. Calculate the firm's break-even point (ByE) in units. Multiple choice question. 346,900 units 284,600 units 196,100 units 489,200 units

196,100 units

Match the types of assets of a business (in the left column) with their descriptions (in the right column). Current assets Fixed assets

Current assets - Cash and anything else that is expected to be converted into cash or consumed in the operation of a business during a period of one year or less Fixed assets - Those that are tangible and will be used over a long period of time

What is the most difficult problem with projecting cash flows over a time period in a new venture? Multiple choice question. Identifying the exact monthly receipts and disbursements Finding owner equity Summarizing the venture's projected assets and liabilities Creating a pro forma balance sheet`

Identifying the exact monthly receipts and disbursements

Match the components of a venture's financial plan (in the left column) with their descriptions (in the right column). Instructions Profit Cash flow

Profit -Obtained by subtracting expenses from sales Cash flow - Calculated as the difference between actual cash receipts and cash payments

FIB: One of the simplest and probably the most widely used small business accounting software package is Intuit's __.

QuickBooks

How should an entrepreneur of a new venture deal with disbursements that are greater than cash receipts in any time period? (Check all that apply.) Multiple select question. The entrepreneur must immediately halt all operations of his or her venture until sufficient cash flow is generated. The entrepreneur must begin using the direct method to project cash flow instead of using the indirect method. The entrepreneur must invest large positive cash flows in short-term sources or deposit them in a bank to cover future time periods. The entrepreneur must either borrow money or have cash in a bank account to cover the higher disbursements.

The entrepreneur must invest large positive cash flows in short-term sources or deposit them in a bank to cover future time periods. The entrepreneur must either borrow money or have cash in a bank account to cover the higher disbursements.

When preparing a pro forma income statement, an entrepreneur of a new venture should consider _____. Multiple choice question. decreasing selling expenses, such as travel, relative to increasing sales adjusting taxes because of the addition of new personnel or increments in salary maintaining the same advertising budget for all seasons increasing selling expenses as sales decrease

adjusting taxes because of the addition of new personnel or increments in salary

Projected net profit calculated from projected revenue minus projected costs and expenses is called _ _ income.

pro forma

Which of following is true of pro forma statements? Multiple choice question. Entrepreneurs must make estimates for years two and three. In preparation of a pro forma income statement, sales by year must be calculated first. In preparation of a pro forma income statement, sales by quarter must be calculated first. Entrepreneurs should only project monthly pro forma income statements for the first year.

Entrepreneurs must make estimates for years two and three.

Which of the following are true of owner equity? (Check all that apply.) Multiple select question. It represents items that are owned or available to be used in venture operations. It displays the surplus of all assets over all liabilities. Revenue and profits negatively impact owners' equity. Costs and expenses reduce owners' equity.

It displays the surplus of all assets over all liabilities. Costs and expenses reduce owners' equity.

The most significant weakness in calculating the breakeven lies in determining if _____. Multiple choice question. revenue will exceed costs an expense is required or not an expense is constant or variable costs will exceed revenue

an expense is constant or variable

Items that are owned or available to be used in the venture operations are known as _____. Multiple choice question. assets equities funds liabilities

assets

As part of forecasting sales, it is advisable for an entrepreneur of a new venture to _____. Multiple choice question. use quantitative methods rather than qualitative methods calculate sales based on the break-even point of a competing venture overestimate the firm's future sales give sales estimates at various levels of activity

give sales estimates at various levels of activity

Money that is owed to creditors by an entrepreneur of a business is known as _____. Multiple choice question. equities credits assets liabilities

liabilities

The amount that displays the net worth of an entrepreneurial venture is _____. Multiple choice question. owner debt company credit company debt owner equity

owner equity

Projected cash available calculated from projected cash accumulations minus projected cash disbursements is known as __ __ __ __.

pro forma cash flow

In the context of the preparation of a pro forma income statement, the key element in a firm's sales budget is _____. Multiple choice question. the current sales value the initial funding received from venture capitalists the amount for which the venture has been insured the estimated sales

the estimated sales

Patrick, the entrepreneur of Cellax Inc., determines that the average selling price of the firm's products is $5.00 per unit. The fixed costs in year 1 are $700,800, and the variable cost per unit is $2.50. Calculate the firm's break-even point (ByE) in units. Multiple choice question. 280,320 units 180,086 units 318,400 units 485,605 units

280,320 units

Identify a true statement about a business's cash flow. Multiple choice question. It is the same as the business's profit. It occurs only when actual payments are received or made. It is the result of subtracting expenses from sales. It is calculated by using the breakeven formula.

It occurs only when actual payments are received or made.

Identify a true statement about the pro forma balance sheet of a new venture. Multiple choice question. It calculates projected cash disbursements. It shows the position of the business at the end of the first year. It summarizes projected net profit by subtracting projected sales from projected operating costs. It projects the maximum profits that can be generated by the venture.

It shows the position of the business at the end of the first year.

In the preparation of a pro forma income statement, an entrepreneur must first _____. Multiple choice question. complete the trademark registration formalities of his or her venture create a sales budget that is an estimate of the expected volume of sales by month estimate a measure of the company's solvency determine a budget for marketing that is the expected spending on promotional activities

create a sales budget that is an estimate of the expected volume of sales by month

A true statement about the indirect method used to project a venture's cash flow is that it _____. Multiple choice question. gives a fast indication of the venture's cash position at a point in time subtracts the cash payments from cash receipts to calculate the venture's profit assumes that the cash to be paid is equal to the cash received deducts expenses from sales to determine the venture's cash flow

gives a fast indication of the venture's cash position at a point in time

True or false: Sales in excess of the break-even point will result in a loss if the selling price remains above the costs necessary to produce each unit. True false question.

Reason: This is false. Sales in excess of the break-even point will result in a profit as long as the selling price remains above the costs necessary to produce each unit. As long as the selling price is greater than the variable costs per unit, some contribution can be made to cover fixed costs.

Identify a feature of breakeven. Multiple choice question. It is that volume of sales at which a business will make a profit. It will be achieved only if a firm's variable cost is greater than its selling price. It is possible to find a breakeven point for each product of a firm when feasible costs are allocated to each product. It is that volume of sales at which a business will incur a loss.

It is possible to find a breakeven point for each product of a firm when feasible costs are allocated to each product.

In the business context, identify a characteristic of the pro forma cash flow. Multiple choice question. The pro forma cash flow should be devoid of any assumption. The pro forma cash flow should be based on historical data rather than on best estimates. It is useful to create the pro forma cash flow by including all the details included in the pro forma income statement. It is sometimes useful to create the pro forma cash flow based on different levels of success.

It is sometimes useful to create the pro forma cash flow based on different levels of success.

Identify a true statement about the break-even sales point. Multiple choice question. It shows items that are owned or available to be used in the venture operations. It tells an entrepreneur the volume of sales needed to cover total variable and fixed expenses. It estimates money that is owed to creditors by an entrepreneur. It tells an entrepreneur the amount owners have invested and/or retained from the venture operations.

It tells an entrepreneur the volume of sales needed to cover total variable and fixed expenses.

Which of the following is an attribute of the indirect method used to project a venture's cash flow? Multiple choice question. It calculates cash flow on the basis of profits rather than on the basis of actual cash receipts. Its objective is to realize the need for adjustments in the net income based on the fact that actual cash may or may not have been received or disbursed. It calculates profit as the difference between cash receipts and cash payments and calculates cash flow as the sum of expenses and sales. Its objective is to reiterate what is in the venture's income statement.

Its objective is to realize the need for adjustments in the net income based on the fact that actual cash may or may not have been received or disbursed.

True or false: While preparing a pro forma income statement, the calculation of percent of sales for each year is not carried out as it is not useful.

Reason: This is false. While preparing a pro forma income statement, the calculation of percent of sales for each year is useful as a means of financial control so that the entrepreneur can ascertain whether any costs are too high relative to sales revenue.

True or false: Capital budgets are aimed to provide a basis for assessing expenditures that will impact a business for more than one year.

Reason: This is true. Capital budgets are aimed to provide a basis for assessing expenditures that will impact a business for more than one year.

Match the components of a pro forma balance sheet of a venture (in the left column) with their effects (in the right column). Revenue Expense

Revenue - Increases assets and owners' equity Expense - Decreases owners' equity and either increases liabilities or decreases assets

What is the first thing that must be calculated by an entrepreneur in the preparation of a pro forma income statement? Multiple choice question. Breakeven value Assets of the entrepreneur Sales by month Liabilities of the entrepreneur

Sales by month

What is the first thing that must be calculated by an entrepreneur in the preparation of a pro forma income statement? Multiple choice question. Liabilities of the entrepreneur Sales by month Assets of the entrepreneur Breakeven value

Sales by month

Which of the following is a guideline that should be followed by an entrepreneur when forecasting sales for his or her new venture? Multiple choice question. The entrepreneur should ensure that the projected sales are the same for each month in a year in the pro forma income statement. The entrepreneur must ensure that a single sales estimate is used throughout all processes of forecasting the sales. The entrepreneur should research about other new ventures in the same industry to set reasonable expectations for early sales. The entrepreneur must use a quantitative technique, rather than a qualitative technique, for forecasting sales.

The entrepreneur should research about other new ventures in the same industry to set reasonable expectations for early sales.

In the business context, identify a true statement about pro forma income statements. Multiple choice question. They include details about the total funding that a venture has received to date. They assume that sales are constant for every month of the first year of operations. They include the data about the operating expenses but do not include data about other expenses. They include estimates of all operating expenses for each of the months during the first year of operations.

They include estimates of all operating expenses for each of the months during the first year of operations.

What is the purpose of a venture's pro forma sources and applications of funds statement? Multiple choice question. To show adjustments made to the net income based on the actual cash that is received or disbursed To reiterate the contents of the venture's income statement To make monthly projections of cash unlike making monthly projections for profits To demonstrate how net income and financing were utilized to increase assets or to pay off debt

To demonstrate how net income and financing were utilized to increase assets or to pay off debt

Javed, an entrepreneur, starts a company that manufactures accessories for cars. The company begins manufacturing products. Due to a high demand for its products, the company needs more money as the disbursements become greater than receipts. In this scenario, Javed should _____. Multiple choice question. reduce the price of manufactured products to cover the higher disbursements delay the sale of manufactured products halt production until the cash flow increases borrow funds from a bank to cover the higher disbursements

borrow funds from a bank to cover the higher disbursements

As part of creating a capital budget for a new venture, after creating a sales budget, an entrepreneur should _____. Multiple choice question. prepare a pro forma balance sheet concentrate on operating costs summarize his or her assets estimate a measure of the company's solvency

concentrate on operating costs

An important point that entrepreneurs should remember about the pro forma cash flow is that _____. Multiple choice question. it is based on best estimates it is based on the initial funding by venture capitalists and other investors it is calculated by adding projected cash accumulations to projected cash disbursements it is the amount of capital required to start a venture

it is based on best estimates

An attribute of the pro forma balance sheet of a new venture is that it _____. Multiple choice question. projects the operating expenses for the second and third years calculates the maximum profit that can be generated by the venture predicts the actual cash flow for each quarter of a financial year provides the entrepreneur a measure of the firm's solvency

provides the entrepreneur a measure of the firm's solvency

A feature of a venture's pro forma sources and applications of funds statement is that it _____. Multiple choice question. summarizes projected net profit by subtracting projected revenue from projected costs and expenses summarizes all the projected sources of funds available to the venture and how these funds will be disbursed states the cost of goods produced, which includes units in inventory states volume of sales where the venture neither makes a profit nor incurs a loss

summarizes all the projected sources of funds available to the venture and how these funds will be disbursed