Chapter 10: Managing Start-up Performance—Money and People

True/False

1. Net profit (or loss) = variable costs – total expenses.
2. The difference between book value and going concern value is called goodwill.
3. Cash disbursements can also be referred to as “cash out”.
4. According to the time value of money approach, it is better to receive a dollar today than it is to receive a dollar any time in the future.
5. If the IRR of a potential investment is lesser than the required rate of return, the investment should be undertaken.
6. Fortunately, taxes do not affect cash flow because they are deposited into separate accounts and dispersed later.
7. Support, a cultural attribute of a successful innovative company, is the degree to which new ideas from all sources are welcomed and responded to promptly and appropriately.
8. A good manager never fires an employee.
9. Overdisclosing is far better than restricting information.
10. You cannot use a separation agreement when someone leaves the company voluntarily.
11. The longer the runway, the quicker the burn rate.

Short Answer / Fill in the blank

1. Book value is derived through an analysis of this financial statement: __________.
2. __________ are costs that are assigned to inventory before being sold.
3. __________ are costs that are identified with the product.
4. COH is the cash in all bank accounts __________ expected cash from customers, suppliers, and other accounts.
5. A(n) __________ is when you ask yourself, “If one of the stakeholders finds our later what happened, could this be embarrassing or worse, create serious problems, even legal repercussions?”
6. A __________ agreement clearly explains the conditions and expectations of an employee leaving the company.
7. “I trust the people I work with. I find it easy to be open and honest with people from other departments” is an example statement of ____________.
8. __________ is the difference between revenues and expenses as reported in the income statements.
9. ___________ accounting does not recognize that cash may have been required to purchase materials, labor, and other resources in advance of the sale.
10. _________ is the rate at which a new company uses up its cash to finance overhead before generating positive cash flow from operations.

Multiple Choice

1. The Income Statement:
   • 1. Represents Assets=liabilities + shareholder equity.
     2. Allows a manager to monitor deterioration in shareholder equity.
     3. Allows a manager to see how profitable the company is on a monthly and annual basis.
     4. Shows the company’s long-term asset position.
2. The Balance Sheet:
   1. is a reflection of economic value.
   2. reflects what the business is worth and its resale value.
   3. takes inflation into account.
   4. is based on historical costs and may not reflect economic value, worth, and resale value.
3. The three major sections of the Balance Sheet are the:
4. revenues, expenses, and current assets.
5. assets, liabilities, and equity.
6. cash, fixed assets, and interest payments.
7. cash flow, fixed assets and other assets, and debt structure.
8. Which of the following statements is TRUE?
9. Working capital and fixed costs act like a variable cost
10. Working capital and fixed assets act like a fixed cost
11. Working capital acts like a variable cost; fixed assets act like a fixed cost
12. Working capital acts like a fixed cost; fixed assets act like a variable cost
13. The balance sheet equation is:
14. Assets= Liabilities + Shareholder equity.
15. Liabilities-Assets= WIP.
16. Assets + Liabilities= Shareholder equity.
17. WIP= Assets + Liabilities.
18. The “Runway” refers to:
19. How often the company turns over inventory.
20. How long the company has been in business.
21. How many months it would take for the company to run out of money.
22. The time in which it takes to calculate the COH.
23. To use the breakeven technique, you need all but which one of the following types of information:
24. fixed costs of operation
25. variable costs of production
26. price per unit
27. lifetime value of a customer
28. A legal document instructing an employee to return all materials that belong to the company at the time of termination is an example of an:
29. Separation agreement.
30. ISO.
31. Full disclosure.
32. Employment agreement.
33. A cost that varies proportionately with increases in activity is called:
34. a variable cost.
35. a fixed cost.
36. a semi-variable cost.
37. none of the above.
38. Which of the following statements is more likely to be true?
39. Not all business costs can be classified as variable costs or fixed costs; the terms vary with the unit produced or the service provided
40. The higher the fixed costs, the easier it is to gain a high return on assets
41. The higher the variable costs, the easier it is to achieve a high gross margin
42. The higher the fixed costs, the easier it is to achieve a high gross margin
43. Which of the following statements is true?
44. Revenues remain constant, regardless of the level of business activity
45. Variable costs remain constant, regardless of the level of business activity
46. The ratio of fixed to variable costs is likely to decline as business activity increases
47. The ratio of fixed to variable costs is likely to increase as business activity increases
48. To increase the lifetime value of your customers, all but which one of these objectives apply?
49. Increase length of time a customer buys from you
50. Decrease length of time a customer buys from you
51. Increase the amount customers spend on each purchase
52. Decrease the time between purchases
53. Incentive stock options:
54. are rarely used today.
55. are only available to employees.
56. are not available to employees.
57. are generally transferred to investors.
58. The breakeven point is the level of activity (units) at which:
59. Revenues equal contribution.
60. Variable costs equal fixed costs.
61. Total revenue equal costs.
62. Fixed costs equal contribution.
63. Which of the following is not a step of handling an employee resignation?
64. Analyze.
65. Conduct an exit interview.
66. Celebrate.
67. Cause and effect.
68. Preparation of a monthly cash flow statement is recommended in order to:
69. Periodically assess the company’s cash position.
70. Keep the accountant busy.
71. Determine inventory levels.
72. They are not recommended.
73. Receipts and Disbursements are the main headings on which of the following financial statements?
74. Balance sheet
75. Cash flow
76. Income
77. Breakeven
78. Which of the following is NOT one of the eleven categories of a standard budget?
79. Net Income
80. EBIT
81. COH
82. Operating Profit
83. The amount available for dividends or reinvestment in the company is called:
84. Profit.
85. Net income.
86. EBIT.
87. Sales.
88. “The degree to which there is both planned and random interaction between functions and division at all levels of the organization” is the definition of which cultural attribute of a successful innovative company?
89. Freedom
90. Support
91. Engagement
92. Communication
93. Which of the following is NOT a cultural attribute of a successful innovative company identified in the textbook?
94. Risk
95. Honesty
96. Platitudes
97. Communication
98. Which of the following is NOT one of the three principals to resolve ethical dilemmas?
99. Employee agreement
100. The gut-feel test
101. Analysis of conflicts
102. Full disclosure

1. The balance sheet equation is:
2. Liabilities + shareholder equity = Assets
3. Shareholder equity - Liabilities = Assets
4. Shareholder equity + cash = Assets
5. Assets-Liabilities = Shareholder equity
6. Which of the following is not one of the three methods used to measure financial performance?
   1. Sales performance
   2. Customer service
   3. Profits
   4. Cash generated
7. Which of the following is NOT a group metric typically used for measuring start-up performance?
   1. Investment metrics.
   2. Profitability metrics.
   3. Funding metrics.
   4. Customer metrics.
8. COCA is generally calculated as:
   1. Total Assets minus Cash and Common Stock.
   2. Gross Profit/Net Income.
   3. Marketing & Sales expenses/number of new customers.
   4. Fix costs/Contribution margin per unit.
9. Which is true of managing money?
   1. Managing money is one of the most important aspects in building a company securely.
   2. Not knowing precisely whether you have sufficient funds to execute your plans is one of the most stressful and dangerous threats to a company.
   3. Highly profitable and fast-growing companies can go bankrupt from not managing money carefully.
   4. All of the above are true about managing money.
10. Under the IRR analysis, which of the following statements best describes the decision rule for potential investments?
    1. If the IRR of a potential investment is equal to or greater than the investor’s required rate of return, the investment should be undertaken.
    2. If the IRR is equal to or greater than the NPV of the investment, the investment should be undertaken.
    3. If IRR is equal to or greater than breakeven point, the investment should be undertaken.
    4. None of the above are true about IRR (internal rate of return).
11. How many units must be sold for this company to achieve breakeven (answer in units)?

Data:

Estimated selling price per unit: $10

Estimated variable cost per unit: $6

Estimated fixed costs: $100,000

• • 1. 400,000 units.
    2. 25,000 units.
    3. 600,000 units.
    4. Cannot be calculated from this data.

1. Which is true of managing people?
   1. It is important to create an organization in which all employees understand the core values that underpin decision making.
   2. Once a corporate culture is established, an entrepreneur can passively manage the employees.
   3. Leadership from the top is only necessary when problems arise within the organization.
   4. All of the above are true.