77 Answered Test Questions:
1. A company has a post-money valuation of $500,000. The last investor put in $100,000. The pre-money valuation before the investor came in was _________________.
Answers:
• $400,000
• $600,000
• $1,000,000
• $100,000
2. Why does a Balance Sheet balance (assets = liabilities + equity)?
Answers:
• It is required by law.
• Companies force it to balance.
• Accounting is a double-entry system of equal debits and credits.
• Auditors make adjustments to make it balance.
3. The primary financial statements that are forecast are _________________.
Answers:
• income statement only
• retained earnings and cash flow
• balance sheet and trial balance
• income statement, balance sheet, and cash flow
4. Which of the following is NOT an operating expense?
Answers:
• Rent
• Accounts Payable
• Insurance
• Bank fees
5. An operating budget in a corporate setting is usually prepared ________________.
Answers:
• for the following fiscal year
• for the next 5 years
• one month at a time
• None of the above; an operating budget is not typically created in a corporate setting.
6. Why would a company perform a variance/sensitivity analysis?
Answers:
• It is a required financial statement.
• Auditors will ask for it.
• Shareholders require the document.
• To see how the forecast model changes based on changing dynamic inputs
7. Depreciation on the Balance Sheet reflects ___________________.
Answers:
• the current period depreciation
• Tax Liability
• Total Assets
• cumulative depreciation on fixed assets
8. For which of the following company structures is it easiest to issue shares?
Answers:
• LLC
• C Corporation
• Sole Proprietorship
• LLP
9. Why might someone forecast future years as one annual number?
Answers:
• The forecaster is lazy.
• It is the best method for forecasting future years.
• It saves management time and energy.
• Because it is difficult to predict what will happen, applying a growth percentage to the year is the most reasonable assumption.
10. Why is it reasonable for a startup company to forecast a Net Loss for several years?
Answers:
• A company can never make money in its first years.
• It reduces tax liability in future years.
• As the company launches and grows, expenses will often exceed any revenue-generating abilities; hence, the expected payoff will not come until future years.
• It's not reasonable and should not be done.
11. Which of the following represents three possible revenue streams for an online venture?
Answers:
• Product Sales, In-Store Sales, Bulk Purchases
• Ad Revenue, Affiliate Revenue, Product Sales
• In-Store Sales, Ad Revenue, Product Sales
• In-Store Sales, Affiliate Revenue, Product Sales
12. For a startup company looking to gain investor interest, which of the following seems like a reasonable amount of time to forecast ahead?
Answers:
• 6 months
• 1 year
• 5 years
• 20 years
13. Revenues on the Profit & Loss should be changed ___________________.
Answers:
• by inputting them directly into the cells
• through the accounting system
• by showing change in cash flow
• by changing assumptions on the assumptions page
14. Is income tax forecasted?
Answers:
• Yes, usually
• Never
• Not unless required by the country law
• Yes, but only if the company is forecasted to earn over $1 million
15. Which of the following would NOT be included on a summary page?
Answers:
• Cash Balance
• Net Income
• Payroll Expense
• Total Equity
16. Which of the following parties should be kept in mind when creating a financial forecast?
Answers:
• The government
• The end user
• The financial model builder
• The Board of Directors
17. What does an increasing trend in Accounts Payable indicate for a company?
Answers:
• It indicates nothing in particular.
• The company is making better use of its cash and is not paying bills as quickly.
• Cash is being mismanaged.
• Net Income is increasing.
18. The Net Income on the Cash Flow Forecast comes from the __________________.
Answers:
• Balance Sheet
• Statement of Retained Earnings
• Forecasted Profit & Loss Statement
• Variance Analysis
19. Why is Change in Accounts Payable added back to Net Income?
Answers:
• There is no reason to do so.
• An increase in AP reflects the fact that the company did not spend cash on paying its bills.
• It is required by the SEC.
• It is required by IRS tax law.
20. To calculate a worst case scenario, a company would ____________ and ____________.
Answers:
• increase revenue streams, decrease operating expenses
• increase operating expenses, increase revenues
• decrease revenues, increase operating expenses
• show no change to revenue, show change only to operating expenses
21. A capitalization summary would show ______________________.
Answers:
• Net Income, Cash, and Retained Earnings
• Operating Expenses and Tax Liability
• Change in Accounts Receivable
• Valuation, Investment, and Ownership %
22. In what way are the Income Statement and the Cash Flow Statement linked in a dynamic forecast?
Answers:
• Change in Accounts Receivable is carried forward to the Cash Flow Statement.
• Depreciation Expense is carried forward to the Cash Flow Statement.
• Net Income is carried over to the first line of the Cash Flow Statement.
• Rent expense is used on the Cash Flow Statement.
23. Net Income on the Balance Sheet reflects _______________.
Answers:
• Net Income for the current month
• year-to-date Net Income
• Change in Assets from inception
• Tax liability
24. What is meant by the term "post-money valuation"?
Answers:
• The valuation of a company before collecting accounts receivable
• The valuation of a company after collecting all accounts receivable
• The valuation of a company after an investment round
• The valuation of a company before an investment round
25. One method of calculating the valuation of a company is ________________.
Answers:
• Accounts Payable change
• Discounted Cash Flows
• Retained Earnings Growth
• Tax Liability discounted
26. The purpose of a worst case analysis is to _____________________.
Answers:
• show the best possible result
• advise the reader not to invest
• show that management is competent
• show what the results would be if things do not work out as forecasted
27. Should a summary include metrics such as Gross Margin %?
Answers:
• Yes, they are good high-level indicators.
• Yes, it is required by law.
• No, they are excessive information.
• No, they are too complex for a summary.
28. Which of the following would most likely be included on a summary page for Balance Sheet data?
Answers:
• Total Assets, Total Liabilities, Total Equity
• Net Income, Total Sales, Total Operating Expense
• Cash Balance, Cash Inflows, Cash Outflows
• Retained Earnings and Cash
29. Operating expenses should ____________________.
Answers:
• be summarized, showing one lump sum per period
• be organized by department
• be detailed, showing each line item that the actual P&L will have
• not be included
30. In what way are the Cash Flow Statement and the Balance Sheet linked in a dynamic forecast?
Answers:
• They are not interrelated.
• Cash from the Cash Flow Statement is carried over to the Balance Sheet cash line.
• Equity from the Balance Sheet is transferred to the Cash Flow Statement.
• Accounts Receivable is transferred from the Cash Flow Statement to the Balance Sheet.
31. How is income tax forecasted?
Answers:
• By applying the prevailing corporate tax rate to any income for the period
• By showing it escalating over time
• By assuming zero unless profits exceed $1 million
• By tax professionals who handle forecasting separately
32. In which of the following ways would typical Rent Expense be modeled?
Answers:
• Consistent over the next five years
• Based on average rent in major metropolitan areas
• Always assuming a 10% growth per year
• Related to both the number of employees and natural increases in rent
33. The term "burn rate" refers to ______________.
Answers:
• the total operating expenses
• the amount of cash a company spends on average in a given period
• the total fixed asset expenditures
• revenue growth
34. Capitalization is defined as ______________________.
Answers:
• the debt structure of a company
• the capital structure of a company
• current assets
• the annual net income
35. In what way are the Income Statement and the Balance Sheet linked in a dynamic forecast?
Answers:
• Change in Accounts Receivable is determined on the Income Statement.
• Ending cash balance is brought from the Income Statement to the Balance Sheet.
• There is no relationship between the two.
• Net income is carried over to the Equity section.
36. Another way to express the Balance Sheet formula is ________________.
Answers:
• Cash = Liabilities
• Equity = Assets - Liabilities
• Net Income = Assets - Liabilities
• Retained Earnings = Assets + Liabilities
37. Which of the following would one expect to be the highest expense?
Answers:
• Liability insurance
• Salaries
• Benefits
• Office supplies
38. In which of the following sections would Change in Accounts Receivable be recorded?
Answers:
• Cash from Investing
• Net Income
• Cash from Operations
• Cash from Financing
39. Which of the following decisions could be made by looking at the Balance Sheet?
Answers:
• To move offices
• To invest excess cash into higher-yield investments
• To reduce employee benefits
• To outsource payroll functions
40. Which of the following is the accepted format for a forecasted Balance Sheet?
Answers:
• Expenses first, then Revenue
• Revenue, COGS, Operating Expenses
• Taxes, COGS, Revenue, Operating Expenses
• Assets, Liabilities, Equity
41. What is meant by the term "pre-money valuation"?
Answers:
• The valuation of a company before collecting accounts receivable
• The valuation of a company after collecting all accounts receivable
• The valuation of a company after an investment round
• The valuation of a company before an investment round
42. Which of the following would be the most useful forecasting interval?
Answers:
• Monthly
• Quarterly
• Yearly
• Weekly
43. Why is it important to create assumptions for all possible changing variables?
Answers:
• It's not important; there is no real value in doing so.
• It makes the model overly complex and difficult to use.
• It allows the user to avoid paying taxes.
• It makes future updates to the model easier because the user does not need to search for numbers embedded in formulas in the financial statements.
44. The most logical formatting convention for assumptions would be ___________________.
Answers:
• to use a 10-color coding scheme
• to spread assumptions throughout the entire model
• to outline and use red text in all input cells, and to add a note at the top of the assumptions stating that only red-text cells are to be changed, with uniform formatting and assumptions placement
• to use no particular formatting, but to make the assumptions simple with black text and no highlighting
45. Which of the following decisions would best be made by looking at cash flow?
Answers:
• Decisions about inventory management
• Decisions about tax planning
• The decision to spend less on capital assets and pay down payables in the next period
• The decision to increase production
46. To be as specific as possible, a revenue forecast should ______________.
Answers:
• be summarized by year
• be summarized by quarter
• be detailed month by month
• show a total for five years
47. Ad Revenue, which is revenue generated by placing advertisements of other companies on your site, can be modeled by _________________.
Answers:
• assuming a fixed amount each year and applying it to all years
• assuming that Google's ad rates apply
• figuring the average revenue per ad multiplied by the expected number of advertisement spots in a given period
• figuring the average sales revenue on other products
48. The majority ownership of a private company is typically held by __________________.
Answers:
• private bankers
• venture capital firms
• employees
• company officers
49. In general, a financial plan can be defined as _____________________.
Answers:
• a plan for spending, saving, and generating revenue
• a 10-year strategy plan
• the prior year's financial reports
• a plan to be used only by the Board of Directors
50. Why would an investor be interested in a company's pre-money valuation?
Answers:
• The investor is required by law to ask for the pre-money valuation.
• Knowing the valuation allows the investor to secretly calculate how much he can expect in return.
• Knowing the valuation helps the investor put his investment in perspective and understand how it is relative to the capital already in the company.
• Knowing the valuation gives the investor the ability to calculate net income.
51. In which of the following sections would a startup company record an investment by a venture capital firm?
Answers:
• Cash from Investing
• Net Income
• Cash from Operations
• Cash from Financing
52. In what way are the Balance Sheet and the Cash Flow Statement linked in a dynamic forecast?
Answers:
• There is no relationship between the two.
• Changes in Accounts Receivable are carried over to the Cash Flow Operating Activities section.
• Net Income is determined on the Balance Sheet and carried over to the Cash Flow Statement.
• Tax liability is calculated using both statements.
53. The term "revenue driver" refers to ____________________.
Answers:
• the per-unit sales price
• any factor that drives revenue, such as site impressions
• the total revenue by product
• the total revenue
54. A simple method of calculating variance is to _________________.
Answers:
• apply a percentage increase/decrease to each line item on the P&L
• build an entirely new model for each
• use current interest rates
• look at the company's FICA score
55. Which of the following is the accepted format for a forecasted P&L?
Answers:
• Expenses first, then Revenue
• Revenue, COGS, Operating Expenses
• Taxes, COGS, Revenue, Operating Expenses
• Assets, Liabilities, Equity
56. What is the purpose of a summary page?
Answers:
• It is required by the IRS.
• It saves the financial model creator from having to delve into details.
• It makes the financial model creator look smart.
• It gives a quick overview of the forecasted outcomes for various financials.
57. Would it be better to create detailed input that individually forecasts expenses or to create a simple, one-line input for Operating Expenses?
Answers:
• Simple input: it will save the end user a lot of time.
• Simple input: it's not worth figuring out the specifics of Operating Expenses.
• Detailed input: each expense grows based on different variables.
• Detailed input: the model looks more impressive if there are more line items.
58. A normal revenue model will _______________.
Answers:
• decline in revenue due to restructuring
• decline in revenue as the initial buzz wears off
• have straight line revenues
• increase revenues over time
59. For most new ventures in the process of creating a forecast, the expense that warrants the most detailed analysis and input is _____________.
Answers:
• wages
• rent
• telephone and utilities
• benefits
60. Overall, what is the purpose of a Cash Flow Statement?
Answers:
• It shows how the company received and spent cash each period.
• It is used to determine whether a company should pay dividends.
• It shows Net Income.
• It determines tax liability.
61. To calculate a best case scenario, a company would ____________ and ____________.
Answers:
• increase revenue streams, decrease operating expenses
• increase operating expenses, increase revenues
• decrease revenues, increase operating expenses
• show no change to revenue, show change only to operating expenses
62. What purpose does a central assumptions input tab serve in an Excel-based forecast?
Answers:
• It adds a level of complexity.
• It helps create an easy-to-use spreadsheet in which all inputs are located in one place.
• There is no particular purpose for it; it is simply required by law.
• There is no particular purpose for it; it is simply required by the SEC.
63. Naming assumption cells is helpful because ____________________.
Answers:
• it allows for easier creation and tracking of formulas built into the model
• formulas will not work unless they are named
• it prevents subsequent users from editing the cells
• management cannot decipher any hidden references
64. Companies calculate their valuation for the purpose of _____________________.
Answers:
• determining their Net Income
• seeing if they can get credit from the bank
• determining their tax liability
• using the outcome as a basis for working with investors and deciding how much equity an investment is worth
65. The basic formula for a Balance Sheet is __________________.
Answers:
• Cash = Liabilities
• Assets = Liabilities + Equity
• Net Income = Assets - Liabilities
• Retained Earnings = Assets + Liabilities
66. Which of the following is the accepted format for a forecasted Cash Flow Statement?
Answers:
• Net Income, Operating Activities, Financing Activities, Investing Activities
• Revenue, COGS, Operating Expenses
• Taxes, COGS, Revenue, Operating Expenses
• Assets, Liabilities, Equity
67. Which of the following would most likely NOT be included on summary financials?
Answers:
• Net Income
• Total Assets
• Accounts Payable
• Sales
68. Retained Earnings reflect ____________________.
Answers:
• the cumulative Net Income for a company from inception until its last reporting year
• Net Income for the current year
• Change in Assets
• Change in Liabilities
69. Which of the following would be a logical arrangement for showing revenue?
Answers:
• Summary totals
• Detailed by revenue stream
• Detailed by sales person
• Summarized by sales person
70. In a variance/sensitivity analysis, a company will typically calculate _________________.
Answers:
• only a worst case scenario
• only a best case scenario
• both best case and worst case scenarios of altered revenues and expenses
• None of the above; most companies won't do a variance/sensitivity analysis.
71. How is Cash at the beginning of the period determined?
Answers:
• It depends on the company's AR level.
• It is determined by looking at revenues.
• It is determined through a complex calculation involving interest.
• It is taken from the prior period's ending cash balance.
72. A company has a pre-money valuation of $1,000,000. An investor will invest $100,000. The post-money valuation is _________________.
Answers:
• $900,000
• $1,000,000
• $1,100,000
• $2,200,000
73. Valuation can be calculated by ____________________.
Answers:
• discounting net income for the next several years
• applying a fixed percentage to tax liability
• examining Rent Expense
• Total Retained Earnings
74. Valuation will typically trend _______________.
Answers:
• in a straight line; valuation does not change
• upwards over time as the company increases sales
• downwards over time as the company increases sales
• upwards over time as the company decreases sales
75. Why would a company be conservative when projecting revenues?
Answers:
• Being conservative is better than being overly optimistic.
• The company wants to show the highest possible revenue.
• Being conservative reduces the firm's tax liability.
• Being conservative is required by law.
76. Valuation is a ______________________.
Answers:
• result of Net Income, Sales, and Cash Flow
• result of Accounts Receivable
• result of Accounts Payable
• result of Equity and Retained Earnings
77. Another name for the Balance Sheet is ____________________.
Answers:
• Statement of Financial Position
• Cash Flow Statement
• Statement of Retained Earnings
• Statement of Accounts
1 NOT Answered Yet Test Questions:
(hold on, will be updated soon)78. Which of the following decisions could be made by examining the Balance Sheet?
Answers:
• To increase production
• To hire another key executive
• To reduce payroll by 20%
• To collect more aggressively on a growing receivables balance
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