Question 1

Many small business owners do not use discounted cash flow (DCF) techniques. What are the reasons why they do not?

Accepted Answer

Several important reasons might explain the limited use of DCF techniques, including the following:
•	For many owners of small firms, the business is an extension of their lives—that is, business events affect them personally. The same is true in reverse: What happens to the owner personally affects his or her decisions about the firm. The firm and its owner are inseparable. Consequently, nonfinancial variables may play a significant role in an owner's decisions. 
•	Survival often becomes the top priority when the undercapitalization and liquidity problems of a small business directly affect the decision-making process. Long-term planning, therefore, is not viewed by the owner as a high priority in the total scheme of things.
•	The greater uncertainty of cash flows within small firms makes long-term forecasting and planning seem unappealing and even a waste of time. The owner simply has no confidence in his or her ability to predict cash flows beyond two or three years, so calculating the cash flows for the entire life of a project is viewed as a futile effort.
•	The value of a closely held firm is less easily observed than that of a publicly traded firm, whose securities are actively traded in the marketplace. Therefore, the owner of a small firm may consider the market-value rule of maximizing net present values irrelevant. Estimating the cost of capital is also much more difficult for a small company than for a large firm.
•	The limited size of a small firm's projects may make net present value computations less feasible in a practical sense. The time and expense required to analyze a capital investment are generally the same whether the project is large or small, so it is relatively costlier for a small firm to conduct such a study.
•	Financial management talent within a small firm is a scarce resource. The owner-manager frequently has a technical background, as opposed to a business or finance orientation, and his or her perspective is influenced greatly by that background.

Question 2

Match the term with its definition.
-An analytical method that helps managers make decisions about long-term investments

Accepted Answer

A) accounting return on investment technique 
B) capital budgeting analysis 
C) discounted cash flow (DCF) techniques 
D) internal rate of return (IRR) 
E) net present value (NPV)
F)payback period technique
G)pledged accounts receivable 
A) accounting return on investment technique 
B) capital budgeting analysis 
C) discounted cash flow (DCF) techniques 
D) internal rate of return (IRR) 
E) net present value (NPV)
F)payback period technique
G)pledged accounts receivable B

Question 3

Inventory management and accounts payable management are intertwined.

Accepted Answer

A) True 
 B)False  False

Question 4

Discounted cash flow (DCF) techniques can generally be trusted to provide a more reliable basis for decisions than can the accounting return on investment technique or the payback period technique.

Accepted Answer

A) True 
 B)False

Question 5

What are key issues in managing accounts payable?

Accepted Answer

The management of accounts payable is ba

Question 6

Ralph has always enjoyed fireworks and has set up a booth from June 4 through July 4. Additional inventory is scheduled to be sent throughout the month. Ralph is now wondering if he has ordered too much. List three reasons that could have motivated Ralph in his inventory buying.

Accepted Answer

Ralph likes fireworks, so his enthusiasm

Question 7

If the net present value of a proposed investment is positive,

Accepted Answer

A)  the firm should not make the investment because the initial outlay of the investment exceeds the present value of the cash flows discounted at the rate of return required to satisfy the firm's investors. 
B)  the investment does not earn the rate of return required to satisfy the firm's investors. 
C)  the present value of future cash flows would be unaffected by the proposed investment. 
D)  the firm should make the investment because the present value of future cash flows discounted at the rate of return required to satisfy the firm's investors exceeds the initial outlay of the investment. 
A)  the firm should not make the investment because the initial outlay of the investment exceeds the present value of the cash flows discounted at the rate of return required to satisfy the firm's investors. 
B)  the investment does not earn the rate of return required to satisfy the firm's investors. 
C)  the present value of future cash flows would be unaffected by the proposed investment. 
D)  the firm should make the investment because the present value of future cash flows discounted at the rate of return required to satisfy the firm's investors exceeds the initial outlay of the investment.

Question 8

Assume that the cost of certain equipment that a business is considering purchasing is $100,000. The equipment will be depreciated over five years, at which point the salvage value is expected to be $8,000. Anticipated after-tax profits (losses) are as follows:

$\begin{array} { c c } 
\text { Year } & \text { After-Tax Profits/Losses } \
1 & \$ ( 10,000 ) \
2 & 20,000 \
3 & 25,000 \
4 & 35,000 \
5 & 20,000
\end{array}$
?
Compute the accounting return on the proposed investment.
?

Accepted Answer

The answer of Assume that the cost of certain equipment...

Question 9

Cash flows and profits are

Accepted Answer

A)  opposites. 
B)  different. 
C)  identical. 
D)  identical after adjustment for depreciation. 
A)  opposites. 
B)  different. 
C)  identical. 
D)  identical after adjustment for depreciation.

Question 10

The internal rate of return (IRR) method estimates the rate of return that can be expected from a contemplated investment.

Accepted Answer

A) True 
 B)False

Question 11

Accounts receivable financing

Accepted Answer

A)  allows small businesses to extend credit to customers. 
B)  delays the time a company receives money from receivables. 
C)  means borrowing money against the firm's accounts receivable. 
D)  is not a suggested practice due to the cost. 
A)  allows small businesses to extend credit to customers. 
B)  delays the time a company receives money from receivables. 
C)  means borrowing money against the firm's accounts receivable. 
D)  is not a suggested practice due to the cost.

Question 12

Match the term with its definition.
-A capital budgeting technique that compares expected average annual after-tax profits to the average book value of an investment

Accepted Answer

A) accounting return on investment technique 
B) capital budgeting analysis 
C) discounted cash flow (DCF) techniques 
D) internal rate of return (IRR) 
E) net present value (NPV)
F)payback period technique
G)pledged accounts receivable 
A) accounting return on investment technique 
B) capital budgeting analysis 
C) discounted cash flow (DCF) techniques 
D) internal rate of return (IRR) 
E) net present value (NPV)
F)payback period technique
G)pledged accounts receivable

Question 13

Accounts payable _____ cash available for the firm when payment is made.

Accepted Answer

A)  increase the amount of 
B)  reduce the amount of 
C)  have no effect on the 
D)  represent all of the 
A)  increase the amount of 
B)  reduce the amount of 
C)  have no effect on the 
D)  represent all of the

Question 14

The cash conversion period is the time period between ordering inventory and receiving cash for its sale.

Accepted Answer

A) True 
 B)False

Question 15

A firm's net cash flow may be determined by examining its bank account.

Accepted Answer

A) True 
 B)False

Question 16

The cash conversion period equals the days in inventory plus the days sales outstanding minus days in payables.

Accepted Answer

A) True 
 B)False

Question 17

For most small businesses, a yearly inventory for accounting purposes is adequate for proper inventory control.

Accepted Answer

A) True 
 B)False

Question 18

Working capital management

Accepted Answer

A)  deals with assigning cash values to employees. 
B)  is not important to small businesses. 
C)  involves managing current assets and short-term sources of financing. 
D)  involves managing long-term assets and liabilities. 
A)  deals with assigning cash values to employees. 
B)  is not important to small businesses. 
C)  involves managing current assets and short-term sources of financing. 
D)  involves managing long-term assets and liabilities.

Question 19

The longer the cash conversion period, the greater the potential for cash flow problems to exist for a firm.

Accepted Answer

A) True 
 B)False

Question 20

During the cash conversion period, the firm

Accepted Answer

A)  increases its cash flow by paying accounts payable. 
B)  no longer has the benefit of accounts receivable. 
C)  sells its long-term assets. 
D)  no longer has the benefit of accounts payable. 
A)  increases its cash flow by paying accounts payable. 
B)  no longer has the benefit of accounts receivable. 
C)  sells its long-term assets. 
D)  no longer has the benefit of accounts payable.

Exam 22: Managing the Firms Assets

Many small business owners do not use discounted cash flow (DCF) techniques. What are the reasons why they do not?

Match the term with its definition. -An analytical method that helps managers make decisions about long-term investments

Inventory management and accounts payable management are intertwined.

Discounted cash flow (DCF) techniques can generally be trusted to provide a more reliable basis for decisions than can the accounting return on investment technique or the payback period technique.

What are key issues in managing accounts payable?

Ralph has always enjoyed fireworks and has set up a booth from June 4 through July 4. Additional inventory is scheduled to be sent throughout the month. Ralph is now wondering if he has ordered too much. List three reasons that could have motivated Ralph in his inventory buying.

If the net present value of a proposed investment is positive,

Cash flows and profits are

The internal rate of return (IRR) method estimates the rate of return that can be expected from a contemplated investment.

Accounts receivable financing

Match the term with its definition. -A capital budgeting technique that compares expected average annual after-tax profits to the average book value of an investment

Accounts payable _____ cash available for the firm when payment is made.

The cash conversion period is the time period between ordering inventory and receiving cash for its sale.

A firm's net cash flow may be determined by examining its bank account.

The cash conversion period equals the days in inventory plus the days sales outstanding minus days in payables.

For most small businesses, a yearly inventory for accounting purposes is adequate for proper inventory control.

Working capital management

The longer the cash conversion period, the greater the potential for cash flow problems to exist for a firm.

During the cash conversion period, the firm

The Entrepreneurial Lifethe Entrepreneurial Life

Integrity, Ethics, and Social Entrepreneurship

Starting a Small Business

Franchises and Buyouts

The Family Business

The Business Plan: Visualizing the Dream

The Marketing Plan

The Organizational Plan: Teams, Legal Structures, Alliances, and Directors

The Location Plan

Understanding a Firms Financial Statements

Forecasting Financial Requirements

A Firms Sources of Financing

Planning for the Harvest

Building Customer Relationships

Product Development and Supply Chain Management

Pricing and Credit Decisions

Promotional Planning

Global Opportunities for Small Businesses

Professional Management and the Small Business

Managing Human Resources

Managing Small Business Operations

Managing Risk

Filters