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Test Bank

Supplement A: Financial Statements and Projections for Startups

Multiple Choice

1. Vivienne wants to produce a report that measures her financial performance on a monthly basis. She wants to see sales- and expense-related activities that result in profit or loss over a period of time. She is interested in producing which of the following statements?

a. backlog statement

b. revenue statement

c. entrepreneur’s scorecard

d. income statement

Learning Objective: A.2: Describe financial statements as an essential part of financial projections.

Cognitive Domain: Application

Answer Location: A.2. Three Essential Financial Statements

Difficulty Level: Medium

AACSB Standard: Application of knowledge

2. Arya wants to produce a financial report that shows the amounts the company owes, what it owns, including the shareholders’ stake at a particular date in time. She wants to produce a/an ______.

a. balance sheet

b. bookings order

c. accounts receivable sheet

d. income statement

Learning Objective: A.2: Describe financial statements as an essential part of financial projections.

Cognitive Domain: Application

Answer Location: A.2. Three Essential Financial Statements

Difficulty Level: Medium

AACSB Standard: Application of knowledge

3. Karter is very busy and wants to produce a financial report that details the inflows and outflows of cash for his company over the last month. He is interested in producing a/an ______.

a. shareholders statement

b. cash flow statement

c. entrepreneur’s scorecard

d. accrued expenses report

Learning Objective: A.2: Describe financial statements as an essential part of financial projections.

Cognitive Domain: Application

Answer Location: A.2. Three Essential Financial Statements

Difficulty Level: Medium

AACSB Standard: Application of knowledge

4. The financial statement in which the cost of goods sold and expenses are subtracted from total revenue to arrive at a net income figure is a/an ______.

a. balance sheet

b. cash flow statement

c. entrepreneur’s scorecard

d. income statement

Learning Objective: A.2: Describe financial statements as an essential part of financial projections.

Cognitive Domain: Comprehension

Answer Location: The Income Statement

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

5. What is the backlog?

a. the amount of money that the company owes vendors

b. the amount of money due to a company from its customers

c. orders that have been received but not delivered to the customer

d. orders that have been delivered to the customer but not yet paid for

Learning Objective: A.2: Describe financial statements as an essential part of financial projections.

Cognitive Domain: Knowledge

Answer Location: The Income Statement

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

6. Operating expenses include which of the following?

a. cost of goods sold

b. liabilities, deferred expenses, and assets

c. sales, general, and administrative expenses

d. amortization and interest expense

Learning Objective: A.2: Describe financial statements as an essential part of financial projections.

Cognitive Domain: Knowledge

Answer Location: The Income Statement

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

7. Earnings before interest, taxes, depreciation, and amortization is the same as ______.

a. net income

b. EB

c. EBITDA

d. operating profits

Learning Objective: A.2: Describe financial statements as an essential part of financial projections.

Cognitive Domain: Knowledge

Answer Location: The Income Statement

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

8. The balance sheet shows ______.

a. what the business owns and what the business owes

b. only net worth

c. current employee salaries

d. shareholder deferred revenue

Learning Objective: A.2: Describe financial statements as an essential part of financial projections.

Cognitive Domain: Comprehension

Answer Location: The Balance Sheet

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

9. ______ are assets that can be converted into cash within a year.

a. Cash flow assets

b. Current assets

c. Intangible assets

d. Deferred assets

Learning Objective: A.4: Describe the journey of cash through the cash conversion cycle.

Cognitive Domain: Knowledge

Answer Location: The Balance Sheet

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

10. ______ is the amount that customers owe to a company after receipt of items or services purchased.

a. Accounts payable

b. Accounts receivable

c. Accounts deferred

d. Accounts accrued

Learning Objective: A.4: Describe the journey of cash through the cash conversion cycle.

Cognitive Domain: Knowledge

Answer Location: The Balance Sheet

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

11. Brynlee paid $500,000 for a company, $100,000 in excess of the book value. Brynlee has ______.

a. $100,000 of expenses

b. $100,000 of intangible assets

c. goodwill of $100,000

d. debt of $100,000

Learning Objective: A.2: Describe financial statements as an essential part of financial projections.

Cognitive Domain: Application

Answer Location: Other Types of Assets

Difficulty Level: Medium

AACSB Standard: Application of knowledge

12. Which of the following are intangible assets?

a. assets you cannot access

b. a plug amount received to balance the books

c. patents, software programs, copyrights, trademarks, and/or brand names

d. property, plant, and equipment

Learning Objective: A.2: Describe financial statements as an essential part of financial projections.

Cognitive Domain: Knowledge

Answer Location: Other Types of Assets

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

13. When a company has long-term investments, it means it ______.

a. has cash, stocks, bonds, and/or real estate that has been on its books longer than one year

b. should be selling them soon so it can become short-term profit

c. has more cash than it needs and it is wasting it on long-term investments

d. is going for a bank loan

Learning Objective: A.2: Describe financial statements as an essential part of financial projections.

Cognitive Domain: Comprehension

Answer Location: Other Types of Assets

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

14. Jaylah has a 5-year bank loan with her business. The principal that is scheduled to be paid in the last 4 years of that 5-year period is considered ______.

a. a loss

b. long-term debt

c. a short-term portion of long-term debt

d. operational cash flows

Learning Objective: A.2: Describe financial statements as an essential part of financial projections.

Cognitive Domain: Application

Answer Location: Liabilities and Shareholder Equity

Difficulty Level: Medium

AACSB Standard: Application of knowledge

15. Kurt has a 5-year bank loan with his business. The principal that is scheduled to be paid in the first 12 months is considered ______.

a. a loss

b. a long-term liability

c. a short-term portion of long-term debt

d. operational cash flows

Learning Objective: A.2: Describe financial statements as an essential part of financial projections.

Cognitive Domain: Application

Answer Location: Liabilities and Shareholder Equity

Difficulty Level: Medium

AACSB Standard: Application of knowledge

16. Shareholder equity includes what two main components?

a. retained earnings and capital stock

b. long-term investments and retained earnings

c. intangible assets and capital stock

d. retained earnings and fixed assets

Learning Objective: A.2: Describe financial statements as an essential part of financial projections.

Cognitive Domain: Knowledge

Answer Location: Liabilities and Shareholder Equity

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

17. Which of the following is a cash inflow?

a. wages

b. shares

c. payment to suppliers

d. dividends to shareholders

Learning Objective: A.2: Describe financial statements as an essential part of financial projections.

Cognitive Domain: Knowledge

Answer Location: The Cash Flow Statement

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

18. A linkage between the financial statements includes which of the following?

a. Net income from the balance sheet is entered into the income statement.

b. Net income from the income statement is entered into the retained earnings in the balance sheet.

c. Assets have to equal liabilities.

d. Cash is the total expenses on the income report.

Learning Objective: A.3: Clarify the relationship between the three financial statements.

Cognitive Domain: Comprehension

Answer Location: A.3. Linkages Between the Three Financial Statements

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

19. Jimi is very interested in managing his cash. You mentioned this course to him and told him about ______, which is the number of days a company’s cash is tied up in the production and sales process.

a. the income statement

b. the cash convention report

c. the cash conversion cycle

d. adding depreciation and amortization to net income

Learning Objective: A.3: Clarify the relationship between the three financial statements.

Cognitive Domain: Knowledge

Answer Location: A.4. The Journey of Cash: The Cash Conversion Cycle

Difficulty Level: Medium

AACSB Standard: Application of knowledge

20. Janis went to her accountant and learned about DSO, defined as ______.

a. a measure of the number of days it takes to collect on accounts receivable

b. a measure of the average number of days it takes to sell the entire inventory of a company

c. a measure of the number of days it takes you to pay your bills

d. equaling DOI + DSO − DPO

Learning Objective: A.4: Describe the journey of cash through the cash conversion cycle.

Cognitive Domain: Knowledge

Answer Location: A.4. The Journey of Cash: The Cash Conversion Cycle

Difficulty Level: Medium

AACSB Standard: Application of knowledge

21. Arabella went to her accountant and learned about DOI, defined as ______.

a. a measure of the number of days it takes to collect on accounts receivable

b. a measure of the average number of days it takes to sell the entire inventory of a company

c. a measure of the number of days it takes you to pay your bills

d. equaling DOI + DSO − DPO

Learning Objective: A.4: Describe the journey of cash through the cash conversion cycle.

Cognitive Domain: Knowledge

Answer Location: A.4. The Journey of Cash: The Cash Conversion Cycle

Difficulty Level: Medium

AACSB Standard: Application of knowledge

22. Jax went to his accountant and learned about the cash conversion cycle, defined as ______.

a. a measure of the number of days it takes to collect on accounts receivable

b. a measure of the average number of days it takes to sell the entire inventory of a company

c. a measure of the number of days it takes you to pay your bills

d. equaling DOI + DSO − DPO

Learning Objective: A.4: Describe the journey of cash through the cash conversion cycle.

Cognitive Domain: Knowledge

Answer Location: A.4. The Journey of Cash: The Cash Conversion Cycle

Difficulty Level: Medium

AACSB Standard: Application of knowledge

23. The pro forma financial statement should include at least three scenarios of your financial forecast, each containing an income statement, balance sheet, and ______.

a. sales statement

b. capitol stock

c. cash flow statement

d. accrued expenses

Learning Objective: A.5: Discuss how to build a pro forma financial statement.

Cognitive Domain: Comprehension

Answer Location: A.5. Building Pro Forma Financial Statements

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

24. Norah is interested in developing her payables policy. She wants to make a policy for which of the following?

a. the process and timing in which obligations to pay for goods and services received by the business will be paid

b. the price and timing of raw materials, and other goods and services necessary to build, sell, and support products

c. how pricing will be determined for her products and services

d. the process and timing in which obligations to pay for products and services sold will be billed and collected

Learning Objective: A.6: Explain how to apply assumptions when building pro forma statements.

Cognitive Domain: Knowledge

Answer Location: A.6. Building Assumptions: Operating Policies and Other Key Assumptions

Difficulty Level: Medium

AACSB Standard: Application of knowledge

25. Norah is interested in developing her purchasing policy. She wants to make a policy for which of the following?

a. the price and timing of raw materials, and other goods and services necessary to build, sell, and support products

b. how pricing will be determined for her products and services

c. the level of compensation and benefits for each type of position in the business

d. the process and timing in which obligations to pay for products and services sold will be billed and collected

Learning Objective: A.6: Explain how to apply assumptions when building pro forma statements.

Cognitive Domain: Knowledge

Answer Location: A.6. Building Assumptions: Operating Policies and Other Key Assumptions

Difficulty Level: Hard

AACSB Standard: Application of knowledge

26. Naseem is interested in developing her pricing policy. She wants to make a policy for which of the following?

a. the price and timing of raw materials, and other goods and services necessary to build, sell, and support products

b. how pricing will be determined for her products and services

c. the level of compensation and benefits for each type of position in the business

d. the process and timing in which obligations to pay for products and services sold will be billed and collected

Learning Objective: A.6: Explain how to apply assumptions when building pro forma statements.

Cognitive Domain: Knowledge

Answer Location: A.6. Building Assumptions: Operating Policies and Other Key Assumptions

Difficulty Level: Hard

AACSB Standard: Application of knowledge

27. Katie is interested in developing her compensation policy. She wants to make a policy for which of the following?

a. the price and timing of raw materials, and other goods and services necessary to build, sell, and support products

b. how pricing will be determined for her products and services

c. the level of compensation and benefits for each type of position in the business

d. the process and timing in which obligations to pay for products and services sold will be billed and collected

Learning Objective: A.6: Explain how to apply assumptions when building pro forma statements.

Cognitive Domain: Knowledge

Answer Location: A.6. Building Assumptions: Operating Policies and Other Key Assumptions

Difficulty Level: Hard

AACSB Standard: Application of knowledge

28. Ana is interested in developing her credit policy. She wants to make a policy for which of the following?

a. the price and timing of raw materials, and other goods and services necessary to build, sell, and support products

b. how pricing will be determined for her products and services

c. the level of compensation and benefits for each type of position in the business

d. the process and timing in which obligations to pay for products and services sold will be billed and collected

Learning Objective: A.6: Explain how to apply assumptions when building pro forma statements.

Cognitive Domain: Knowledge

Answer Location: A.6. Building Assumptions: Operating Policies and Other Key Assumptions

Difficulty Level: Hard

AACSB Standard: Application of knowledge

True/False

1. Presenting carefully thought-out financial projections to investors is an exercise in lowering perceived risk in both you as an entrepreneur and your idea.

Learning Objective: A.1: Explain the purpose of financial projections for startups.

Cognitive Domain: Comprehension

Answer Location: A.1. Financial Projections for Startups

Difficulty Level: Easy

AACSB Standard: Financial theories, analysis, reporting, and markets

2. Shari is working on a report and describes it to you as reporting what the company owes, what it owns, and her shareholder stake at the last day of the prior month. She’s working on an income statement.

Learning Objective: A.2: Describe financial statements as an essential part of financial projections.

Cognitive Domain: Application

Answer Location: A.2. Three Essential Financial Statements

Difficulty Level: Medium

AACSB Standard: Application of knowledge

3. Bill’s business has sales of $100,000, inventory of $20,000, cost of goods sold of $31,000, and general and administrative expenses of $45,000. Bill’s gross profit is $69,000.

Learning Objective: A.2: Describe financial statements as an essential part of financial projections.

Cognitive Domain: Application

Answer Location: The Income Statement

Difficulty Level: Medium

AACSB Standard: Application of knowledge

4. Bill’s business has sales of $100,000, inventory of $20,000, cost of goods sold of $31,000, and general and administrative expenses of $45,000. Bill’s operating profit is $4,000.

Learning Objective: A.2: Describe financial statements as an essential part of financial projections.

Cognitive Domain: Application

Answer Location: The Income Statement

Difficulty Level: Hard

AACSB Standard: Application of knowledge

5. Bill’s business has sales of $100,000, inventory of $20,000, cost of goods sold of $31,000, and general and administrative expenses of $45,000. Bill’s gross profit is $80,000.

Learning Objective: A.2: Describe financial statements as an essential part of financial projections.

Cognitive Domain: Application

Answer Location: The Income Statement

Difficulty Level: Medium

AACSB Standard: Application of knowledge

6. Sally is worried about her backlog report. This is a report on orders that have been delivered but not yet paid by the customers.

Learning Objective: A.2: Describe financial statements as an essential part of financial projections.

Cognitive Domain: Knowledge

Answer Location: The Income Statement

Difficulty Level: Medium

AACSB Standard: Application of knowledge

7. Sandy’s balance sheet is partially completed. However, she has total assets of $120,000 and total shareholders’ equity of $15,000. Her liabilities should total $105,000.

Learning Objective: A.2: Describe financial statements as an essential part of financial projections.

Cognitive Domain: Application

Answer Location: The Balance Sheet

Difficulty Level: Medium

AACSB Standard: Application of knowledge

8. Sandy’s balance sheet shows assets of $120,000, liabilities of $100,000, and shareholders’ equity of $25,000. Her balance sheet is in balance.

Learning Objective: A.2: Describe financial statements as an essential part of financial projections.

Cognitive Domain: Application

Answer Location: The Balance Sheet

Difficulty Level: Medium

AACSB Standard: Application of knowledge

9. Currents assets are cash and other assets such as inventory, accounts payable, and prepaid expenses that can be converted into cash within a year.

Learning Objective: A.2: Describe financial statements as an essential part of financial projections.

Cognitive Domain: Knowledge

Answer Location: The Balance Sheet

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

10. Goodwill is the price paid for an asset in excess of its book value.

Learning Objective: A.2: Describe financial statements as an essential part of financial projections.

Cognitive Domain: Knowledge

Answer Location: Other Types of Assets

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

Essay

1. Compare and contrast the balance sheet and the cash flow statement.

Learning Objective: A.2: Describe financial statements as an essential part of financial projections.

Cognitive Domain: Analysis

Answer Location: A.2. Three Essential Financial Statements

Difficulty Level: Hard

AACSB Standard: Analytical thinking

2. Provide the line-by-line format of an income statement.

Learning Objective: A.2: Describe financial statements as an essential part of financial projections.

Cognitive Domain: Knowledge

Answer Location: A.2. Three Essential Financial Statements

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

3. Provide the line-by-line format of a balance sheet.

Learning Objective: A.2: Describe financial statements as an essential part of financial projections.

Cognitive Domain: Knowledge

Answer Location: A.2. Three Essential Financial Statements

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

4. Provide the line by line format of the cash flow statement.

Learning Objective: A.2: Describe financial statements as an essential part of financial projections.

Cognitive Domain: Knowledge

Answer Location: A.2. Three Essential Financial Statements

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

5. Describe DSO.

Learning Objective: A.4: Describe the journey of cash through the cash conversion cycle.

Cognitive Domain: Knowledge

Answer Location: A.4. The Journey of Cash: The Cash Conversion Cycle

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

6. Describe DOI.

Learning Objective: A.4: Describe the journey of cash through the cash conversion cycle.

Cognitive Domain: Knowledge

Answer Location: A.4. The Journey of Cash: The Cash Conversion Cycle

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets

7. Describe how to calculate CCC (cash conversion cycle).

Learning Objective: A.4: Describe the journey of cash through the cash conversion cycle.

Cognitive Domain: Comprehension

Answer Location: A.4. The Journey of Cash: The Cash Conversion Cycle

Difficulty Level: Medium

AACSB Standard: Financial theories, analysis, reporting, and markets