BizCafé Brewing a Business eBook Ch. 6 — Money Matters: Accounting and Finance

Measures of profitability, in relation to sales revenue, provide ratios that can be used to give insight into how efficiently we are using our revenue.

True

Explanation: Profitability ratios relative to sales revenue (such as gross profit margin, operating profit margin, and net profit margin) measure how effectively a business controls its expenses and converts its sales revenue into actual profit, reflecting how efficiently revenue is managed.

What is the first step in developing a financial plan?

Access the current financial situation

Explanation: In financial planning, the foundational first step is to evaluate your current financial standing (including income, assets, liabilities, and spending habits) so you have an accurate baseline before setting goals or creating strategies.

Retained earnings generally represent the cheapest form of funding. 

True

Explanation: Retained earnings are a form of internal financing, meaning a company does not incur flotation costs, underwriting fees, or issuance expenses (which are associated with issuing new common stock or debt), making them generally the least expensive source of funding.

Pro forma statements can be compared with actual cash flow or income statements to determine how well we are managing our finances.

True

Explanation: Pro forma statements represent projected or forecasted financial performance. Comparing them against actual cash flow or income statements allows management to perform variance analysis, evaluate budgeting accuracy, and see how effectively finances are being managed.

What is the term for accounting for a business's outflow of money in relation to the inflow of money?

Budgeting

Explanation: Budgeting is the process of quantifying and planning a business's expected financial operations, specifically tracking and controlling cash outflows (expenses and expenditures) relative to cash inflows (revenues).

Purchasing inventory and choosing forms of advertising are some of the responsibilities of management.

True

Explanation: Management is responsible for overseeing business operations, which includes tasks such as purchasing inventory and deciding on marketing or advertising strategies.

An operational budget is concerned with one-time, long-term expenses or investments.

False

Explanation: An operational budget focuses on short-term, day-to-day revenues and operating expenses (such as inventory, utilities, and wages). One-time, long-term expenses or capital investments are instead managed through a capital budget.

Risk models help financial professionals predict the likelihood of certain unfavorable events.

True

Explanation: Risk models are analytical tools used by financial professionals to assess uncertainties and predict the probability or likelihood of unfavorable events occurring

It is important for managers to translate business decisions into monetary terms when communicating with the accounting and finance departments.

True

Explanation: Translating operational plans and business decisions into monetary terms is essential for effective communication with accounting and finance departments, as it enables proper budgeting, financial forecasting, and variance analysis.

Financial plans span all three types of planning (strategic, operational, and tactical).

True

Explanation: Financial plans integrate and span across all three tiers of organizational planning—strategic (long-term goals), tactical (medium-term allocation), and operational (short-term day-to-day activities)—to ensure resources align with overall business objectives.

Which of the following is an item that would appear in an operational budget (as opposed to a capital budget)?

Hiring more staff

Explanation: An operational budget covers short-term, day-to-day operating expenses such as payroll and labor costs. In contrast, purchasing major equipment like an espresso machine, buying a building, or replacing furniture are long-term investments that fall under a capital budget.

Cash on hand is an example of a non-current asset

False

Cash on hand is the most liquid asset a business owns and is classified as a current asset (not a non-current asset), because it is available immediately to meet short-term liabilities and ongoing day-to-day operations.

When we subtract operating expenses from gross margin, we refer to the result as revenue

False

When you subtract operating expenses from gross margin, the result is called operating income (or operating profit), not revenue. Revenue is the total amount of money generated from sales before any expenses are deducted.

A firm that generates $250,000 in net profit from $1,000,000 in sales revenue has a return on sales (ROS) of _____. 

Which form of accounting ensures that our fees and taxes are paid? 

Financial accounting

Financial accounting focuses on reporting historical financial data and ensuring legal, regulatory, and tax compliance for external stakeholders, which includes tracking and ensuring that company fees, regulatory obligations, and taxes are properly accounted for and paid.

_____ is the calculation managers use to determine how much product they need to sell to start earning a profit. 

Break-even volume

Break-even volume is the specific calculation managers use to determine the exact number of units or products that must be sold to cover all fixed and variable costs, meaning total revenue equals total expenses and any sales beyond that point generate a profit.

Cost of goods sold indicates how much we directly spent to generate our sales revenue.

True

Explanation: Cost of Goods Sold (COGS) measures the direct costs attributable to the production of the goods or services sold (such as materials and direct labor), effectively showing how much was directly spent to generate the company's sales revenue.

It is unwise to share your financial plans with your employees, investors, and lenders.

False

Explanation: Sharing financial plans with key stakeholders—such as investors and lenders—is essential for securing capital, building credibility, and demonstrating business viability, while sharing appropriate details with employees helps align the team with the company's financial goals and performance targets.

Which of the following is NOT one of the major areas where AI is being utilized in finance and accounting, as discussed in the text?

Capital expenditure planning

Explanation: In business and finance textbooks, artificial intelligence is commonly highlighted as being utilized for automated processes like risk modeling, processing loan applications (credit scoring), and detecting fraud. In contrast, capital expenditure planning involves strategic, long-term corporate investment decisions and financial evaluations (such as NPV and IRR) that rely primarily on managerial judgment rather than standard automated AI applications.

Non-current assets are entities that the business could convert into cash in less than a year.

False

Explanation: Non-current assets (also referred to as long-term assets) are resources that a business expects to hold, use, or keep for more than one year (such as property, plant, equipment, and long-term investments). Assets that can be converted into cash, sold, or consumed within a year are classified as current assets.

Net margin

profit/sales

Income statements

Are we making money?

Balance sheet

What do we own and owe?

It is a one day snapshot. Assets= Liabilities+Equity

Cash flow statement

Where did the cash go?

Gross margin

gross profit/revenue

Net Income (periodic)

The total profit or loss generated during a single specific time period

It is calculated as:

revenue - total expenses