Q&A Hero

Q: Savanna Combs opened a clothing boutique two years ago. Unfortunately, the boutique failed after 18 months. Savanna attributes the failure of her boutique to the facts that her employees couldn't adjust quickly enough to their new roles and that her boutique lacked a "track record" with outside buyers and sellers, which made it difficult to form partnerships and make sales. Savanna suffered from what research calls the ________. A) burden of novelty B) millstone of innovation C) liability of newness D) liability of preparedness E) burden of newness

Q: The fact that companies often falter because the people who start the firms can't adjust quickly enough to their new roles and because the firm lacks a "track record" with outside buyers and sellers, is referred to as the ________. A) liability of preparedness B) liability of newness C) burden of novelty D) burden of freshness E) millstone of innovation

Q: Describe each of the four primary financial objectives of firms.

Q: The same financial ratios used to evaluate a firm's historical financial statement should be used to evaluate the pro forma financial statements.

Q: The pro forma income statement shows the projected flow of cash into and out of the company during a specified period.

Q: The pro forma balance sheet 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.

Q: 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 ________. A) income to meet its payroll on a weekly or monthly basis B) income to exceed industry norms C) cash to meet its needs D) inventory to meet its sales and production forecasts E) short-term assets to cover its short-term liabilities

Q: 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. A) balance sheet B) statement of cash flows C) income statement D) expense statement E) statement of owners' equity

Q: 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 ________. A) grew too quickly, which overwhelmed its cash flow B) was not careful enough in preparing its pro forma financial statements C) was not efficient in the way it utilized its assets D) spent too much money on marketing E) did not compare its financial ratios to industry peers

Q: A firm's pro forma financial statements are similar to its historical financial statements except that they ________. A) do not include the income statement B) are required by the SEC in all cases C) look back rather than forward D) look forward rather than back E) do not include the statement of cash flows

Q: What are forecasts? What role do they play in the preparation of pro forma financial statements?

Q: The break-even point for a new restaurant or product is the point where the total revenue received equals total costs associated with the output of the restaurant or the sale of the product.

Q: 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 ________. A) continuous percentage method of forecasting B) stable fraction method of forecasting C) regular proportion method of forecasting D) constant ratio method of forecasting E) steady percentage method of forecasting

Q: 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 ________. A) net sales B) gross profit C) net income D) operating income E) cost of sales

Q: 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) ________. A) forecast sheet B) forecast hypothesis C) estimate statement D) assumption sheet E) hypothesis sheet

Q: What is ratio analysis? Why is it important?

Q: Describe the purpose of the income statement, the balance sheet, and the statement of cash flows.

Q: In the context of a firm's statement of cash flows, operating activities include the purchase, sale, or investment in fixed assets (e.g., real estate, equipment, and buildings).

Q: The statement of cash flows summarizes the changes in a firm's cash position for a specified period of time and details why the change occurred.

Q: A firm's working capital is defined as its fixed assets minus its long-term liabilities.

Q: A statement of cash flows is a snapshot of a company's assets, liabilities, and owners' equity at a specific point in time.

Q: The major categories of assets listed on a balance sheet include current, fixed, and other assets.

Q: A firm's profit margin, or return on sales, is computed by dividing net income by net sales.

Q: The balance sheet reflects the results of the operations of a firm over a specified period of time.

Q: The income statement records all the revenues and expenses for a given period and shows whether the firm is making a profit or is experiencing a loss.

Q: According to the textbook, the most practical way to interpret or make sense of a firm's historical financial statements is through ________. A) profit analysis B) regression analysis C) the preparation of pro forma financial statements D) ratio analysis E) percentage analysis

Q: 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. A) investing B) financing C) operating D) liquidity E) capital

Q: 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). A) operating B) investing C) capital D) financing E) liquidity

Q: The statement of cash flows is divided into three separate activities ________. A) profitability activities, stability activities, and investing activities B) stability activities, earning activities, and financing activities C) operating activities, capital activities, and liquidity activities D) spending activities, earning activities, and capital activities E) operating activities, investing activities, and financing activities

Q: 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? A) Income statement B) Balance sheet C) Statement of cash flows D) Statement of ratio analysis E) Statement of owners' equity

Q: A firm's ________ is its current assets divided by its current debt. A) working share B) present share C) working capital D) owners' equity E) current ratio

Q: A firm's working capital is its ________. A) inventory and accounts receivable minus its current liabilities B) current assets minus its current liabilities C) total assets minus its total liabilities D) cash and cash equivalents minus its current liabilities E) accounts receivable minus its total accounts payable

Q: When evaluating a balance sheet, the two primary questions are ________. A) whether a firm has sufficient short-term assets to cover its short-term debts and whether it is profitable B) whether a firm is profitable and whether a firm is financially sound C) whether a firm's cost of sales is going up and whether it is generating excess cash that could be used to pay down debt or pay dividends D) whether a firm has sufficient short-term assets to cover its short-term debts and whether it is financially sound E) whether a firm is profitable and whether it is generating excess cash that could be used to pay down debt or pay dividends

Q: Which of the following is an example of a long-term liability? A) Accounts payable B) Real estate mortgage C) Accrued expenses D) Current portion of real estate mortgage E) Owners' equity

Q: 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. A) other B) intermediate term C) temporary D) current E) fixed

Q: 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 ________. A) compare a firm's financial ratios against its primary competitors and industry norms to fairly assess how well a firm is performing financially B) 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 D) ratio analysis is ineffective E) look at multiple years of an income statement rather than a single year to fairly assess how well a firm is performing financially

Q: Real estate, buildings, equipment and furniture are classified as ________ assets on a company's balance sheet. A) intermediate term B) fixed C) other D) permanent E) current

Q: Which of the following statement is incorrect regarding how balance sheets are prepared? A) The left-hand side of a balance sheet shows a firm's assets. B) The assets on a balance sheet are shown in order of liquidity. C) Assets are recorded at fair market value rather than cost. D) The right-hand side of a balance sheet shows a firm's liabilities and its owners' equity. E) Intellectual property receives value in some cases and in some cases it does not.

Q: A(n) ________ is a snapshot of a company's assets, liabilities, and owners' equity at a specific point in time. A) income statement B) statement of cash flows C) effectiveness statement D) balance sheet E) efficiency statement

Q: A firm's profit margin, or return on sales, is computed by dividing ________. A) net income by net sales B) gross profit by net sales C) net income by gross profit D) net income by cost of sales E) operating income by gross profit

Q: According to the textbook, the three numbers that receive the most attention when evaluating an income statement are ________. A) depreciation, interest income, and income tax expense B) cost of sales, gross profit, and operating expenses C) net sales, cost of sales, and operating expenses D) gross profit, net sales, and incomes tax expense E) gross profit, other income, and net income

Q: On a firm's income statement, net sales consists of ________. A) operating expenses minus cost of sales B) total sales minus allowances for returned goods and discounts C) cost of sales minus allowances for returned goods and discounts D) cost of sales minus operating expenses E) total sales minus operating expenses

Q: 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? A) Balance sheet B) Owner's equity statement C) Statement of cash flows D) Forecast E) Income statement

Q: 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. A) statement of cash flows B) income statement C) forecast D) balance sheet E) operating budget

Q: Which of the following selections correctly matches the financial statement with its description? A) Income statement tells how much a firm is making or losing B) Income statement depicts the structure of a firm's assets and liabilities C) Balance sheet shows where a firm's cash is coming from D) Balance sheet tells how much a firm is making or losing E) Statement of cash flows depicts the structure of a firm's assets and liabilities

Q: Describe the difference between historical and pro forma financial statements.

Q: Pro forma financial statements are projections for future periods based on forecasts and are typically completed for 2 to 3 years into the future.

Q: Historical financial statements reflect past performance and are usually prepared on a quarterly and annual basis.

Q: Which of the following statements about pro forma financial statements is incorrect? A) Pro forma financial statements are projections for future periods based on forecasts. B) Pro forma financial statements are typically completed for two to three years into the future. C) Pro forma financial statements are required by the SEC. D) Most companies consider their pro forma financial statements to be confidential and reveal them to outsiders only on a "need to know basis." E) Pro forma financial statements are strictly planning tools.

Q: ________ financial statements are projections for future periods based on forecasts and are typically completed for two to three years into the future. A) Chronological B) Pro forma C) Ad-hoc D) Concurrent E) Historical

Q: ________ financial statements reflect past performance and are usually prepared on a quarterly and annual basis. A) Chronological B) Ad-hoc C) Historical D) Concurrent E) Pro forma

Q: Budgets are itemized forecasts of a company's income, expenses, and capital needs and are also an important tool for financial planning and control.

Q: ________ depict relationships between items on a firm's financial statements. A) Financial proportions B) Fiscal relations C) Fiscal projections D) Monetary balances E) Financial ratios

Q: 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) A partnership that bands small businesses together to attain volume discounts on common products and services that they buy B) A partnership that bands small businesses together to collectively make 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 D) A partnership that bands small businesses together to get the best possible terms from finance companies E) A partnership that bands small businesses together to get the best possible rates on property and liability insurance

Q: In regard to budgets, which of the following statements is not true? A) Budgets include an itemized forecast of a company's expenses. B) Budgets are a poor tool for financial control. C) Budgets are an important tool for financial planning. D) Budgets include an itemized forecast of a company's capital needs. E) Budgets include an itemized forecast of a company's income.

Q: Match the financial term with its proper definition. A) Forecasts depict relationships between items on a firm's financial statements B) Forecasts written reports that quantitatively describe a firm's financial health C) Budget itemized forecasts of a company's income, expenses, and capital needs D) Financial ratios written report that quantitatively describes a firm's financial health E) Financial statements an estimate of a firm's future income and expenses

Q: ________ are itemized forecasts of a company's income, expenses, and capital needs and are also an important tool for financial planning and control. A) Profitability statements B) Financial statements C) Owners' equity statements D) Budgets E) Statements of cash flows

Q: ________ are an estimate of a firm's future income and expenses, based on its past performance, its current circumstances, and its future plans. A) Calculation statements B) Forecasts C) Statements of cash flow D) Financial statements E) Prediction statements

Q: A financial statement is a(n) ________. A) set of ratios which depict relationships between a firm's financial items B) estimate of a firm's future income and expenses C) hybrid statement of cash flows D) itemized forecast of a company's income, expenses, and capital needs E) written report that quantitatively describes a firm's financial health

Q: If a firm's debt-to-equity ratio gets too high, it may have trouble meeting its obligations and securing the level of financing needed to fuel its growth.

Q: A company's accounts receivable is money owed to it by its customers.

Q: Stability is a company's ability to meet its short-term financial obligations.

Q: Efficiency is the ability to earn a profit.

Q: The strength and vigor of a firm's overall financial posture is referred to as ________. A) liquidity B) effectiveness C) stability D) profitability E) efficiency

Q: 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 ________. A) efficiency B) effectiveness C) stability D) liquidity E) profitability

Q: 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 ________. A) long-term assets B) owners' equity C) accounts payable D) accounts receivable E) inventory

Q: A company's merchandise, raw materials, and products waiting to be sold are called its ________. A) set aside B) accumulation C) reserve D) inventory E) stock

Q: 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 ________. A) accounts receivable B) inventory C) accounts collectable D) accounts obtainable E) accounts payable

Q: Money owed to a company by its customers is referred to as ________. A) accounts obtainable B) accounts payable C) accounts receivable D) inventory E) accounts collectable

Q: A company's ability to productively utilize its assets relative to its revenue and its profits is referred to as ________. A) efficiency B) effectiveness C) stability D) liquidity E) profitability

Q: ________ is a company's ability to meet its short-term financial obligations. A) Liquidity B) Profitability C) Effectiveness D) Stability E) Efficiency

Q: Match the financial objective with its correct definition. A) stability the overall health of the financial structure of the firm, particularly as it relates to its debt-to-equity ratio B) profitability how productively a firm utilizes its assets C) liquidity a company's ability to make a profit D) efficiency a company's ability to meet its short-term obligations E) profitability the overall health of the financial structure of the firm, particularly as it relates to its debt-to-equity ratio

Q: The four main financial objectives of a firm are _________. A) efficiency, effectiveness, strength, and flexibility B) power, success, efficiency, and effectiveness C) control, effectiveness, liquidity, and power D) success, strength, liquidity, and profitability E) profitability, liquidity, efficiency, and stability

Q: Which of the following was not identified as one of the four main financial objectives of a firm? A) Stability B) Efficiency C) Timeliness D) Liquidity E) Profitability

Q: Financial management deals with raising money and managing a company's finances in a way that achieves the highest rate of return.

Q: Financial management deals with two things-managing a company's finances and ________. A) operations management B) inventory control C) raising money D) production management E) supply chain management

Q: 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 B) managing accounts receivable C) projecting future income D) projecting future expenses E) completing financial statements

Q: The ________ is a form of business organization that is rapidly gaining popularity in the United States. The concept originated in Germany and was first introduced in the United States in the state of Wyoming. A) limited partnership B) general partnership C) limited liability company D) subchapter S corporation E) C corporation

Q: Which of the following is not one of the standards that a business must meet to qualify for status as a subchapter S corporation? A) The business must be a subsidiary of another corporation. B) All shareholders must agree to have the corporation formed as a subchapter S corporation. C) It can have no more than 100 members (husbands and wives count as one member). D) It can have only one class of stock issued and outstanding. E) The shareholders must be U.S. citizens.

Q: A ________ combines the advantages of a partnership and a C corporation. A) subchapter S corporation B) limited partnership C) general partnership D) sole proprietorship E) subchapter K corporation