Chapter 11

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

goods purchased on account

In the simple linear regression analysis equation, Y = a + bx, b represents (A) the slope of the line. (B) expected sales. (C) the constant. (D) the factor on which sales are dependent.

the slope of the line

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

False

It is typical for a firm to prepare an operating budget but not a cash budget. (A) True (B) False

False

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

False

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

False

Financial information is important to entrepreneurs because: (A) it pulls together all the information presented in other segments of the business. (B) it doesn't follow any clear process about the financial operations. (C) it answers all questions about the business and the entrepreneur. (D) it takes away the assumptions concerning business operations.

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

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.

capital investments

Which is not included within balance sheet ratios? (A) gross margin (B) cash (C) current assets (D) debt-to-worth

cash

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

cash

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

five

In handling questionable costs, the cost in question is substituted first as a _____ and then as a _____. (A) fixed cost; variable cost (B) mixed cost; fixed cost (C) variable cost; total cost (D) total cost; fixed cost

fixed cost; variable cost

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

ratio analysis

The contribution margin approach formula is (A) (SP - VC) S - FC (B) SP (FC - VC)S (C) (FC - VC) S -SP (D) FC = (SP - VC)

(SP - VC) S - FC

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

False

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

an operating budget

A budget is one of the most powerful tools that an entrepreneur can use in planning business operations. (A) True (B) False

True

The cash-flow budget provides an overview of cash inflows and outflows for the budget period. (A) True (B) False

True

An inventory turnover ratio of 9.81 means that the average dollar volume of inventory is used up almost _____ times during the fiscal year (A) 10 (B) 100 (C) 1 (D) 1.2

10

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

True

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.

zero

The traditional accounting equation is: assets + liabilities = owner's equity.

False

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

True

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

True

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

True

The traditional accounting equation that verifies the accuracy of the entrepreneur's balance sheet is (A) assets = liabilities + owners' equity. (B) assets + liabilities = owner's equity. (C) assets + owner's equity = liabilities. (D) assets = liabilities - owner's equity.

Assets= liabilities + owners' equity

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

sales revenue

Horizontal analysis looks at financial statements and ratios over time.

True

The first step in creating an operating budget is to prepare the sales forecast. (A) True (B) False

True

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

True

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

True

Which of the following is not one of the most common methods used in capital budgeting? (A) payback method (B) internal rate of return (IRR) method (C) net present value (NPV) method (D) anticipated change in net income method

anticipated change in net income method

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

horizontal analysis

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.

how many projects, in total, should be selected

The first step in the preparation of the cash-flow budget is the (A) identification of cash inflows. (B) identification of cash outflows. (C) identification and timing of cash inflows. (D) identification and timing of cash outflows.

identification and timing of cash inflows

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. (B) net present value. (C) payback method. (D) break-even point.

internal rate of return

From an entrepreneur's standpoint, preparing financial statements is useful because (A) it is a way to anticipate conditions. (B) it only displays a series of various ratios. (C) it is good for predicting the future. (D) it is helpful in creating the the R & D budget.

it is a way to anticipate conditions

The principle 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.

maximize the value of the firm

Many companies continue to use the payback method. 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.

more favorable in its short-term effects on earnings

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. (B) operating budget. (C) entrepreneurial budget. (D) expected results budget.

operating budget

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

the last balance sheet prepared before the budget period began

How many months of the year should be illustrated in the first pro forma income statement? (A) three (B) eight (C) six (D) twelve

twelve

After the operating budget has been prepared, an entrepreneur can proceed to the next phase of the budget process, the cash-flow budget.

True

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

True

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

True

Gross margin measures profitability at the gross profit level: the number of dollars of gross margin produced for every $1 of sales.

True

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.

a rend line analysis

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

expected product profitability

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.

the product should not be profitable if expected sales do not exceed the lower break- even point

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

they are complex

The set of assumptions on which financial projections are based have little meaning. (A) True (B) False

False

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.

the number of units that must e produced in order to meet the sales forecast.

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.

the payback method

Which of the following statements is 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.

they do not necessarily correlate with information from other parts of the business

When using the graphic approach to break-even analysis, the entrepreneur must plot which of the following? (A) total revenue and total costs (B) total expenses and total revenue (C) total costs and total income (D) total income and total expenses

total revenue and total costs

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.

recognizing future cash flows beyond the payback period

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 operating activity. (D) is synonymous with labor costs

changes in the same direction and in direct proportion to changes in operating activity

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

complex

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

False

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

False

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

True

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.

a dollar today is worth more than a dollar in the future

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

a material purchases budget

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.

the sum of the desired ending inventory and the number of units to be sold

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

vertical and horizontal

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

False

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.

cost of capital

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.

does not change in response to changes in activity for a given period of time

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

estimate operating expenses

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.

it is very simple to use in comparison with other methods

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.

preparation of the sales forecast

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.

the dependent variable