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CHAPTER 2: BUILD: BALANCE SHEET, RISK, FINANCING, AND DIVERSIFICATION

TRUE/FALSE

  1. Because they own a lot of valuable items that make more money, wealthy people become even more wealthy.

Answer: True

Diff: EasyPage Ref: 31

Goal: Making Money Work for You

  1. Finding the right balance between revenues and spending can mean all the difference between success and failure.

Answer: True

Diff: EasyPage Ref: 32

Goal: Differentiate an asset from a liability, recognize assets that generate income, and evaluate an organization's financial position by its balance sheet.

  1. Liquidity is the ability of an asset to be converted into cash.

Answer: True

Diff: EasyPage Ref: 33

Goal: Differentiate an asset from a liability, recognize assets that generate income, and evaluate an organization's financial position by its balance sheet.

  1. The fundamental accounting equation is Assets = Liabilities + Owners' Equity.

Answer: True

Diff: EasyPage Ref: 34

Goal: Differentiate an asset from a liability, recognize assets that generate income, and evaluate an organization's financial position by its balance sheet.

  1. The income statement, cash flow statement, and balance sheet are all equally important to business operation.

Answer: True

Diff: EasyPage Ref: 35

Goal: Differentiate an asset from a liability, recognize assets that generate income, and evaluate an organization's financial position by its balance sheet.

  1. A balance sheet is helpful both on a business level and on a personal level.

Answer: True

Diff: EasyPage Ref: 36

Goal: Differentiate an asset from a liability, recognize assets that generate income, and evaluate an organization's financial position by its balance sheet.

  1. A risk is any circumstance in which the outcome of a decision or action is uncertain.

Answer: True

Diff: EasyPage Ref: 37

Goal: Appreciate the value and necessity of risk in business byconducting a SWOT analysis and considering opportunitycosts.

  1. A company's weaknesses are the internal factors that will help it achieve its objective.

Answer: False

Diff: EasyPage Ref: 38

Goal: Appreciate the value and necessity of risk in business byconducting a SWOT analysis and considering opportunitycosts.

  1. A company's opportunities are external conditions that can assist the company in achieving its objectives.

Answer: True

Diff: EasyPage Ref: 39

Goal: Appreciate the value and necessity of risk in business byconducting a SWOT analysis and considering opportunitycosts.

  1. When making a decision, the cost of passing up another option is known as opportunity cost.

Answer: True

Diff: EasyPage Ref: 40

Goal: Appreciate the value and necessity of risk in business byconducting a SWOT analysis and considering opportunitycosts.

  1. Giganto Corporation makes tanker ships and corn syrup. The company decides to get out of the tanker ship industry. This is an example of diversification.

Answer: False

Diff: ModeratePage Ref: 41

Goal: Use the concept of diversification to not only manage risk,but also thrive in it.

  1. Mergers and acquisitions are different methods to diversify risk.

Answer: True

Diff: EasyPage Ref: 42

Goal: Use the concept of diversification to not only manage risk,but also thrive in it.

  1. The long tail describes the idea that companies can succeed selling a few units of millions of products.

Answer: True

Diff: ModeratePage Ref: 43

Goal: Use the concept of diversification to not only manage risk,but also thrive in it.

  1. Financing for a period of one year or less is generally known as short-term financing.

Answer: True

Diff: EasyPage Ref: 44

Goal: Make short-term and long-term financing decisions basedon risk and diversification.

  1. When a bank lends money with no collateral backing it up, the bank is making a secured loan.

Answer: False

Diff: EasyPage Ref: 44

Goal: Make short-term and long-term financing decisions basedon risk and diversification.

  1. A bond is an agreement to lend money that will be repaid at a later date.

Answer: True

Diff: EasyPage Ref: 45

Goal: Make short-term and long-term financing decisions basedon risk and diversification.

  1. When a company borrows money that it has a legal obligation to repay, the company is using equity financing.

Answer: False

Diff: EasyPage Ref: 46

Goal: Make short-term and long-term financing decisions basedon risk and diversification.

  1. A portfolio is a collection of several different types of investments.

Answer: True

Diff: EasyPage Ref: 47

Goal: Become a wise investor who makes decisions based on riskand diversification.

  1. Vertical diversification is the situation in which you have assets that address different aspects of the same situation.

Answer: False

Diff: EasyPage Ref: 48

Goal: Become a wise investor who makes decisions based on riskand diversification.

  1. Investments in objects, such as coins, stamps, and art, are considered to be very liquid.

Answer: False

Diff: EasyPage Ref: 49

Goal: Become a wise investor who makes decisions based on riskand diversification.

MULTIPLE CHOICE

  1. Most wealthy people know that ______.
  1. just wanting a million dollars is enough
  2. the more money you earn, the less you pay in taxes and expenses
  3. you cannot put all your financial "eggs" in one basket
  4. spending a lot of money is the path to riches

Answer: c

Diff: ModeratePage Ref: 31

Goal: Making Money Work for You

  1. In order to make more money for themselves, rich people ______.
  1. pay taxes
  2. take out loans for personal uses
  3. charge purchases with credit cards
  4. own stocks, property, and their own businesses

Answer: d

Diff: ModeratePage Ref: 31

Goal: Making Money Work for You

  1. Owning items that make you money gives you the ability to acquire ______items that make you ______money.
  1. more; no
  2. more; even more
  3. no; no
  4. no; even more

Answer: b

Diff: ModeratePage Ref: 31

Goal: Making Money Work for You

  1. Anything you own or control, which you can exchange for some value is a(n) ______.
  1. liability
  2. asset
  3. retained earning
  4. equity

Answer: b

Diff: EasyPage Ref: 32

Goal: Differentiate an asset from a liability, recognize assets that generate income, and evaluate an organization's financial position by its balance sheet.

  1. Accounts receivable is ______.
  1. any money that you or a business are owed
  2. property, manufacturing plants, and equipment
  3. any money that you owe to a business
  4. credit that is extended to a business for necessary purchases

Answer: a

Diff: EasyPage Ref: 32

Goal: Differentiate an asset from a liability, recognize assets that generate income, and evaluate an organization's financial position by its balance sheet.

  1. Which of the following is a fixed asset?
  1. an item of intellectual property
  2. a patent
  3. a manufacturing plant
  4. a copyright

Answer: c

Diff: EasyPage Ref: 32

Goal: Differentiate an asset from a liability, recognize assets that generate income, and evaluate an organization's financial position by its balance sheet.

  1. Which of the following is an intangible asset?
  1. property
  2. a manufacturing plant
  3. a patent
  4. equipment

Answer: c

Diff: EasyPage Ref: 32

Goal: Differentiate an asset from a liability, recognize assets that generate income, and evaluate an organization's financial position by its balance sheet.

  1. An example of an asset that can earn money while you own it is a(n) ______.
  1. MP3 music player that you listen to while eating dinner
  2. shoebox of cash hidden under your bed
  3. computer server that your business uses to double the number of Web site visitors
  4. console that only you use to play video games

Answer: c

Diff: ModeratePage Ref: 33

Goal: Differentiate an asset from a liability, recognize assets that generate income, and evaluate an organization's financial position by its balance sheet.

  1. A legal obligation that an individual or companyhas to pay back is a(n) ______,
  1. inventory
  2. liability
  3. owners' equity
  4. asset

Answer: b

Diff: EasyPage Ref: 33

Goal: Differentiate an asset from a liability, recognize assets that generate income, and evaluate an organization's financial position by its balance sheet.

  1. ______consist of credit that is extended to a business for necessary purchases.
  1. Accounts receivable
  2. Accounts payable
  3. Intangible assets
  4. Retained earnings

Answer: b

Diff: EasyPage Ref: 33

Goal: Differentiate an asset from a liability, recognize assets that generate income, and evaluate an organization's financial position by its balance sheet.

  1. The assets you keep after you have paid off all your liabilities make up your ______.
  1. current assets
  2. net worth
  3. balance sheet
  4. long-term assets

Answer: b

Diff: EasyPage Ref: 34

Goal: Differentiate an asset from a liability, recognize assets that generate income, and evaluate an organization's financial position by its balance sheet.

  1. Owners' equity can be also known as ______equity.
  1. current
  2. long-term
  3. shareholders'
  4. asset

Answer: c

Diff: ModeratePage Ref: 34

Goal: Differentiate an asset from a liability, recognize assets that generate income, and evaluate an organization's financial position by its balance sheet.

  1. A record of a company's assets and liabilities at a fixed point in time is known as a(n) ______.
  1. cash flow statement
  2. balance sheet
  3. account payable
  4. income statement

Answer: b

Diff: EasyPage Ref: 34

Goal: Differentiate an asset from a liability, recognize assets that generate income, and evaluate an organization's financial position by its balance sheet.

  1. All of the following are included in the fundamental accounting equation EXCEPT ______.
  1. assets
  2. owners' equity
  3. bonds
  4. liabilities

Answer: c

Diff: EasyPage Ref: 34

Goal: Differentiate an asset from a liability, recognize assets that generate income, and evaluate an organization's financial position by its balance sheet.

  1. From looking at Apple Inc.'s balance sheet in Figure 2.2, an investor knows that Apple would not be forced to sell fixed assets to cover its debts because ______are more than enough to pay off all its liabilities.
  1. property, plant, and equipment
  2. current assets
  3. intangible assets
  4. common stock

Answer: b

Diff: ChallengingPage Ref: 34-35

Goal: Differentiate an asset from a liability, recognize assets that generate income, and evaluate an organization's financial position by its balance sheet.

  1. From Apple Inc.'s balance sheet in Figure 2.2, an investor knows that Apple is financing its business from the sale of stock and retained earnings because its long-term debt is ______.
  1. $0
  2. over $39 billion
  3. about $4 billion
  4. about $19 billion

Answer: a

Diff: ChallengingPage Ref: 35

Goal: Differentiate an asset from a liability, recognize assets that generate income, and evaluate an organization's financial position by its balance sheet.

  1. The greater the risk, the ______difference between a favorable or unfavorable outcome.
  1. less important is the
  2. more likely there is no
  3. larger the
  4. smaller the

Answer: c

Diff: EasyPage Ref: 37

Goal: Appreciate the value and necessity of risk in business byconducting a SWOT analysis and considering opportunitycosts.

  1. Risk affects ______.
  1. neither your personal nor your business life
  2. both your personal and your business lives
  3. only your business life and not your personal life
  4. only your personal life and not your business life

Answer: b

Diff: ModeratePage Ref: 37

Goal: Appreciate the value and necessity of risk in business byconducting a SWOT analysis and considering opportunitycosts.

  1. All of the following are financial risks reflected on the balance sheet EXCEPT ______.
  1. excess inventory
  2. not enough cash
  3. zero long-term debt
  4. too much debt

Answer: c

Diff: ModeratePage Ref: 37

Goal: Appreciate the value and necessity of risk in business byconducting a SWOT analysis and considering opportunitycosts.

  1. A factor in SWOT analysis is ______.
  1. officers
  2. workers
  3. strengths
  4. terminations

Answer: c

Diff: EasyPage Ref: 38

Goal: Appreciate the value and necessity of risk in business byconducting a SWOT analysis and considering opportunitycosts.

  1. What are internal factors that will help a company achieve its objective?
  1. strengths
  2. weaknesses
  3. opportunities
  4. threats

Answer: a

Diff: EasyPage Ref: 38

Goal: Appreciate the value and necessity of risk in business byconducting a SWOT analysis and considering opportunitycosts.

  1. High quality employees are an example of a(n) ______.
  1. strength
  2. weakness
  3. opportunity
  4. threat

Answer: a

Diff: ModeratePage Ref: 38

Goal: Appreciate the value and necessity of risk in business byconducting a SWOT analysis and considering opportunitycosts.

  1. What are internal factors that may stop a company from achieving its objective?
  1. threats
  2. strengths
  3. weaknesses
  4. opportunities

Answer: c

Diff: EasyPage Ref: 38

Goal: Appreciate the value and necessity of risk in business byconducting a SWOT analysis and considering opportunitycosts.

  1. An unknown brand in the marketplace is an example of a(n) ______.
  1. strength
  2. weakness
  3. opportunity
  4. threat

Answer: b

Diff: ModeratePage Ref: 38

Goal: Appreciate the value and necessity of risk in business byconducting a SWOT analysis and considering opportunitycosts.

  1. What are external conditions that can assist the company in achieving its objective?
  1. weaknesses
  2. strengths
  3. threats
  4. opportunities

Answer: d

Diff: EasyPage Ref: 39

Goal: Appreciate the value and necessity of risk in business byconducting a SWOT analysis and considering opportunitycosts.

  1. A major customer looking for a new company for its advertising campaign is an example of a(n) ______.
  1. strength
  2. opportunity
  3. threat
  4. weakness

Answer: b

Diff: ModeratePage Ref: 39

Goal: Appreciate the value and necessity of risk in business byconducting a SWOT analysis and considering opportunitycosts.

  1. What are external conditions that may deter a company from achieving its objective?
  1. threats
  2. opportunities
  3. strengths
  4. weaknesses

Answer: a

Diff: EasyPage Ref: 39

Goal: Appreciate the value and necessity of risk in business byconducting a SWOT analysis and considering opportunitycosts.

  1. A weak economic environment in which customers cannot pay on time or at all is an example of a(n) ______.
  1. threat
  2. opportunity
  3. strength
  4. weakness

Answer: a

Diff: EasyPage Ref: 39

Goal: Appreciate the value and necessity of risk in business byconducting a SWOT analysis and considering opportunitycosts.

  1. Companies use SWOT to analyze______risks and benefits.
  1. neither internal nor external
  2. only external
  3. both internal and external
  4. only internal

Answer: c

Diff: ModeratePage Ref: 40

Goal: Appreciate the value and necessity of risk in business byconducting a SWOT analysis and considering opportunitycosts.

  1. You are thinking about attending a business conference. But spending three days on the trip will mean falling behind on your current project. By considering the value of lost time, you are applying the concept of ______.
  1. SWOT analysis
  2. diversification
  3. opportunity cost
  4. merger

Answer: c

Diff: ModeratePage Ref: 40

Goal: Appreciate the value and necessity of risk in business byconducting a SWOT analysis and considering opportunitycosts.

  1. Spreading resources out over several different areas is called ______.
  1. diversification
  2. risk
  3. opportunity
  4. liability

Answer: a

Diff: EasyPage Ref: 41

Goal: Use the concept of diversification to not only manage risk,but also thrive in it.

  1. Diversification is a method of managing ______.
  1. risk
  2. strengths
  3. retained earnings
  4. dividends

Answer: a

Diff: EasyPage Ref: 41

Goal: Use the concept of diversification to not only manage risk,but also thrive in it.

  1. When Google announced that it was developing software for cell phones, the company showed that it was ______its sources of income.
  1. diversifying
  2. risking
  3. merging
  4. factoring

Answer: a

Diff: EasyPage Ref: 42

Goal: Use the concept of diversification to not only manage risk,but also thrive in it.

  1. What is a merger?
  1. two companies agree to go forward as a single new company
  2. one company takes over another company and sets itself up as the new owner
  3. one company divides into two or more companies
  4. three or more companies spread resources out over several different areas

Answer: a

Diff: EasyPage Ref: 42

Goal: Use the concept of diversification to not only manage risk,but also thrive in it.

  1. What is an acquisition?
  1. one company takes over another company and sets itself up as the new owner
  2. three or more companies spread resources out over several different areas
  3. one company divides into two or more companies
  4. two companies agree to go forward as a single new company

Answer: a

Diff: EasyPage Ref: 42

Goal: Appreciate the value and necessity of risk in business byconducting a SWOT analysis and considering opportunitycosts.

  1. Which of the following is a reason for two companies to join together?
  1. expanding the size of each company
  2. closing stores in other geographic areas in order to concentrate on just one area
  3. giving up control over a competitive advantage
  4. increasing risk

Answer: a

Diff: EasyPage Ref: 42

Goal: Use the concept of diversification to not only manage risk,but also thrive in it.

  1. When a business borrows money, it pays a fee for the use of that money. The fee is called ______.
  1. collateral
  2. factoring
  3. equity
  4. interest

Answer: d

Diff: EasyPage Ref: 44

Goal: Make short-term and long-term financing decisions basedon risk and diversification.

  1. For which of the following purchases would a company use short-term financing?
  1. property
  2. manufacturing facility
  3. equipment
  4. inventory or supplies

Answer: d

Diff: ModeratePage Ref: 44

Goal: Make short-term and long-term financing decisions basedon risk and diversification.

  1. A loan that is backed by something of value, such as property or inventory, is known as a(n) ______.
  1. credit card balance
  2. unsecured loan
  3. line of credit
  4. secured loan

Answer: d

Diff: EasyPage Ref: 44

Goal: Make short-term and long-term financing decisions basedon risk and diversification.

  1. A kind of loan that is generally givenonly to trusted customers or to companies perceived to be extremely financially stable is called a(n) ______.
  1. unsecured loan
  2. secured loan
  3. factoring arrangement
  4. credit card balance

Answer: a

Diff: EasyPage Ref: 44

Goal: Make short-term and long-term financing decisions basedon risk and diversification.

  1. A line of credit ______.
  1. allows a business to borrow short-term funds, up to a set amount, whenever it is necessary without having to apply for a new loan every time
  2. requires a company to use property as a collateral
  3. requires a company to use accounts receivable as collateral
  4. involves selling accounts receivable to a third party at a discounted rate

Answer: a