Business & Financial Analysis Chapter 8 Verified Test Bank

Entrepreneurship, 3e (Bamford)

Chapter 8 Business & Financial Analysis

1) In the context of hypothesis-driven experimentation, a linear analysis that tests a single aspect of a product on the entire customer base of a company is the quickest way of developing the product.

2) The lean start-up approach suggests that entrepreneurs refine the products or services offered by their firms by experimenting with them on customers.

3) The lean start-up approach suggests that it is more productive to experiment with a customer with various products, services, and solutions than to craft a business using various products, services, and solutions than to craft a business plan by speculating what the customer wants.

4) Using experiments to test various aspects of a business builds up credibility of the business model among funding organizations and suppliers.

5) No operating business ever matches the proposed business exactly.

6) Any firm conducting an evaluation of its operations should focus primarily on the key aspects with which it hopes to build a competitive advantage in the market.

7) A small business owner must constantly monitor the firm's performance because competitors, customers, and suppliers will change.

8) A new small business does not need to worry about monitoring how well its inventory management system is operating.

9) A business has a limited number of items upon which to perform a financial analysis.

10) Ratio analysis is a tool used by a small business owner to examine the overall health of the organization.

11) Liquidity, activity, marketing, and profitability are the four basic categories of performance ratios.

12) Financial ratios measure the short-term ability of a business to meet its obligations.

13) If a business drops below the lower bounds of its liquidity level, then its bank will likely increase the line of credit to the firm.

14) Current ratios are computed by dividing current assets by current liabilities.

15) Figures derived from a ratio analysis of a firm need to be evaluated against the past performance of the firm to understand its current health.

16) Activity ratios measure the efficiency with which an entrepreneur is handling the resources of his or her business.

17) In the context of activity ratios, a rise in a firm's rate of inventory turnover indicates that the firm is moving closer to a just-in-time system of inventory management.

18) Accounts payable turnover examines how fast a company turns credit sales into cash.

19) The fixed asset turnover ratio is net sales divided by fixed assets or net sales divided by total assets.

20) Leverage ratios are used to examine the relative level of indebtedness of an entrepreneurial business.

21) A deviation analysis is a chart that tracks various performance measures from one time period to the next.

22) When conducting a deviation analysis, it is advisable to develop a chart using data gathered across long intervals. This ensures that changes in the operations of the business are more apparent in the chart.

23) A deviation analysis allows an entrepreneur to quickly evaluate the performance of his or her organization on those items that are considered most important to the success of the firm.

24) A common feature of deviation analyses and sensitivity analyses is that they both focus on the metric of sales figures to analyze the health of a firm.

25) A sensitivity analysis tracks an organization's health by comparing its current performance to its past performance.

26) Sensitivity analysis allows a business person an opportunity to test out assumptions and view the potential financial impact of assumptions about future income and expenses prior to committing any new resources.

27) Short surveys allow a business to gather contextual information that is not easy to categorize about its customers, suppliers, and employees.

28) Short surveys can be given to any party to a transaction with your business and provide an entrepreneur with the opportunity to evaluate his or her company's performance on dimensions that may lead to financial success.

29) Surveys are effective ways to analyze a business because the data they gather is free of bias.

30) In a survey being conducted on a very large set of customers, interviewing every third customer will reflect the opinions of all customers within a small margin of error.

31) The questions on a survey should be designed to promote the business.

32) When designing a survey, an organization should focus on answering queries directly related to its mission or strategy.

33) Deviation analyses and sensitivity analyses are very similar. 

34) A sensitivity analysis surveys customers of a firm to see if their needs and desires are being met by the products or services the firm provides.

35) In the context of the importance of having a measurement focus, the standard parts of a business need to be managed in the simplest way possible and with minimal extra analysis.

36) Survey data can be analyzed by using simple statistical techniques, such as percentages. It does not have to be a difficult process.

37) Conducting a regression analysis of survey data allows a business owner to see how different variables explain the differences for a given measure, such as profits.

38) A small business owner needs to concentrate on analyzing business areas that are unique in order to create differences from competitors.

39) When evaluating the financial foundation of a business, the owner should consider

A) whether the firm is exploiting its key competitive advantages.

B) comparing current activities with the firm's mission statement.

C) comparing current activities with industry standards.

D) all of these.

40) The evaluation of a firm starts with

A) the mission of the firm.

B) a ratio analysis.

C) a deviation analysis.

D) the expectations of customers.

41) Any company analysis should proceed from the ________ and move toward the ________.

A) negative; positive

B) lowest; highest

C) general; specific

D) specific; general

42) All of the following are techniques used to perform an analysis of a business, its activities, and its performance EXCEPT

A) ratio analysis.

B) deviation analysis.

C) sensitivity analysis.

D) management analysis.

43) Rosa, an entrepreneur, wants to measure the overall health of her small business by using a form of ratio analysis. Her chosen method requires her to measure how often she must restock her firm's inventory, examine how quickly her firm can turn credit sales into cash, and measure the productivity of her firm's fixed assets. In this scenario, the ratio analysis method chosen by Rosa requires the measurement of her firm's ________.

A) liquidity ratios

B) activity ratios

C) leverage ratios

D) profitability ratios

44) ________ is a series of ratios along four areas of company performance (liquidity, activity, leverage, and profitability) that provides a picture of the health of the company.

A) Deviation analysis

B) Ratio analysis

C) Sensitivity analysis

D) Profitability analysis

45) Dennis wants to measure the short-term ability of his company to meet its financial obligations. He would use ________.

A) activity ratios

B) liquidity ratios

C) leverage ratios

D) profitability ratios

46) In the context of ratio analysis, identify the scenario that best illustrates a leverage ratio analysis.

A) The owner of Aurvive Inc. measures the firm's finances to make sure that it can generate sufficient funds to repay loans.

B) Westburn Dairy is analyzed by its creditors to determine if it needs further loans to stabilize its operations.

C) The CEO of Lupone Systems analyzes the frequency with which the inventory of the company has to be restocked.

D) Antilles Consulting's owner examines the performance of the firm and analyses its ability to make economic returns over and above its costs.

47) A firm's financial liquidity can be measured by its

A) sensitivity ratio.

B) turnover ratio.

C) total asset ratio.

D) current ratio.

48) The quick ratio is sometimes referred to as the ________.

A) acid test

B) current ratio

C) profitability test

D) leverage ratio

49) To analyze his firm's health, the CEO of Epixore Software tries to determine how quickly the firm's current assets can be turned into cash to cover short-term liabilities. He then subtracts the firm's inventory from the list of current assets to determine if the remaining assets alone could cover short-term liabilities. In the context of ratio analysis, the CEO of Epixore Software is trying to determine his firm's ________ ratio.

A) leverage

B) profitability

C) activity

D) liquidity

50) ________ measure the efficiency with which an entrepreneur can handle his or her business's resources.

A) Profitability ratios

B) Leverage ratios

C) Inventory ratios

D) Activity ratios

51) ________ is a metric that examines how fast a company turns credit sales into cash.

A) Inventory control turnover

B) Account receivable turnover

C) Total asset turnover

D) Fixed asset turnover

52) In the context of ratio analysis, the quick ratio measures

A) the current assets of a firm, excluding its current inventory, relative to its current liabilities.

B) the total assets of a firm, including equity investments and accounts receivable.

C) the cash that can be quickly gained by selling a firm's current inventory at hugely discounted rates.

D) the overall profits of a firm measured across a fixed period of time.

53) ________ are used to measure the level of indebtedness of a small business.

A) Profitability ratios

B) Activity ratios

C) Leverage ratios

D) Financial ratios

54) The ________ ratio provides information on the portion of a business owned by the lenders and the portion owned by the founders.

A) debt-to-equity

B) debt-to-assets

C) times-interest-earned

D) equity-to-profit

55) The ________ ratio measures the percentage of the assets of a firm that are owned by the creditors.

A) debt-to-equity

B) debt-to-assets

C) times-interest-earned

D) equity-to-profit

56) The ________ ratio estimates the number of times that a business could repay the current interest owed on its debt.

A) debt-to-equity

B) debt-to-interest

C) times-interest-earned

D) times-debt-earned

57) ________ examine the performance of a business and its ability to make economic returns over and above its costs.

A) Financial ratios

B) Activity ratios

C) Leverage ratios

D) Profitability ratios

58) The ________ ratio measures the overall profits that are obtained from all sales during a given period.

A) gross profit margin

B) operating profit margin

C) net profit margin

D) return on equity

59) Which of the following figures is also known as Earnings before Interest and Taxes (EBIT)?

A) Gross profit margin

B) Operating profit margin

C) Net profit margin

D) Return to equity

60) The ________ figure presents a picture of the relative margin after all obligations and expenses are considered.

A) gross profit margin

B) operating profit margin

C) net profit margin

D) return on equity

61) The ________ ratio examines the ability of a firm to return an overall profit compared to the amount of assets that has been invested into the effort.

A) return on debt

B) return on profit

C) return on assets

D) return on equity

62) Dennis's stockholders want him to constantly improve his firm's ________ ratio because it would improve the future value of their investment in the firm.

A) return on total assets

B) profit margin on sales

C) return on equity

D) fixed asset turnover

63) In the context of leverage ratios, the figure that estimates how capable a firm is of servicing the current interest owed on its debts is referred to as ________.

A) accounts payable

B) debt-to-assets

C) debt-to-equity

D) times interest earned

64) The investors of Intra Dynamix request an evaluation of its profitability. The firm's managers provide them with an evaluation of the profit the firm is generating, focusing on how much each dollar invested in the firm is generating in profit. In the context of profitability ratios, the managers of Intra Dynamix are evaluating the firm's ________.

A) return on assets

B) net profit margin

C) return on equity

D) gross profit margin

65) Identify a true statement about ratio analysis.

A) Entrepreneurs must evaluate their firms on all ratio analysis figures to gain a proper understanding of their firms' operational health.

B) A ratio analysis only provides insight into a firm's health when compared over time or to the ratios of other firms.

C) While they are valuable tools, ratio analysis is ultimately less useful than nonfinancial data analysis methods.

D) Because of the large amounts of financial data it requires, a ratio analysis cannot be performed by relatively new entrepreneurial firms.

66) A ________ analysis is a chart that tracks various performance measures from one time period to the next.

A) deviation

B) sensitivity

C) leverage

D) financial

67) In the context of measuring the performance of a business, identify a true statement about deviation analysis.

A) Deviation analysis analyzes the performance of the company in terms of the expectations of its customers.

B) Effective deviation analysis requires the performance of a business to be contrasted against a competitor's performance across the same time frame.

C) To gain the greatest possible insight on a business, deviation analysis must be performed on its performance at frequent intervals.

D) Profit margins are considered the most important metric in a deviation analysis.

68) Which of the following statements about deviation analysis is NOT correct?

A) A deviation analysis chart should be maintained at least monthly.

B) Any drops in a factor that is being charted should be cause for alarm.

C) Deviation analysis quickly shows the performance on factors deemed important by a business owner.

D) None of these

69) A ________ analysis involves using a current cash flow statement, income statement, or balance sheet to create a pro forma projection of a dramatic increase or decrease in sales or a major complication that might be experienced by a business.

A) deviation

B) sensitivity

C) leverage

D) financial

70) Sensitivity analysis is one of the methods for examining the ability of an organization to handle changes in the future. Which financial statement is required for this type of analysis?

A) A balance sheet

B) An income statement

C) A current cash flow statement

D) All of these

71) In the context of analyzing the health, activities, and performance of a business, which of the following is a nonfinancial method of analysis?

A) Dividend discount model

B) Horizontal analysis

C) Short surveys

D) Ratio analysis

72) The management at Invive Soap Company wishes to improve its understanding of how customers view the company's products. It selects an analysis method where it asks five questions to a randomly chosen group of customers. The questions test how the customers feel about the variety and quality of products offered by the company. In the context of measuring company performance, the management at Invive Soap Company is using

A) short surveys.

B) hypothesis-driven testing.

C) deviation analysis.

D) ratio analysis.

73) Which of the following statements about having a measurement focus is correct?

A) Concentrate the analysis efforts on areas that are ordinary.

B) Concentrate the analysis efforts on areas that are unique.

C) Focus on unorthodox factors.

D) Focus on orthodox factors.

74) Any company analysis should proceed from the ________ and move toward the ________.

75) A ________ is the evaluation of a series of ratios along four categories of company performance (liquidity, activity, leverage, and profitability) that provides a picture of the health of a company.

76) The quick ratio is also known as the ________ test.

77) ________ ratios are used to examine the relative level of indebtedness of the entrepreneurial business.

78) ________ profit is created by taking the total net sales of a firm and subtracting returned merchandise as well as the direct cost of goods. 

79) ________ profit is the bottom-line calculation from the income statement.

80) A ________ analysis allows an owner to quickly evaluate the performance of the organization on those items that the individual considers most important to the success of the firm.

81) A ________ analysis allows a small business owner to look at how the business would react to various factors such as a dramatic increase or decrease in sales.

82) There will always be ________ in surveys because only those individuals who wish to fill out the survey will do so.

83) To obtain accurate and useful data from surveys, questions should be ________. 

84) Explain why a small business owner must monitor the performance of the firm. What changes could impact the performance of an existing business?

85) What are the four questions that a financial analysis should answer?

86) List and describe the four classic techniques for financial analysis.

87) Define liquidity ratios and detail two specific types.

88) List and define the five profitability ratios.

89) Describe the importance of surveys to a small business owner.