Test Bank For Entrepreneurial Finance A Practical Approach Second Edition Denise M, Lee

chapter 1

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Question 1

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The personal finances of the nascent entrepreneur and the finances of the start−up venture he creates are inextricably linked. One of the reasons this is true is because most new ventures are founded as ______.

corporations

➔

pass−through entities non−profits virtual entities

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Question 2

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There are two major causes of business failure that, with some effort on the part of the entrepreneur, are, in many cases, avoidable. They are ______.

lack of resources and fierce industry competition ineffective business partners and economic downturns inability to find needed talent and currency fluctuations

➔

poor timing and lack of proper preparation

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Question 3

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Two examples of business models with which many entrepreneurs are currently finding success are ______.

the subscription−based business model and the technological innovation business model

➔

the subscription−based business model and the marketplace business model the marketplace business model and the technological innovation business model the technological innovation business model and the diversification business model

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Question 4

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Working capital is ______.

a fund that invests in a basket of assets, such as stocks or bonds, and trades on a regulated exchange like the New York Stock Exchange when a customer uses a credit card to buy something and then cancels the transaction

➔

the capital required to sustain operations and support business growth after a company’s start−up phase equal to current assets divided by current liabilities

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Question 5

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A hybrid legal business entity authorized by state law featuring some of the characteristics of both partnerships and corporations is a ______.

limited liability corporation

➔

limited liability company hybrid partnership hybrid joint venture

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Question 6

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A legal entity authorized by state law to act as an artificial person in order to conduct business or engage in certain other activities is a ______.

limited liability corporation limited liability company partnership

➔

corporation

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Question 7

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It is a life goal of Nish’s to start his own business. Before starting a business, in order to increase his chances for entrepreneurial success, as an aspiring entrepreneur, he should ______.

quit his job prevent himself from engaging in distractions like hobbies

➔

work in and learn about the industry in which he intends to start the business

prepare a will

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Question 8

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Those who reach the market first with a truly innovative new product or service tend to ______ in the long run compared to later (copycat) entrants to the market.

be less profitable and less able to hold onto market share be less profitable but better able to hold onto market share

➔

be more profitable and better able to hold onto market share be more profitable but less able to hold onto market share

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Question 9

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The personal finances of the nascent entrepreneur and the finances of the start−up venture they create are inextricably linked. One of the reasons this is true is because many founders ______.

take on angel investors for their business utilize venture capital funding for their business successfully execute a crowdfunding campaign for their business

➔

personally guarantee the debt or contracts of their business

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Question 10

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Quintin is interested in starting a business. In order to increase his chances for entrepreneurial success, as an aspiring entrepreneur, he should do which of the following?

Establish a small network that is limited to those he is reasonably certain can help him with the business he intends to start.

➔

Establish a large network both within and outside of the industry in which he intends to start the business.

Establish a large network only within the industry in which he intends to start the business.

Establish a large network outside of the industry in which he intends to start the business

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Question 11

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A feasibility analysis should ______.

be performed immediately after a business has commenced operations

➔

concentrate on assessing the likelihood of economic success of a business never be shown to potential investors never be over 20 pages long

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Question 12

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A feasibility analysis is performed to answer four questions. One of those questions is ______.

for what price can the business ultimately be sold who will be the primary investors in the business how much capital will the primary investors in the business contribute

➔ are there enough interested customers that a business based on the concept under consideration can actually turn a profit

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Question 13

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The financial plan of a feasibility analysis should include all of the following except ______.

a detailed accounting of the amount of start−up capital required by the business and how and when that start−up capital will be used expected product pricing expected customer demand

➔

a copy of each founder’s credit report

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Question 14 The financial plan of a feasibility analysis should include all of the following except ______. ➔

the expected work hours of the founding entrepreneur(s) detailed on a weekly or monthly basis expected working capital needs the expected return on investment

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a breakeven analysis that supports the proposed business’s economic viability

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Question 15

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A business plan is ______.

required for entrepreneurial success

➔

more comprehensive than a feasibility analysis less comprehensive than a feasibility analysis always inclusive of a map detailing the business’s physical location

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Question 16

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Major components of a business plan include ______.

all the components of a feasibility analysis, including the “go” or “no go” feasibility decision

➔

a growth plan a map detailing the layout of the CEO’s office a cash flow mitigation plan

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Question 17

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Which of the following statements is not true?

Most new businesses require a substantial time commitment from the entrepreneur.

Most new businesses require a significant financial investment by the entrepreneur.

➔

Most start−ups earn no revenue during their first three years of operation.

More than half of start−ups aren’t profitable in their first year.

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Question 18 Which statement is true regarding the three major credit reporting agencies? ➔

They build your credit report based solely on the information voluntarily reported to them by creditors.

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They build your credit report based on information they buy from creditors.

They are required to provide you with a free copy of your credit report, at your request, once every 4 months.

They are nonprofit agencies of the federal government.

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Question 19

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In order to clearly separate himself from his business, an entrepreneur should do all of the following except ______.

pay the business rent or some reasonable remuneration for any significant business assets the entrepreneur uses for personal purposes

make sure the use of any business vehicle is more than 50 percent business use as documented in a daily mileage log that describes the purpose of every mile driven

➔

never take personal items to his place of business keep separate bank and debt accounts for personal versus business use

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Question 20

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In order to clearly separate himself from his business, an entrepreneur should do all of the following except ______. ➔

decline to sign business documents

execute a formal operating agreement between the entrepreneur, the partners (if applicable), and the company decline to personally guarantee a loan of the business decline to personally guarantee a contract of the business

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Question 21 One of the top 10 legal and financial mistakes entrepreneurs make is ______.

failing to sue other business owners when they should bringing outside investors into the business taking too long to review a written agreement before signing it

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➔

failing to keep current with regard to filing tax returns and paying taxes

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Question 22

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One of the top 10 legal and financial mistakes entrepreneurs make is ______.

not leaving enough “wiggle room” in customer payment terms and therefore losing sales

➔

not putting clear payment terms in place for customers over−insuring the business investing their own money in the business

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Question 23

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One of the top 10 legal and financial mistakes entrepreneurs make is ______.

setting up an LLC instead of a corporation consulting with a tax attorney outsourcing payroll processing

➔

processing payroll internally

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Question 24

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______ is intangible property created from human intellect, often evidenced by copyrights, patents and trademarks.

A feasibility analysis A business plan

➔

Intellectual property A trade secret

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Question 25

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______ financial statements are financial statements that attempt to estimate the future financial situation of a company based upon certain identified assumptions.

Traditional Historical Comparative

➔

Pro forma

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Question 26

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One of the top 10 legal and financial mistakes entrepreneurs make is ______.

putting agreements, terms of doing business, and other understandings in writing

➔

not adequately identifying, avoiding, reducing, or insuring against the risks that can destroy a business showing their business plan to potential investors showing their business plan to potential business partners

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Question 27

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Generally, the timing is right to start a business when ______. ➔

the customer is ready for what the entrepreneur has to offer the industry is ready for what the entrepreneur has to offer the economy has just come out of a recession the economy is about to go into a recession

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Question 28

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You can lower your credit score over time by engaging in which of the following behaviors ______.

taking on a reasonable amount of debt

➔

opening too many credit card accounts at one time making too many on−time debt payments (creditors want to earn interest) overall responsible credit use

Question 29

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Which of the following is not true related to your credit report?

Inaccurate information could be included on the report.

Some of your credit accounts could be missing from the report.

Information that doesn’t belong to you could be included on the report.

➔

Suspected local identity thieves could be identified on the report.

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Question 30

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In 1981, the Fair Isaac Corporation (FICO) created a branded version of your credit score called the FICO Score. According to FICO ______. ➔

the FICO Score is the credit score most widely used by U.S. lenders to make loan approval decisions

to compute credit scores, FICO uses information provided by the three major credit reporting agencies— Equifax, Experian, and Excelsior

you may have as many as five different FICO Scores, one computed by each credit reporting agency, one calculated by FICO itself, and one calculated by the bank from whom you are requesting a loan Excelsior is the most reliable credit reporting agency

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Question 31

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Common approaches to risk management include risk avoidance, risk reduction, risk transfer, and risk assumption. Risk avoidance is characterized by the avoidance of any hazard that exposes a business or an individual to risk. An example of risk avoidance would be ______.

a business self−insuring its employees’ medical coverage an entrepreneur installing a security system at his business’s facility

➔

a business owner instituting a “Cash Only” sales policy at his business a business offering customers trade credit

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Question 32 Trade credit is a business−to−business arrangement by which ______.

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the supplier business can purchase items from the customer business on account—paying no cash at the time of purchase, but instead paying for the items at a later date

the supplier business can purchase items from the customer business on account—paying cash at the time of purchase and thus receiving a discount as a result

➔ the customer business can purchase items from the supplier business on account—paying no cash at the time of purchase, but instead paying for the items at a later date

the customer business can purchase items from the supplier business on account—paying cash at the time of purchase and thus receiving a discount as a result

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Question 33

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Common approaches to risk management include risk avoidance, risk reduction, risk transfer, and risk assumption. Risk reduction involves engaging in behaviors and programs specifically designed to reduce risk. An example of a risk reduction behavior would be ______.

a business self−insuring its employees’ medical coverage

➔

an entrepreneur installing a security system at his business’s facility a business owner instituting a “Cash Only” sales policy at his business accepting checks from customers for purchases

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Question 34

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A factor is a third party who ______.

for a fee that is usually equivalent in amount to 5 percent to 10 percent of the total accounts receivable sold, provides the business owner with immediate cash for the accounts receivable

for a fee that is usually equivalent in amount to 5 percent to 10 percent of the total accounts receivable sold, provides the business owner with immediate cash for the accounts receivable and then goes about collecting the accounts receivable themselves

for a fee that is usually equivalent in amount to 1 percent to 5 percent of the total accounts receivable sold, provides the business owner with immediate cash for the accounts receivable

➔ for a fee that is usually equivalent in amount to 1 percent to 5 percent of the total accounts receivable sold, provides the business owner with immediate cash for the accounts receivable and then goes about collecting the accounts receivable themselves

Question 35

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Common approaches to risk management include risk avoidance, risk reduction, risk transfer, and risk assumption. Risk transfer involves proactively transferring risk to another party. An example of risk transfer would be ______. ➔

a business selling its accounts receivable to a factor a business not offering customers the opportunity to make purchases using credit an entrepreneur installing a sprinkler system at his business’s facility a business self−insuring its employees’ medical coverage

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Question 36

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Common approaches to risk management include risk avoidance, risk reduction, risk transfer, and risk assumption. Risk assumption occurs when one proactively assumes risk because one believes that the loss or cost one is likely to incur by assuming that risk is less than the loss or cost associated with risk avoidance, risk reduction, or risk transfer. An example of a risk assumption behavior would be ______. ➔

a business self−insuring its employees’ medical coverage a business purchasing business insurance an entrepreneur installing a security system at his business’s facility a business owner instituting a “Cash Only” sales policy at his business

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Question 37

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Accounts receivable represent ______.

the amounts a company owes its vendors related to their purchases from those vendors utilizing the credit or trade credit offered by the vendors

➔ the amounts customers owe a company related to their purchases from that company utilizing the credit or trade credit offered by that company delinquent customer accounts that have been written off by a company amounts a company owes to its vendors but does not plan to pay

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Question 38

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The rate of new business failure would likely be significantly ______ if every entrepreneur took the time to ______.

lower, obtain the approval of his family and friends before starting a business

➔

lower, do a feasibility analysis that includes a breakeven analysis before starting a business lower, get the federal government’s approval before starting the business higher, adequately prepare before starting a business

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Question 39

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The mistakes that most severely damage a business tend to be either ______.

psychological or operational operational or legal

➔

legal or financial financial or custodial

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Question 40

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A feasibility analysis should include a description of the business concept underlying the proposed business. A description of the business concept should include all of the following except ______.

a detailed description of the proposed product or service a description of the product’s or service’s likely customers

➔

a description of the value the product or service will bring to a business’s vendors

a description of the distribution channels that will most likely be utilized to get the product or service to its customers

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Question 41 The rate of new business failure is very high in some industries and very low in others.

True

➔

False

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Question 42

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The topic of entrepreneurial finance recognizes that oftentimes entrepreneurs make decisions for the businesses they’ve founded with their personal financial goals—and other personal goals—clearly in mind. ➔

True False

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Question 43

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A secured credit card is a credit card backed by an insurance policy paid for by you.

True

➔

False

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Question 44

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A personal guarantee is, by definition, comprehensive. It cannot have a dollar amount, time, or other type of limitation placed on it.

True

➔

False

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Question 45

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Entrepreneurship is a linear process.

True

➔

False

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Question 46

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A pass−through entity is a business whose profits are not taxed at the company level but instead pass through to the business owners’ individual tax returns, where they are taxed.

➔

True False

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Question 47

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A company’s business model indicates how a business concept will make a company—and ultimately the entrepreneur—money. ➔

True False

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Question 48

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If a founder is a solo entrepreneur, it is unnecessary to complete an operating agreement.

True

➔

False

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Question 49

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A business plan is required for entrepreneurial success.

True

➔

False

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Question 50 A business plan should not be shown to individuals outside of the organization.

True

➔

False

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chapter 2

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Question 1

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Bootstrapping involves all of the following except ______.

seeking out what you can “get for free” or purchase “used” bartering for noncash assets and services

➔

using any means necessary to get the resources your start−up needs

embracing the entrepreneurial mindset in order to get a business through its start−up phase until more traditional means of financing the young venture become available

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Question 2

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Capital acquired by a business with the understanding that the capital will have to be repaid by the business, usually within a defined time period and usually with interest, is called ______.

equity capital

➔

debt capital a grant reward−based crowdfunding

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Question 3

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Capital acquired by a business as a result of selling some form of ownership of that business is called ______. ➔

equity capital debt capital a grant reward−based crowdfunding

Question 4

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The accumulation of small amounts of capital from a large number of individuals via a campaign on the internet, such individuals generally expecting nothing in return (other than a news update, a small token gift, or a promised product or service, usually of nominal value), is called ______.

entrepreneurial crowdfunding lending−based crowdfunding equity crowdfunding

➔

reward−based crowdfunding

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Question 5

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Which of the following is true about angel investors?

On any one investment, an angel is more likely than not to make a profit.

➔

Ninety percent of all cash returns are produced by 10 percent of an angel’s investments.

SEC rules limit angels to investing in no more than 5 start−ups per year.

Angels invest only equity capital in start−ups companies.

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Question 6

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A venture capital investment is typically an equity investment that has which of the following attributes?

A venture capital investment is made with the intention to achieve majority control of a company over time.

A venture capital investment generates a guaranteed return by requiring that, by a certain date, the founder(s) pursue a realization event such as the sale of the company or an initial public offering.

➔ A venture capital investment is made in the interest of generating returns similar to those desired by angel investors.

A venture capital investment is generally made in anticipation of a follow−up angel investment.

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Question 7

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The average annual return a U.S. venture capital fund receives on all of its venture capital investments combined is ______ percent.

15%

➔

25% 40% 50%

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Question 8

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Series A is ______. ➔ the first sophisticated round of investment capital to fund a young entity’s growth after seed capital has already been provided

a very highly regulated and managed first sale of most or all of the stock of a previously private company—or mostly private company—to the general public a Securities and Exchange Commission (SEC) regulation a type of Small Business Administration (SBA) loan

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Question 9

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Which of the following is not true about proof of concept?

Proof of concept is evidence that a start−up’s business concept is feasible.

Proof of concept makes obtaining financing more possible for a start−up.

➔

Proof of concept makes obtaining financing unnecessary for a start−up.

Proof of concept may be in the form of sales of the start−up’s product or service to customers.

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Question 10

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Lending−based crowdfunding can be disadvantageous in that ______.

the start−up’s owners receive funding without giving away any ownership

often the lenders become the start−up’s advocates via positive word−of−mouth and promotional social media posts it is an avenue of funding that can often be pursued when traditional avenues of debt financing cannot

➔

the money received has to be repaid

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Question 11

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McKayla is an accredited investor. This means she most likely ______.

makes over $200,000 per year in income or has a net worth greater than $1 million makes over $200,000 per year in income and has a net worth greater than $1 million

➔ makes over $200,000 per year in income or has a net worth greater than $1 million, excluding her primary residence

has successfully gone through Securities and Exchange Commission (SEC) training and is approved to invest in start−ups

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Question 12

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Which statement is true about equity crowdfunding?

There are limits on the amount of money accredited investors can invest.

There are limits on the number of shares of stock that may be issued.

➔

The shares of stock purchased cannot be sold (in most instances) for at least one year.

The shares of stock purchased cannot be sold (in most instances) for at least one year, but there is a very active marketplace where the shares can be readily sold once their sale is permitted.

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Question 13 Which is true with regard to equity crowdfunding? ➔

Equity crowdfunding rules limit start−ups to raising only up to $5 million within a period of 12 months.

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Equity crowdfunding rules limit start−ups to raising only up to $5 million within a period of 12 months, unless the start−up is a nonprofit, in which case the limit is $10 million.

Equity crowdfunding is different from reward−based crowdfunding in that even if a company does not raise the full amount of their funding goal, the company still gets to keep any money that is raised.

A start−up less than 2 years old is waived from meeting SEC requirements related to equity crowdfunding.

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Question 14

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Convertible notes are securities that document the terms of an investor’s ______.

loan to a company, but also include an option for the investor to extend the length of the loan if desired by the investor at a future time

➔ loan to a company, but also include an option for the investor to convert the loan into an equity position in the company if desired by the investor at a future time

equity position in a company, but also include an option for the investor to convert the equity into a loan to the company if desired by the investor at a future time

loan to a company, but also include an option for the investor to convert the loan into a foreign (non U.S.) currency if desired by the investor at a future time

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Question 15

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Best practices when structuring debt for a start−up business include all of the following except ______.

negotiating the ability to pay interest only for a period of months or years, ideally until the new venture gets past its start−up phase

➔

negotiating a variable, annually inflation−adjusted interest rate negotiating a long repayment term with the ability to repay early, if and when desired

negotiating the ability to renegotiate interest rates, fees, and repayment terms, if and when circumstances change

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Question 16 There are significant differences between a typical U.S. small business and a more broad−based entrepreneurial venture. A small business tends to ______.

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come up with ideas that solve national or world problems pursue larger scope, more disruptive ideas that involve a higher degree of risk

➔

grow slowly, rather than exponentially implement sweeping change

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Question 17

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There are significant differences between a typical U.S. small business and a more broad−based entrepreneurial venture. A broad−based entrepreneurial venture tends to ______.

keep money and jobs in the local community be run on a day−to−day basis by its founder

➔

pursue larger scope, more disruptive ideas that involve a higher degree of risk grow slowly, rather than exponentially

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Question 18

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With regard to entrepreneurship, traction is ______. ➔ evidence that a product or service is being adopted at such a rate that the business model and the business’s potential for sustainable growth appear to be validated

a schedule that outlines the entire debt and equity structure of a business, including the order in which lenders and investors will be satisfied in the event of a company’s liquidation

a startup’s first significant seed capital received from a source other than the founders or their friends and families the grip of a tire on a road

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Question 19 The typical angel investment ranges from ______ to ______ per company.

$10,000, $50,000

➔

$25,000, $100,000 $50,000, $100,000

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$100,000, $500,000

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Question 20

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Because of the time, money, and effort generally required to comply with securities laws, entrepreneurs often choose to pursue funding via paths that avoid the need to register securities with the SEC. There are two general types of exemption from SEC registration: exempt securities and exempt transactions. Exempt securities include ______. ➔

government securities, insurance policies, and commercial paper government securities, insurance policies, and common stock insurance policies, common stock, and preferred stock debentures, common stock, and preferred stock

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Question 21

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Because of the time, money, and effort generally required to comply with securities laws, entrepreneurs often choose to pursue funding via paths that avoid the need to register securities with the SEC. There are two general types of exemption from SEC registration: exempt securities and exempt transactions. Exempt transactions include ______. ➔

certain private placements and intrastate offerings public offerings and intrastate offerings certain private placements and public offerings certain private placements and initial public offerings

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Question 22

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All of the following are true about Regulation D except ______.

Regulation D is the exemption related to private placements described in an amendment to the Securities Act of 1933.

Regulation D is a regulation that allows companies to raise capital through the issuance of securities without having to register those securities with the SEC.

Regulation D is the means by which many angel investors acquire their equity positions in young companies.

➔

Regulation D includes Regulation A and A+.

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Question 23

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Under Rule 504 of Regulation D certain issuers may offer and sell up to $10 million of securities to ______.

non−accredited investors, in any 12−month period, not subject to specific SEC disclosure requirements

➔

accredited investors, in any 12−month period, not subject to specific SEC disclosure requirements any investor, in any 12−month period, not subject to specific SEC disclosure requirements angel investors, but only after a 12−month “quiet period” has been met

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Question 24

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Under Rule 506 of Regulation D, certain issuers may offer and sell an unlimited amount of securities by relying on one of two possible exemptions: Rule 506(b) and 506(c). Issuers relying on Rule 506(b) may sell to an unlimited number of ______.

investors accredited investors, and up to 35 non−accredited investors

➔

accredited investors, and up to 35 non−accredited investors who are financially sophisticated

accredited investors, and up to 35 non−accredited investors who are financially sophisticated and have a net worth of at least $500,000

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Question 25

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Under Rule 506 of Regulation D, certain issuers may offer and sell an unlimited amount of securities by relying on one of two possible exemptions: Rule 506(b) and 506(c). Issuers relying on Rule 506(c) may

______.

advertise their offerings to the general public via the internet, social media, and traditional media and sell their offerings to any investor advertise their offerings only to accredited investors via the internet, social media, and traditional media

advertise their offerings to the general public via the internet, social media, and traditional media, but may only sell their offerings to angel investors

➔ advertise their offerings to the general public via the internet, social media, and traditional media, but may only sell their offerings to accredited investors

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Question 26

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Which of the following is true about Regulation A? ➔

Regulation A is a regulation that allows an exemption from certain registration requirements of the SEC. Regulation A is usually utilized by companies in the start−up phase.

Regulation A includes Rule 507 and Rule 509.

Regulation A is the exemption related to private placements described in an amendment to the Securities Act of 1933.

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Question 27

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2015 updates to Regulation A (creating what is commonly referred to as “Regulation A+”) allow companies to pursue public offerings under two tiers: Tier 1 and Tier 2. Under Tier 1 companies can offer up to ______.

$1 million of securities in any one−year period to any investor $1 million of securities in any one−year period to accredited investors only

➔

$20 million of securities in any one−year period to any investor $20 million of securities in any one−year period to accredited investors only

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Question 28 Which of the following is not true about a Tier 2 Regulation A offering?

A Tier 2 Regulation A offering is sometimes called a “mini−IPO.”

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A Tier 2 Regulation A offering essentially represents the middle ground between a private placement under Regulation D and a public offering in the form of a full−scale IPO.

➔

A Tier 2 Regulation A offering is limited to $100 million of securities in any one−year period.

A Tier 2 Regulation A offering can act as a liquidity event for early−stage investors.

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Question 29

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A private placement is ______.

a very highly regulated and managed first sale of most or all of the stock of a previously private company—or mostly private company—to the general public

the first sophisticated round of investment capital to fund a young entity’s growth after seed capital has already been provided an issue of securities offered for sale to the public by a company or other entity

➔

the sale of securities directly to a private investor, rather than as part of a public offering

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Question 30

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“Blue sky laws” are ______.

environmental regulations regarding clean air

➔

state securities laws state securities laws regulating clean air federal securities laws

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Question 31 Intrastate offerings are ______.

securities whose sale is limited to state governments securities sold directly to private investors as part of a public offering unsecured, short−term debt instruments

➔

securities whose sale is limited to investors in one state

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Question 32

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Investors in start−ups ______.

are philanthropic and do not expect to make a profit on their investment

➔

take on a lot of risk and as a result expect to make a healthy profit on their investment do not expect to eventually be repaid or provided with a means to exit their investment are required to be on the business’s board of directors

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Question 33

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Which of the following statements is not true?

Debt needs to be repaid, and there are limits to the amount of debt any company can obtain and support.

Almost every path to securing capital for a young venture, other than perhaps the funding that comes from the entrepreneurs themselves or from their friends and families, involves the issuance of a security.

Because of the time, money, and effort generally required to comply with securities laws, entrepreneurs often choose to pursue funding via paths that avoid the need to register securities with the SEC.

➔

Bootstrapping can usually completely eliminate a business’s need for capital.

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Question 34

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Grants are ______.

tax credits provided to an individual or an entity that do not have to be repaid

tax credits provided to an individual or an entity that do not have to be repaid until the activity for which the grant was received becomes profitable

➔

monies provided to an individual or an entity that do not have to be repaid

monies provided to an individual or an entity that do not have to be repaid until the activity for which the grant was received becomes profitable

Unanswered

Question 35

0 / 1 pts

Venture capital funds are monies typically used to invest in young, market−driven companies with very large potential upside. Venture capital funds are typically accumulated by ______. ➔

private venture capital firms community development financial institutions (CDFIs) certain large banks angel investors

Unanswered

Question 36

0 / 1 pts

Which of the following statements is not true?

Corporations as a source of venture capital are relatively new to the entrepreneurial funding landscape.

Corporations as a source of venture capital currently represent about 25 percent of all venture capital funding.

Corporations as a source of venture capital are widely viewed as a desirable source of funding.

➔ Corporations as a source of venture capital are widely viewed as an undesirable source of funding because, by their very nature, corporations simply are not innovative.

Unanswered

Question 37

0 / 1 pts

The primary motivation for allowing non−accredited investors access to equity crowdfunding was the federal government’s desire to open up a new source of ______.

customers for the banking industry

➔

capital for job−creating entrepreneurs revenue for attorneys and accountants grant potential for university researchers

Unanswered

Question 38 A capitalization table is a schedule that outlines ______. ➔

the debt and equity structure of a business the asset, debt and equity structure of a business

0 / 1 pts

the organizational structure of a business which words will be capitalized in the marketing materials of a business

Unanswered

Question 39

0 / 1 pts

Potential sources of debt capital for start−ups—beyond the founders themselves, their friends and families, angel investors, venture capital funds, and CDFIs—include all of the following except ______.

banks and commercial lenders SBA−guaranteed loans lending−based crowdfunding

➔

equity crowdfunding

Unanswered

Question 40

0 / 1 pts

Almost every path to securing capital for a young venture, other than perhaps the funding that comes from the entrepreneurs themselves or from their friends and families, involves the issuance of a security. Which of the following is not a security?

a stock a bond

➔

a start−up “acceptance” a promissory note

Unanswered

Question 41

0 / 1 pts

Bootstrapping involves utilizing strategic negotiation tactics in order to avoid, delay, or minimize the outlay of cash. ➔

True False

Unanswered

Question 42

0 / 1 pts

Small business investment companies (SBICs) are firms similar to venture capital firms that are licensed

and regulated by the Securities and Exchange Commission (SEC).

True

➔

False

Unanswered

Question 43

0 / 1 pts

Once you give away or sell any ownership of your company, it is usually easy to get it back.

True

➔

False

Unanswered

Question 44

0 / 1 pts

The term “angel investor” originated on Broadway, where it was used to describe the individuals who provided the financing for theatrical productions. ➔

True False

Unanswered

Question 45

0 / 1 pts

An entrepreneur can make the decision to treat the use of her personal credit card for the benefit of her start−up as a loan to be repaid by the start−up at a later date or as an equity investment in that start−up. ➔

True False

Unanswered

Question 46 The Small Business Administration (SBA) makes loans to start−ups.

True

➔

False

0 / 1 pts

Question 47

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A typical business line of credit needs to be paid down to $0 at least once each year. ➔

True False

Unanswered

Question 48

0 / 1 pts

While Regulation D allows a company to avoid formally registering with the SEC altogether, Regulation A is a regulation that instead allows an exemption from certain registration requirements of the SEC. ➔

True False

Unanswered

Question 49

0 / 1 pts

On average, the founders themselves provide more funding for their start−up businesses than all other sources of funding combined. ➔

True False

Unanswered

Question 50

0 / 1 pts

Because of the high risk that venture capitalists assume by investing in small, early−stage companies, venture capitalists usually ensure that they can exert significant control over the companies when they deem such control desirable. This control is viewed by most founders to be an advantage associated with obtaining venture capital investment.

True

➔

False

chapter 3

Unanswered

Question 1

0 / 1 pts

Which of the following is not true?

Certain legal forms of business significantly limit a business owner’s personal liability with regard to the business.

Certain legal forms of business allow a business owner total control over his business.

➔ Certain legal forms of business allow both a business owner and his business to avoid paying income taxes on the profits of the business.

Certain legal forms of business permit a business owner to write off the initial losses suffered by a start−up on his personal income tax return.

Unanswered

Question 2

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The legal form of business organization most often utilized in the United States is the ______.

corporation limited liability company partnership

➔

sole proprietorship

Unanswered

Question 3

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A characteristic of a sole proprietorship is that ______. ➔

its owner is responsible for the payment of all legal and tax judgments against the business its owner is accountable to a board of trustees it can pay a dividend to its owner

lenders get to choose to whom they want to make a loan, and they prefer making loans to sole proprietorships because sole proprietorships have only one owner

Question 4

0 / 1 pts

A characteristic of a sole proprietorship is that ______.

it can sell stock in the business

➔

its owner has unlimited liability with regard to the business its owner is accountable to a board of directors it can pay a salary to its owner

Unanswered

Question 5

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A characteristic of a partnership is that ______.

its income is taxed double−taxed its dividends are not guaranteed but occur at the pleasure of the board of directors

➔

it is an association of two or more persons who carry on a business as co−owners for a profit it must include both general and limited partners

Unanswered

Question 6

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A characteristic of a partnership is that ______.

it can pay a salary to its owner

➔

it can pay a distribution to its owner its owners are accountable to a board of trustees its owners are called “members”

Unanswered

Question 7 A characteristic of a general partnership is that ______.

it can sell common stock in the business

➔

its owners have unlimited liability with regard to the business its owners are accountable to a board of directors

0 / 1 pts

lenders get to choose to whom they want to make a loan, and they prefer making loans to partnerships because the owners are usually professionals like accountants, architects, and attorneys

Unanswered

Question 8

0 / 1 pts

A characteristic of a C corporation is that ______.

its owners are personally liable for any debts of the business its owners have unlimited liability with regard to the business

➔

there is significant ongoing paperwork required to properly maintain a corporation its owners are called “members”

Unanswered

Question 9

0 / 1 pts

A characteristic of a C corporation is that ______.

its owners are responsible for the payment of all legal and tax judgments against the business it can pay its owners a distribution

➔

its board of directors elects the officers of the corporation

venture capitalists and angels often won’t invest because they don’t want pass−through income on their personal income tax returns

Unanswered

Question 10

0 / 1 pts

A characteristic of a C corporation is that ______.

its owners have total control over the business

➔

it can sell preferred stock in the business its owners can write off the initial losses often suffered by a start−up on their personal income tax returns its owners must be “natural persons,” which means business entities may not be owners

Unanswered

Question 11 A characteristic of an S corporation is that ______.

0 / 1 pts

its owners are personally liable for any debts of the business its owners have unlimited liability with regard to the business

➔

transfer of ownership is easy because the transfer of stock is easy its owners are called “members”

Unanswered

Question 12

0 / 1 pts

A characteristic of an S corporation is that ______.

its owners are responsible for the payment of all legal and tax judgments against the business it can pay its owners a dividend

➔

its board of directors elects the officers of the corporation its income is double taxed

Unanswered

Question 13

0 / 1 pts

A characteristic of an S corporation is that ______.

its owners have total control over the business it can sell preferred stock in the business it is not permitted to have only one owner

➔

its owners must be “natural persons,” which means business entities may not be owners

Unanswered

Question 14 A characteristic of a typical limited liability company is that ______.

its owners are personally liable for any debts of the business its owners have unlimited liability with regard to the business its owners elect a board of directors

➔

its owners are called “members”

0 / 1 pts

Question 15

0 / 1 pts

A characteristic of a typical limited liability company is that ______.

its owners are responsible for the payment of all legal and tax judgments against the business it can pay its owners a dividend

➔

it can pay its owners a distribution its income is double taxed

Unanswered

Question 16

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A characteristic of a typical limited liability company is that ______.

its board of directors elects the officers of the corporation it can sell preferred stock in the business it is not permitted to have only one owner

➔ some venture capitalists won’t invest because LLCs are pass−through entities whose income certain limited partners of venture capital firms are legally prohibited from receiving

Unanswered

Question 17

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Which of the following is not true about a sole proprietorship?

It must obtain any needed licenses or permits to operate, just like any other business.

It must register to collect and remit any applicable sales taxes, just like any other business.

➔

Unlike most other businesses, it is not permitted to have employees.

Unlike most other businesses, its creation does not require the filing of any formal paperwork with the business’s applicable state.

Unanswered

Question 18 Which of the following is true about a limited partnership? ➔

A limited partnership consists of one or more general partners and one or more limited partners.

A limited partnership may have no more than 100 partners.

0 / 1 pts

Each partner in a limited partnership has unlimited liability with regard to the business.

None of the partners in a limited partnership has unlimited liability with regard to the business.

Unanswered

Question 19

0 / 1 pts

Which of the following is not true about a limited partner? ➔

A limited partner is 100 percent liable for the acts of the partnership.

A limited partner generally functions as an investor whose liability is limited to the amount he invests in the partnership.

A limited partner doesn’t play an active role in the business.

A limited partner can inadvertently dissolve his role as a limited partner—and become liable as a general partner—if he begins to take an active role in the management of the company.

Unanswered

Question 20

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Which of the following is not a pass−through entity?

An S corporation.

➔

A C corporation.

A limited partnership.

A partnership.

Unanswered

Question 21

0 / 1 pts

It is usually easier for a C corporation to obtain equity financing compared to businesses organized in alternative legal forms because ______.

a C corporation’s profits are double taxed

➔ due to securities regulations, tax concerns, and their own legal form of business organization, many investors can or will invest only in C corporations a C corporation is limited to 100 shareholders, which is attractive to investors

a C corporation’s owners have total control over the business since there is no board of directors, only a board of advisors

Unanswered

Question 22

0 / 1 pts

It is usually easier for a C corporation to obtain debt financing compared to businesses organized in alternative legal forms because ______.

a C corporation can issue stock a C corporation has a board of advisors who act as fiduciaries for the corporation’s lenders

due to securities regulations, tax concerns, and their own legal form of business organization, many investors can or will invest only in C corporations.

➔ lenders get to choose to whom they want to make a loan, and, as a result, business credit is often reserved for larger, more sophisticated businesses that have a formal legal structure in place, like a corporation

Unanswered

Question 23

0 / 1 pts

Which of the following is an advantage associated with C corporations?

A C corporation’s shareholders cannot write off the initial losses often suffered by a start−up on their personal income tax returns.

Dividends to the C corporation’s common shareholders are not guaranteed and occur at the pleasure of the board of directors.

➔ Beyond issuing just common stock, a C corporation has the ability to issue convertible notes, preferred stock, and stock options and also to develop and maintain other sophisticated debt, equity, or compensation offerings that other legal forms of business generally cannot.

There is significant ongoing paperwork required to properly maintain a corporation.

Unanswered

Question 24

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A limited liability company (LLC) where all of the members participate in managing the business is called ______.

a manager−managed LLC a corporate−managed LLC

➔

a member−managed LLC a consensus−managed LLC

Question 25

0 / 1 pts

What did the Tax Cuts and Jobs Act of 2017 accomplish?

increased the corporate tax rate to 21 percent

➔

reduced the corporate tax rate to 21 percent made sole proprietorships as a legal form of business illegal starting in 2025

made the S corporation—or the LLC taxed as an S corporation—a more attractive legal form of business than in the past

Unanswered

Question 26

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The Tax Cuts and Jobs Act of 2017 introduced ______. ➔

an up to 20 percent deduction of the qualified business income of certain pass−through businesses an up to 50 percent deduction of the qualified business income of certain pass−through businesses an up to 20 percent deduction of the qualified business income of certain C corporations an up to 50 percent deduction of the qualified business income of certain C corporations

Unanswered

Question 27

0 / 1 pts

Which of the following is not true about nonprofits?

Nonprofits are largely funded by grants and donations.

Nonprofits can be staffed by both volunteers and employees.

Nonprofits can pay their directors and employees—and provide them with employee benefits—within reason.

➔

Upon their creation, nonprofits are automatically exempt from paying federal income taxes.

Unanswered

Question 28

0 / 1 pts

Some states impose corporate income tax or gross receipts tax on C corporations and entities taxed as C corporations. The only states that levy neither a corporate income tax nor a gross receipts tax are ______.

Hawaii and Alaska

➔

South Dakota and Wyoming

Minnesota and Wisconsin Rhode Island and Delaware

Unanswered

Question 29

0 / 1 pts

Items that fall under the general category of “payroll taxes” for a typical business owner include ______.

withholdings from employee paychecks for individual federal, state, and local income taxes, social security, and Medicare

withholdings from employee paychecks for individual federal, state, and local income taxes, and withheld and accrued social security and Medicare

withholdings from employee paychecks for individual federal, state, and local income taxes, withheld and accrued social security and Medicare, and federal and state unemployment

➔ withholdings from employee paychecks for individual federal, state, and local income taxes, withheld and accrued social security and Medicare, federal and state unemployment, and workers’ compensation

Unanswered

Question 30

0 / 1 pts

What is true for the owners of pass−through entities who are owners of an S corporation or an entity taxed as an S corporation?

Workers’ compensation is not a tax−deductible expense.

Federal and state unemployment and workers’ compensation are not tax−deductible expenses.

➔ Social security and Medicare taxes do not apply to the pass−through profits remaining after “reasonable” salaries have been paid to the owner−employees.

The owner pays both sides of the social security and Medicare taxes due related to the profit that flows through to his individual tax return, but he gets a small discount via IRS Schedule SE and the ability to deduct half of the tax paid on his IRS Form 1040.

Unanswered

Question 31 Owner earnings processed through a payroll system are, in most states, subject to ______.

state unemployment state and federal unemployment

0 / 1 pts

state unemployment and workers’ compensation

➔

state and federal unemployment and workers’ compensation

Unanswered

Question 32

0 / 1 pts

Workers’ compensation is a form of state−based social insurance ______.

paid for by employees paid for by employees and employers

➔

paid for by employers paid for by employers, though they get no benefit from it

Unanswered

Question 33

0 / 1 pts

Which of the following statements is not true?

The larger the percentage of his company that he owns, the more the business owner feels not only the pain of every tax dollar paid by himself as an individual, but also the pain of every tax dollar paid by his business.

A 100 percent owner−employee of an entity taxed as a C or an S corporation is effectively paying both sides of the social security and Medicare taxes related to any salary he may take. He is also absorbing the full effect of any unemployment or workers’ compensation paid related to that salary.

➔ A 100 percent owner−employee of a C corporation does not feel the effect of any corporate income taxes paid by his corporation.

A 100 percent owner−employee of a C corporation is absorbing the full effect of any corporate income taxes paid by his corporation.

Unanswered

Question 34 Ordinary dividends are dividends that ______.

relate to common stock only relate to preferred stock only are the same as qualified dividends

➔

are, by definition, dividends that are not qualified dividends

0 / 1 pts

Unanswered

Question 35

0 / 1 pts

Which of the following statements is not true?

Qualified dividends are—in most instances—taxed at a lower rate than ordinary dividends.

The federal tax rates on long−term capital gains are generally lower than the federal tax rates on ordinary income.

Workers’ compensation, federal unemployment, state unemployment, social security, and Medicare taxes do not apply to capital gains or dividends.

➔

Capital gains and dividends are generally not taxed at the state level.

Unanswered

Question 36

0 / 1 pts

Which statement is true about the U.S. tax code? ➔

It has been made more complicated by the Tax Cuts and Jobs Act of 2017.

It has been simplified by the Tax Cuts and Jobs Act of 2017.

It clearly indicates that the best legal form of business for tax purposes is the S corporation.

It clearly indicates that the best legal form of business for tax purposes is the C corporation.

Unanswered

Question 37

0 / 1 pts

Some states require that the founders who create a nonprofit set the entity up as ______.

an LLC

➔

a corporation a limited liability partnership a state joint venture

Unanswered

Question 38

0 / 1 pts

The founders of a corporation can easily lose the ability to affect the direction and operation of the entity they create if they fail to establish themselves as ______.

members of the board of directors officers of the corporation

➔

both members of the board of directors and officers of the corporation

members of the board of directors, officers of the corporation, and members of the corporation’s audit committee

Unanswered

Question 39

0 / 1 pts

Partnership as a legal form exists in what general forms in the U.S.?

general partnership and limited partnership

➔

general partnership, limited partnership, and limited liability partnership general partnership, limited partnership, limited liability partnership, and limited corporate partnership general partnership, limited partnership, and limited corporate partnership

Unanswered

Question 40

0 / 1 pts

If a general partner of a general partnership dies or otherwise withdraws from his role as partner, under the default regulations of many states, when no written partnership agreement exists ______. ➔

the general partnership automatically dissolves ownership of the partnership assets automatically transfers to the federal government

if the partnership’s name includes the name of the deceased partner, the partnership must be re−named within 30 days a limited partner must be selected to take over management of the partnership

Unanswered

Question 41

0 / 1 pts

The legal form of business organization chosen by an entity’s founders is generally permanent and cannot be changed.

True

➔

False

Question 42

0 / 1 pts

Preferred stock is a class of ownership of a C corporation that has a higher claim on the assets and earnings of the corporation than the corporation’s common stock. ➔

True False

Unanswered

Question 43

0 / 1 pts

The 2017 Tax Cuts and Jobs Act may make the C corporation—or the LLC taxed as a C corporation—a less attractive legal form of business than in the past.

True

➔

False

Unanswered

Question 44

0 / 1 pts

Like a franchise, a nonprofit is not, in and of itself, a legal form of business. ➔

True False

Unanswered

Question 45

0 / 1 pts

The distributions received by owners of pass−through entities are not themselves taxed. The taxation of a business’s profits and the distributions to its owners may, in fact, occur quite independently of each other in terms of timing. ➔

True False

Unanswered

Question 46

0 / 1 pts

It is usually worthwhile for a business owner to investigate the tax incentives available to their business— as well as the relevant state and local income tax rates that will apply to the profits of the business—when considering where to locate or expand the business.

➔

True False

Unanswered

Question 47

0 / 1 pts

Distributions are always superior tax−wise to other types of cash harvest (dividends, salary, or capital gain).

True

➔

False

Unanswered

Question 48

0 / 1 pts

The problem with harvesting cash from a company via capital gain is that—while it is an option available to any legal form of business—it involves selling all or part of the company. ➔

True False

Unanswered

Question 49

0 / 1 pts

An S corporation is the formal corporate form of all corporations, by default, unless the corporation meets certain requirements and proactively requests C corporation tax status from the Internal Revenue Service.

True

➔

False

Unanswered

Question 50

0 / 1 pts

If they desire to do so, the partners may execute a partnership agreement that allocates income to the partners based on metrics other than the partners’ respective business ownership percentages. ➔

True False

chapter 4

Unanswered

Question 1

0 / 1 pts

A(n) ______ is a summary of the revenue and expenses of a business over a specified period of time.

balance sheet statement of financial position

➔

income statement statement of cash flows

Unanswered

Question 2

0 / 1 pts

The financial statements of a company whose stock is publicly traded are required by the Securities and Exchange Commission (SEC) to be ______.

guaranteed every year by an independent certified public accountant (CPA)

➔

audited every year by an independent certified public accountant (CPA) approved every year by the Internal Revenue Service (IRS) audited every year by the Internal Revenue Service (IRS)

Unanswered

Question 3

0 / 1 pts

Depreciation expense represents ______.

the cumulative wearing out of certain of a business’s fixed assets over time, valued in dollars the cumulative wearing out of all of a business’s fixed assets over time, valued in dollars

➔

the wearing out of certain of a business’s fixed assets over time, valued in dollars the wearing out of all of a business’s fixed assets over time, valued in dollars

Unanswered

Question 4

0 / 1 pts

On a company's financial statements, the cost of inventory, once the company has sold it, becomes

______.

operating expense

➔

cost of goods sold accounts payable gross profit

Unanswered

Question 5

0 / 1 pts

On an income statement, operating income equals ______.

gross margin minus operating expenses

➔

gross profit minus operating expenses operating expenses minus interest expense operating expenses minus interest expense and income tax expense

Unanswered

Question 6

0 / 1 pts

On an income statement, for most sole proprietorships, partnerships and LLC’s, operating income minus interest expense equals ______.

nominally distributable profit earnings per share net income before income taxes

➔

net income

Unanswered

Question 7

0 / 1 pts

Dependent upon the industry in which a service business operates – and dependent upon the purpose of the financial statement itself – service businesses may present the costs to deliver services to their clients on their income statements by means of a line item called ______.

cost of returns or cost of allowances cost of goods sold or cost of services

➔

cost of services, cost of revenue, or cost of sales cost of goods sold, cost of services, cost of revenue, or cost of sales

Unanswered

Question 8

0 / 1 pts

When an income statement includes a line item called provision for income taxes, it will also include a line item called ______.

income tax expense provision for sales taxes

➔

net income before income taxes interest expense

Unanswered

Question 9

0 / 1 pts

Accumulated depreciation represents the ______. ➔

cumulative wearing out of certain of a business’s fixed assets over time, valued in dollars cumulative wearing out of all of a business’s fixed assets over time, valued in dollars wearing out of certain of a business’s fixed assets over time, valued in dollars wearing out of all of a business’s fixed assets over time, valued in dollars

Unanswered

Question 10

0 / 1 pts

On a balance sheet, accounts payable typically represents ______.

a noncurrent liability

➔ amounts owed to the vendors that provide essential products/services to the business so that the business can, in turn, produce the products/services it sells to its customers

cost of goods sold an operating expense of a product−based business

Unanswered

Question 11

0 / 1 pts

Short−term portion of long−term debt is ______.

a fabricated term (it doesn’t exist)

➔

a portion of the principal of one or more major long−term borrowings (e.g., a mortgage payable) due to be paid within the next 30 days required on the income statement

Unanswered

Question 12

0 / 1 pts

“Owners’ equity” on a balance sheet indicates ______.

a solo owner of a sole proprietorship a solo business owner who is not a shareholder of a corporation multiple business owners who are partners in a partnership

➔

multiple business owners who are neither partners in a partnership nor shareholders of a corporation

Unanswered

Question 13

0 / 1 pts

On a balance sheet, total assets must always equal ______.

total liabilities and debt net income minus that year’s dividend payments

➔

total liabilities and equity the total cash inflows to the business minus the total cash outflows of the business

Unanswered

Question 14

0 / 1 pts

The current assets on a balance sheet are typically presented in the order of least to most “liquid.”

Liquidity in relation to an asset on a balance sheet essentially refers to ______. ➔

how quickly an asset can be turned into cash the ease with which an asset can be turned into cash without significant loss of value the rate at which a business spends its cash how quickly (on average) accounts receivable are paid

Unanswered

Question 15

0 / 1 pts

On a balance sheet, ______, if it exists, is usually listed as the first current liability. ______, if it exists, is usually listed as the last current liability.

cash, prepaid insurance accounts payable; sales tax payable

➔

accounts payable; short−term portion of long−term debt land; accumulated depreciation

Unanswered

Question 16

0 / 1 pts

Which of the following statements best describes preferred stock?

It is a class of ownership of a C corporation that has a lower claim on the assets and earnings of the corporation than common stock

➔

It generally has a dividend that must be paid out before dividends can be paid to common stockholders It usually has more comprehensive voting rights than common stock It is usually only offered to people the corporation prefers

Unanswered

Question 17

0 / 1 pts

On the equity section of its balance sheet, an S corporation looks like ______.

an LLC

➔

a C corporation a partnership a sole proprietorship

Unanswered

Question 18

0 / 1 pts

Which of the following best describes the net increase (decrease) in cash on a statement of cash flows?

It is not always determinable

The net increase (decrease) plus the ending cash balance from the current year should equal the beginning cash balance on the current year’s balance sheet It is the same amount every year

➔

It represents the overall change in the company’s cash balance during the current year

Unanswered

Question 19

0 / 1 pts

The values of the assets included on a balance sheet are generally based on ______.

the assets’ market value

➔

the assets’ cost the asset values provided by a paid professional asset appraiser the best guess of the CEO of the applicable company

Unanswered

Question 20

0 / 1 pts

Which of the following is not true?

The primary difference between the income statement of a C corporation or an entity taxed as a C corporation and every other type of entity is that the income statement of a C corporation or an entity taxed as a C corporation includes a line for income tax expense.

Pro forma financial statements are financial statements created by an entrepreneur that attempt to estimate the future financial results of a company based upon certain identified assumptions.

➔ On an income statement, operating expenses includes all of an enterprise’s expenses that are not included in cost of goods sold/cost of sales/cost of revenue/cost of services.

Beyond just annual financial statements, investors, lenders, or others might require monthly or quarterly financial statements for the business.

Unanswered

Question 21

0 / 1 pts

If net income for 2025 was $356,000, retained earnings as of 12/31/24 was $262,000, retained earnings as of 12/31/25 was $304,000, and the amount of equity investment during 2025 was $200,000, the amount of dividends Landbourne Corporation paid its shareholders in 2025 was ______.

$818,000 $514,000

➔

$314,000 $114,000

Unanswered

Question 22

0 / 1 pts

If net income for 2025 was $248,000, owner’s equity as of 12/31/24 was $175,000, owner’s equity as of 12/31/25 was $100,000, and the amount of equity investment during 2025 was $150,000, the amount of cash Sam Landbourne, the owner of Landbourne Enterprises, LLC, took in the form of distributions from his company in 2025 was ______.

$673,000 $573,000

➔

$473,000 $323,000

Unanswered

Question 23

0 / 1 pts

If net income for 2025 was $410,000, retained earnings as of 12/31/24 was $325,000, dividends during 2025 were $160,000, and the amount of equity investment during 2025 was $225,000, retained earnings as of 12/31/25 for the Airborne Corporation was ______.

1,120,000 $960,000

$800,000

➔

$575,000

Unanswered

Question 24

0 / 1 pts

If net income for 2025 was $316,000, owner’s equity as of 12/31/24 was $185,000, distributions during 2025 were $155,000, and the amount of equity investment during 2025 was $215,000, owner’s equity as of 12/31/25 for Airborne Enterprises, LLC was ______.

$871,000 $716,000

➔

$561,000 $346,000

Unanswered

Question 25

0 / 1 pts

On its income statement, an S corporation most closely resembles ______. ➔

an LLC a C corporation a partnership a sole proprietorship

Unanswered

Question 26

0 / 1 pts

______ is a balance sheet subtotal made up of major assets that will likely not be converted into cash within the next 12 months.

Total current assets Total assets Net fixed assets

➔

Fixed assets

Question 27

0 / 1 pts

______ is the cumulative amount shareholders paid for the common stock of a company beyond its par value.

Deferred capital Preferred capital

➔

Paid−in capital in excess of par Provision for capital

Unanswered

Question 28

0 / 1 pts

Which of the following is not one of the three basic financial statements of a typical for−profit business?

Income Statement

➔

Statement of Equity Allocation Statement of Financial Position Statement of Cash Flows

Unanswered

Question 29

0 / 1 pts

What is the purpose of pro forma financial statements?

To audit past financial performance.

To record actual cash flows.

➔

To estimate future financial results based on assumptions.

To calculate tax liabilities.

Unanswered

Question 30 What is the main difference between audited and compiled financial statements?

Audited statements are created by entrepreneurs, while compiled ones are made by CPAs.

➔

Audited statements involve external verification; compiled statements do not provide assurance.

Compiled statements are required for public companies; audited ones are optional.

0 / 1 pts

Compiled statements analyze internal policies; audited ones do not.

Unanswered

Question 31

0 / 1 pts

______ typically require audited financial statements.

Privately held companies Small businesses without investors

➔

Companies listed on public stock exchanges Sole proprietorships

Unanswered

Question 32

0 / 1 pts

What is the primary function of an accounting information system in an entrepreneurial business?

To manage employee payroll and benefits.

To automate marketing and customer outreach.

➔

To provide data for financial statements and tax filings.

To control inventory and procurement only.

Unanswered

Question 33

0 / 1 pts

An entrepreneur may choose to hire an outside accountant to set up the accounting information system because ______.

it is a legal requirement for all new businesses it guarantees increased revenue and sales it eliminates the need for accounting software

➔

it saves time and helps avoid costly accounting and tax issues

Unanswered

Question 34 On an income statement, net sales represent ______.

0 / 1 pts

➔

sales minus returns and allowances sales after deducting operating expenses sales plus allowances sales before taxes and depreciation

Unanswered

Question 35

0 / 1 pts

What are typically omitted from operating expenses?

salaries depreciation

➔

cost of goods sold utilities

Unanswered

Question 36

0 / 1 pts

What is the primary difference between the income statements of a C corporation and other entities like sole proprietorships or partnerships?

C corporations report revenue but not expenses.

➔

C corporations include a provision for income taxes.

C corporations exclude depreciation expense.

C corporations combine sales and cost of goods sold into one line.

Unanswered

Question 37

0 / 1 pts

The line item for ______ appears only on the income statement of a C corporation and not on one for an entity taxed as a C corporation.

net income gross profit

➔

earnings per share of common stock operating income

Question 38

0 / 1 pts

On a balance sheet, the term ______ refers to the cumulative amount a business owner has invested in the business, adjusted for net income or loss and any distributions.

retained earnings

➔

owner’s equity accounts receivable paid−in capital

Unanswered

Question 39

0 / 1 pts

Why does the equity section of a balance sheet rarely reflect the true market value of a business?

It includes the projected future earnings of the company.

It is based on the current market value of assets.

It often excludes liabilities.

➔

It is cost−based and ignores expected future income and asset appreciation.

Unanswered

Question 40

0 / 1 pts

What is a key reason individuals should approach financial statements with caution?

They always reflect the company’s highest performance.

They are prepared using uniform rules across all industries.

➔

They are created by people who can make mistakes or manipulate data.

They are audited weekly by the IRS.

Unanswered

Question 41

0 / 1 pts

A balance sheet is a summary of the assets, liabilities, and equity of a business over a specified period of time.

True

➔

False

Unanswered

Question 42

0 / 1 pts

Compiled financial statements are financial statements that have been subjected to inquiry and analytical procedures by an outside accountant who expresses limited assurance that the financial statements fairly present the financial position, performance, continued viability and risks associated with the company in question.

True

➔

False

Unanswered

Question 43

0 / 1 pts

Equity is the amount by which the liabilities exceed the assets of a business.

True

➔

False

Unanswered

Question 44

0 / 1 pts

The equity section of a balance sheet will vary in form and format dependent upon the legal form of the business. ➔

True False

Unanswered

Question 45

0 / 1 pts

Provision for income taxes is the same thing as income tax expense. ➔

True False

Unanswered

Question 46

0 / 1 pts

Deferred taxes is a balance sheet line item unique to C corporations and entities taxed as a C corporation.

➔

True False

Unanswered

Question 47

0 / 1 pts

The book value (equity section) indicated by the balance sheet of a business usually accurately reflects the market value of the business.

True

➔

False

Unanswered

Question 48

0 / 1 pts

On a balance sheet, a current asset is an item of value that is either cash or an asset that will be converted into cash within the next 30 days.

True

➔

False

Unanswered

Question 49

0 / 1 pts

Net income (also called profit and net profit) equals operating income minus interest expense for most sole proprietorships, partnerships, LLCs, and S corporations. ➔

True False

Unanswered

Question 50

0 / 1 pts

For most entrepreneurial start−ups, it is necessary to hire a full−time accountant (as an employee of the organization) to manage the accounting information system and prepare year−end financial statements, tax documents, and tax returns.

True

➔

False

chapter 5

Unanswered

Question 1

0 / 1 pts

Vertical analysis is ______.

an entrepreneur’s best attempt to predict the future operational effectiveness, profitability, and cash flows of a business, often with the goal of obtaining funding for the business

➔ the process of using a single line item on a financial statement as a constant and determining how all the other line items relate as a percentage of that constant

determining the percentage increase or decrease in each line of a financial statement from a base time period to a successive time period

the form of analysis most relevant to a business owner contemplating adding a new product or service to his company’s offerings or an entrepreneur contemplating starting a new venture

Unanswered

Question 2

0 / 1 pts

Vertical analysis of an income statement is carried out by ______.

using total assets as a constant and dividing every figure on the income statement by total assets using equity as a constant and dividing every figure on the income statement by equity using net sales as a constant and multiplying every figure on the income statement by net sales

➔

using net sales as a constant and dividing every figure on the income statement by net sales

Unanswered

Question 3 Vertical analysis of a balance sheet is carried out by ______. ➔

using total assets as a constant and dividing every figure on the balance sheet by total assets using equity as a constant and dividing every figure on the balance sheet by equity using net sales as a constant and multiplying every figure on the balance sheet by net sales using net sales as a constant and dividing every figure on the balance sheet by net sales

0 / 1 pts

Question 4

0 / 1 pts

Horizontal analysis is ______.

an entrepreneur’s best attempt to predict the future operational effectiveness, profitability, and cash flows of a business, often with the goal of obtaining funding for the business

the process of using a single line item on a financial statement as a constant and determining how all the other line items relate as a percentage of that constant

➔ determining the percentage increase or decrease in each line of a financial statement from a base time period to a successive time period

the form of analysis most relevant to a business owner contemplating adding a new product or service to his company’s offerings or an entrepreneur contemplating starting a new venture.

Unanswered

Question 5

0 / 1 pts

Breakeven analysis is ______.

an entrepreneur’s best attempt to predict the future operational effectiveness, profitability, and cash flows of a business, often with the goal of obtaining funding for the business

the process of using a single line item on a financial statement as a constant and determining how all the other line items relate as a percentage of that constant

determining the percentage increase or decrease in each line of a financial statement from a base time period to a successive time period

➔ the form of analysis most relevant to a business owner contemplating adding a new product or service to his company’s offerings or an entrepreneur contemplating starting a new venture

Unanswered

Question 6 A current ratio of less than one indicates ______.

a company has run out of cash a company has run out of working capital

➔

a company faces short−term challenges with regard to paying its bills a company faces long−term challenges with regard to paying its bills

0 / 1 pts

Question 7

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A customer purchase using a credit card issued by a financial institution doesn’t represent a true accounts receivable to a business because ______.

customers who use these types of credit cards usually get reward points

➔ purchases with these types of credit cards are converted by a business into cash at the business’s local bank customers can cancel a credit card purchase businesses rarely allow purchases utilizing these types of credit cards

Unanswered

Question 8

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A reserve for bad debts is ______.

an estimate of what percentage of a business’s assets are financed with debt compared to equity

an estimate of the amount of the debt included on the balance sheet that won’t be paid, typically included on the balance sheet as a contra−liability an estimate of the amount of the accounts payable included on the balance sheet that won’t be paid

➔ an estimate of the amount of the accounts receivable included on the balance sheet that won’t be collected, typically included on the balance sheet as a contra−asset account

Unanswered

Question 9

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If this year’s sales are $900,000 and next year’s sales are expected to be $950,000, we are projecting ______. ➔

an approximate 5.56% increase in sales an approximate 5.26% increase in sales an approximate 5.56% decrease in sales an approximate 5.26% decrease in sales

Unanswered

Question 10

0 / 1 pts

If this year’s sales are $950,000 and next year’s sales are expected to be $900,000, we are projecting ______.

an approximate 5.56% increase in sales an approximate 5.26% increase in sales an approximate 5.56% decrease in sales

➔

an approximate 5.26% decrease in sales

Unanswered

Question 11

0 / 1 pts

A business ended 12/31/25 and 12/31/24 with net accounts receivable balances of $313,432 and $378,699, respectively. Net credit sales for 2025 and 2024 were $4,533,299 and $5,106,447, respectively.

This business’s accounts receivable turnover for 2025 was approximately ______.

14.76 14.46

➔

13.10 11.97

Unanswered

Question 12

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Given that a business has an accounts receivable turnover of 11, the business’s approximate average collection period is ______.

11 days 30 days

➔

33 days 45 days

Unanswered

Question 13

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Given that a business has an inventory turnover of 12, on average, the business sells −− and has to replace −− its inventory every ____ days or so.

12 days

➔

30 days 33 days 45 days

Unanswered

Question 14

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Breakeven revenue equals ______. ➔

the amount of revenue that must be brought in over an indicated period of time in order to not lose money

the minimum price at which a product or service must be sold—under a given set of cost and sales unit conditions—in order to not lose money the number of units that must be sold over an indicated period of time in order to not lose money the number of units that must be manufactured over an indicated period of time in order to not lose money

Unanswered

Question 15

0 / 1 pts

Unit contribution is ______.

the amount of sales price left over after profit per unit has been considered the amount of sales price left over after applicable variable and fixed costs have been considered the amount of sales price left over after applicable fixed costs have been considered

➔

the amount of sales price left over after applicable variable costs have been considered

Unanswered

Question 16

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Note that a new product line—or any new product or service being evaluated using breakeven analysis— may have ______.

indirect fixed costs indirect fixed costs or allocated fixed costs indirect fixed costs, allocated fixed costs, and both indirect and allocated fixed costs

➔

direct fixed costs, allocated fixed costs, both direct and allocated fixed costs, or neither type of fixed cost

Unanswered

Question 17 When calculating breakeven units, one ______. ➔

should always round up to the next whole unit

0 / 1 pts

should always round down to the next whole unit should always round to the closest decimal should never round the result

Unanswered

Question 18

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Breakeven price will change ______.

when revenue changes when either revenue changes or net revenue changes when the way in which we allocate revenue across products changes

➔

when either variable cost changes or fixed costs change

Unanswered

Question 19

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Which type of financial statements would be most useful if an entrepreneur is trying to evaluate a company’s past performance?

pro forma financial statements projected income statements

➔

historical financial statements comparative balance sheets

Unanswered

Question 20

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If the purpose of financial analysis is to improve a company’s future performance, which type of financial statements should be used?

only historical financial statements only pro forma financial statements cash flow statements

➔

both historical and pro forma financial statements

Question 21

0 / 1 pts

Anusha is an entrepreneur who is conducting a breakeven analysis. She is most likely trying to ______.

compare profit margins over several years determine the value of total assets identify problems in past business operations

➔

decide whether to introduce a new product or start a new business

Unanswered

Question 22

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Which of the following is not one of the four commonly used methods of financial statement analysis?

vertical analysis horizontal analysis

➔

market trend analysis ratio analysis

Unanswered

Question 23

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If an entrepreneur is trying to decide whether to start a business, they should primarily use ______ financial statements.

historical audited

➔

pro forma consolidated

Unanswered

Question 24

0 / 1 pts

______ analysis compares financial data over multiple time periods to identify trends and changes in performance.

Vertical

➔

Horizontal

Ratio Breakeven

Unanswered

Question 25

0 / 1 pts

Vertical analysis compares each line item on a financial statement to a common base. On the income statement, this common base is usually ______.

gross profit total assets net income

➔

net sales

Unanswered

Question 26

0 / 1 pts

In vertical analysis, the percentage of net sales is calculated using the formula: (Amount of applicable income statement line item divided by ______) x 100.

gross profit net income

➔

net sales total liabilities

Unanswered

Question 27

0 / 1 pts

Horizontal analysis is primarily used to ______.

identify fraud in accounting records determine relationships between line items in a single period compare financial performance across different companies

➔

calculate percentage changes in line items over time

Unanswered

Question 28

0 / 1 pts

The formula for calculating percentage change in horizontal analysis is: [(New amount – Old amount) divided by ______] x 100.

new amount

➔

old amount gross profit net sales

Unanswered

Question 29

0 / 1 pts

Comparative financial statements are useful in horizontal analysis because they ______. ➔

present multiple periods side by side for easy comparison combine income statements and balance sheets into one report omit detailed expenses for simplicity highlight only profitable years

Unanswered

Question 30

0 / 1 pts

If returns and operating expenses are increasing faster than sales, the most likely outcome is ______.

increased profitability

➔

decreased net income despite higher sales decreased gross profit but higher net income improved financial ratios

Unanswered

Question 31 In vertical analysis of a balance sheet, which line item is always equal to 100%?

net income retained earnings

➔

total assets total liabilities

0 / 1 pts

Unanswered

Question 32

0 / 1 pts

Vertical analysis of a balance sheet uses the formula: (Amount of applicable balance sheet line item divided by ______) × 100.

net sales total liabilities gross profit

➔

total assets

Unanswered

Question 33

0 / 1 pts

A large percentage increase in liabilities without a corresponding increase in assets may suggest the need to ______. ➔

investigate how borrowed funds were used ignore the issue since liabilities are common lower product prices immediately increase employee wages

Unanswered

Question 34

0 / 1 pts

What insight can vertical and horizontal analysis of a balance sheet provide together?

a better understanding of marketing trends the company's tax obligations

➔

a complete picture of financial strengths and weaknesses the value of historical financial data

Unanswered

Question 35 Working capital is calculated by subtracting ______ from a company’s current assets.

total liabilities equity

0 / 1 pts

➔

current liabilities cost of goods sold

Unanswered

Question 36

0 / 1 pts

The formula for accounts receivable turnover is: credit sales divided by ______.

gross profit

➔

average net accounts receivable total accounts payable operating income

Unanswered

Question 37

0 / 1 pts

Inventory turnover is calculated by dividing cost of goods sold by ______.

net sales average equity

➔

average inventory total current assets

Unanswered

Question 38

0 / 1 pts

A times−interest−earned ratio of 9.58 means that ______.

the company can pay its interest expense 9.58 times with its net income the company’s interest payments are too high the company’s debt−to−equity ratio is too high

➔

the company earned enough operating income to cover its interest 9.58 times

Unanswered

Question 39

0 / 1 pts

A return on assets (ROA) of 17.19% means the company generates about ______ of profit for every dollar

of assets it holds. ➔

$0.17 $0.24 $1.71 $0.71

Unanswered

Question 40

0 / 1 pts

Breakeven is the point at which a business’s or product line’s ______ equals zero.

gross margin fixed costs

➔

net income total revenue

Unanswered

Question 41

0 / 1 pts

On a comparative financial statement, the most recent information may be presented either to the left or to the right of older information. ➔

True False

Unanswered

Question 42

0 / 1 pts

A fixed cost is a cost that varies in total with a change in the volume of production or sales but is fixed on a per unit basis.

True

➔

False

Unanswered

Question 43

0 / 1 pts

For a business, breakeven is the point where the business’s revenue equals zero. For a product line,

breakeven is the point at which that product line’s revenue equals zero.

True

➔

False

Unanswered

Question 44

0 / 1 pts

The percentages associated with the vertical analysis of an income statement add and subtract just as the income statement lines they are associated with add and subtract. ➔

True False

Unanswered

Question 45

0 / 1 pts

Horizontal analysis of a balance sheet is performed the same way as horizontal analysis of an income statement. ➔

True False

Unanswered

Question 46

0 / 1 pts

When doing vertical analysis of a balance sheet, the total assets line and the total liabilities and equity line will both equal 100%. ➔

True False

Unanswered

Question 47

0 / 1 pts

For purposes of breakeven analysis, all the costs of a business are ultimately categorized as being either fixed or variable. ➔

True False

Unanswered

Question 48

0 / 1 pts

When performing vertical analysis of an income statement, we use sales as the constant if there is no line for net sales on the income statement. ➔

True False

Unanswered

Question 49

0 / 1 pts

The purpose of doing vertical, horizontal, and ratio analysis is to compare your company’s most recent performance against its past performance and the performance of other companies in your industry. ➔

True False

Unanswered

Question 50

0 / 1 pts

Allocated fixed costs are generally allocated according to strict Internal Revenue Service (IRS) guidelines.

True

➔

False

chapter 6

Unanswered

Question 1

0 / 1 pts

The amount for which an asset is expected to be sold after a business has fully depreciated the asset and ceased using it is called ______.

net fixed asset value cost accumulated depreciation

➔

salvage value

Unanswered

Question 2

0 / 1 pts

The sales price for an item that costs $10, assuming a retailer wishes to achieve a target margin of 20%, would equal ______.

$50.00

➔

$12.50 $12.00 $8.00

Unanswered

Question 3

0 / 1 pts

Some financial statements include a reminder at the bottom of the statement about how the inexactness of ______ can cause discrepancies.

bottom−up sales target margins

➔

rounding depreciation

Unanswered

Question 4

0 / 1 pts

Which of the following statements is false?

All pro forma financial statements are an entrepreneur’s best guess of the future based on research and logic.

If the research that underlies pro forma financial statements is poor, the financial statements will be of little value.

There’s no such thing as a “correct” pro forma financial statement.

➔ The only reason an entrepreneur needs to create pro forma financial statements is if a potential investor or lender requests them.

Unanswered

Question 5

0 / 1 pts

Which of the following is true regarding estimating sales for a brand−new venture?

As much as reasonably possible, sales need to be estimated from the top down rather than built from the bottom up.

➔ As much as reasonably possible, sales need to be built from the bottom up rather than estimated from the top down.

As much as reasonably possible, the entrepreneur should avoid estimating sales for a brand−new venture.

As much as reasonably possible, the entrepreneur should overestimate the sales for a brand−new venture.

Unanswered

Question 6

0 / 1 pts

If Luis is conducting primary market research before starting a food truck business, whose information should be the most important to him?

other owners of food truck businesses potential investors

➔

potential customers financial experts

Unanswered

Question 7 A pro forma financial statement should always be completed before ______.

hiring employees

0 / 1 pts

launching a marketing campaign

➔

starting a new business filing for a trademark

Unanswered

Question 8

0 / 1 pts

Like most lenders, the Small Business Administration will typically require ______ before guaranteeing a loan.

an expected return on investment a list of capital needs

➔

a pro forma financial statement a breakeven analysis on prices

Unanswered

Question 9

0 / 1 pts

If a potential investor understands the ______, they will be more likely to believe the pro forma financial statements are reasonable estimates.

capital plan

➔

research supporting the numbers revenue model marketing pitch

Unanswered

Question 10 One purpose of creating pro forma financial statements is to ______. ➔

estimate future financial results of a business file taxes in advance determine employee satisfaction finalize supplier contracts

0 / 1 pts

Question 11

0 / 1 pts

Which of the following is most likely to request three to five years of pro forma financial statements?

product designers

➔

potential investors sales managers brand ambassadors

Unanswered

Question 12

0 / 1 pts

Which statement about pro forma financial statements is true?

They replace tax filings for a start−up business.

They do not require any assumptions or research.

➔

They are based on documented assumptions and schedules.

They are only useful after a business has already launched.

Unanswered

Question 13

0 / 1 pts

An entrepreneur will want to develop ______ to show to investors,

only verbal investor pitches

➔

a pro forma income statement and balance sheet a list of business partners’ hobbies a press release template

Unanswered

Question 14 Pro forma financial statements are most valuable when they ______.

are optimistic and forward−looking are short and general in scope

➔

are supported by thorough and documented research focus only on profit margins

0 / 1 pts

Unanswered

Question 15

0 / 1 pts

A schedule of start−up costs is designed to ______.

estimate long−term profits of a business

➔

detail all costs incurred before the first sale occurs track employee wages monitor post−launch marketing spend

Unanswered

Question 16

0 / 1 pts

The creation of a schedule of start−up costs begins with ______.

analyzing current cash flow projecting sales forecasts calculating net profit margin

➔

a list of words

Unanswered

Question 17

0 / 1 pts

Which of the following best defines the purpose of industry research for entrepreneurs?

developing employee handbooks

➔

understanding industry trends, competitors, and market conditions writing business slogans setting retail prices without data

Unanswered

Question 18 One important benefit of developing a schedule of start−up costs is that it ______. ➔

helps determine if the current funding is sufficient guarantees profitability in year one

0 / 1 pts

sets pricing for the first year automatically generates financial reports

Unanswered

Question 19

0 / 1 pts

The ______ of pro forma financial statements depends on the quality of the research behind them.

length timing

➔

worth format

Unanswered

Question 20

0 / 1 pts

If the entrepreneurs have $150,000 to start the business and the total start−up costs are $120,250, what conclusion can be drawn?

They need a second investor.

➔

They currently have sufficient funds.

They must delay their launch.

They should cut the inventory budget.

Unanswered

Question 21

0 / 1 pts

Which financial statement helps an entrepreneur determine how much cash is available at the end of the start−up phase? ➔

pro forma pre−revenue balance sheet annual income statement pro forma cash flow statement statement of retained earnings

Unanswered

Question 22

0 / 1 pts

Yolanda chargers the cost and receives payment before she completes the service her business offers, She should record it as a ______.

payable revenue current liability

➔

prepaid asset

Unanswered

Question 23

0 / 1 pts

On a pro forma pre−revenue balance sheet, clothing inventory and checkout counters are classified as ______.

current liabilities expenses

➔

assets prepaid costs

Unanswered

Question 24

0 / 1 pts

Which of the following items would most likely appear on the expense statement rather than the balance sheet?

computers and software clothing inventory

➔

utilities expense prepaid insurance

Unanswered

Question 25

0 / 1 pts

A total of $150,000 deposited at the beginning of the start−up phase is reflected in the reconciliations as ______.

net income and capital gains

➔

beginning cash and beginning owners’ equity operating revenue and current assets

retained earnings and prepaid assets

Unanswered

Question 26

0 / 1 pts

A(n) ______ is an amount owed that must be paid within the next 12 months. ➔

current liability fixed cost revenue obligation intangible asset

Unanswered

Question 27

0 / 1 pts

A company’s first pro forma income statement is often created on a quarterly basis because ______.

all businesses are required to file taxes quarterly monthly financial data is unreliable

➔

some industries, like retail, operate on a seasonal schedule quarterly statements are easier to audit

Unanswered

Question 28

0 / 1 pts

What is the primary purpose of developing a list of assumptions before preparing pro forma financial statements?

To define marketing strategies.

To establish the legal structure of the business.

To finalize pricing.

➔

To inform projections of revenue, expenses, and operations.

Unanswered

Question 29 Primary market research involves ______.

0 / 1 pts

analyzing industry publications

➔

directly gathering data from current or potential customers reviewing government databases consulting with internal employees

Unanswered

Question 30

0 / 1 pts

The straight−line, half−year convention depreciation method means ______.

full depreciation occurs in the first year no depreciation is recorded until year two

➔

half depreciation is recorded in the first and last years depreciation expense is calculated the same way every year

Unanswered

Question 31

0 / 1 pts

Cost of goods sold (COGS) represents ______.

marketing and advertising expenses salaries and wages

➔

the direct cost of products sold during a specific period overhead and administrative fees

Unanswered

Question 32 A 10% quarterly increase in COGS is most likely represented in a spreadsheet using ______.

a pivot table hardcoded values a pie chart

➔

a formula linked to a separate assumption cell

0 / 1 pts

Question 33

0 / 1 pts

What is the correct formula to estimate a product’s sales price based on expected margin?

Cost + Margin Cost × Margin

➔

Sales = Cost ÷ (1 – Margin) Sales = Margin ÷ Cost

Unanswered

Question 34

0 / 1 pts

Which of the following is an example of the wrong way to estimate future sales? ➔

estimating 1% of a $1b market without supporting data building from cost and margin assumptions using primary market research calculating sales per product line and scaling

Unanswered

Question 35

0 / 1 pts

Which of the following is a good practice when creating financial spreadsheets for pro forma statements?

Avoid using formulas to speed up input.

➔

Use dynamic formulas and isolate key cells.

Round all calculations manually.

Create separate spreadsheets for each month only.

Unanswered

Question 36

0 / 1 pts

Which of the following best describes the purpose of using spreadsheets with formulas when creating pro forma financial statements?

To make the statements visually appealing.

To reduce the need for market research.

To eliminate the need for accounting software.

➔

To ensure automatic recalculations when assumptions change.

Unanswered

Question 37

0 / 1 pts

The first pro forma income statement for a business that opens on October 1st and reports quarterly will typically cover a total of ______ quarters.

3 4

➔

5 6

Unanswered

Question 38

0 / 1 pts

Which of the following statements about primary market research is most accurate?

It involves analyzing trade journals and competitor websites.

It is less reliable than secondary data from published sources.

It should be avoided when launching a start−up due to cost.

➔

It is conducted by communicating directly with current or potential customers.

Unanswered

Question 39

0 / 1 pts

Using the straight−line, half−year convention, an asset with a depreciable value of $47,000 and a useful life of 5 years would have a first−year depreciation expense of ______.

$9,400

➔

$4,700 $23,500 $5,875

Unanswered

Question 40 Which of the following best describes the bottom−up approach to estimating sales?

0 / 1 pts

➔

Starting with unit−level cost and margin data to build detailed sales projections.

Assuming a percentage of a large market and calculating total annual revenue.

Using the business owner’s opinion on projected success.

Estimating market size first and then setting sales goals based on it.

Unanswered

Question 41

0 / 1 pts

A schedule of start−up costs, like many schedules the entrepreneur will create, begins with a list of words, rather than numbers. ➔

True False

Unanswered

Question 42

0 / 1 pts

The amount added to the cost of a good to determine its sales price is called markup. ➔

True False

Unanswered

Question 43

0 / 1 pts

A business commencing its operations late in the year can create the need for a first pro forma income statement for the business that incorporates more than one year. ➔

True False

Unanswered

Question 44

0 / 1 pts

Primary market research is performed to provide insight regarding the size and complexity of an industry, the number and nature of its participants, and the economic, political, market, and other factors that affect it.

True

➔

False

Unanswered

Question 45

0 / 1 pts

A top−down approach to estimating sales is preferable to a bottom−up approach.

True

➔

False

Unanswered

Question 46

0 / 1 pts

An entrepreneur will prepare reconciliations of cash and equity in concert with the creation of a pre−revenue balance sheet, but the preparation of such reconciliations is unnecessary with regard to the first post−revenue balance sheet.

True

➔

False

Unanswered

Question 47

0 / 1 pts

Percentage increases or decreases in expenses—or the lack thereof—are usually mirrored in their related prepaids or payables. ➔

True False

Unanswered

Question 48

0 / 1 pts

One way to determine the expected sales amount for an item or group of items is to divide the cost of the item or group of items by the expected margin for that item or group of items.

True

➔

False

Question 49

0 / 1 pts

Every time the pro forma income statements (or early pro forma balance sheets) are updated with new information, every existing pro forma balance sheet, reconciliation of cash, reconciliation of equity, and statement of cash flows dated on or after that change will also have to be updated. ➔

True False

Unanswered

Question 50

0 / 1 pts

When a business sells many different products with different variable costs at different prices, it makes more sense to calculate breakeven revenue for the business instead of calculating breakeven sales units and breakeven price for each product. ➔

True False

chapter 7

Unanswered

Question 1

0 / 1 pts

The first pro forma post−revenue balance sheet is typically created to be compared with the ______ to show financial progress during initial operations.

reconciliation of cash schedule of start−up costs pro forma income statement

➔

pro forma pre−revenue balance sheet

Unanswered

Question 2

0 / 1 pts

Which of the following is not included in the calculation of owners’ equity at the end of the period if the business is not a corporation?

beginning equity

➔

retained earnings current period net income expected distributions to owners

Unanswered

Question 3

0 / 1 pts

If a payable increases during the period, it is treated on the cash reconciliation as a(n) ______.

use of cash expense

➔

source of cash depreciation adjustment

Unanswered

Question 4

0 / 1 pts

What is the correct formula for calculating retained earnings at the end of a period for a non−corporate entity?

Beginning earnings + New equity investment – Dividends or Distributions Beginning earnings – Expenses + Inventory Beginning earnings + Cash inflows – Cash outflows

➔

Beginning earnings + Net income – Dividends or Distributions

Unanswered

Question 5

0 / 1 pts

The accumulated depreciation at the end of a period is calculated by ______.

subtracting total net income from total equity

➔

adding current period depreciation to beginning accumulated depreciation deducting fixed asset purchases from cash dividing total liabilities by fixed asset value

Unanswered

Question 6

0 / 1 pts

The expected sales tax payable on one−third of fourth quarter 2030 sales totaling $168,372 is calculated using a 6% rate and equals ______.

$1,684

➔

$3,364 $5,050 $6,741

Unanswered

Question 7 The term “net fixed assets” appears on the post−revenue balance sheet because ______.

the assets have appreciated in value the assets have been fully sold

➔

accumulated depreciation must be subtracted from fixed assets fixed assets are recorded at resale value

0 / 1 pts

Unanswered

Question 8

0 / 1 pts

Which of the following items is not adjusted or included in the reconciliation of cash?

changes in prepaid insurance changes in payables depreciation expense

➔

retained earnings

Unanswered

Question 9

0 / 1 pts

Which of the following correctly describes the treatment of distributions on when calculating owners’ equity at the end of a period?

They are added to net income.

They are ignored if made to only one owner.

They are subtracted from beginning equity.

➔

They are subtracted after net income and investments are added.

Unanswered

Question 10

0 / 1 pts

When preparing multi−year pro forma income statements, it is important to include projections for ______ in addition to revenue and cost of goods sold.

startup grants

➔

operating expenses employee age demographics loan interest rates only

Unanswered

Question 11 Why is it beneficial to gross up cost of goods sold using average margins?

0 / 1 pts

➔

It simplifies forecasting by estimating sales from known costs.

It eliminates the need for a balance sheet.

It avoids calculating payroll and taxes.

It ensures expenses are underreported for tax purposes.

Unanswered

Question 12

0 / 1 pts

To calculate sales from cost of goods sold, the formula used is Sales amount = Cost of item ÷ ______.

(1 + Expected average margin)

➔

(1 – Expected average margin) (Cost of goods sold – markup) (Sales price × margin)

Unanswered

Question 13

0 / 1 pts

Why would a business owner want to create pro forma income statements extending several years into the future?

To estimate immediate startup costs.

To predict short−term sales only.

➔

To evaluate long−term profitability and sustainability.

To prepare for payroll changes.

Unanswered

Question 14

0 / 1 pts

If the quarterly cost of goods sold for clothing in 2031 is known, the annual cost of goods sold is found by multiplying by ______.

2 3

➔

4 12

Question 15

0 / 1 pts

Which of the following is the best reason to create a cost of goods sold schedule for future years?

To estimate employee bonuses.

To calculate sales tax.

To project inventory turnover.

➔

To predict product sales.

Unanswered

Question 16

0 / 1 pts

Which calculation is included in the final version of multi−year pro forma income statements?

estimated equipment repairs

➔

estimated sales schedule breakeven price loan application fees

Unanswered

Question 17

0 / 1 pts

If it costs Jen $5 to make a candle, what should she set the sales amount of her candle for if she expects a profit margin of 20%?

$7.50 $5.20 $25.00

➔

$6.25

Unanswered

Question 18

0 / 1 pts

Which of the following would most likely be included in the financial packet shared with an investor or lender? ➔

Pre− and post−revenue balance sheets.

Copies of customer testimonials.

Employee background checks.

Vendor invoices and receipts.

Unanswered

Question 19

0 / 1 pts

When formatting financial statements for a formal presentation, “fourth quarter 2029” may be restated as “for the ______ ended December 31, 2029.”

fiscal year six months

➔

three months calendar quarter

Unanswered

Question 20

0 / 1 pts

To help potential investors understand the long−term profitability of a business, an entrepreneur should include ______ in the pro forma financial statements package. ➔

a detailed list of assumptions and income statements the marketing plan only audited statements from competitors quarterly tax returns

Unanswered

Question 21

0 / 1 pts

Why should the list of assumptions be shared with potential investors or lenders?

It shows the business’s final cash balance.

➔

It outlines the logic and research behind the financial data.

It provides legal disclosures and disclaimers.

It serves as a replacement for the income statement.

Unanswered

Question 22

0 / 1 pts

A financial statement for Jamil’s business includes his projected revenue and expenses for the years 2030–2034. This would most likely be considered a ______.

balance sheet depreciation schedule startup cost estimate

➔

pro forma income statement

Unanswered

Question 23

0 / 1 pts

When preparing pro forma financial statements for external review, entrepreneurs may choose to exclude ______ from balance sheets to create a more formal presentation.

revenue projections

➔

reconciliation of cash and equity income tax estimates expected net income

Unanswered

Question 24

0 / 1 pts

Which of the following best describes the purpose of combining multiple pro forma income statements into one financial statement?

To eliminate the need for assumption details.

To shorten the business plan.

➔

To give potential investors a clear view of multi−year financial performance.

To avoid showing detailed quarterly changes.

Unanswered

Question 25

0 / 1 pts

Pro forma balance sheets become increasingly ______ the further they project into the future.

accurate time−saving

➔

unrealistic profitable

Unanswered

Question 26

0 / 1 pts

Why are income statements often completed before balance sheets during pro forma planning?

They include less financial detail.

➔

They are easier and quicker to prepare.

They don’t require assumptions.

They are not needed for investors.

Unanswered

Question 27

0 / 1 pts

A major reason entrepreneurs delay creating formal statements of cash flows is because a(n) ______ can usually serve as an acceptable substitute.

marketing analysis tax return invoice record

➔

reconciliation of cash

Unanswered

Question 28 Which of the following is a valid reason for postponing pro forma balance sheets for years 2–5?

Most businesses don't have expenses after year one.

Income statements don’t rely on balance sheets.

➔

Updating them requires significant time as assumptions change.

They are legally restricted by lenders.

0 / 1 pts

Unanswered

Question 29

0 / 1 pts

If an investor requests additional long−term balance sheets, the entrepreneur should prepare them only if the ______ outweighs the time and effort required.

interest rate

➔

potential reward original loan amount current cash flow

Unanswered

Question 30

0 / 1 pts

Which statement best explains why statements of cash flows are often delayed during the early financial planning process?

They are illegal to prepare before profitability.

They rely on fully audited reports.

➔

They are often unnecessary if cash reconciliations are provided.

They only apply to nonprofits.

Unanswered

Question 31

0 / 1 pts

Before creating additional pro forma financial statements, entrepreneurs are encouraged to first complete a ______ analysis. ➔

breakeven competitive market customer satisfaction social media

Unanswered

Question 32

0 / 1 pts

Why might an entrepreneur still choose to create future balance sheets, even if not initially required?

To calculate sales commissions.

To show profit distributions to customers.

To create advertising content.

➔

To demonstrate the business will not run out of cash before reaching profitability.

Unanswered

Question 33

0 / 1 pts

One drawback of creating detailed pro forma balance sheets too early is that any change to income statements requires ______.

adjusting marketing budgets only revising employee contracts

➔

updating all related balance sheets and reconciliations redoing customer surveys

Unanswered

Question 34

0 / 1 pts

Which of the following best summarizes the recommendation for handling years 2–5 of pro forma financial planning?

Always complete all financial statements up front.

Skip income statements and focus on balance sheets.

Outsource all projections to a third−party accountant immediately.

➔

Prioritize income statements and defer balance sheets, unless necessary.

Unanswered

Question 35 Which formula is used to calculate breakeven revenue?

Gross margin × Net profit Total variable costs ÷ Net sales

➔

Total fixed costs ÷ Gross margin Net sales – Total costs

0 / 1 pts

Question 36

0 / 1 pts

If gross profit is $382,883 and sales are $587,087, gross margin is approximately ______.

15.6% 45.0%

➔

65.2% 75.9%

Unanswered

Question 37

0 / 1 pts

A fixed cost is a cost that remains the same over a given period of time, regardless of ______.

interest rate changes

➔

production or sales volume product shelf life inflation rates

Unanswered

Question 38

0 / 1 pts

Calculating breakeven revenue is useful because it helps ______.

determine staffing needs predict product life cycles estimate quarterly tax payments

➔

compare expected revenue to the amount needed to avoid losses

Unanswered

Question 39 All pro forma financial statements are ultimately ______ based on research and logic.

contracts

➔

educated guesses audited records profit guarantees

0 / 1 pts

Unanswered

Question 40

0 / 1 pts

Which factor most strongly determines the credibility of a pro forma financial statement?

the number of pages in the report the formatting style used

➔

the quality of the research supporting it the name of the business owner

Unanswered

Question 41

0 / 1 pts

An increase in a payable is treated as a deduction from cash on the reconciliation of cash.

True

➔

False

Unanswered

Question 42

0 / 1 pts

Preparing pro forma income statements for future years helps entrepreneurs estimate the long−term profitability of their business. ➔

True False

Unanswered

Question 43

0 / 1 pts

The list of assumptions is important to share with investors because it explains the research and logic behind pro forma financial statements. ➔

True False

Question 44

0 / 1 pts

Investors and lenders usually require that pro forma income statements be presented separately for each year, without the option of combining them into a single financial statement.

True

➔

False

Unanswered

Question 45

0 / 1 pts

Pro forma balance sheets become more realistic the further into the future they project.

True

➔

False

Unanswered

Question 46

0 / 1 pts

A reconciliation of cash can often serve as a substitute for a formal statement of cash flows in early−stage financial planning. ➔

True False

Unanswered

Question 47

0 / 1 pts

A business should consider breakeven revenue as the minimum amount of revenue it must generate to avoid losing money. ➔

True False

Unanswered

Question 48 Gross margin is calculated by dividing net sales by gross profit.

True

0 / 1 pts

➔

False

Unanswered

Question 49

0 / 1 pts

Pro forma financial statements can be considered accurate predictions of a business’s future performance.

True

➔

False

Unanswered

Question 50

0 / 1 pts

The value of a pro forma financial statement depends heavily on the quality of the research used to create it. ➔

True False

chapter 8

Unanswered

Question 1

0 / 1 pts

The percentage of sales method involves a 7−step process, the first step of which is ______. ➔ calculating or determining the expected percentage increase or decrease in sales from the previous year to the current year

incorporating into the preliminary balance sheet those assumptions and expectations about the future of the company about which we are confident calculating subtotals and totals on the preliminary balance sheet creating a reconciliation of cash and a reconciliation of equity

Unanswered

Question 2

0 / 1 pts

The percentage of sales method involves a 7−step process, the last step of which is ______.

calculating or determining the expected percentage increase or decrease in sales from the previous year to the current year

incorporating into the preliminary balance sheet those assumptions and expectations about the future of the company about which we are confident

➔

verifying total assets equals and total liabilities and equity creating a reconciliation of cash and a reconciliation of equity

Unanswered

Question 3

0 / 1 pts

If 2030 sales were $500,000 and 2031 sales are expected to be $545,000, the expected percentage change in sales is ______.

−8.26% 8.26%

➔

9% −9%

Unanswered

Question 4

0 / 1 pts

If 2019 sales were $545,000 and 2020 sales are expected to be $500,000, the expected percentage change in sales is ______. ➔

−8.26% 8.26% 9% −9%

Unanswered

Question 5

0 / 1 pts

Which of the following statements is false regarding the preparation of a pro forma balance sheet using the percentage of sales method?

Subtotals and totals should not be determined using the percentage increase or decrease in sales.

Cash and equity should not be determined using the percentage increase or decrease in sales.

➔ Every balance sheet item other than subtotals, totals, cash and equity should be determined using the percentage increase or decrease in sales.

The cash and equity line items should reflect the balances indicated by their respective reconciliations.

Unanswered

Question 6

0 / 1 pts

The cash flows from the operating activities section of a statement of cash flows typically does all of the following except ______.

consider a business’s net income or net loss add back depreciation expense to net income or net loss

identify the dollar change in noncash current asset and current liability balance sheet line items from the beginning of the period to the end of the period

➔ include summary information regarding the purchase or sale of investments in the financial markets and the purchase or sale of fixed assets

Unanswered

Question 7

0 / 1 pts

For the most part, transforming a pro forma reconciliation of cash into a pro forma statement of cash flows involves ______.

calculating or determining the expected percentage increase or decrease in sales from the previous year to the current year

➔ reorganizing the information on the reconciliation of cash into the format required by a statement of cash flows and then adding subtotals and totals verifying total assets equals and total liabilities and equity creating a reconciliation of equity

Unanswered

Question 8

0 / 1 pts

The typical expectation regarding the disposal of a fixed asset when creating pro forma financial statements is that the fixed asset will be______.

sold for more than its cost sold for its cost

➔

assigned a salvage value of $0 sold for at least $100

Unanswered

Question 9

0 / 1 pts

Which of the following would not be included in the cash flows from financing activities section of a pro forma statement of cash flows?

Information regarding the sale or repurchase of a company’s own stock.

Information regarding the receipt of debt proceeds or the repayment of debt.

Information about the payment of dividends or distributions.

➔

Information about insurance settlement proceeds related to fixed assets.

Unanswered

Question 10

0 / 1 pts

Which of the following would not be included in the cash flows from investing activities section of a pro forma statement of cash flows?

Information regarding the purchase or sale of investments in the financial markets

➔

Information about the payment of dividends or distributions.

Information regarding the purchase or sale of fixed assets.

Information about insurance settlement proceeds related to fixed assets.

Unanswered

Question 11

0 / 1 pts

Which of the following would be included on a pro forma statement of cash flows?

An amount reclassified from long−term to short−term on a balance sheet.

An amount reclassified from short−term to long−term on a balance sheet.

The amount of a fully depreciated fixed asset with no salvage value disposed of for $0.

➔

Cash distributions to a company’s owners.

Unanswered

Question 12

0 / 1 pts

Which statement best explains why the percentage of sales method is useful in preparing a pro forma balance sheet?

It eliminates the need for making assumptions about future operations.

It provides exact projections for cash flows and revenues.

➔

It allows logical estimates of future balance sheet items based on reliable sales projections.

It replaces the need for calculating depreciation and liabilities.

Unanswered

Question 13

0 / 1 pts

The formula to calculate the percentage increase or decrease in sales is: (_____ – previous year sales) ÷ previous year sales × 100.

net income gross profit total assets

➔

current year sales

Question 14

0 / 1 pts

Once adjustments from reconciliations are made, the pro forma balance sheet is considered substantially correct if ______.

it forecasts growth it includes all marketing expenses it matches the income statement

➔

total assets equal total liabilities and equity

Unanswered

Question 15

0 / 1 pts

What is the purpose of reconciling cash and equity in the pro forma balance sheet process?

To eliminate debt from the final balance sheet.

To increase profitability projections.

➔

To ensure total assets equal total liabilities and equity.

To convert cash flows into sales figures.

Unanswered

Question 16

0 / 1 pts

The percentage of sales method allows businesses to focus on what they know while providing a logical way to estimate ______.

depreciation

➔

uncertain balance sheet line items dividends tax refunds

Unanswered

Question 17

0 / 1 pts

Why is it often difficult to project exact dollar amounts for future balance sheet items the further we move into the future?

Currency inflation prevents accurate estimates.

Businesses typically stop keeping detailed records.

➔

Confidence in assumptions decreases over time.

Investors restrict access to financial data.

Unanswered

Question 18

0 / 1 pts

After all steps of the percentage of sales method are completed, a final check ensures that total assets are equal to total ______.

income and revenue expenses and losses sales and growth

➔

liabilities and equity

Unanswered

Question 19

0 / 1 pts

The percentage of sales method is primarily used to estimate balance sheet items when ______.

inventory turnover is inconsistent historical data is unavailable

➔

certain future values cannot be confidently predicted a business does not generate net income

Unanswered

Question 20

0 / 1 pts

A clothing business is using the percentage change in sales method. The business owners realized that employee pay per hour is expected to increase 20 percent next year. This means that ______ should be increased 20 percent as well.

accumulated depreciation prepaid insurance utilities payable

➔

payroll payable

Question 21

0 / 1 pts

Miya owns a store, and she expects her utilities expense is going to increase by 3%. She knows this means the related ______ line item should also be increased by 3%.

prepaid insurance

➔

utilities payable cash accounts receivable

Unanswered

Question 22

0 / 1 pts

Which statement is a correct assumption based on the percentage of sales method?

All expense increases must be applied to cash first.

➔

If an expense increases, its related prepaid or payable typically increases by the same percentage.

Reconciliations are only needed for prepaid assets.

Percentage increase in sales must be used for all line items, including totals.

Unanswered

Question 23

0 / 1 pts

In 2031, depreciation expense is expected to be $9,400. Therefore, accumulated depreciation should be adjusted to equal the 2030 balance plus ______.

total net income insurance expense

➔

$9,400 owners’ distributions

Unanswered

Question 24

0 / 1 pts

Why are reconciliations of cash and equity necessary when preparing a pro forma balance sheet?

Because they provide exact future sales projections.

➔

Because these items cannot be reliably estimated using percentage changes in sales.

Because they are adjusted automatically during the income statement process.

Because they are always equal to total assets.

Unanswered

Question 25

0 / 1 pts

The statement of cash flows summarizes a company’s cash receipts and expenditures over a ______.

fiscal year

➔

specified period of time single transaction net income cycle

Unanswered

Question 26

0 / 1 pts

What is added back to net income when calculating cash flows from operating activities?

insurance expense dividends paid

➔

depreciation expense accounts payable

Unanswered

Question 27

0 / 1 pts

Cash flows from ______ activities include cash received or paid from day−to−day business operations.

investing financing marketing

➔

operating

Unanswered

Question 28 Which section of the statement of cash flows would show the purchase of fixed assets?

0 / 1 pts

cash flows from operating activities

➔

cash flows from investing activities cash flows from financing activities statement of retained earnings

Unanswered

Question 29

0 / 1 pts

Cash flows from financing activities would include the ______.

sale of inventory

➔

payment of dividends collection of accounts receivable depreciation adjustment

Unanswered

Question 30

0 / 1 pts

Selena is working on a statement of cash flow for her business. She is reporting her business’s net income. Which section of the statement should she do this in?

cash flows from marketing activities cash flows from investing activities cash flows from financing activities

➔

cash flows from operating activities

Unanswered

Question 31

0 / 1 pts

Jin is working on a statement of cash flow for his business. He is reporting sale of fixed assets. Which section of the statement should she do this in?

cash flows from marketing activities

➔

cash flows from investing activities cash flows from financing activities cash flows from operating activities

Question 32

0 / 1 pts

Transforming a reconciliation of cash into a pro forma statement of cash flows primarily involves reorganizing the information and adding ______.

bank statements cash receipts

➔

subtotals and totals long−term liabilities

Unanswered

Question 33

0 / 1 pts

Which line item is typically the first shown on a pro forma statement of cash flows?

net cash from investing activities depreciation expense cash ending balance

➔

net income or net loss

Unanswered

Question 34

0 / 1 pts

A fixed asset purchase is typically reported in the ______ section of the statement of cash flows.

operating activities financing activities

➔

investing activities equity activities

Unanswered

Question 35 Why might a statement of cash flows omit the “cash flows from investing activities” section?

Because investing activities are illegal for start−ups.

➔

Because no investing activities occurred during the reporting period.

Because all investments are listed on the balance sheet instead.

0 / 1 pts

Because the income statement already includes this information.

Unanswered

Question 36

0 / 1 pts

An abandoned asset with no salvage value and no cash received upon disposal would ______ on the statement of cash flows.

appear under investing activities

➔

not appear appear under financing activities require adjustment to net income

Unanswered

Question 37

0 / 1 pts

Which scenario would trigger the need to update every pro forma financial statement?

change in marketing strategy reduction in payroll taxes disposal of a fully depreciated asset

➔

change to any single line item in any pro forma statement

Unanswered

Question 38

0 / 1 pts

Why should entrepreneurs often delay creating years 2–5 of pro forma financial statements?

Because most businesses are not profitable in the early years.

To avoid overwhelming investors with long−term data.

➔

Because updates in assumptions require repeated revisions to all future statements.

Because cash reconciliations can only be created after year 1 is complete.

Unanswered

Question 39

0 / 1 pts

One of the primary purposes of preparing pro forma financial statements is to provide entrepreneurs with insights into the ______ of their proposed business.

market competition operational constraints

➔

expected future financial results investor preferences

Unanswered

Question 40

0 / 1 pts

Why is it important for an entrepreneur to conduct a big−picture review after completing pro forma financial statements?

To double−check math errors before filing taxes.

To identify competitors in the market.

To finalize all marketing materials.

➔

To determine if business assumptions or plans need adjustments.

Unanswered

Question 41

0 / 1 pts

The percentage of sales method is a technique used to develop a pro forma balance sheet based on the fact that the assets and liabilities of a company typically vary with its sales. ➔

True False

Unanswered

Question 42

0 / 1 pts

If insurance expense is expected to increase 10 percent from 2030 to 2031, on the preliminary pro forma balance sheet for December 31, 2031, the prepaid insurance amount should be 10 percent more than the prepaid insurance amount at December 31, 2030. ➔

True False

Unanswered

Question 43

0 / 1 pts

If utilities expense is expected to decrease 10 percent from 2030 to 2031, on the preliminary pro forma

balance sheet for December 31, 2031, the utilities payable amount should be 10 percent less than the utilities payable amount at December 31, 2030. ➔

True False

Unanswered

Question 44

0 / 1 pts

Assuming no fixed asset disposals are expected, if fixed assets are expected to increase 10 percent from 2030 to 2031, on the preliminary pro forma balance sheet for December 31, 2031, the accumulated depreciation amount should be 10 percent more than the accumulated depreciation amount at December 31, 2030.

True

➔

False

Unanswered

Question 45

0 / 1 pts

When preparing a pro forma balance sheet, total assets do not have to equal total liabilities and equity.

True

➔

False

Unanswered

Question 46

0 / 1 pts

As a business moves forward in time and becomes more mature, there will generally be more asset and liability line items included on the business’s balance sheet. ➔

True False

Unanswered

Question 47 A pro forma balance sheet should reflect the cash and equity balances determined by preparing reconciliations of cash and equity. ➔

True

0 / 1 pts

False

Unanswered

Question 48

0 / 1 pts

When preparing a pro forma balance sheet using the percentage of sales method, we only use the calculated percentage increase or decrease in sales to estimate pro forma balance sheet line items we do not know or cannot estimate through other means. ➔

True False

Unanswered

Question 49

0 / 1 pts

Depreciation expense is usually the first line item included on a pro forma statement of cash flows.

True

➔

False

Unanswered

Question 50

0 / 1 pts

Every increase or decrease in the noncash asset and liability accounts on a reconciliation of cash is reflected on its associated statement of cash flows.

True

➔

False

chapter 9

Unanswered

Question 1

0 / 1 pts

Which of the following is not an example of bootstrapping?

Choosing to commence business operations from your home.

Convincing a retailer to display or sell your product in a prominent area of her store, free of charge to your company.

Utilizing independent contractors—instead of hiring employees—to the extent reasonably possible, for as long as possible.

➔

Paying yourself a large salary immediately upon commencing business operations.

Unanswered

Question 2

0 / 1 pts

Which of the following is not an example of bootstrapping?

Choosing to commence business operations via a kiosk, mobile cart, or vehicle rather than from a permanent physical location.

Trading services with other entrepreneurial ventures.

➔

Buying new office furniture, vehicles, or equipment instead of purchasing such items used.

Choosing to commence business operations in a free or low−cost business incubator.

Unanswered

Question 3

0 / 1 pts

The Busy Bee Basket Company’s calendar year 2020 credit sales amounted to $6,996,000. The net accounts receivable amounts on the Busy Bee Basket Company’s balance sheets as of December 31, 2030, and December 31, 2031, were $568,421 and $595,866, respectively. The Busy Bee Basket Company’s accounts receivable turnover for 2030 is ______.

0.083 11.741

➔

12.018 12.308

Unanswered

Question 4

0 / 1 pts

If Delta Medical Company’s accounts receivable turnover for 2031 was 12.17, then Delta Medical Company’s average collection period for 2031 was ______.

12 days

➔

30 days 45 days 365 days

Unanswered

Question 5

0 / 1 pts

Which of the following statements about a reserve for bad debts is not true?

A reserve for bad debts is an estimate of the amount of accounts receivable included on a balance sheet that won’t be collected.

➔

A reserve for bad debts is presented as a liability on the balance sheet.

When a company can determine that a certain percentage of its accounts receivable are typically not collectible, the company should establish a reserve for bad debts.

In the case of a start−up, there may be no history with which to estimate a reserve for bad debts.

Unanswered

Question 6

0 / 1 pts

Which of the following statements about inventory is not true? ➔

A final product is a final product. It cannot be a raw material to another company.

At some point, raw materials inventory usually ends up being included in work−in−process inventory.

Virtually all finished goods inventory has, at some point, been work−in−process inventory.

For many businesses, inventory represents the company’s largest current asset.

Unanswered

Question 7

0 / 1 pts

If your company plans to take advantage of all aspects of an offered 20/10/5 trade discount, what price will your company pay for an item with a list price of $1,000?

$350 $650

➔

$684 $965

Unanswered

Question 8

0 / 1 pts

If your company plans to take advantage of all aspects of an offered 20/10/5 trade discount, what net cost rate will you be paying?

35% 65%

➔

68.4% 96.5%

Unanswered

Question 9

0 / 1 pts

If your company plans to take advantage of all aspects of an offered 20/10/5 trade discount, what single equivalent discount rate are you receiving?

65% 35%

➔

31.6% 3.5%

Unanswered

Question 10

0 / 1 pts

You have to pay a $45,000 invoice with stated terms of 1/10, net 30. Stated terms of 1/10, net 30 means ______.

the customer will get a 10% discount on the amount of the invoice if payment is made on the first day after the invoice date; otherwise, 100% of the invoice amount is due on the thirtieth day after the invoice date

the customer will get a 10% discount on the amount of the invoice if payment is made on or before the tenth day after the invoice date; otherwise, 100% of the invoice amount is due on the thirtieth day after the invoice date

the customer will get a 1% discount on the amount of the invoice if payment is made on or before the tenth day after the invoice date; otherwise, 100% of the invoice amount is due on the twentieth day after the invoice date

➔ the customer will get a 1% discount on the amount of the invoice if payment is made on or before the tenth day after the invoice date; otherwise, 100% of the invoice amount is due on the thirtieth day after the invoice date.

Unanswered

Question 11

0 / 1 pts

You have to pay a $45,000 invoice with stated terms of 1/10, net 30. What options are available associated with paying this invoice on a timely basis? ➔ Settle the $45,000 invoice with a payment of $44,550 on or before the tenth day, or settle the $45,000 invoice with a payment of $45,000 on or before the thirtieth day.

Settle the $45,000 invoice with a payment of $44,550 on the first day, or settle the $45,000 invoice with a payment of $45,000 on or before the thirtieth day.

Settle the $45,000 invoice with a payment of $40,500 on or before the tenth day, or settle the $45,000 invoice with a payment of $45,000 on or before the thirtieth day.

Settle the $45,000 invoice with a payment of $40,500 on the first day, or settle the $45,000 invoice with a payment of $45,000 on or before the thirtieth day.

Unanswered

Question 12

0 / 1 pts

You have to pay a $25,000 invoice with stated terms of 2/15, net 30. Stated terms of 2/15, net 30 means ______.

the customer will get a 15% discount on the amount of the invoice if payment is made on or before the second day after the invoice date; otherwise, 100% of the invoice amount is due on the thirtieth day after the invoice date

the customer will get a 15% discount on the amount of the invoice if payment is made on or before the fifteenth day after the invoice date; otherwise, 100% of the invoice amount is due on the thirtieth day after the invoice date

the customer will get a 2% discount on the amount of the invoice if payment is made on or before the tenth day after the invoice date; otherwise, 100% of the invoice amount is due on the fifteenth day after the invoice date

➔ the customer will get a 2% discount on the amount of the invoice if payment is made on or before the fifteenth day after the invoice date; otherwise, 100% of the invoice amount is due on the thirtieth day after the invoice date.

Question 13

0 / 1 pts

You have to pay a $25,000 invoice with stated terms of 2/15, net 30. What options are available associated with paying this invoice on a timely basis? ➔ Settle the $25,000 invoice with a payment of $24,500 on or before the fifteenth day or settle the $25,000 invoice with a payment of $25,000 on or before the thirtieth day.

Settle the $25,000 invoice with a payment of $24,500 on or before the second day or settle the $25,000 invoice with a payment of $25,000 on or before the fifteenth day.

Settle the $25,000 invoice with a payment of $21,250 on or before the second day or settle the $25,000 invoice with a payment of $25,000 on or before the thirtieth day.

Settle the $25,000 invoice with a payment of $21,250 on or before the fifteenth day or settle the $25,000 invoice with a payment of $25,000 on or before the thirtieth day.

Unanswered

Question 14

0 / 1 pts

Jeffre is the owner of Randolph’s Luxury Vinyl, LLC. Jeffrey estimates that the annual demand for color tone Y66, the inventory item he is currently analyzing, is 100,000 gallons. Jeffrey further estimates that it costs his company $7.50 to place an order. Randolph’s Luxury Vinyl has a warehouse for which the average cost to hold one dollar of inventory for one year equals $0.02. The price per gallon for carpet trim Y66 is $50. What is Randolph’s Luxury Vinyl’s economic order quantity for color tone Y66?

$1,500,000 100,000 1224.74

➔

1225

Unanswered

Question 15

0 / 1 pts

Jeffrey is the owner of Randolph’s Luxury Vinyl, LLC. Jeffrey estimates that the annual demand for color tone Y33, the inventory item he is currently analyzing, is 50,000 gallons. Jeffrey further estimates that it costs his company $7.50 to place an order. Randolph’s Luxury Vinyl has a warehouse for which the average cost to hold one dollar of inventory for one year equals $0.02. The price per gallon for carpet trim Y33 is $5. What is Randolph’s Luxury Vinyl’s economic order quantity for color tone Y33?

$750,000 $50,000 2738.61

➔

2739

Unanswered

Question 16

0 / 1 pts

It takes Randolph’s Luxury Vinyl, LLC three days to receive an order of color tone Y66 from the supplier once an order is placed, and the highest quantity of color tone Y66 Randolph’s Luxury Vinyl has ever used in one day is 300 gallons. Average daily demand for color tone Y66 is 282 gallons. What is Randolph’s Luxury Vinyl’s likely reorder point for color tone Y66?

48 330 864

➔

900

Unanswered

Question 17

0 / 1 pts

It takes Randolph’s Luxury Vinyl, LLC four days to receive an order of color tone Y33 from the supplier once an order is placed, and because it is a critical inventory item, Randolph’s Luxury Vinyl has decided they want a safety stock for color tone Y33 equal to 10% of average daily demand. Average daily demand for color tone Y33 is 140 gallons. What is Randolph’s Luxury Vinyl’s likely reorder point for color tone Y33?

56 196 574

➔

616

Unanswered

Question 18

0 / 1 pts

Which of the following is not a balance sheet item working capital management typically focuses on?

cash accounts receivable inventory

➔

fixed assets

Unanswered

Question 19

0 / 1 pts

Which of the following is not a balance sheet item working capital management typically focuses on?

accounts payable accrued liabilities short−term debt

➔

long−term debt

Unanswered

Question 20

0 / 1 pts

In terms of order of occurrence, ______. ➔

profitability usually occurs before a business becomes cash flow positive a business usually becomes cash flow positive before it becomes profitable profitability never occurs before a business becomes cash flow positive a business never becomes cash flow positive before it becomes profitable

Unanswered

Question 21

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In order to properly manage its accounts receivable, a business should do all of the following except ______.

perform ongoing analysis and monitoring of its accounts receivable determine and evaluate the average accounts receivable collection period

➔

ignore when customers pay late so as not to upset those customers create and evaluate an aging of accounts receivable

Question 22

0 / 1 pts

Customer credit terms do vary by industry, but U.S. credit terms commonly ______.

indicate that interest will start to accrue on a purchase on the day after the applicable purchase state a maximum portion of the total amount owed that will be permitted to be repaid each month

➔

indicate a maximum amount of credit a customer will be permitted prohibit payment with cash (only payment by check is acceptable)

Unanswered

Question 23

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Customer credit terms do vary by industry, but U.S. credit terms commonly ______. ➔ indicate that no interest charge will apply to amounts paid in full within a stated number of days for payment, usually 30 days, after an applicable purchase indicate a minimum amount of credit a customer must legally be permitted prohibit payment by check (only cash is acceptable)

state the name of the collection agency to which the amount owed will be referred in the event of nonpayment in a timely manner

Unanswered

Question 24

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Which one of the following is not a goal of cash management?

To sustain an adequate level of cash (i.e., never run out of cash).

To achieve and maintain positive cash flow.

To obtain the highest return reasonably possible on idle cash.

➔

To minimize fixed assets.

Unanswered

Question 25 Sustaining an adequate level of cash is critical for any business, but never running out of cash is particularly critical for a start−up because ______. ➔

the typical U.S. start−up likely doesn’t have the ability to borrow to cover a cash shortfall

0 / 1 pts

the typical U.S. start−up is almost immediately profitable the typical U.S. start−up is almost immediately cash flow positive the typical U.S. start−up is almost immediately profitable, but not cash flow positive

Unanswered

Question 26

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The two primary goals of inventory management are to ______. ➔ keep inventory at a minimum level to maximize available cash, but keep enough inventory on hand to always satisfy production or customer demand

keep inventory at a maximum level and keep enough inventory on hand to always satisfy production or customer demand

keep inventory at a minimum level to maximize available cash, but keep enough inventory on hand to satisfy production or customer demand most of the time

keep inventory at a maximum level and keep enough inventory on hand to satisfy production or customer demand most of the time

Unanswered

Question 27

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Current liabilities management focuses on ______.

maximizing the amount of the cash payments needed to appropriately settle accounts payable, accrued liabilities, and short−term debt obligations on a timely basis

➔ minimizing the amount of the cash payments needed to appropriately settle accounts payable, accrued liabilities, and short−term debt obligations on a timely basis

maximizing the amount of the cash payments needed to appropriately settle accounts payable and accrued liabilities; short−term debt obligations are tied to long−term debt and are therefore not a focus of current liabilities management

minimizing the amount of the cash payments needed to appropriately settle accounts payable and accrued liabilities; short−term debt obligations are tied to long−term debt and are therefore not a focus of current liabilities management

Unanswered

Question 28 Which of the following is not true about accounts payable?

0 / 1 pts

➔

Accounts payable are amounts a business owes to its customers.

Usually, accounts payable relate to a business’s recurring purchases.

For many businesses, the largest portion of accounts payable typically relates to purchases of inventory.

The usual method of managing accounts payable is to pay out as little cash as possible in order to properly settle the obligations.

Unanswered

Question 29

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A trade discount is ______.

a discount available after a designated purchase threshold has been met by a customer a discount based on the number of units ordered by a customer a discount offered to a credit customer to entice the customer to pay their bill early

➔

an amount deducted from the list price of an item when specific services are performed by a trade customer

Unanswered

Question 30

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A cash discount is ______.

a discount available after a designated purchase threshold has been met by a customer a discount based on the number of units ordered by a customer

➔

a discount offered to a credit customer to entice the customer to pay her bill early an amount deducted from the list price of an item when specific services are performed by a trade customer

Unanswered

Question 31

0 / 1 pts

A quantity discount is ______.

a discount available after a designated purchase threshold has been met by a customer

➔

a discount based on the number of units ordered by a customer a discount offered to a credit customer to entice the customer to pay her bill early an amount deducted from the list price of an item when specific services are performed by a trade customer

Question 32

0 / 1 pts

A cumulative purchase discount is ______. ➔

a discount available after a designated purchase threshold has been met by a customer a discount based on the number of units ordered by a customer a discount offered to a credit customer to entice the customer to pay her bill early an amount deducted from the list price of an item when specific services are performed by a trade customer

Unanswered

Question 33

0 / 1 pts

Accrued liabilities typically include all of the following except ______.

payroll payable payroll taxes payable sales taxes payable

➔

mortgage payable

Unanswered

Question 34

0 / 1 pts

For many entrepreneurs, the best way to avoid a problem with accrued liabilities is to ______.

deliberately and systematically funnel the funds needed to pay accrued liabilities into the business’s regular checking account

➔ deliberately and systematically funnel the funds needed to pay accrued liabilities into a bank account separate from the business’s regular checking account deliberately and systematically avoid all business circumstances that create accrued liabilities deliberately and systematically refuse to pay accrued liabilities

Unanswered

Question 35

0 / 1 pts

Which of the following statements is false? ➔ Short−term portion of long−term debt is the amount of principal due to be paid in the next 6 months related to a business’s long−term loans.

Not all lenders allow early repayment of a loan.

The short−term portion of long−term debt can be determined by looking at the loan amortization tables associated with a company’s loans.

Making larger−than−required or faster−than−required loan payments are both effective ways to reduce the overall amount of interest paid on a loan.

Unanswered

Question 36

0 / 1 pts

Which of the following statements is false?

With a bank line of credit, a company obtains a credit limit, but the company isn’t obligated to make payments unless it actually borrows money.

A line of credit is normally obtained from a company’s primary bank and must usually be repaid in full at least once a year.

A line of credit is usually established by a company as a cushion to be tapped into in the event of a cash shortage or the threat of a cash shortage.

➔ To obtain the best interest rate on a line of credit, the terms of a line of credit should be negotiated only when a business has run out of cash and the line of credit is actually needed.

Unanswered

Question 37

0 / 1 pts

If the related applicable products or services are expected to be delivered to the customer within the next 12 months, customer deposits or prepayments are categorized as ______ on a company’s balance sheet. ➔

current liabilities long−term liabilities current assets equity

Unanswered

Question 38

0 / 1 pts

Until an organization is of the size to warrant a full−time accountant or chief financial officer (CFO), all checks issued by the business should be signed by ______.

a trusted employee

two trusted employees an owner’s spouse

➔

an owner

Unanswered

Question 39

0 / 1 pts

An owner should perform ______ in order to identify the nature and amount of any lost, damaged, or stolen inventory.

scheduled physical inventory counts

➔

surprise physical inventory counts surprise employee car searches both scheduled and surprise employee physical pat−downs

Unanswered

Question 40

0 / 1 pts

An aging of accounts receivable is a schedule that ______.

lists customers with unpaid balances in alphabetical order

➔

categorizes unpaid customer invoices based on the number of days they have been outstanding categorizes unpaid customer invoices based on how quickly they have been paid lists customers with unpaid balances in the order of least likely to most likely to pay

Unanswered

Question 41

0 / 1 pts

Start−up businesses usually go through a period of zero revenue: the start−up phase of the business. ➔

True False

Unanswered

Question 42

0 / 1 pts

In order to speed up collections of accounts receivable, cash discounts are often offered to customers. An example would be “2/10, net 30.” In this example, if the customer pays the bill within 2 days of the invoice

date, a 10% discount is given. Otherwise, the entire amount is due on the thirtieth day.

True

➔

False

Unanswered

Question 43

0 / 1 pts

Entrepreneurial working capital management involves asking for better terms than those offered by any vendor, creditor, lender, or customer in order to maximize your business’s profitability and cash flow. ➔

True False

Unanswered

Question 44

0 / 1 pts

Proper working capital management and bootstrapping can help an entrepreneur overcome cash flow issues and allow more focus on refining and growing the business. ➔

True False

Unanswered

Question 45

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Sales paid for with a credit card like a Visa or MasterCard should be included in a company's accounts receivable.

True

➔

False

Unanswered

Question 46 A business can be profitable and still go out of business because it runs out of cash. ➔

True False

0 / 1 pts

Unanswered

Question 47

0 / 1 pts

Economic order quantity is the optimal quantity of an item that should be remaining in inventory when a business places an order for more of that item.

True

➔

False

Unanswered

Question 48

0 / 1 pts

The net cost rate is the actual percentage of list price paid after taking advantage of a series of trade discounts. ➔

True False

Unanswered

Question 49

0 / 1 pts

Replacement parts for key manufacturing equipment is a good example of work−in−process inventory.

True

➔

False

Unanswered

Question 50

0 / 1 pts

When a company can determine that a certain percentage of its accounts receivable are typically not collectible—or when a company has identified specific individual accounts receivable that are likely not collectible—the company should establish a reserve for bad debts. ➔

True False

chapter 10

Unanswered

Question 1

0 / 1 pts

Which of the following statements about time value of money is false?

Time value of money is the loss of purchasing power that occurs as a result of the interest considerations associated with the passage of time.

The basic principle underlying time value of money is that a dollar in your possession today is worth more than a dollar you’ll receive in the future.

➔ Time value of money is important because pro forma financial statement creation always involves the concept of time value of money.

Time affects the value of money.

Unanswered

Question 2

0 / 1 pts

Stated rate of interest is ______.

the actual interest rate paid by the borrower or earned by the investor after interest compounding is taken into consideration

➔

the rate of interest that’s listed or quoted, normally on an annual basis, that disregards compounding

the total amount due related to a loan or investment—equal to the principal borrowed or invested, plus interest an interest rate that is not a whole number

Unanswered

Question 3

0 / 1 pts

Maturity amount is ______.

the actual interest rate paid by the borrower or earned by the investor after interest compounding is taken into consideration the rate of interest that’s listed or quoted, normally on an annual basis, that disregards compounding

➔ the total amount due related to a loan or investment—equal to the principal borrowed or invested, plus interest

an interest rate that is not a whole number

Unanswered

Question 4

0 / 1 pts

Effective annual interest rate is ______. ➔ the actual interest rate paid by the borrower or earned by the investor after interest compounding is taken into consideration the rate of interest that’s listed or quoted, normally on an annual basis, that disregards compounding

the total amount due related to a loan or investment—equal to the principal borrowed or invested, plus interest an interest rate that is not a whole number

Unanswered

Question 5

0 / 1 pts

Future value of a lump sum is ______.

the value in today’s dollars of some amount to be received or paid in the future

➔

the value at some future point in time of an amount loaned, borrowed, saved, or invested today

the future value of a series of equal payments where each payment is made at the end of a period in the series the future value of a series of unequal payments

Unanswered

Question 6 Present value of a lump sum is ______. ➔

the value in today’s dollars of some amount to be received or paid in the future the value at some future point in time of an amount loaned, borrowed, saved, or invested today

the present value of a series of equal payments where each payment is made at the end of a period in the series the present value of a series of unequal payments

0 / 1 pts

Question 7

0 / 1 pts

Present value of an ordinary annuity is ______.

the value in today’s dollars of some amount to be received or paid in the future the value at some future point in time of an amount loaned, borrowed, saved, or invested today

the present value of a series of equal payments where each payment is made at the beginning of a period in the series

➔ the present value of a series of equal payments where each payment is made at the end of a period in the series

Unanswered

Question 8

0 / 1 pts

Future value of an ordinary annuity is ______.

the value in today’s dollars of some amount to be received or paid in the future the value at some future point in time of an amount loaned, borrowed, saved, or invested today

the future value of a series of equal payments where each payment is made at the beginning of a period in the series

➔ the future value of a series of equal payments where each payment is made at the end of a period in the series

Unanswered

Question 9

0 / 1 pts

A non−integer interest rate is ______.

the actual interest rate paid by the borrower or earned by the investor after interest compounding is taken into consideration the rate of interest that’s listed or quoted, normally on an annual basis, that disregards compounding

the total amount due related to a loan or investment—equal to the principal borrowed or invested, plus interest

➔

an interest rate that is not a whole number

Unanswered

Question 10

0 / 1 pts

A series of equal payments is called ______. ➔

an annuity an annuity due an ordinary annuity a stream of unequal payments

Unanswered

Question 11

0 / 1 pts

An annuity where the payments are made or received at the beginning of each time period, such as a payment made on the first day of every month is called ______.

a stream of unequal payments

➔

an annuity due an ordinary annuity a periodic annuity

Unanswered

Question 12

0 / 1 pts

An annuity where the payments are made or received at the end of each time period, such as a payment made on the last day of every month is called ______.

a stream of unequal payments an annuity due

➔

an ordinary annuity a periodic annuity

Unanswered

Question 13

0 / 1 pts

The total amount to be repaid to a lender related to $5,000 borrowed for five years at a simple interest rate of 5% is ______.

$250 $1,250 $5,250

➔

$6,250

Unanswered

Question 14

0 / 1 pts

The total amount of interest to be paid to a lender related to $5,000 borrowed for five years at 5% interest compounded annually is approximately ______.

$250 $1,082.50 $1,250

➔

$1,381.41

Unanswered

Question 15

0 / 1 pts

A credit card company has offered you a credit card with a 6% interest rate compounded semiannually.

What is the effective annual interest rate you’ll pay on this credit card? ➔

6.09% 6.14% 6.17% 6.18%

Unanswered

Question 16

0 / 1 pts

A local bank has offered you a loan with a 6% interest rate compounded quarterly. What is the effective annual interest rate you’ll pay on this loan?

6.09%

➔

6.14% 6.17% 6.18%

Unanswered

Question 17

0 / 1 pts

A credit card company has offered you a credit card with a 6% interest rate compounded monthly. What is the effective annual interest rate you’ll pay on this credit card?

6.09% 6.14%

➔

6.17% 6.18%

Unanswered

Question 18

0 / 1 pts

What is the future value of $100,000 deposited today if money is compounded annually at 8% for eight years?

$53,060 $106,366

➔

$185,090 $188,450

Unanswered

Question 19

0 / 1 pts

What is the future value of $100,000 deposited today if money is compounded quarterly at 8% for eight years?

$53,060 $117,371 $185,090

➔

$188,450

Unanswered

Question 20

0 / 1 pts

You deposit $2,500 in an account that compounds monthly at a 6% annual rate. Assuming you leave the money untouched, and the account continually earns interest at 6% compounded monthly, approximately how much will you have in the account at the end of five years?

$3,345.50

➔

$3,372.13

$14,092.75 $82,469.25

Unanswered

Question 21

0 / 1 pts

A contribution made at the beginning of year 1 that will grow for 7 years at 7% interest uses a Future Value Factor (FVF) of ______.

1.0700 1.3108

➔

1.6058 1.5036

Unanswered

Question 22

0 / 1 pts

If a contribution is made at the beginning of year 7 and the target year is the end of year 7, how many periods of compounding (n) should be used?

0

➔

1 6 7

Unanswered

Question 23

0 / 1 pts

The number of compounding periods (n) for a contribution made at the beginning of year 4 and growing until the end of year 7 is ______.

2 3

➔

4 5

Question 24

0 / 1 pts

When payments are made at the end of each year instead of the beginning, the value of n for each payment is reduced by ______.

2

➔

1 0 It depends on the interest rate

Unanswered

Question 25

0 / 1 pts

Why is calculating the future value of a stream of unequal payments in Excel more complex than calculating present value? ➔

Excel does not have a built−in function to calculate it directly.

Interest rates cannot be applied to multiple years.

You must first calculate the NPV and subtract from the future value.

It only works if all payments are equal.

Unanswered

Question 26

0 / 1 pts

How much do you have to deposit in an account today to achieve a value of $2,000,000 in five years if the annual interest rate is 12%, compounded annually? ➔

$1,134,800 $1,903,000 $3,524,600 $7,209,600

Unanswered

Question 27

0 / 1 pts

How much do you have to deposit in an account today to achieve a value of $2,000,000 in five years if the annual interest rate is 12%, compounded monthly?

$2,200

$550,400

➔

$1,100,800 $7,209,600

Unanswered

Question 28

0 / 1 pts

Mr. Q needs to make a $10,000 balloon payment on the loan on his house ten years from now. If he can earn 10% quarterly on his money, approximately how much money does Mr. Q need to deposit today in order to have the $10,000 he needs in ten years?

$221

➔

$3,724.30 $3,855.00 $25,397.00

Unanswered

Question 29

0 / 1 pts

If the interest rate is 7%, the Future Value Factor (FVF) for n = 1 is ______.

1.0000

➔

1.0700 1.1400 1.6058

Unanswered

Question 30 In calculating the future value of a stream of unequal payments, which step is necessary?

Apply a single average interest rate to the total.

Use Excel’s NPV function with a 0% rate.

➔

Calculate the future value of each payment separately.

Subtract the present value from each year’s contribution.

0 / 1 pts

Question 31

0 / 1 pts

The FVF depends on the interest rate (i) and the number of periods (n) and is used to determine the ______ value of a payment.

discounted present nominal

➔

future

Unanswered

Question 32

0 / 1 pts

When calculating the future value of a retirement account, you may need to compute the future value of both ______ and ______.

interest; inflation

➔

lump sums; annuities stocks; bonds taxes; dividends

Unanswered

Question 33

0 / 1 pts

Why must the future value of a lump sum be calculated after determining the future value of an annuity in a retirement scenario?

Because lump sums grow more slowly than annuities.

Because the annuity must be converted to a present value first.

➔

Because each year's total contribution continues to grow over time.

Because retirement accounts are taxed differently.

Unanswered

Question 34

0 / 1 pts

In a retirement plan with monthly contributions, the interest rate used for time value of money calculations must be ______ to reflect monthly compounding.

multiplied by 12

averaged over the year adjusted to an annual rate

➔

divided by 12

Unanswered

Question 35

0 / 1 pts

What is the future value of $5,500 invested at the end of each year for ten years if money earns 16% per annum?

$24,262.70 $26,582.60 $55,000.00

➔

$117,268.25

Unanswered

Question 36

0 / 1 pts

What is the future value of $5,500 invested at the end of each quarter for ten years if money earns 16 percent compounded quarterly?

$26,405.50 $108,860.40 $220,000.00

➔

$522,640.25

Unanswered

Question 37

0 / 1 pts

What is the approximate future value of $1,000 invested at the end of each quarter for 10 years if money earns 9 percent compounded quarterly?

$2,435.19 $11,203.40 $40,000.00

➔

$63,786.18

Question 38

0 / 1 pts

What is the present value of a retirement account if you receive $60,000 per year at the end of each year for 25 years and money earns 6% compounded annually?

$13,980

➔

$767,004 $813,024 $3,291,870

Unanswered

Question 39

0 / 1 pts

What is the present value of a retirement account if you receive $15,000 per quarter at the end of each quarter for 15 years and money earns 12 percent compounded quarterly?

$4,599.00

➔

$415,134.00 $559,195.50 $1,131,019.50

Unanswered

Question 40

0 / 1 pts

What is the approximate present value of $5,000 received at the end of each month for five years if money earns 6 percent compounded monthly?

$3,706.85

➔

$258,627.80 $300,000.00 $348,850.00

Unanswered

Question 41

0 / 1 pts

Capital assets are assets that have an expected useful life in excess of one year. ➔

True False

Unanswered

Question 42

0 / 1 pts

Simple interest involves earning or charging interest on both a stated principal amount and the interest that has been previously earned or charged.

True

➔

False

Unanswered

Question 43

0 / 1 pts

The simple interest formula can be used to calculate compound interest. ➔

True False

Unanswered

Question 44

0 / 1 pts

Interest is the price (i.e., rent) charged for money that’s borrowed or loaned. ➔

True False

Unanswered

Question 45 More frequent interest compounding results in larger amounts when we calculate present values.

True

➔

False

0 / 1 pts

Question 46

0 / 1 pts

More frequent interest compounding results in smaller amounts when we calculate future values.

True

➔

False

Unanswered

Question 47

0 / 1 pts

Future value of a lump sum and present value of a lump sum may be calculated using their formulas in two ways: 1) looking up the applicable factor in the present value or future value tables and then multiplying that factor by the appropriate lump sum amount or 2) calculating the applicable factor using a calculator and then multiplying that factor by the appropriate lump sum amount. ➔

True False

Unanswered

Question 48

0 / 1 pts

An interest rate can result in different interest and maturity amounts depending upon whether the interest is calculated as simple interest or compound interest. ➔

True False

Unanswered

Question 49

0 / 1 pts

Using the factors in the present value and future value tables can help avoid the math errors associated with calculating factors using a calculator, but because the factors in the tables are rounded to four decimal places, using the factors from the tables also generally results in a slightly different solution than the solution determined performing all calculations with a calculator. ➔

True False

Unanswered

Question 50

0 / 1 pts

We can use Microsoft Excel to calculate future value of a lump sum and present value of a lump sum. ➔

True False

chapter 11

Unanswered

Question 1

0 / 1 pts

A business realizes that under new government regulations, they will have to change all of their delivery vehicles to electric vehicles in one of the states they operate in. ______ is the process the business owners can use to determine if the benefit of working in that state is greater than the cost of the new vehicles.

working capital management percentage of sales

➔

capital budgeting Section 179 analysis

Unanswered

Question 2

0 / 1 pts

______ are the costs that will be incurred before a new asset or project can begin to provide its intended benefit.

Operational costs

➔

Start−up costs Working capital costs Tax costs

Unanswered

Question 3 ______ are the costs that will be incurred on an ongoing basis to support a new asset or project. ➔

Operational costs Start−up costs Working capital costs Tax costs

0 / 1 pts

Question 4

0 / 1 pts

Which of the following is an example of a start−up cost associated with manufacturing a new product? ➔

the cost of the equipment needed to manufacture the new product the cost of carrying increased levels of inventory in order to manufacture the new product the income taxes on the increase in net income resulting from manufacturing the new product the cost of the annual insurance on the equipment needed to manufacture the new product

Unanswered

Question 5

0 / 1 pts

Which of the following is an example of an operational cost associated with manufacturing a new product?

the cost of the equipment needed to manufacture the new product the cost of carrying increased levels of inventory in order to manufacture the new product the income taxes on the increase in net income resulting from manufacturing the new product

➔

the cost of the annual insurance on the equipment needed to manufacture the new product

Unanswered

Question 6

0 / 1 pts

Which of the following is an example of a working capital cost associated with manufacturing a new product?

the cost of the equipment needed to manufacture the new product

➔

the cost of carrying increased levels of inventory in order to manufacture the new product the income taxes on the increase in net income resulting from manufacturing the new product the cost of the annual insurance on the equipment needed to manufacture the new product

Unanswered

Question 7 Which of the following is an example of a tax cost associated with manufacturing a new product?

the cost of the equipment needed to manufacture the new product the cost of carrying increased levels of inventory in order to manufacture the new product

➔

the income taxes on the increase in net income resulting from manufacturing the new product

0 / 1 pts

the cost of the annual insurance on the equipment needed to manufacture the new product

Unanswered

Question 8

0 / 1 pts

When performing capital budgeting analysis, the business owner must determine the benefits associated with the investment or project under consideration. Examples of such benefits include all of the following except ______.

the amount of any increase in net income the amount of any decrease in income taxes to be paid the amount of any increase in cash flow

➔

the cost of any required new fixed asset(s)

Unanswered

Question 9

0 / 1 pts

When performing capital budgeting analysis, the business owner must determine the benefits associated with the investment or project under consideration. Examples of such benefits include all of the following except ______.

the amount of any increase in productivity the amount of any decrease in income taxes to be paid

➔

the amount of any decrease in cash flow the salvage value associated with any fixed−asset purchase

Unanswered

Question 10

0 / 1 pts

The payback method, which is widely used, has disadvantages, which include all of the following except ______.

it doesn’t consider the time value of money it favors investments with a quick return over those with the largest overall return it doesn’t always provide a clear answer regarding whether one should invest in a particular opportunity

➔

it doesn’t consider all of the benefits associated with a proposed investment or project

Question 11

0 / 1 pts

A U.S. company deciding whether to bring manufacturing operations back to the United States from overseas is engaging in capital budgeting analysis due to ______.

seasonal fluctuations in sales

➔

changes in business strategy and cost structures federal income tax audits routine inventory management

Unanswered

Question 12

0 / 1 pts

Introducing a new product or service is only justified if the ______.

cost of production is lower than competitors’ costs marketing campaign is well−received by customers company has excess labor capacity

➔

expected revenues and benefits exceed the associated costs

Unanswered

Question 13

0 / 1 pts

When a company has multiple potential products to launch but has limited resources to invest in only one, capital budgeting analysis is used to ______.

identify the cheapest product to produce

➔

determine which product has the highest projected net benefits reduce the number of employees needed for production ensure all products are launched at the same time

Unanswered

Question 14

0 / 1 pts

In evaluating a proposed equipment purchase, the interest expense from the loan is not treated as a project cash flow because it relates to ______.

the equipment’s depreciation schedule

➔

the company’s financing decision, not the project itself

the company’s tax liability annual operating expenses of the equipment

Unanswered

Question 15

0 / 1 pts

What is typically considered a direct expense associated with an equipment purchase?

supplies used in tandem with the equipment

➔

maintenance costs of the equipment interest expense on the loan used to pay for the equipment training for employees using the equipment

Unanswered

Question 16

0 / 1 pts

The Expected Annual After−Tax Benefit (EAATB) is calculated by adjusting the expected increase in net income to account for ______ and depreciation.

cash sales interest expense

➔

income taxes loan principal repayment

Unanswered

Question 17

0 / 1 pts

Why do many business owners use cash flow rather than net income as the primary measure of success?

Net income is irrelevant to investors.

Cash flow is easier to calculate than net income.

Cash flow shows profitability without tax considerations.

➔

A company can be profitable but still fail due to poor cash flow.

Unanswered

Question 18

0 / 1 pts

The three methods typically used to evaluate a capital budgeting decision are payback, net present value (or lowest total cost), and ______.

return on equity

➔

internal rate of return debt−to−equity ratio gross margin analysis

Unanswered

Question 19

0 / 1 pts

When calculating EAATB, depreciation is added back because it is a ______.

tax credit

➔

noncash expense fixed operating cost financing cost

Unanswered

Question 20

0 / 1 pts

Which statement best explains why income tax expense increases if net income increases from an equipment purchase? ➔

Higher net income results in higher taxable income.

Depreciation deductions are eliminated.

Loan interest is no longer deductible.

Cash flow decreases tax liability.

Unanswered

Question 21 The payback method calculates the number of years it will take a business to ______.

reach maximum profitability repay all debts

➔

recover the money it invests in a project or asset generate net income equal to total costs

0 / 1 pts

Unanswered

Question 22

0 / 1 pts

The formula for the payback method is: payback = ______.

cost of project ÷ net present value

➔

cost of project ÷ average expected annual after−tax benefit (AEAATB) AEAATB ÷ cost of project total after−tax benefits ÷ cost of project

Unanswered

Question 23

0 / 1 pts

Why does the payback method sometimes fail to give a clear answer about whether to invest?

It ignores tax effects.

It cannot calculate cash flow.

It cannot compare two different project options.

➔

It only measures how quickly investment is recovered, not total profitability.

Unanswered

Question 24

0 / 1 pts

A payback period that exceeds the expected functional life of an investment generally suggests ______.

the investment is worth considering

➔

the investment is not financially sound the investment should be financed differently the AEAATB is too high

Unanswered

Question 25

0 / 1 pts

The net present value (NPV) method considers the ______ by discounting future cash flows back to the present.

cost of debt

➔

time value of money average payback period market price of assets

Unanswered

Question 26

0 / 1 pts

When using the NPV method, which statement is correct?

A zero NPV always indicates the highest return.

A lower NPV always means a better investment.

A negative NPV means the investment should be accepted.

➔

A positive NPV means the investment should be accepted.

Unanswered

Question 27

0 / 1 pts

The discount rate used in NPV calculations is typically based on the company’s ______. ➔

cost of capital current tax rate inventory turnover loan repayment schedule

Unanswered

Question 28

0 / 1 pts

What is a key advantage of the NPV method over the payback method?

It is easier to calculate.

It ignores cash flows after the payback period.

➔

It uses objective criteria by valuing future cash flows in today’s dollars.

It guarantees a higher total return than other methods.

Unanswered

Question 29

0 / 1 pts

For a given investment amount, the ______ the positive NPV, the better the return on the investment.

lower

➔

higher shorter longer

Unanswered

Question 30

0 / 1 pts

The internal rate of return (IRR) is the interest rate at which the net present value (NPV) of an investment is ______. ➔

zero positive equal to the payback period maximized

Unanswered

Question 31

0 / 1 pts

Which statement best describes the IRR method?

It calculates the shortest payback period for an investment.

➔

It determines the actual rate of return of an investment, considering the time value of money.

It measures the total profit over the life of an investment without discounting cash flows.

It calculates the cost of capital for a company.

Unanswered

Question 32

0 / 1 pts

If an investment’s IRR is higher than the company’s minimum required rate of return, the investment is generally considered ______.

unnecessary unacceptable

➔

acceptable risk−free

Unanswered

Question 33

0 / 1 pts

The IRR is the discount rate that makes the present value of the investment’s costs equal to the ______ of its future benefits. ➔

present value future value net profit margin payback ratio

Unanswered

Question 34

0 / 1 pts

When owners of an entity that is neither a C corporation nor an entity taxed as a C corporation make capital budgeting decisions, they often use ______ to account for income tax effects.

the corporate tax rate of 21% the highest federal tax bracket

➔

the average personal income tax rate of all owners a flat 10% tax rate

Unanswered

Question 35

0 / 1 pts

When multiple consecutive years have the same EAATB, a shortcut to calculating NPV involves ______.

using the future value of an annuity

➔

using the present value of an ordinary annuity (PVOA) averaging the cash flows ignoring discount rates

Unanswered

Question 36

0 / 1 pts

When calculating a PVOA factor for consecutive equal EAATBs that do not include all years of the investment, the correct factor is determined by subtracting the PVOA for the year before the first EAATB from the PVOA for the ______.

first year of the project

➔

last consecutive equal EAATB year total investment period year after the last EAATB

Unanswered

Question 37

0 / 1 pts

The lowest total cost (LTC) method is most commonly used by business owners who must ______ and want to do so at the lowest overall cost.

find the quickest payback period avoid assets with the shortest life

➔

replace high−priced fixed assets get the highest net present value

Unanswered

Question 38

0 / 1 pts

How is the LTC method similar to the NPV method?

Both calculate payback period in years.

➔

Both use time value of money concepts.

Both result in a positive NPV for the best choice.

Both ignore depreciation expense.

Unanswered

Question 39 Unlike the NPV method, the LTC method will always result in a ______.

positive NPV

➔

negative NPV zero NPV neutral cash flow

0 / 1 pts

Question 40

0 / 1 pts

The goal of the LTC method is to choose the option with ______.

the shortest payback period the highest salvage value

➔

the smallest negative NPV the highest internal rate of return

Unanswered

Question 41

0 / 1 pts

When performing capital budgeting analysis, a benefit must take into account the income taxes that must be paid on it before it can be considered a true benefit. ➔

True False

Unanswered

Question 42

0 / 1 pts

Subject to a variety of limitations, Section 179 of the U.S. tax code allows businesses to immediately expense up to 100% of the cost of a fixed−asset purchase for tax purposes when that fixed−asset purchase meets certain criteria. ➔

True False

Unanswered

Question 43

0 / 1 pts

While a company may use one method of depreciation for general accounting and financial statement preparation purposes, typically a company uses an alternative method to determine depreciation expense for tax purposes. ➔

True False

Question 44

0 / 1 pts

The payback method’s calculation considers the time value of money.

True

➔

False

Unanswered

Question 45

0 / 1 pts

The payback method favors investments with a quick return over those with the largest overall return because it doesn’t consider the value of the cash flows that occur beyond the payback period. ➔

True False

Unanswered

Question 46

0 / 1 pts

When making a decision using net present value (NPV), if the NPV is positive, make the investment. If the NPV is negative, don’t make the investment. ➔

True False

Unanswered

Question 47

0 / 1 pts

The internal rate of return (IRR) is the interest rate that, when used as the discount rate to determine the net present value (NPV) of a proposed investment, results in an NPV that is positive.

True

➔

False

Unanswered

Question 48

0 / 1 pts

If there are multiple consecutive years with the same expected annual after−tax benefit (EAATB), one present value of an ordinary annuity (PVOA) calculation can replace multiple present value of a lump sum calculations.

➔

True False

Unanswered

Question 49

0 / 1 pts

With the lowest total cost method (LTC), the goal is to determine the least expensive purchase option, which is the option with the smallest negative net present value (NPV). ➔

True False

Unanswered

Question 50

0 / 1 pts

Because the LTC method ignores depreciation expense, income taxes, and time value of money, it can point a business owner toward an unobvious correct purchase choice.

True

➔

False

chapter 12

Unanswered

Question 1

0 / 1 pts

Cash harvest options can generally be categorized into those that ______.

reduce operating expenses and those that increase it

➔

involve an owner exiting the business and those that do not require liquidation of assets and those where liquidation is optional are only available to C corporations and those that are available to all corporations

Unanswered

Question 2

0 / 1 pts

A ______ is an agreement that limits an individual’s ability to compete with a business after the individual has been an employee of the business or sold the business. ➔

non−compete agreement buy−sell agreement liquidation dissolution

Unanswered

Question 3

0 / 1 pts

Legally terminating the existence of a business is called a ______.

non−compete agreement buy−sell agreement liquidation

➔

dissolution

Unanswered

Question 4

0 / 1 pts

Which situation is an example of a cash harvest option where the owner stays involved in the business?

selling the business to a competitor

➔

leveraged recapitalization initial public offering (ipo) liquidation of assets

Unanswered

Question 5

0 / 1 pts

A leveraged recapitalization allows a company to take on substantial debt to pay dividends or distributions to owners while the owner ______.

sells all ownership shares transfers control to a successor

➔

maintains full ownership of the company liquidates the business

Unanswered

Question 6

0 / 1 pts

The primary purpose of business succession planning is to ______.

increase cash flow to owners secure outside investors for expansion reduce the company’s tax obligations

➔

identify who will take over management in the event the owner retires, becomes incapacitated, or dies

Unanswered

Question 7

0 / 1 pts

A financial strategy whereby the debt used to purchase a company is collateralized fully or partially by the assets or cash flows of the company being purchased is called ______.

due diligence the Gordon growth model a leveraged recapitalization

➔

a leveraged buyout

Question 8

0 / 1 pts

A financial strategy whereby a company takes on substantial debt that is then used to make significant dividend or distribution payments to the company’s owners is called ______.

due diligence the Gordon growth model

➔

a leveraged recapitalization a leveraged buyout

Unanswered

Question 9

0 / 1 pts

An effective business succession plan should ideally be ______ and transparent to all stakeholders to avoid distress and disagreements. ➔

in writing informal oral confidential

Unanswered

Question 10

0 / 1 pts

A comprehensive description of a business that business brokers, merger and acquisition advisors, and investment banking firms distribute to the individuals and companies they think will have an interest in buying the business is called a ______.

retainer term sheet

➔

selling memo due diligence list

Unanswered

Question 11

0 / 1 pts

A usually bulleted list of the significant conditions and circumstances associated with a proposed business arrangement is called a ______.

retainer

➔

term sheet selling memo due diligence list

Unanswered

Question 12

0 / 1 pts

A capital gain occurs when an owner or investor sells all or part of a company for ______ than their investment in the company.

less equal value

➔

more book value only

Unanswered

Question 13

0 / 1 pts

The discounted cash flow method of business valuation is a methodology that places a value on a business by determining, at a specified discount rate, the sum of the ______ values of all of the business’s expected future cash flows.

future

➔

present average weighted−average

Unanswered

Question 14

0 / 1 pts

Which of the following statements is false with regard to selling a business?

An asset−only purchase is often preferable for a buyer.

To get the best price for your business, beyond sharing your financial statements, you’ll want to be able to produce two or three years of accurate tax returns.

One type of professional help that’s almost always required when selling a business is the guidance of a good attorney.

➔

Selling a business, though generally a large and complex transaction, rarely brings with it a significant emotional impact for a business owner.

Unanswered

Question 15

0 / 1 pts

Ava is looking to sell her large technology business that is valued at $400 million. Who should she hire to help her execute the sale?

a mergers and acquisitions advisor a business broker

➔

an investment banking firm a Certified Business Intermediary

Unanswered

Question 16

0 / 1 pts

Which of the following statements is false with regard to selling a business?

If you’re willing to stay on with the business for a specified period of time after selling it, this usually reduces the perceived risk on the part of the buyer and increases the perceived value of your company.

If you’re in the process of attempting to sell a business for the first time, realize that you likely don’t know the proper procedures and etiquette and that you should proceed cautiously.

If your business holds significant assets whose market value can change significantly over time, the services of a commercial realtor or a professional appraiser may be in order.

➔ Potential buyers will be unconcerned if a business is dependent on one or two major customers, as long as those customers are financially sound.

Unanswered

Question 17

0 / 1 pts

Which of the following statements is false with regard to selling a business? ➔

The right time to sell your business is when the business’s sales and profitability start to decline.

In general, if market conditions aren’t good, wait until market conditions improve before attempting to sell your business.

It is possible for in−person presentations to interested potential acquirers to take the form of a fairly informal interview−style meeting with one person at a lunch.

During due diligence, whether the answers are verbal or written, you should always be careful to qualify your answers as necessary.

Unanswered

Question 18

0 / 1 pts

Which of the following statements is false with regard to selling a business?

Many business owners are nervous about the business sale close, but most closes are incident−free.

➔ A valuation of the business prepared by the owner will hold more weight with potential buyers than a valuation prepared by a professional.

Companies attractive to potential buyers have a good reputation and a clear competitive advantage, offer reliable products and services, have multiple growing revenue streams that include identified repeat customers, and, ideally, are profitable.

The discounted cash flow method is the most commonly used method to value a business.

Unanswered

Question 19

0 / 1 pts

Which of the following statements is false with regard to selling a business?

Before the first offer from a buyer is ever presented, it’s wise to get all of the business’s owners and investors to agree what is—and what is not—an acceptable offer.

➔

It is highly unusual for your business’s acquirer to ask you to sign a non−compete agreement.

Often, the stock transferred in exchange for a business is restricted by the buyer from being immediately sold.

An expected large tax bill as a result of a business’s sale requires that a certain minimum amount of cash be part of any deal struck.

Unanswered

Question 20

0 / 1 pts

Which of the following statements about business dissolution is false?

It is wise to formally notify your suppliers, your distributors, and all the others with whom you’ve done business within the last 12 months of your company’s impending closure.

➔ The requirements and process for formal business dissolution are the same for every state and for every legal form of business.

The very last item that should be terminated is the business’s checking account.

The last tax return of any type filed should be marked “final.”

Unanswered

Question 21

0 / 1 pts

Liquidation of a business means ______.

converting the business to a pass−through entity selling only the profitable segments of the business issuing new shares to investors

➔

selling all assets, paying liabilities, and distributing remaining cash to owners

Unanswered

Question 22

0 / 1 pts

Dissolution of a business refers to ______.

selling the business to a competitor

➔

legally terminating the existence of the business restructuring company debt transferring ownership to employees

Unanswered

Question 23

0 / 1 pts

An employee stock ownership plan (ESOP) is ______.

a plan for employees to purchase company stock on the public market a retirement plan funded by company profits

➔

an employee benefit plan designed to invest primarily in the stock of the sponsoring employer a mandatory employee ownership structure for all private companies

Unanswered

Question 24 Why is a Tier 2 Regulation A offering is sometimes called a “mini−IPO”?

0 / 1 pts

➔

Regulation A lets smaller companies list Tier 2 offerings on securities exchanges like NASDAQ and NYSE.

Regulation A lets large companies list small Tier 2 offerings on securities exchanges like NASDAQ and NYSE. Regulation A lets a company conduct a traditional IPO without selling most of their ownership.

Regulation A lets startup companies conduct their first IPO through a Tier 2 offering.

Unanswered

Question 25

0 / 1 pts

Jamal is a business broker. At his job, he typically assists in the sale of companies valued at _______. ➔

less than $2 million $2 million to $20 million $20 million to $100 million over $100 million

Unanswered

Question 26

0 / 1 pts

Which type of professional usually assists in selling very large or complex companies valued from $100 million to over $1 billion?

business broker M&A advisor

➔

investment banking firm commercial realtor

Unanswered

Question 27

0 / 1 pts

Properly positioning a company for sale involves steps such as clarifying what’s being sold, preparing the business for sale, and ______.

eliminating all debt before the sale

➔

putting the company on the market at the right time and for the right reasons reducing staff size before listing the company selling to the highest bidder regardless of fit

Unanswered

Question 28

0 / 1 pts

Buyers are most interested in which financial measure when evaluating a business for purchase?

total revenue total assets owned number of employees

➔

profits and profitability

Unanswered

Question 29

0 / 1 pts

A common benchmark for revenue diversification is that no single customer should represent more than ______ of a business’s total sales. ➔

5% 10% 15% 25%

Unanswered

Question 30

0 / 1 pts

What time is generally considered the best time to sell a business?

When the business is declining.

➔

When the business is at a peak of strength.

When the business is struggling to cover expenses.

When there is no competition in the market.

Unanswered

Question 31

0 / 1 pts

During the business sale process, keeping the business in top shape means maintaining strong operations and ______.

reducing inventory to minimum levels

➔

presenting a clean and well−maintained appearance

eliminating all discretionary expenses cutting employee wages to increase profit

Unanswered

Question 32

0 / 1 pts

What is one of the six steps to execute the business sale process?

Make video presentations to share online with potential buyers.

Lay off all nonessential employees.

➔

Transition the business post−sale.

Eliminate all liabilities before starting negotiations.

Unanswered

Question 33

0 / 1 pts

A management presentation differs from a selling memo because it typically includes more visuals, company history, and ______.

details about competitors’ weaknesses a legally binding purchase agreement

➔

profiles of key employees and their roles complete audited tax returns

Unanswered

Question 34

0 / 1 pts

A non−compete agreement may be considered unreasonable if it is too long, covers too large an area, or ______.

involves a cash payment requires ongoing consulting work is negotiated by an attorney

➔

prevents a person from earning a living

Unanswered

Question 35

0 / 1 pts

At the close of a business sale, what typically occurs? ➔

Buyer and seller sign final paperwork, shake hands, and issue press releases.

The seller immediately leaves and has no further interaction with the buyer.

All employees are replaced by the buyer’s team.

All liabilities of the company are eliminated.

Unanswered

Question 36

0 / 1 pts

If a business owner sells their business in its entirety and has no consulting agreement, the post−sale transition is typically limited to informing employees, wishing them well, and ______.

negotiating new supplier contracts

➔

packing up and leaving overseeing operations for six months reviewing the buyer’s financials

Unanswered

Question 37

0 / 1 pts

When a seller stays on post−sale under a consulting agreement, one of their primary responsibilities is ______.

increasing their ownership stake in the company retaining full control of company decision−making

➔

helping integrate cultures and maintaining employee morale negotiating the buyer’s future acquisitions

Unanswered

Question 38 During the post−sale transition, it’s important for the former owner to accept that ______.

they will still make all major business decisions

➔

the new owner may implement significant changes the company will operate exactly as before the former owner retains control of employees

0 / 1 pts

Unanswered

Question 39

0 / 1 pts

When a business owner sells only the assets of the company, they are left with a shell of a company that must be ______. ➔

legally dissolved reorganized for future operations converted into a nonprofit merged with the buyer’s company

Unanswered

Question 40

0 / 1 pts

Before a state grants formal dissolution, many states require confirmation that ______.

the business has been sold to a new owner who passed a background check

➔

all final tax returns have been filed and taxes paid the owner has secured new business financing a successor company has been registered

Unanswered

Question 41

0 / 1 pts

Before formally dissolving a business, the last tax return filed should be marked “final.”. ➔

True False

Unanswered

Question 42

0 / 1 pts

Ideally, a good business succession plan is in writing and transparent to all of a business’s stakeholders so that, when the time comes to institute the plan, the process can move forward with those most affected by the plan both aware of and in agreement with the plan. ➔

True False

Question 43

0 / 1 pts

In order for a business owner to harvest cash via capital gain, the owner must sell 100% of their ownership of a business.

True

➔

False

Unanswered

Question 44

0 / 1 pts

In association with a U.S. initial public offering (IPO), the Securities and Exchange Commission (SEC) requires that 100% of the ownership of a company be offered for sale to the general public.

True

➔

False

Unanswered

Question 45

0 / 1 pts

Regulation A gives a smaller company the ability to make a limited−size public offering, including the ability to list Tier 2 offerings on the Nasdaq Stock Market (NASDAQ) and the New York Stock Exchange (NYSE). ➔

True False

Unanswered

Question 46

0 / 1 pts

Guillermo’s business holds significant assets in the form of precious metals and gems. When selling his business, he should also consider hiring a professional appraiser to determine the value of his assets. ➔

True False

Unanswered

Question 47

0 / 1 pts

Buying intellectual property is attractive to big companies, so having intellectual property will likely be helpful if you want to sell your company someday.

➔

True False

Unanswered

Question 48

0 / 1 pts

Attempting to sell a business should only occur after properly positioning the business for sale. ➔

True False

Unanswered

Question 49

0 / 1 pts

The need to introduce new products and services is one of the most common reasons large companies purchase other companies. ➔

True False

Unanswered

Question 50

0 / 1 pts

No matter how unappealing they are, never exclude a company from your list of potential acquirers.

True

➔

False

chapter 13

Unanswered

Question 1

0 / 1 pts

What is an appropriate way to value a business?

based on expected stock market trends based on equity on the company’s balance sheet

➔

based on market comparisons of similar companies based on employee testimonials

Unanswered

Question 2

0 / 1 pts

A proper business valuation primarily focuses on ______.

the time and money invested in the business the company’s historical performance only

➔

the expected future cash flows of the business the amount of taxes paid in prior years

Unanswered

Question 3

0 / 1 pts

A business is ultimately worth the price it can ______ in the marketplace.

list

➔

command record borrow

Unanswered

Question 4

0 / 1 pts

Martin wants is conducting a business valuation on his graphic design company. He wants to use an approach that considers his business’s ability to generate net income and positive cash flow. Which

approach would fit his needs?

asset−based valuation market−based valuation book value method

➔

earnings−based valuation

Unanswered

Question 5

0 / 1 pts

The capitalization of earnings method calculates value by dividing annual net income or net cash flow by ______.

the company’s debt ratio

➔

required rate of return annual depreciation total assets

Unanswered

Question 6

0 / 1 pts

Elio has a company that is being liquidated. Which business valuation method would be most useful him to use? ➔

asset−based valuation market−based valuation discounted cash flow capitalization of earnings

Unanswered

Question 7 A key limitation of the market−based valuation method is that ______.

it ignores asset values

➔

it requires detailed sales data on comparable businesses, which may be hard to obtain it cannot be applied to small businesses it does not consider competitive advantages

0 / 1 pts

Unanswered

Question 8

0 / 1 pts

The discounted cash flow method is more commonly used than the capitalization of earnings method because ______.

it ignores year−to−year changes in earnings it assumes earnings remain constant

➔

it accounts for changes in earnings over time it is simpler to calculate

Unanswered

Question 9

0 / 1 pts

The discounted cash flow (DCF) method determines the value of a business by calculating the sum of the present values of all expected future cash flows at a specified ______.

capital structure

➔

discount rate equity multiplier growth rate

Unanswered

Question 10

0 / 1 pts

The DCF method is considered the most commonly used method of business valuation because it focuses on a company’s ______.

historical profits book equity value

➔

expected future cash flows total asset base

Unanswered

Question 11

0 / 1 pts

Which ancient civilization is believed to have used techniques similar to discounted cash flow when calculating interest due on loans?

Egyptians Greeks Romans

➔

Babylonians

Unanswered

Question 12

0 / 1 pts

The Gordon growth model assumes that cash flows after the forecast period will grow at a ______ rate forever.

fluctuating declining

➔

constant variable

Unanswered

Question 13

0 / 1 pts

The DCF method became more formalized and popular as a valuation method following which event? ➔

Stock Market Crash of 1929.

Industrial Revolution.

Dot−com Bubble Burst.

2008 Financial Crisis.

Unanswered

Question 14 The present value factor (PVF) formula used in the DCF method is ______.

PVF = (1 + i)n

➔

PVF = (1 / (1 + i)n) PVF = FV × (1 + i)n PVF = PV × i × n

0 / 1 pts

Question 15

0 / 1 pts

The terminal value in the DCF method represents ______.

the value of assets on the balance sheet the equity portion of the business the depreciation adjusted market value

➔

the value of all cash flows beyond the forecast period

Unanswered

Question 16

0 / 1 pts

In the Gordon growth model, the denominator of the formula is equal to ______.

long−term growth rate – discount rate

➔

discount rate – long−term growth rate discount rate + growth rate discount rate × growth rate

Unanswered

Question 17

0 / 1 pts

Why does the Gordon growth model remain useful even though companies do not exist forever? ➔

Because far−future cash flows have negligible present value.

Because it assumes companies stop growing after 5 years.

Because it ignores terminal value.

Because it calculates growth based on net income.

Unanswered

Question 18 Equity value in a DCF valuation is most relevant when ______.

determining the total revenue of the company

➔

transferring or selling ownership interest estimating annual depreciation calculating book value of assets

0 / 1 pts

Unanswered

Question 19

0 / 1 pts

In a DCF valuation, the discount rate is often chosen based on ______. ➔

industry averages and perceived risk the company’s tax rate shareholder dividend expectations historical cost of fixed assets

Unanswered

Question 20

0 / 1 pts

In determining the value of one share of stock in a corporation using DCF, equity value is divided by ______.

book value of assets earnings per share

➔

number of common shares outstanding total liabilities

Unanswered

Question 21

0 / 1 pts

The enterprise value of a company is calculated as ______.

equity value + cash – debt

➔

equity value + debt – cash equity value – debt – cash equity value – debt + cash

Unanswered

Question 22

0 / 1 pts

Jordan is calculating enterprise value for her skin care business. For the purpose of her calculations, debt includes ______

accounts payable and payroll payable taxes payable and accrued expenses

➔

mortgages, equipment loans, and notes payable all liabilities on the balance sheet

Unanswered

Question 23

0 / 1 pts

For enterprise value calculation, cash on the balance sheet is ______.

added to equity value

➔

subtracted from equity value ignored in the calculation treated as a liability

Unanswered

Question 24

0 / 1 pts

Which liability is considered debt for enterprise value purposes? ➔

bank lines of credit payroll taxes payable accounts payable

Unanswered

Question 25

0 / 1 pts

Most business brokers, M&A advisors, and investment banking firms consider which measure the best estimate of the value of a business to be put on the market for sale?

book value

➔

enterprise value equity value market capitalization

Question 26

0 / 1 pts

Daniel is preparing to sell his clothing company. The business broker he hired suggests that enterprise value would be the best estimate of the value of Daniel’s company. When Daniel and the broker calculate the company’s enterprise value, they will see that it reflects the value of ______.

only the company’s equity the company’s assets minus liabilities only the company’s tangible assets

➔

the company’s equity plus its debt minus its cash

Unanswered

Question 27

0 / 1 pts

When selling an entire company, the valuation typically uses ______. ➔

enterprise value equity value liquidation value book value of equity

Unanswered

Question 28

0 / 1 pts

When performing a business valuation, the discount rate is usually ______ compared to the discount rates used for capital budgeting.

lower

➔

higher the same irrelevant

Unanswered

Question 29

0 / 1 pts

What is the most common reason business valuation discount rates are higher than capital budgeting discount rates?

Lower cash flow projections.

➔

Higher levels of uncertainty and risk.

Easier access to financing.

Consistent asset growth.

Unanswered

Question 30

0 / 1 pts

Aisha runs a medium−sized marketing company with an annual revenue of $150 million. When conducting her business valuation, she will likely use a discount rate of ______.

5–10% 10–15%

➔

20–25% 30–35%

Unanswered

Question 31

0 / 1 pts

Free cash flow is calculated as ______.

cash flows from operations + capital expenditures

➔

cash flows from operations – capital expenditures net income – capital expenditures net income + depreciation + amortization

Unanswered

Question 32

0 / 1 pts

Amortization expense represents ______.

the purchase of new intangible assets the increase in intangible asset values the writing off of tangible assets over time

➔

the writing off of intangible assets over time

Unanswered

Question 33

0 / 1 pts

Marina has a start−up company that has minimal fixed assets or capital expenditures. She can use projected net income in place of ______.

discount rate capital gains

➔

free cash flow debt−to−equity ratio

Unanswered

Question 34

0 / 1 pts

The discount rate, projected net income, and expected future cash flows used in a discounted cash flow business valuation are ______.

rarely challenged fixed by accounting standards

➔

highly subject to challenge irrelevant to investors

Unanswered

Question 35

0 / 1 pts

The formula for calculating free cash flow is ______. ➔

cash flows from operations – capital expenditures net income + depreciation + amortization revenue – operating expenses net income – taxes – interest

Unanswered

Question 36 Why are discount rates for business valuation often higher than those used for capital budgeting?

Because businesses typically undervalue their assets.

➔

Due to higher uncertainty, perceived risks, and ownership transfer risks.

Because taxes increase discount rates automatically.

Due to increased depreciation of fixed assets.

0 / 1 pts

Unanswered

Question 37

0 / 1 pts

One advantage of the discounted cash flow method is that it focuses on ______.

short−term profit fluctuations historical asset values

➔

long−term anticipated future earnings past operating performance

Unanswered

Question 38

0 / 1 pts

Compared to asset− and market−based methods of business valuation, the discounted cash flow method offers a number based on more ______.

historically based appraisals

➔

objective calculations subjective appraisals of value short term perspectives

Unanswered

Question 39

0 / 1 pts

A major disadvantage of the discounted cash flow method is that ______.

it cannot be applied to public companies it ignores long−term growth rates it always produces lower valuations than asset−based methods

➔

it requires high confidence in anticipated future cash flows

Unanswered

Question 40 The valuation number from the discounted cash flow method is highly dependent on ______.

asset depreciation and historical costs

0 / 1 pts

➔

the discount rate and assumed long−term growth rate shareholder equity only market interest rates from the prior year

Unanswered

Question 41

0 / 1 pts

The equity number on a company’s balance sheet accurately reflects the true market value of the business.

True

➔

False

Unanswered

Question 42

0 / 1 pts

The discounted cash flow method accounts for changes in a company’s earnings from year to year. ➔

True False

Unanswered

Question 43

0 / 1 pts

The discounted cash flow method values a business by estimating future cash flows and discounting them back to their present value. ➔

True False

Unanswered

Question 44 The Gordon growth model assumes that cash flows will grow at a fluctuating rate indefinitely.

True

➔

False

0 / 1 pts

Question 45

0 / 1 pts

Enterprise value is calculated by adding a company’s equity value to its debt and then subtracting its cash. ➔

True False

Unanswered

Question 46

0 / 1 pts

For purposes of calculating enterprise value, accounts payable is included as debt.

True

➔

False

Unanswered

Question 47

0 / 1 pts

Discount rates for business valuation are typically lower than those used for capital budgeting because the forecasted cash flows are more certain.

True

➔

False

Unanswered

Question 48

0 / 1 pts

Free cash flow is calculated as cash flows from operations minus capital expenditures. ➔

True False

Unanswered

Question 49

0 / 1 pts

The discounted cash flow method works best when there is a high degree of confidence in the anticipated future cash flows of a business. ➔

True False

Unanswered

Question 50

0 / 1 pts

The valuation result from the discounted cash flow method is largely unaffected by the discount rate used.

True

➔

False

chapter 14

Unanswered

Question 1

0 / 1 pts

Emmanuel wants to reduce risk in his accounting firm. He decides to purchase professional liability insurance for his firm. By purchasing insurance, Emmanual is engaging in ______.

risk avoidance risk reduction

➔

risk transfer risk assumption

Unanswered

Question 2

0 / 1 pts

Which type of insurance would most benefit a food truck business operating in an area that is highly susceptible to earthquakes?

commercial property insurance

➔

business interruption insurance long−term care insurance product liability insurance

Unanswered

Question 3

0 / 1 pts

_______ is a short−term debt instrument issued by a company that is guaranteed by that company’s bank.

A commodity Commercial paper A mutual fund

➔

A banker’s acceptance

Unanswered

Question 4

0 / 1 pts

______ is an unsecured, short−term debt instrument, typically issued in a large denomination by a large bank, a foreign government, or a large corporation with a strong balance sheet, the proceeds of which are typically used to finance accounts receivable or inventory or to meet short−term debt obligations.

A commodity

➔

Commercial paper A mutual fund A banker’s acceptance

Unanswered

Question 5

0 / 1 pts

______ is an investment vehicle set up by a company that collects funds from investors and uses the funds to purchase large blocks of bonds, stocks, and other types of investment securities.

A commodity Commercial paper

➔

A mutual fund A banker’s acceptance

Unanswered

Question 6

0 / 1 pts

______ is an article of commerce that can be traded, bought, or sold in bulk on some type of exchange. ➔

A commodity Commercial paper A mutual fund A banker’s acceptance

Unanswered

Question 7 FDIC insurance covers all of the following types of deposit accounts except ______.

checking accounts savings accounts Certificates of Deposit

0 / 1 pts

➔

brokerage accounts

Unanswered

Question 8

0 / 1 pts

______ are bonds issued by a government or a government agency other than the federal government or one of its government−sponsored enterprises (GSEs) or agencies.

U.S. Treasury bonds High−yield bonds Agency

➔

Municipal bonds

Unanswered

Question 9

0 / 1 pts

______ are securities issued by the federal government in order to finance its budget deficit. ➔

U.S. Treasury bonds High−yield bonds Agency Municipal bonds

Unanswered

Question 10

0 / 1 pts

______ are bonds issued by less financially sound entities than those that issue investment−grade bonds.

U.S. Treasury bonds

➔

High−yield bonds Agency Municipal bonds

Unanswered

Question 11

0 / 1 pts

The municipality of Lakewood, Ohio, is issuing 6 percent interest rate, 30−year, tax−free municipal bonds.

Peter Peterson, an Ohio resident who pays out 25 percent of his income annually for federal, state, and

local income taxes, is considering purchasing some of these bonds. When comparing this investment with other potential investments that are not tax free, what yield should Peter use? ➔

8.00% 6.00% 4.50% 24.00%

Unanswered

Question 12

0 / 1 pts

An investor is interested in purchasing a $50,000, five−year, 8 percent interest rate bond to be issued today. The bond pays interest semiannually, and the applicable current market interest rate is 6 percent.

What is the amount of the semi−annual interest payments associated with this bond?

$4,000

➔

$2,000 $3,000 $1,500

Unanswered

Question 13

0 / 1 pts

An investor is interested in purchasing a $50,000, five−year, 8 percent interest rate bond to be issued today. The bond pays interest semiannually, and the applicable current market interest rate is 6 percent.

What discount rate would we use to determine the present value of the semi−annual interest payments associated with this bond?

8% 4% 6%

➔

3%

Unanswered

Question 14

0 / 1 pts

An investor is interested in purchasing a $50,000, five−year, 8 percent interest rate bond to be issued today. The bond pays interest semiannually, and the applicable current market interest rate is 6 percent.

What is the principal amount associated with this bond?

$30,000

$40,000

➔

$50,000 $70,000

Unanswered

Question 15

0 / 1 pts

An investor is interested in purchasing a $50,000, five−year, 8 percent interest rate bond to be issued today. The bond pays interest semiannually, and the applicable current market interest rate is 6 percent.

What discount rate would we use to determine the present value of the principal amount associated with this bond?

8% 4% 6%

➔

3%

Unanswered

Question 16

0 / 1 pts

To achieve financial success and continued security, one should preserve capital by investing in vehicles that provide an after−tax return that is ______.

lower than the inflation rate equal to the inflation rate

➔

greater than the inflation rate not impacted by inflation

Unanswered

Question 17 Portfolio risk refers to the risk that ______.

a single investment fails to generate any return only equities will lose value over time

➔

the combination of investments will fail to meet financial objectives all investments will lose value simultaneously due to market collapse

0 / 1 pts

Question 18

0 / 1 pts

What is one of the five main asset classes of investments?

personnel and employees

➔

bonds and similar debt instruments intellectual property life insurance policies

Unanswered

Question 19

0 / 1 pts

Actively managing the diversification and allocation of financial assets is done primarily to ______.

increase short−term profits

➔

reduce portfolio risk eliminate inflation guarantee fixed returns

Unanswered

Question 20

0 / 1 pts

______ will receive both the current and any unpaid back dividends, called dividends in arrears, before any common shareholder receives any dividend. ➔

Cumulative preferred stock Callable preferred stock Convertible preferred stock Call premium stock

Unanswered

Question 21 ______ is preferred stock that may be exchanged for shares of common stock.

Cumulative preferred stock Callable preferred stock

➔

Convertible preferred stock

0 / 1 pts

Call premium stock

Unanswered

Question 22

0 / 1 pts

______ is the investment technique of accumulating a position in an investment by buying a fixed dollar amount of that investment on a regular basis, regardless of its price.

Position trading Hedging Margin trading

➔

Dollar−cost averaging

Unanswered

Question 23

0 / 1 pts

______, also known as buy and hold, involves buying stocks with the intent to hold them for a long period time. ➔

Position trading Hedging Margin trading Dollar−cost averaging

Unanswered

Question 24

0 / 1 pts

______ involves an investor borrowing money from the brokerage house where they have a brokerage account in order to buy stock.

Position trading Hedging

➔

Margin trading Dollar−cost averaging

Unanswered

Question 25

0 / 1 pts

______ involves the use of options by an investor to limit her potential loss if the price of a security she buys heads in the direction opposite to that anticipated or desired.

Position trading

➔

Hedging Margin trading Dollar−cost averaging

Unanswered

Question 26

0 / 1 pts

All of the following statements about short−term trading, margin trading, selling short, and options trading are true, except ______.

short−term trading, margin trading, selling short, and options trading are all generally considered speculative and high risk.

short−term trading, margin trading, selling short, and options trading are all generally considered riskier than buying and holding shares of stock long term.

short−term trading, margin trading, selling short, and options trading are not advised for novice or unsophisticated investors.

➔ short−term trading, margin trading, selling short, and options trading guarantee a better overall return compared to more traditional investment techniques like position trading and dollar−cost averaging.

Unanswered

Question 27

0 / 1 pts

A(n) ______ is the price that a prospective buyer is willing to pay for a security.

ask price

➔

bid price margin call call premium

Unanswered

Question 28 A(n) ______ is the price that a prospective seller is willing to accept for a security.

0 / 1 pts

➔

ask price bid price margin call call premium

Unanswered

Question 29

0 / 1 pts

A(n) ______ is an amount of money a company will pay above the current market price for a share of its preferred stock if the stock is called back by the company.

ask price bid price margin call

➔

call premium

Unanswered

Question 30

0 / 1 pts

A(n) ______ is a demand by a brokerage house that an investor deposit additional cash or securities in order to cover potential losses.

ask price sales load

➔

margin call call premium

Unanswered

Question 31 A ______ is a fee charged when certain mutual fund shares are purchased or sold by an investor.

bid price

➔

sales load margin call call premium

0 / 1 pts

Question 32

0 / 1 pts

Which of the following statements is false?

Commercial real estate is land and buildings used by a property owner to generate rental income from businesses.

Owner−occupied residential real estate is limited by law to a person’s primary residence and one additional vacation home.

Non−owner−occupied residential real estate is subject to depreciation.

➔ A real estate investment trust (REIT) is an attractive investment because it must distribute 100 percent of its taxable income to its investors each year.

Unanswered

Question 33

0 / 1 pts

Which of the following statements is false? ➔ Historically, precious metals have delivered a higher return than many other types of investments, including stocks.

Investing in collectables like baseball cards, coins, stamps, paintings, and antiques is considered highly speculative.

Fuels, metals, and agricultural products are examples of commodities.

A futures contract is an agreement to buy or sell a commodity at a specified future date at a specified price.

Unanswered

Question 34

0 / 1 pts

Owner−occupied residential real estate is limited by law to ______.

a person’s primary residence only a person’s primary residence and two vacation homes

➔

a person’s primary residence and one additional vacation home unlimited properties owned by the same individual

Unanswered

Question 35

0 / 1 pts

Which type of real estate investment typically becomes subject to depreciation because it generates income?

owner−occupied residential real estate

➔

non−owner−occupied residential real estate vacant land held for personal use personal vacation homes

Unanswered

Question 36

0 / 1 pts

One major tax benefit of owning rental real estate as a pass−through entity is that net proceeds are classified as ______.

earned income subject to self−employment tax active business income taxed at corporate rates exempt income not reported on tax returns

➔

passive income not subject to Social Security and Medicare taxes

Unanswered

Question 37

0 / 1 pts

A 1031 exchange allows a real estate investor to ______. ➔

defer capital gains taxes by reinvesting in a like−kind property of equal or greater value avoid paying all taxes on property sales permanently reduce mortgage interest rates on investment properties convert real estate holdings into tax−free cash

Unanswered

Question 38 Commodity futures are generally highly leveraged, meaning a trader typically posts ______ of the contract’s total value to control it.

1–3%

➔

5–15% 20–25%

0 / 1 pts

50%

Unanswered

Question 39

0 / 1 pts

Precious metals are widely considered a hedge against inflation, but their investment share should generally not exceed ______ of an individual’s total asset holdings.

2%

➔

5% 10% 20%

Unanswered

Question 40

0 / 1 pts

Collectables are considered a speculative investment because their value primarily depends on ______.

consistent interest payments government regulation

➔

market demand exceeding supply predictable long−term appreciation

Unanswered

Question 41

0 / 1 pts

A wise entrepreneur is always trying to reduce risk. ➔

True False

Unanswered

Question 42

0 / 1 pts

Most renters’ and homeowners’ insurance policies don’t cover losses due to flooding. ➔

True False

Unanswered

Question 43

0 / 1 pts

Umbrella insurance refers to liability insurance that’s in excess of an individual’s other specified policies and also potentially primary insurance for losses not covered by an individual’s other insurance policies. ➔

True False

Unanswered

Question 44

0 / 1 pts

A personal homeowner’s insurance policy covers a home−based business in the same way a commercial property insurance policy covers a business operating out of a commercial facility.

True

➔

False

Unanswered

Question 45

0 / 1 pts

A personal auto policy is perfectly adequate to protect both the business and the vehicle’s owner when a vehicle used primarily for business is involved in an accident.

True

➔

False

Unanswered

Question 46

0 / 1 pts

In order to achieve financial success in life and enjoy continued financial security, one must preserve capital by investing in vehicles that provide an after−tax return greater than the inflation rate. ➔

True False

Unanswered

Question 47

0 / 1 pts

In order to achieve financial success in life and enjoy continued financial security, one must actively manage the diversification and allocation of financial assets among the different asset classes and investment vehicles in order to reduce overall investment risk. ➔

True False

Unanswered

Question 48

0 / 1 pts

Because cash equivalents can be quickly and easily converted into cash without significant loss of value, cash equivalents are generally considered superior to cash in terms of liquidity.

True

➔

False

Unanswered

Question 49

0 / 1 pts

Yield is different from an investment’s total return in that yield generally doesn’t consider an asset’s appreciation or depreciation in market value. ➔

True False

Unanswered

Question 50

0 / 1 pts

A corporation’s preferred shareholders are its true owners and use their voting rights to exercise control over the corporation.

True

➔

False

chapter 15

Unanswered

Question 1

0 / 1 pts

Retirement income in the United States primarily comes from which three main sources?

savings accounts, pensions, and stocks

➔

social security, employer−sponsored plans, and iras bonds, 401(k)s, and annuities pensions, savings, and rental income

Unanswered

Question 2

0 / 1 pts

Belinda was born in 1932. To receive social security retirement benefits, she must have earned how many credits?

20 credits 30 credits 35 credits

➔

40 credits

Unanswered

Question 3

0 / 1 pts

Myra is a full−time employee at a nonprofit organization. When it comes to saving for retirement, Myra’s employers most likely offered her a ______ plan.

401(k) solo 401(k)

➔

403(b) pension

Unanswered

Question 4

0 / 1 pts

Social security retirement benefits are based on the average of your highest ______ years of earnings.

25 30

➔

35 40

Unanswered

Question 5

0 / 1 pts

Which type of employer−sponsored plan provides a pre−specified retirement benefit based on earnings history, years of service, and age?

defined contribution plan profit−sharing plan

➔

defined benefit plan SIMPLE IRA

Unanswered

Question 6

0 / 1 pts

Which type of plan involves contributions from an employee and often matching contributions from an employer?

defined benefit plan

➔

defined contribution plan non−deductible IRA SEP IRA

Unanswered

Question 7 What is the age at which most individuals may begin withdrawing funds from an IRA or defined contribution plan without penalty?

55

➔

59½ 65

0 / 1 pts

70

Unanswered

Question 8

0 / 1 pts

By age 73, most individuals must begin taking ______ from traditional IRAs and defined contribution plans.

interest tax penalties modified adjusted gross income (MAGI)

➔

required minimum distributions (RMDs)

Unanswered

Question 9

0 / 1 pts

What is the annual contribution limit for traditional or Roth IRAs in 2025 for individuals under age 50?

$6,000

➔

$7,000 $16,500 $23,500

Unanswered

Question 10

0 / 1 pts

Which type of IRA allows after−tax contributions and offers tax−free withdrawals on earnings after age 59½ if held at least five years?

traditional deductible IRA traditional non−deductible IRA

➔

Roth IRA SEP IRA

Unanswered

Question 11 Why are SIMPLE IRA plans attractive to employers?

0 / 1 pts

Employee withdrawals are generally not included in the employee’s taxable income.

➔

They involve little administrative paperwork.

There are no annual required minimum distributions.

All contributions are funded by the employer.

Unanswered

Question 12

0 / 1 pts

In 2025, the annual employee contribution limit for a 401(k) or 403(b) plan is ______.

$7,000 $16,500

➔

$23,500 $70,000

Unanswered

Question 13

0 / 1 pts

Seth is self−employed. He wants to set up a retirement plan for himself, but he finds the process of setting up a solo 401(k) to be too complicated for him. What type of plan that is popular with the self−employed could Seth set up instead?

Deductible IRA Backdoor Roth IRA Non−deductible IRA

➔

SEP IRA

Unanswered

Question 14

0 / 1 pts

Which retirement plan is designed for self−employed individuals with no employees other than a spouse?

SIMPLE IRA

➔

Solo 401(k) SEP IRA Profit−sharing plan

Question 15

0 / 1 pts

Which type of IRA has no required minimum distributions during the account owner’s lifetime?

traditional deductible IRA traditional non−deductible IRA SEP IRA

➔

Roth IRA

Unanswered

Question 16

0 / 1 pts

A Section 529 plan is a ______.

federal tax−deductible savings account for any investment

➔

state−run tax−advantaged college savings program employer−sponsored retirement plan for education expenses federal grant program for tuition payments

Unanswered

Question 17

0 / 1 pts

In a prepaid tuition plan within a Section 529, ______. ➔

contributions buy tuition credits at current rates contributions buy tuition credits at future rates tuition credits can only be purchased after enrollment tuition credits are locked at inflation−adjusted rates

Unanswered

Question 18 Which of the following is true about Section 529 plan tax benefits?

Contributions are always federally tax−deductible.

➔

Earnings grow tax−free when used for qualified expenses.

Nonqualified withdrawals are tax−free.

There is a $2,000 annual contribution limit per beneficiary.

0 / 1 pts

Unanswered

Question 19

0 / 1 pts

Effective January 1, 2024, up to what lifetime amount can be rolled from a 529 plan to a Roth IRA if conditions are met?

$10,000 $25,000

➔

$35,000 $50,000

Unanswered

Question 20

0 / 1 pts

Coverdell Education Savings Accounts (ESAs) differ from 529 plans because ______. ➔

they allow broader investment choices they have no contribution limit they have no income phaseouts they can only be used for college expenses

Unanswered

Question 21

0 / 1 pts

Janine and Gregory want to set up a college savings account for their child. They want a plan that will allow them to also use the funds for non−tuition education expenses while their child is in k−12 school.

What type of plan should they choose? ➔

Coverdell ESA Section 529 plan Series EE and I bonds profit−sharing plan

Unanswered

Question 22 At what age must ESA assets generally be distributed to the beneficiary?

0 / 1 pts

18 21 25

➔

30

Unanswered

Question 23

0 / 1 pts

Which account type may impact a student’s financial aid eligibility the most due to being counted as a student asset?

529 Plan.

Coverdell ESA.

➔

UGMA/UTMA Custodial Account.

Roth IRA.

Unanswered

Question 24

0 / 1 pts

What is the “kiddie tax” related to UGMA/UTMA accounts?

A tax break for minors’ savings accounts.

➔

A tax on a minor child’s unearned income at the parents’ tax rate if it exceeds a threshold.

A penalty on contributions over $2,700.

A flat 10% tax on custodial accounts.

Unanswered

Question 25 The Savings Bond Education Tax Exclusion requires which of the following?

The taxpayer must be under age 24.

Bonds must be registered in the student’s name only.

➔

Bonds must be Series EE or I issued after 1989.

Bonds must be redeemed only after retirement.

0 / 1 pts

Question 26

0 / 1 pts

A key advantage of using a Roth IRA for education savings over a 529 plan is ______.

contributions are tax−deductible

➔

unused funds can be repurposed for retirement without penalty no annual contribution limit applies earnings are always tax−free regardless of use

Unanswered

Question 27

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Why is it often recommended to plan for retirement before fully funding a child’s college expenses?

College can always be paid with federal grants.

Retirement accounts offer higher returns.

➔

Neglecting retirement may endanger the parent’s long−term financial stability.

Colleges do not consider parental income for aid eligibility.

Unanswered

Question 28

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Which of the following is a common method to avoid or reduce probate costs?

Leaving all assets in the probate estate.

➔

Establishing joint ownership with right of survivorship.

Filing for a federal estate lien early.

Converting all property into cash at death.

Unanswered

Question 29

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Estate planning is the process of arranging for the ______ management and disposal of a person’s assets and liabilities during life and after death.

costly and lengthy

➔

tax−efficient, income−maximizing, and asset−protecting probate−required and court−supervised

temporary and flexible

Unanswered

Question 30

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A will is a written document that provides direction for how ______ will be distributed after death.

debts income

➔

assets insurance policies

Unanswered

Question 31

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The probate estate includes property owned by the decedent that requires the appointment of a ______ to manage and distribute the property.

trustee

➔

fiduciary beneficiary executor

Unanswered

Question 32

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Assets held in a payable−on−death (POD) account are generally ______.

included in the probate estate

➔

excluded from the probate estate taxed at a higher rate transferred to the state

Unanswered

Question 33 Joint ownership with right of survivorship is most commonly used for ______.

0 / 1 pts

stocks only insurance policies trust accounts

➔

real estate property

Unanswered

Question 34

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The annual exclusion for gift tax purposes in 2025 allows an individual to gift up to ______ per year to each recipient without reducing the lifetime exclusion.

$10,000 $15,000

➔

$19,000 $25,000

Unanswered

Question 35

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A revocable living trust allows the trustor to ______.

make no changes after it is created

➔

alter provisions during their lifetime eliminate taxes entirely remove beneficiaries at death

Unanswered

Question 36

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A transfer−on−death (TOD) designation can be added to which of the following assets to bypass probate? ➔

home title, car title, securities checking accounts retirement accounts credit card accounts

Question 37

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Celeste is eager to start estate planning. She is worried that upon her death, her estate might take long to settle, and the process could expose her family’s financial information to the public. Celeste appears to be concerned about the downsides of the ______ process.

estate tax small estate exemption

➔

probate trust

Unanswered

Question 38

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An estate tax is levied on ______, while an inheritance tax is paid by ______.

beneficiaries; the estate

➔

the estate; the heirs the heirs; the federal government the trustee; the beneficiaries

Unanswered

Question 39

0 / 1 pts

Ricardo can keep his securities holdings and home title out of probate by using a ______ designation. This designation will pass his assets directly to his beneficiary, his daughter, upon his death.

revocable living trust

➔

transfer−on−death (TOD) small estate exemption trust

Unanswered

Question 40 Which type of trust permanently removes assets from a taxable estate?

revocable living trust

➔

irrevocable trust

0 / 1 pts

POD account TOD designation

Unanswered

Question 41

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A person must have at least 40 credits to qualify for social security retirement benefits if born after 1929. ➔

True False

Unanswered

Question 42

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Roth IRAs require required minimum distributions (RMDs) during the account owner’s lifetime.

True

➔

False

Unanswered

Question 43

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A SIMPLE IRA generally requires an employer to either match employee contributions up to 3% of compensation or make a 2% non−elective contribution. ➔

True False

Unanswered

Question 44

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Section 529 plan contributions are federally tax−deductible.

True

➔

False

Unanswered

Question 45

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Coverdell ESAs have a $2,000 annual contribution limit per beneficiary. ➔

True False

Unanswered

Question 46

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UGMA and UTMA custodial accounts become the legal property of the minor once established. ➔

True False

Unanswered

Question 47

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Roth IRA contributions can be withdrawn tax−free at any time. ➔

True False

Unanswered

Question 48

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Assets held in a properly established revocable living trust are excluded from the probate estate. ➔

True False

Unanswered

Question 49

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A payable−on−death (POD) account automatically transfers assets to the named beneficiary at death, bypassing probate. ➔

True False

Question 50

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Tyra is currently the sole beneficiary of her mother’s payable−on−death (POD) account. Because she is the only beneficiary indicated on the account, she is obligated to share the assets of the account with her younger siblings.

True

➔

False