Entrepreneurship: Successfully Launching New Ventures, Ventures, 5e (Barringer/Ireland) Chapter 8 Assessing a New Venture's Financial Strength and Viability 1) GymFlow, GymFlow, the company profiled in the opening feature in Chapter 8, created a mobile app that shows how busy a gym is at any given point in time. According to the case, in regard to financial management, the cofounders of GymFlow found that was one of their most difficult challenges. A) managing accounts payable !) managing accounts receivable C) pro"ecting future income #) pro"ecting future e$penses %) completing financial statements Answer& C #iff& 1 'age (ef& *+ -& 8.1& earn about the importance of understanding the financial management of an entrepreneurial firm. AAC!& (eflective /hin0ing ) Financial management deals with two thingsmanaging a company2s finances and . A) operations management !) inventory control C) raising money #) production management %) supply chain management Answer& C #iff& 1 'age (ef& 31 -& 8.1& earn about the importance of understanding the financial management of an entrepreneurial firm. AAC!& (eflective /hin0ing 4) Financial management deals with raising money and managing a company2s finances in a way that achieves the highest rate of return. Answer& /(5% #iff& 1 'age (ef& 31 -& 8.1& earn about the importance of understanding the financial management of an entrepreneurial firm. AAC!& (eflective /hin0ing 1 Copyright 6 713 'earson %ducation, nc. 9) :hich of the following was not identified as one of the four main financial ob"ectives of a firm; A) tability !) %fficiency C) /imeliness #) i<uidity %) 'rofitability Answer& C #iff& 1 'age (ef& 3 -& 8.& dentify the four main financial ob"ectives of entrepreneurial entrepreneurial ventures. AAC!& (eflective /hin0ing *) /he four main financial ob"ectives of a firm are . A) efficiency, efficiency, effectiveness, strength, and fle$ibility !) power, success, efficiency, and effectiveness C) control, effectiveness, li<uidity, li<uidity, and power p ower #) success, strength, li<uidity, li<uidity, and profitability %) profitability, li<uidity, efficiency, and stability Answer& % #iff& 1 'age (ef& 3 -& 8.& dentify the four main financial ob"ectives of entrepreneurial entrepreneurial ventures. AAC!& (eflective /hin0ing 3) =atch the financial ob"ective with its correct definition. A) stability > the overall health of the financial structure of the firm, particularly as it relates to its debttoe<uity ratio !) profitability > how productively a firm utili?es its assets C) li<uidity > a company2s ability to ma0e a profit #) efficiency > a company2s ability to meet its shortterm obligations %) profitability > the overall health of the financial structure of the firm, particularly as it relates to its debttoe<uity ratio Answer& A #iff& 'age (ef& 3 -& 8.& dentify the four main financial ob"ectives of entrepreneurial entrepreneurial ventures. AAC!& Analytical /hin0ing @) is a company2s co mpany2s ability to meet its shortterm financial obligations. A) i<uidity !) 'rofitability C) %ffectiveness #) tability %) %fficiency Answer& A #iff& 1 'age (ef& 3 -& 8.& dentify the four main financial ob"ectives of entrepreneurial entrepreneurial ventures. AAC!& (eflective /hin0ing Copyright 6 713 'earson %ducation, nc. 8) A company2s ability to productively p roductively utili?e its assets relative to its revenue and its profits is referred to as . A) efficiency !) effectiveness C) stability #) li<uidity %) profitability Answer& A #iff& 'age (ef& 3 -& 8.& dentify the four main financial ob"ectives of entrepreneurial entrepreneurial ventures. AAC!& (eflective /hin0ing +) =oney owed to a company by its customers is referred to as . . A) accounts obtainable !) accounts payable C) accounts receivable #) inventory %) accounts collectable Answer& C #iff& 'age (ef& 3 -& 8.& dentify the four main financial ob"ectives of entrepreneurial entrepreneurial ventures. AAC!& (eflective /hin0ing 17) usan oward owns a seafood restaurant in Baples, Florida. he is currently owed 1,777 1,777 by a corporation that she catered a series of meetings for and 4,777 on an overdue account. Amanda has 9,777 in . A) accounts receivable !) inventory C) accounts collectable #) accounts obtainable %) accounts payable Answer& A #iff& 'age (ef& 3 -& 8.& dentify the four main financial ob"ectives of entrepreneurial entrepreneurial ventures. AAC!& (eflective /hin0ing 11) A company2s merchandise, raw materials, and products p roducts waiting to be sold are called its . A) set aside !) accumulation C) reserve #) inventory %) stoc0 Answer& # #iff& 'age (ef& 3 -& 8.& dentify the four main financial ob"ectives of entrepreneurial entrepreneurial ventures. AAC!& (eflective /hin0ing 4 Copyright 6 713 'earson %ducation, nc. 1) 'eggy -wens owns a store that sells e$ercise e<uipment. %ach Danuary 1, she ma0es a very accurate account of all her merchandise and products waiting to be sold that are in her store. -n Danuary 1, 'eggy is ta0ing account of her store2s . A) longterm assets !) owners2 e<uity C) accounts payable #) accounts receivable %) inventory Answer& % #iff& 'age (ef& 3 -& 8.& dentify the four main financial ob"ectives of entrepreneurial entrepreneurial ventures. AAC!& (eflective /hin0ing 14) outhwest Airlines uses its assets very productively. ts turnaround time, or the time that its airplanes sit on the ground while they are a re being loaded and unloaded, is the lowest in the airline industry. industry. n terms of the primary financial ob"ectives of a firm, this attribute is a measure of outhwest2s . A) efficiency !) effectiveness C) stability #) li<uidity %) profitability Answer& A #iff& 'age (ef& 3 -& 8.& dentify the four main financial ob"ectives of entrepreneurial entrepreneurial ventures. AAC!& Analytical /hin0ing 19) /he strength and vigor of a firm2s overall financial posture is referred to as . A) li<uidity !) effectiveness C) stability #) profitability %) efficiency Answer& C #iff& 'age (ef& 3 -& 8.& dentify the four main financial ob"ectives of entrepreneurial entrepreneurial ventures. AAC!& (eflective /hin0ing 1*) %fficiency is the ability to earn a profit. Answer& FA% #iff& 'age (ef& 3 -& 8.& dentify the four main financial ob"ectives of entrepreneurial entrepreneurial ventures. AAC!& (eflective /hin0ing 9 Copyright 6 713 'earson %ducation, nc. 13) tability is a company2s ability to meet its shortterm financial obligations. Answer& FA% #iff& 'age (ef& 3 -& 8.& dentify the four main financial ob"ectives of entrepreneurial entrepreneurial ventures. AAC!& (eflective /hin0ing 1@) A company2s accounts receivable is money owed to it by its customers. Answer& /(5% #iff& 1 'age (ef& 3 -& 8.& dentify the four main financial ob"ectives of entrepreneurial entrepreneurial ventures. AAC!& (eflective /hin0ing 18) f a firm2s debttoe<uity ratio gets too high, it may have hav e trouble meeting its obligations and securing the level of financing needed to fuel its growth. Answer& /(5% #iff& 'age (ef& 3 -& 8.& dentify the four main financial ob"ectives of entrepreneurial entrepreneurial ventures. AAC!& (eflective /hin0ing 1+) A financial statement is aEn) . . A) set of ratios which depict relationships between a firm2s financial items !) estimate of a firm2s future income and e$penses C) hybrid statement of cash flows #) itemi?ed forecast of a company2s income, e$penses, and capital needs %) written report that <uantitatively describes a firm2s financial health Answer& % #iff& 'age (ef& 3 -& 8.4& #escribe the process of financial management as used in in entrepreneurial firms. AAC!& (eflective /hin0ing 7) are an estimate of a firm2s future income and e$penses, based on its past performance, its current circumstances, and its future plans. A) Calculation statements !) Forecasts C) tatements of cash flow #) Financial statements %) 'rediction statements Answer& ! #iff& 'age (ef& 34 -& 8.4& #escribe the process of financial management as used in in entrepreneurial firms. AAC!& (eflective /hin0ing * Copyright 6 713 'earson %ducation, nc. 1) are itemi?ed forecasts of a company2s income, e$penses, and capital needs and are also an important tool for financial planning and control. A) 'rofitability statements !) Financial statements C) -wners2 e<uity statements #) !udgets %) tatements of cash flows Answer& # #iff& 'age (ef& 34 -& 8.4& #escribe the process of financial management as used in in entrepreneurial firms. AAC!& (eflective /hin0ing ) =atch the financial term with its proper definition. A) Forecasts > depict relationships between items on a firm2s financial statements !) Forecasts > written reports that <uantitatively describe a firm2s financial health C) !udget > itemi?ed forecasts of a company2s income, e$penses, and capital needs #) Financial ratios > written report that <uantitatively describes a firm2s financial health %) Financial statements > an estimate of a firm2s future income and e$penses Answer& C #iff& 'age (ef& 34 -& 8.4& #escribe the process of financial management as used in in entrepreneurial firms. AAC!& (eflective /hin0ing 4) n regard to budgets, which of the following statements is not true; A) !udgets include an itemi?ed forecast of a company2s e$penses. !) !udgets are a poor tool for financial control. C) !udgets are an important tool for financial planning. #) !udgets include an itemi?ed forecast of a company2s capital needs. %) !udgets include an itemi?ed forecast of a company2s income. Answer& ! #iff& 4 'age (ef& 34 -& 8.4& #escribe the process of financial management as used in in entrepreneurial firms. AAC!& (eflective /hin0ing 3 Copyright 6 713 'earson %ducation, nc. 9) /he 'artnering for uccess feature in Chapter 8 focuses on buying groups, and recommends that small businesses see0 out buying groups to participate in. :hat is a buying group in the conte$t of the feature; A) A partnership that bands small businesses together to attain volume discounts on common products and services that they buy !) A partnership that bands small businesses together to collectively ma0e the commitment to buy local at every available opportunity C) A partnership that bands small businesses together to get the best prices possible from foreign importers and manufacturers #) A partnership that bands small businesses together to get the best possible terms from finance companies %) A partnership that bands small businesses b usinesses together to get the best possible rates on property and liability insurance Answer& A #iff& 'age (ef& 34 -& 8.4& #escribe the process of financial management as used in in entrepreneurial firms. AAC!& (eflective /hin0ing *) depict relationships between items on a firm2s financial statements. A) Financial proportions !) Fiscal relations C) Fiscal pro"ections #) =onetary balances %) Financial ratios Answer& % #iff& 'age (ef& 39 -& 8.4& #escribe the process of financial management as used in in entrepreneurial firms. AAC!& (eflective /hin0ing 3) !udgets are itemi?ed forecasts of a company2s income, e$penses, and capital needs and are also an important tool for financial planning and control. Answer& /(5% #iff& 'age (ef& 34 -& 8.4& #escribe the process of financial management as used in in entrepreneurial firms. AAC!& (eflective /hin0ing @) financial statements reflect past performance and are usually prepared on a <uarterly and annual basis. A) Chronological !) Ad-hoc C) istorical #) Concurrent %) Pro forma Answer& C #iff& 'age (ef& 3* -& 8.9& %$plain the difference difference between historical and pro forma forma financial statements. AAC!& (eflective /hin0ing @ Copyright 6 713 'earson %ducation, nc. 8) financial statements are pro"ections for future periods based on forecasts and are typically completed for two to three years into the future. A) Chronological !) Pro forma C) Ad-hoc #) Concurrent %) istorical Answer& ! #iff& 'age (ef& 3* -& 8.9& %$plain the difference difference between historical and pro forma forma financial statements. AAC!& (eflective /hin0ing +) :hich of the following statements about pro forma financial statements is incorrect; A) Pro forma financial statements are pro"ections for future periods based on forecasts. !) Pro forma financial statements are typically completed for two to three years into the future. C) Pro forma financial statements are re<uired by the %C. #) =ost companies consider their pro forma financial statements to be confidential and reveal them to outsiders only on a need to 0now basis. %) Pro forma financial statements are strictly planning tools. Answer& C #iff& 4 'age (ef& 3* -& 8.9& %$plain the difference difference between historical and pro forma forma financial statements. AAC!& (eflective /hin0ing 47) istorical financial statements reflect past performance and are usually prepared on a <uarterly and annual basis. Answer& /(5% #iff& 1 'age (ef& 3* -& 8.9& %$plain the difference difference between historical and pro forma forma financial statements. AAC!& (eflective /hin0ing 41) Pro forma financial statements are pro"ections for future periods based on forecasts and are typically completed for to 4 years into the future. Answer& /(5% #iff& 'age (ef& 3* -& 8.9& %$plain the difference difference between historical and pro forma forma financial statements. AAC!& (eflective /hin0ing 8 Copyright 6 713 'earson %ducation, nc. 4) #escribe the difference between historical and pro forma financial statements. Answer& istorical financial statements statements reflect past performance and are usually prepared on a <uarterly and annual basis. Pro forma financial statements are pro"ections for future periods based on forecasts and are typically completed for two to three years into the future. Pro forma financial statements are strictly planning tools, while historical financial statements reflect actual information. #iff& 1 'age (ef& 3* -& 8.9& %$plain the difference difference between historical and pro forma forma financial statements. AAC!& (eflective /hin0ing 44) :hich of the following selections correctly matches the financial statement with its description; A) ncome statement > tells how much a firm is ma0ing or losing !) ncome statement > depicts the structure of a firm2s assets and liabilities C) !alance sheet > shows where a firm2s cash is coming from #) !alance sheet > tells how much a firm is ma0ing or losing %) tatement of cash flows > depicts the structure of a firm2s assets and liabilities Answer& A #iff& 4 'age (ef& 33 -& 8.*& #escribe the different different historical financial financial statements and their purposes. purposes. AAC!& (eflective /hin0ing 49) A firm2s reflects the results of its operations over a specified period and an d shows whether it is ma0ing a profit or is e$periencing a loss. A) statement of cash flows !) income statement C) forecast #) balance sheet %) operating budget Answer& ! #iff& 'age (ef& 33 -& 8.*& #escribe the different different historical financial financial statements and their purposes. purposes. AAC!& (eflective /hin0ing 4*) :hich financial statement records all of a firm2s revenues and e$penses for a given period and shows whether the firm is ma0ing a profit or e$periencing a loss; A) !alance sheet !) -wner2s e<uity statement C) tatement of cash flows #) Forecast %) ncome statement Answer& % #iff& 'age (ef& 33 -& 8.*& #escribe the different different historical financial financial statements and their purposes. purposes. AAC!& (eflective /hin0ing + Copyright 6 713 'earson %ducation, nc. 43) -n a firm2s income statement, net sales consists of . A) operating e$penses minus cost of sales !) total sales minus allowances for returned goods and discounts C) cost of sales minus allowances for returned goods and discounts #) cost of sales minus operating e$penses %) total sales minus operating e$penses Answer& ! #iff& 'age (ef& 33 -& 8.*& #escribe the different different historical financial financial statements and their purposes. purposes. AAC!& (eflective /hin0ing 4@) According to the te$tboo0, the three numbers that receive the most attention when evaluating an income statement are . A) depreciation, interest income, and income ta$ e$pense !) cost of sales, gross profit, and operating e$penses C) net sales, cost of sales, and operating e$penses #) gross profit, net sales, and incomes ta$ e$pense %) gross profit, other income, and net income Answer& C #iff& 4 'age (ef& 3@ -& 8.*& #escribe the different different historical financial financial statements and their purposes. purposes. AAC!& (eflective /hin0ing 48) A firm2s profit margin, or return on sales, is computed by dividing . A) net income by net sales !) gross profit by net sales C) net income by gross profit #) net income by cost of sales %) operating income by gross profit Answer& A #iff& 4 'age (ef& 3@ -& 8.*& #escribe the different different historical financial financial statements and their purposes. purposes. AAC!& Analytical /hin0ing 4+) AEn) is a snapshot of a company2s assets, liabilities, and owners2 e<uity at a specific point in time. A) income statement !) statement of cash flows C) effectiveness statement #) balance sheet %) efficiency statement Answer& # #iff& 'age (ef& 3@ -& 8.*& #escribe the different different historical financial financial statements and their purposes. purposes. AAC!& (eflective /hin0ing 17 Copyright 6 713 'earson %ducation, nc. 97) :hich of the following statement is incorrect regarding how balance sheets are prepared; A) /he lefthand side of a balance sheet shows a firm2s assets. !) /he assets on a balance sheet are shown in order of li<uidity. C) Assets Assets are recorded at fair mar0et value rather than cost. #) /he righthand side of a balance sheet shows a firm2s liabilities and its owners2 e<uity. e<uity. %) ntellectual property receives value in some cases and in some cases it does not. Answer& C #iff& 'age (ef& 3@ -& 8.*& #escribe the different different historical financial financial statements and their purposes. purposes. AAC!& (eflective /hin0ing 91) (eal estate, buildings, e<uipment and furniture are classified as assets on a company2s balance sheet. A) intermediate term !) fi$ed C) other #) permanent %) current Answer& ! #iff& 'age (ef& 3@ -& 8.*& #escribe the different different historical financial financial statements and their purposes. purposes. AAC!& (eflective /hin0ing 9) /he avvy %ntrepreneurial Firm feature in Chapter 8 focuses on a scenario involving the selection of a new C%- for Bew enture enture Fitness #rin0s. /he lesson learned from the feature was . A) compare a firm2s financial ratios against its primary competitors and industry norms to fairly assess how well a firm is performing financially !) income statements are more effective in assessing how well a firm is performing financially than are balance sheets and statements of cash flow C) the most powerful instrument for understanding how well a firm is performing financially is the statement of cash flows #) ratio analysis is ineffective %) loo0 at multiple years of an income statement rather than a single year to fairly assess how well a firm is performing financially Answer& % #iff& 4 'age (ef& 38 -& 8.*& #escribe the different different historical financial financial statements and their purposes. purposes. AAC!& Analytical /hin0ing 11 Copyright 6 713 'earson %ducation, nc. 94) Cash plus items that are readily convertible to cash, such as accounts receivable, mar0etable securities, and inventories are classified as assets on a firm2s balance sheet. A) other !) intermediate term C) temporary #) current %) fi$ed Answer& # #iff& 'age (ef& 38 -& 8.*& #escribe the different different historical financial financial statements and their purposes. purposes. AAC!& Analytical /hin0ing 99) :hich of the following is an e$ample of a longterm liability; A) Accounts payable !) (eal estate mortgage C) Accrued e$penses #) Current portion of real estate mortgage %) -wners2 e<uity Answer& ! #iff& 'age (ef& 3+ -& 8.*& #escribe the different different historical financial financial statements and their purposes. purposes. AAC!& (eflective /hin0ing 9*) :hen evaluating a balance sheet, the two primary <uestions are . A) whether a firm has sufficient shortterm assets to cover its shortterm debts and whether it is profitable !) whether a firm is profitable and whether a firm is financially sound C) whether a firm2s cost of sales is going up and a nd whether it is generating e$cess cash that could be used to pay down debt or pay dividends #) whether a firm has sufficient shortterm assets to cover its shortterm debts and whether it is financially sound %) whether a firm is profitable and whether it is generating e$cess cash that could be used to pay down debt or pay dividends Answer& # #iff& 4 'age (ef& 3+ -& 8.*& #escribe the different different historical financial financial statements and their purposes. purposes. AAC!& Analytical /hin0ing 1 Copyright 6 713 'earson %ducation, nc. 93) A firm2s wor0ing capital is its . . A) inventory and accounts receivable minus its current liabilities !) current assets minus its current liabilities C) total assets minus its total liabilities #) cash and cash e<uivalents minus its current liabilities %) accounts receivable minus its total accounts payable Answer& ! #iff& 'age (ef& 3+ -& 8.*& #escribe the different different historical financial financial statements and their purposes. purposes. AAC!& (eflective /hin0ing 9@) A firm2s is its current assets divided by its current cu rrent debt. A) wor0ing share !) present share C) wor0ing capital #) owners2 e<uity %) current ratio Answer& % #iff& 'age (ef& 3+ -& 8.*& #escribe the different different historical financial financial statements and their purposes. purposes. AAC!& (eflective /hin0ing 98) :hich of the financial statements used by businesses to 0eep trac0 of their financial affairs is the most similar to an ordinary person2s endofthe month ban0 statement; A) ncome statement !) !alance sheet C) tatement of cash flows #) tatement of ratio analysis %) tatement of owners2 e<uity Answer& C #iff& 'age (ef& @7 -& 8.*& #escribe the different different historical financial financial statements and their purposes. purposes. AAC!& (eflective /hin0ing 9+) /he statement of cash flows is divided into three separate activities . A) profitability activities, stability activities, and investing activities !) stability activities, earning activities, and financing activities C) operating activities, capital activities, and an d li<uidity activities #) spending activities, earning activities, and capital activities %) operating activities, investing activities, and financing activities Answer& % #iff& 'age (ef& @1 -& 8.*& #escribe the different different historical financial financial statements and their purposes. purposes. AAC!& (eflective /hin0ing 14 Copyright 6 713 'earson %ducation, nc. *7) n the conte$t of a firm2s statement of cash flows, activities include the purchase, sale, or investment in fi$ed assets Ee.g., real estate, e<uipment, and buildings). A) operating !) investing C) capital #) financing %) li<uidity Answer& ! #iff& 'age (ef& @1 -& 8.*& #escribe the different different historical financial financial statements and their purposes. purposes. AAC!& (eflective /hin0ing *1) n the conte$t of a firm2s statement of cash flows, activities include cash raised during the period by borrowing money or selling stoc0 andHor cash used during the period by paying dividends, buying bac0 outstanding stoc0, or buying bac0 outstanding bonds. A) investing !) financing C) operating #) li<uidity %) capital Answer& ! #iff& 'age (ef& @1 -& 8.*& #escribe the different different historical financial financial statements and their purposes. purposes. AAC!& (eflective /hin0ing *) According to the te$tboo0, the most practical way to interpret or ma0e sense of a firm2s historical financial statements is through . A) profit analysis !) regression analysis C) the preparation of pro forma financial statements #) ratio analysis %) percentage analysis Answer& # #iff& 'age (ef& @1 -& 8.*& #escribe the different different historical financial financial statements and their purposes. purposes. AAC!& (eflective /hin0ing *4) /he income statement records all the revenues and a nd e$penses for a given period p eriod and shows whether the firm is ma0ing a profit or is e$periencing a loss. Answer& /(5% #iff& 1 'age (ef& 33 -& 8.*& #escribe the different different historical financial financial statements and their purposes. purposes. AAC!& (eflective /hin0ing 19 Copyright 6 713 'earson %ducation, nc. *9) /he balance sheet reflects the results of the operations of a firm over a specified period of time. Answer& FA% #iff& 'age (ef& 3@ -& 8.*& #escribe the different different historical financial financial statements and their purposes. purposes. AAC!& (eflective /hin0ing **) A firm2s profit margin, or return on sales, is computed by dividing net income by net sales. Answer& /(5% #iff& 4 'age (ef& 3@ -& 8.*& #escribe the different different historical financial financial statements and their purposes. purposes. AAC!& (eflective /hin0ing *3) /he ma"or categories of assets listed on a balance sheet include current, fi$ed, and other assets. Answer& /(5% #iff& 4 'age (ef& 3@ -& 8.*& #escribe the different different historical financial financial statements and their purposes. purposes. AAC!& (eflective /hin0ing *@) A statement of cash flows is a snapshot of a company2s assets, liabilities, and owners2 e<uity at a specific point in time. Answer& FA% #iff& 'age (ef& @7 -& 8.*& #escribe the different different historical financial financial statements and their purposes. purposes. AAC!& (eflective /hin0ing *8) A firm2s wor0ing capital is defined as its fi$ed assets minus its longterm liabilities. Answer& FA% #iff& 'age (ef& @7 -& 8.*& #escribe the different different historical financial financial statements and their purposes. purposes. AAC!& (eflective /hin0ing *+) /he statement of cash flows summari?es the changes in a firm2s cash position for a specified period of time and details why the change occurred. Answer& /(5% #iff& 'age (ef& @1 -& 8.*& #escribe the different different historical financial financial statements and their purposes. purposes. AAC!& (eflective /hin0ing 37) n the conte$t of a firm2s statement of cash flows, operating activities include the purchase, sale, or investment in fi$ed assets Ee.g., real estate, e<uipment, and buildings). Answer& FA% #iff& 'age (ef& @1 -& 8.*& #escribe the different different historical financial financial statements and their purposes. purposes. AAC!& (eflective /hin0ing 1* Copyright 6 713 'earson %ducation, nc. 31) #escribe the purpose of the income statement, the balance sheet, and the statement of cash flows. Answer& /he income statement reflects the results of the operations operations of a firm over a specified period of time. t records all the revenues and e$penses for the given period and shows whether the firm is ma0ing a profit or is e$periencing a loss. 5nli0e the income statement, which covers a specified period of time, a balance sheet is a snapshot of a company2s assets, liabilities, and owners2 e<uity at a specific point in time. /he statement of cash flows summari?es the changes in a firm2s cash position for a specified period of time and details why the change occurred. occ urred. /he statement of cash flows is similar to a monthend ban0 statement. t reveals how much cash is on hand at the end of the month as well as how the cash was ac<uired and spent during the month. #iff& 'age (ef& 33 -& 8.*& #escribe the different different historical financial financial statements and their purposes. purposes. AAC!& (eflective /hin0ing 3) :hat is ratio analysis; :hy is it important; Answer& /he most practical way to interpret or ma0e sense of a firm2s historical historical and pro forma financial statements is through ratio analysis. /he ratios described in the te$tboo0 are divided into profitability ratios, li<uidity ratios, and overall ov erall financially stability ratios. /hese ratios provide a means of interpreting the historical and pro forma financial ratios for a firm. #iff& 'age (ef& @1 -& 8.*& #escribe the different different historical financial financial statements and their purposes. purposes. AAC!& (eflective /hin0ing 34) hawn Dones was reading the business plan of Bew enture enture Fitness #rin0s, and noticed that prior to its financial forecasts, Bew enture Fitness #rin0s placed an e$planation of the sources of the numbers for the forecast and the assumptions used to generate them. /his e$planation is called aEn) . A) forecast sheet !) forecast hypothesis C) estimate statement #) assumption sheet %) hypothesis sheet Answer& # #iff& 'age (ef& @4 -& 8.3& #iscuss the role role of forecasts in pro"ecting a firm2s future future income and e$penses. AAC!& (eflective /hin0ing 13 Copyright 6 713 'earson %ducation, nc. 39) n the conte$t of computing the cost of sales, the common way to do this is to use the percentofsales method, which is a method for e$pressing each e$pense item as a percentage of . A) net sales !) gross profit C) net income #) operating income %) cost of sales Answer& A #iff& 'age (ef& @* -& 8.3& #iscuss the role role of forecasts in pro"ecting a firm2s future future income and e$penses. AAC!& (eflective /hin0ing 3*) f a firm determines it can use the percentageofsales method and it follows the procedure described in the te$tboo0, then the net result is that each e$pense item on o n its income statement Ewith the e$ception of those items that can be individually forecast) will grow at the same rate as sales. /his approach is called the . A) continuous percentage method of forecasting !) stable fraction method of forecasting C) regular proportion method of forecasting #) constant ratio method of forecasting %) steady percentage method of forecasting Answer& # #iff& 4 'age (ef& @* -& 8.3& #iscuss the role role of forecasts in pro"ecting a firm2s future future income and e$penses. AAC!& (eflective /hin0ing 33) /he brea0even point for a new n ew restaurant or product is the point where the total revenue received e<uals total costs associated with the output of the restaurant or the sale of the product. Answer& /(5% #iff& 'age (ef& @* -& 8.3& #iscuss the role role of forecasts in pro"ecting a firm2s future future income and e$penses. AAC!& Analytical /hin0ing 3@) :hat are forecasts; :hat role do they play in the preparation of pro forma financial statements; Answer& Forecasts are pro"ections of a firm2s future sales, e$penses, income, and capital e$penditures. A firm2s firm2s forecasts provide the basis for its pro forma financial statements. A well developed set of pro forma financial statements helps a firm create accurate budgets, b uild financial plans, and manage its finances in a proactive rather than a reactive manner. #iff& 'age (ef& @4 -& 8.3& #iscuss the role role of forecasts in pro"ecting a firm2s future future income and e$penses. AAC!& (eflective /hin0ing 1@ Copyright 6 713 'earson %ducation, nc. 38) A firm2s pro forma financial statements are similar to its historical financial statements e$cept that they . A) do not include the income statement !) are re<uired by the %C in all cases C) loo0 bac0 rather than forward #) loo0 forward rather than bac0 %) do not include the statement of cash flows Answer& # #iff& 1 'age (ef& @@ -& 8.@& %$plain the purpose of pro pro forma financial statements. statements. AAC!& (eflective /hin0ing 3+) /he :hat :ent :rong; :rong; feature for Chapter 8 focuses on :ise Acre Fro?en /reats, a company that made organic popsicles from unrefined sweeteners. According to the feature, :ise :ise Acre Fro?en /reats failed largely largely because it . . A) grew too <uic0ly, which overwhelmed its cash flow !) was not careful enough in preparing its pro forma financial statements C) was not efficient in the way it utili?ed its assets #) spent too much money on mar0eting %) did not compare its financial ratios to industry peers Answer& A #iff& 1 'age (ef& @+ -& 8.@& %$plain the purpose of pro pro forma financial statements. statements. AAC!& Analytical /hin0ing @7) /he pro forma provides a firm a sense of how its activities will affect its ability to meet its shortterm liabilities and how its finances will evolve over time. A) balance sheet !) statement of cash flows C) income statement #) e$pense statement %) statement of owners2 e<uity Answer& A #iff& 'age (ef& @+ -& 8.@& %$plain the purpose of pro pro forma financial statements. statements. AAC!& (eflective /hin0ing 18 Copyright 6 713 'earson %ducation, nc. @1) According to the te$tboo0, the most important function of the pro forma statement of cash flows is to pro"ect whether the firm will have sufficient . A) income to meet its payroll on a wee0ly or monthly basis !) income to e$ceed industry norms C) cash to meet its needs #) inventory to meet its sales and production forecasts %) shortterm assets to cover its shortterm liabilities Answer& C #iff& 'age (ef& 87 -& 8.@& %$plain the purpose of pro pro forma financial statements. statements. AAC!& (eflective /hin0ing @) /he pro forma balance sheet provides a firm a sense of how its activities will affect its ability to meet its shortterm liabilities and how its finances will evolve over time. Answer& /(5% #iff& 'age (ef& @@ -& 8.@& %$plain the purpose of pro pro forma financial statements. statements. AAC!& (eflective /hin0ing @4) /he pro forma income statement shows the pro"ected flow of cash into and out of the company during a specified period. Answer& FA% #iff& 'age (ef& @8 -& 8.@& %$plain the purpose of pro pro forma financial statements. statements. AAC!& (eflective /hin0ing @9) /he same financial ratios used to evaluate a firm2s historical financial statement should be used to evaluate the pro forma financial statements. Answer& /(5% #iff& 'age (ef& 84 -& 8.@& %$plain the purpose of pro pro forma financial statements. statements. AAC!& (eflective /hin0ing @*) #escribe each of the four primary financial ob"ectives of firms. Answer& /he four primary financial ob"ectives of most firms are& profitability, profitability, li<uidity, li<uidity, efficiency, efficiency, and stability. stability. 'rofitability is the ability ab ility to earn a profit. i<uidity is a company2s company 2s ability to meet its shortterm financial obligations. %fficiency is how productively a firm utili?es its assets relative to its revenue and its profits. tability is the strength and vigor of the firm2s overall financial posture. #iff& 'age (ef& 3 -& 8.@& %$plain the purpose of pro pro forma financial statements. statements. AAC!& (eflective /hin0ing 1+ Copyright 6 713 'earson %ducation, nc.
