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MGMT 3850 Ch. 11

In order to reach profit objectives, entrepreneurs must be aware of their firms’:
overall financial position and any changes in the financial status.
The ________ shows what assets the business owns and what claims creditors and owners have against those assets, and is built on the basic accounting equation:
Assets = Liabilities + Owner’s Equity.
balance sheet
The ________ represents a “snapshot” of a business, showing an estimate of its value on a given date, while the ________ is a “moving picture” of the firm’s profitability over time.
balance sheet; income statement
Which of the following associations is correct?
current assets-inventory
The first section of a balance sheet lists:
assets
Which of the following items would not be listed as a current asset in a company’s financial reports?
fixtures
________ are those items of value the business owns; ________ are those things the business owes.
assets;liabilities
Cost of goods sold is located on which financial statement?
income statement
Which of the following is not true regarding the components of the income statement?
Cost of goods sold represents the total cost, excluding shipping, of the merchandise sold during the accounting period.
The statement of cash flows:
shows changes in working capital by listing sources and uses of funds.
On a company’s statement of cash flows, depreciation is:
listed as a source of funds because it is a noncash expense, already deducted as a cost of doing business.
Creating projected (pro forma) financial statements would allow a business owner to answer which of the following questions?
A) What profit can my business expect to achieve?
B) What sales level must my business reach if our targeted profit is × dollars?
C) What fixed and variable expenses can my business expect to incur at our targeted sales level?
On a projected income statement, a business owner’s target income is:
the sum of a reasonable salary for the time spent running the business and a normal return on the amount invested in it.
Cash requirements can be determined by dividing cash expenses by:
the average inventory turnover.
A technique that allows the small business owner to perform financial analysis by understanding the relationship between two accounting elements is called:
ratio analysis
Analyzing financial ratios could alert a business owner to which of these problems?
A) Excessive inventory
B) Overextending credit
C) Too much debt
Which of the following is not a liquidity ratio?
total asset turnover ratio
The ________ ratio is a measure of the small company’s ability to pay current debts from current assets and is the liquidity ratio most commonly used as a measure of short-term solvency
current
________ ratios tell whether or not the small company will be able to meet its short-term obligations.
liquidity
Financial analysts suggest that a small business should maintain a current ratio of at least:
2:1
The ________ ratio is a conservative measure of a firm’s liquidity and shows the extent to which a firm’s most liquid assets cover its current liabilities.
quick
When a company is forced into liquidation, owners are most likely to incur a loss when selling:
inventory
________ ratios measure the extent to which an entrepreneur relies on debt capital rather than equity capital to finance a business.
leverage
Which of the following combinations of ratios would indicate that a company is financially mismanaged and is not a good credit risk?
Low liquidity; high leverage
The ________ ratio measures the percentage of total assets financed by a small company’s creditors compared to its owners.
debt
A high debt ratio:
means that creditors provide a large percentage of the company’s total financing.
Which ratio would best give an owner an indication that the business is undercapitalized?
debt to net worth
The higher the ________ ratio, the lower the degree of protection afforded creditors, and the closer creditors’ interest approaches the owner’s interest.
debt to net worth
________ is one indication that a small business may be undercapitalized.
A debt-to-net worth ratio above 1:1
The ________ ratio tells how many times the company’s earnings cover the interest payments on the debt it is carrying.
times-interested-earned
________ ratios help a business owner evaluate the company’s performance and indicate how effectively the business employs its resources.
operating
The average inventory turnover ratio:
A) measures the number of times a company’s inventory is sold out during the accounting period.
B) tells a business owner whether she is managing the company’s inventory properly.
C) tells a business owner how fast the merchandise is moving through the business.
For the most meaningful interpretation, the small business owner should compare his firm’s average collection period to:
the average for the industry and the firm’s credit terms.
An excessively high average payable period ratio:
indicates the presence of a significant amount of past-due accounts payable.
The ________ ratio measures a company’s ability to generate sales in relation to its assets
net sales to total assets
________ ratios indicate how efficiently the small firm is being managed.
profitability
Which ratio would be most helpful to a business owner to measure the profit per dollar of sales?
Net profit on sales
The ________ ratio shows the portion of each sales dollar remaining after deducting all expenses.
net profit on sales
A business should provide the owner with a reasonable rate of return based upon:
the time and money invested in the business.
Ideally, a company reaches a point where increases in operating efficiency mean that expenses as a percentage of sales revenue flatten or even decline. This is referred to as:
operating leverage
The ________ ratio measures the owner’s rate of return on the investment in the business
net profit to equity
The net profit to asset ratio measures:
how much profit a company generates for each dollar of assets that it owns
The break-even point:
A) occurs where a company’s total revenue equals its total expenses.
B) is the point at which a company neither earns a profit nor incurs a loss.
C) tells a business owner the minimum level of activity needed to keep her company in operation.
Which of the following is an assumption of break-even analysis?
A) Fixed expenses remain constant for all levels of sales volume.
B) Variable expenses change in direct proportion to changes in sales volume.
C) Changes in sales volume have no effect on unit sales price.
Current Ratio
measure solvency by showing the firm’s ability to pay current liabilities out of current assets
Quick Ratio
shows the extent to which a firm’s most liquid assets cover its current liabilities
Debt Ratio
measures the percentage of total assets financed by creditors rather than others
Debt to Net Worth Ratio
compares what a business owes it is worth
Times Interested Earned
measures the firm’s ability to make both interest payments on its debt
Average Inventory Turnover Ratio
tells the average number of times a firm’s inventory is turned over or sold out during the accounting period
Average Collection Period Ratio
tells the average number of days required to collect accounts receivable
Average Payable Period Ratio
tells the average number of days required to pay accounts payable
Net sales to Total Assets Ratio
measures a firm’s ability to generate sales given its asset base
Net Profit on Sales Ratio
measures a firm’s profit per dollar of sales
Net Profit to Assets Ratio
tells how much profit a company generates for each dollar of assets that it owns
Net Profit to Equity Ratio
measures an owner’s rate of return on the investment
Which of the following combinations of ratios would indicate that a company is financially mismanaged and is not a good credit risk?
Low liquidity; high leverage
The ________ ratio measures the percentage of total assets financed by a small company’s creditors compared to its owners.
debt
A high debt ratio:
means that creditors provide a large percentage of the company’s total financing.

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