Small Business Accounting Ch7 Test Bank Answers

Chapter 7- Small Business Accounting

True/False

1. Small business owners do not need to understand the basics of accounting

Response: See Introduction

Level: Easy

Learning Objective: Outline the importance and uses of accounting records

1. One of the drawbacks of The Balanced Scorecard is that it excludes intangibles such as customer satisfaction and organizational learning

Response: See 7.1

Level: Easy

Learning Objective: Outline the importance and uses of accounting records

1. Creativity is always bad for accounting

Response: See 7.1

Level: Easy

Learning Objective: Outline the importance and uses of accounting records

1. The business entity concept suggests that the personal transactions must be listed as business transactions

Response: See 7.2.1

Level: Easy

Learning Objective: Describe the basic accounting concepts

1. When an auditor issues a negative going concern opinion for a firm, it implies that the business will exist for an indefinite longer period of time

Response: See 7.2.2

Level: Medium

Learning Objective: Describe the basic accounting concepts

1. The value of everything that the business owns is equal to the difference of what the business owes to others minus the claim the owner has on the business

Response: See 7.2.3

Level: Easy

Learning Objective: Describe the basic accounting concepts

1. The cash flow statement summarizes the revenue and total expenses of the company over a specific period of time

Response: See 7.3.1

Level: Medium

Learning Objective: Explain the format and content of common financial statements

1. The cash flow statement is the primary source for information on the profitability of a firm

Response: See 7.3.1

Level: Easy

Learning Objective: Explain the format and content of common financial statements

1. Net effect of foreign exchange rates is important only for large corporations

Response: See 7.3.2

Level: Easy

Learning Objective: Explain the format and content of common financial statements

1. The Balance sheet is also called the Statement of Financial Position

Response: See 7.3.3

Level: Easy

Learning Objective: Explain the format and content of common financial statements

1. The two sides of the balance sheet must be equal to each other

Response: See 7.3.3

Level: Easy

Learning Objective: Explain the format and content of common financial statements

1. The balance sheet presents historical values that reflect the cost of the asset when it was acquired

Response: See 7.3.3

Level: Easy

Learning Objective: Explain the format and content of common financial statements

1. Retained earnings represent surplus cash available in the firm

Response: See 7.3.4

Level: Easy

Learning Objective: Explain the format and content of common financial statements

1. Total sales MINUS total expenses (after the expenses are paid) is the gross-profit of the firm

Response: See 7.4.1

Level: Easy

Learning Objective: Identify the key ratios used to analyze financial statements

1. The widely used financial ratio to measure the efficiency with which the firm is managed is the debt-to-asset ratio

Response: See 7.4.1

Level: Easy

Learning Objective: Identify the key ratios used to analyze financial statements

1. The times-interest-earned ratio is also known as the coverage ratio

Response: See 7.4.2

Level: Easy

Learning Objective: Identify the key ratios used to analyze financial statements

1. Operating income DIVIDED By interest expense is the debt-to-asset ratio

Response: See 7.4.2

Level: Easy

Learning Objective: Identify the key ratios used to analyze financial statements

1. The two important leverage ratios are debt-to-asset ratio and coverage ratio

Response: See 7.4.2

Level: Easy

Learning Objective: Identify the key ratios used to analyze financial statements

1. The inventory turnover ratio is an example of the leverage ratio of a firm

Response: See 7.4.3

Level: Easy

Learning Objective: Identify the key ratios used to analyze financial statements

1. A high ratio of fixed-assets turnover indicates that the firm is making optimal use of its assets

Response: See 7.4.3

Level: Medium

Learning Objective: Identify the key ratios used to analyze financial statements

1. A low ratio of total assets turnover indicates good marketing strategy and/or appropriate capital expenditures

Response: See 7.4.3

Level: Medium

Learning Objective: Identify the key ratios used to analyze financial statements

1. The current ratio is an example of the liquidity ratio of a firm

Response: See 7.4.4

Level: Easy

Learning Objective: Identify the key ratios used to analyze financial statements

1. The acid-test ratio of a firm is current assets divided by current liabilities

Response: See 7.4.4

Level: Easy

Learning Objective: Identify the key ratios used to analyze financial statements

1. The current ratio lower than 1.0 is considered good for firms

Response: See 7.4.4

Level: Medium

Learning Objective: Identify the key ratios used to analyze financial statements

1. Benchmarking analysis involves comparing firm’s financials against the standard financials for the industry in which the firm operates

Response: See 7.4.4

Level: Medium

Learning Objective: Identify the key ratios used to analyze financial statements

Multiple Choice Questions

1. _______ understands and predicts the results of management’s decisions and actions
2. Tax accounting
3. Managerial accounting
4. Financial accounting
5. Accounting

Response: See section 7.1

Level: Easy

Learning Objective: Outline the importance and uses of accounting records

1. Tax accounting is used to:
2. Ensure that the business is always in compliance
3. Calculate how much money the firm pays in taxes
4. Both A and B are correct
5. Both A and B are incorrect

Response: See section 7.1

Level: Easy

Learning Objective: Outline the importance and uses of accounting records

1. Which of the following is NOT true about the balanced score card?
2. It is a strategic planning and management system
3. Includes organizational learning perspective
4. Excludes customer perspective
5. Includes both financial and non-financial performance metrics

Response: See section 7.1

Level: Medium

Learning Objective: Outline the importance and uses of accounting records

1. The ______suggests that the business is a distinct entity than the person who owns the business
2. Business entity concept
3. Going concern concept
4. Balanced Score card
5. Managerial accounting

Response: See 7.2.1

Level: Easy

Learning Objective: Describe the basic accounting concepts

1. Which of the following implies that a business once started will remain in existence for the foreseeable future?
2. Business entity concept
3. Going concern concept
4. Balanced Score card
5. Managerial accounting

Response: See 7.2.2

Level: Easy

Learning Objective: Describe the basic accounting concepts

1. The basic accounting equation is as follows:
2. Assets = Liabilities - Owner’s Equity
3. Liabilities = Assets + Owner’s Equity
4. Owner’s Equity= Liabilities + Assets
5. Assets = Liabilities + Owner’s Equity

Response: See 7.2.3

Level: Easy

Learning Objective: Describe the basic accounting concepts

1. Which of the following is a benefit of selling on credits?
2. Delays the receipt of cash
3. Risk and fraud
4. Cash shortfall
5. Increases revenue

Response: See 7.2.5

Level: Easy

Learning Objective: Describe the basic accounting concepts

1. Which of the following is NOT a financial statement
2. Profit & Loss statement
3. Balance sheet
4. Cash flow statement
5. Debt-to-asset ratio

Response: See 7.3

Level: Easy

Learning Objective: Explain the format and content of common financial statements

1. The income statement is also known as______
2. Profit-and-loss (P&L) statement
3. Cash flow statement
4. Balance sheet
5. Equity statement

Response: See 7.3.1

Level: Easy

Learning Objective: Explain the format and content of common financial statements

1. In the cash flow statement, the receipt of cash from customers is _______, but the receipts of funds associated with bank loans is ______
2. A financing activity, an operating activity
3. An operating activity, a financing activity
4. A financing activity, a foreign exchange rates
5. An investment activity, an operating activity

Response: See 7.3.2

Level: Medium

Learning Objective: Explain the format and content of common financial statements

1. In the cash flow statement, salary payment to employees is ______activity
2. An operating activity
3. A financing activity
4. A foreign exchange rates
5. An investment activity

Response: See 7.3.2

Level: Medium

Learning Objective: Explain the format and content of common financial statements

1. When a business has more cash going out of the business than coming in, it is called
2. Positive cash flow
3. Equity
4. Dividend
5. Negative cash flow

Response: See 7.3.2

Level: Easy

Learning Objective: Explain the format and content of common financial statements

1. While the _________presents the financial condition of the business over time, the ______ provides an instant snapshot of the business at a given moment in time
2. Income statement, balance sheet
3. Balance sheet, Income statement
4. Equity sheet, balance statement
5. Cash flow statement, equity sheet

Response: See 7.3.3

Level: Easy

Learning Objective: Explain the format and content of common financial statements

1. _______refers to the accumulated net income earned by the firm after paying out any dividends to the owners
2. Assets
3. Liability
4. Owner’s equity
5. Retained earnings

Response: See 7.3.4

Level: Easy

Learning Objective: Explain the format and content of common financial statements

1. Retained earnings can be mathematically represented as:
2. Retained Earnings = Net Profit – Dividends
3. Retained Earnings = Net Profit
4. Retained Earnings = Net Profit + Dividends
5. Retained Earnings = Dividends

Response: See 7.3.4

Level: Easy

Learning Objective: Explain the format and content of common financial statements

1. ________measure the ability of a company to derive profits from sales and to transform its assets into profits
2. Leverage ratios
3. Profitability ratios
4. Liquidity ratios
5. Trend analysis

Response: See 7.4.1

Level: Easy

Learning Objective: Identify the key ratios used to analyze financial statements

1. Total Sales MINUS Cost of Goods sold is the :
2. Equity
3. Liabilities
4. Quick ratio
5. Gross profit

Response: See 7.4.1

Level: Easy

Learning Objective: Identify the key ratios used to analyze financial statements

A firm’s record shows the following information. Use this information to answer questions 18-24:

1. The firm’s gross profit margin is :
2. 20%
3. 42.22%
4. 30.55%
5. 15.23%

Response: See 7.4.1

Level: Medium

Learning Objective: Identify the key ratios used to analyze financial statements

1. The firm’s net profit margin (NPM) is :
2. 42.22%
3. 25.38%
4. 36.11%
5. 15.13%

Response: See 7.4.1

Level: Medium

Learning Objective: Identify the key ratios used to analyze financial statements

1. The firm’s return on assets (ROA) is :
2. 30.1%
3. 25.38%
4. 36.11%
5. 15.13%

Response: See 7.4.1

Level: Medium

Learning Objective: Identify the key ratios used to analyze financial statements

1. The firm’s return on equity (ROE) is :
2. 56.10%
3. 45.12%
4. 33.33%
5. 61.90%

Response: See 7.4.1

Level: Medium

Learning Objective: Identify the key ratios used to analyze financial statements

1. The firm’s debt-to-asset ratio is :
2. 0.20
3. 0.10
4. 0.32
5. 0.50

Response: See 7.4.2

Level: Medium

Learning Objective: Identify the key ratios used to analyze financial statements

1. The firm’s current ratio is :
2. 0.2
3. 3.5
4. 0.2
5. 1.27

Response: See 7.4.4

Level: Medium

Learning Objective: Identify the key ratios used to analyze financial statements

1. What is the firm’s quick ratio?
2. 1.5
3. 2.3
4. 0.5
5. 2.33

Response: See 7.4.4

Level: Medium

Learning Objective: Identify the key ratios used to analyze financial statements

1. _______involves comparing the firm’s present performance with its past performance
2. Benchmarking analysis
3. Trend analysis
4. Industry-average analysis
5. Financial ratios

Response: See 7.4.4

Level: Easy

Learning Objective: Identify the key ratios used to analyze financial statements