Standard 5 Quiz

What are start-up costs?

• Costs that fluctuate based on units of production

• Costs incurred to start a business, including research and licensing

• Costs that stay consistent from month to month

• Costs related to income and net profit

Answer explanation

Start-up costs are the expenses incurred to establish a business, which include essential activities like research and obtaining licenses. This distinguishes them from other costs that may vary or remain constant.

Which of the following is an example of a fixed cost?

• Raw materials

• Rent

• Commission fees

• Packaging costs

Answer explanation

Rent is a fixed cost because it remains constant regardless of production levels, unlike raw materials, commission fees, and packaging costs, which vary with production volume.

Explain the difference between variable costs and fixed costs.

• Variable costs are consistent, while fixed costs fluctuate.

• Variable costs fluctuate based on production, while fixed costs remain constant.

• Both variable and fixed costs fluctuate based on production.

• Both variable and fixed costs remain constant.

Answer explanation

Variable costs change with production levels, increasing or decreasing as output varies. In contrast, fixed costs remain unchanged regardless of production volume, making the correct choice: variable costs fluctuate based on production, while fixed costs remain constant.

What is the formula for calculating profit?

• Revenue + Cost = Profit

• Revenue - Cost = Profit

• Revenue \times Cost = Profit

• Revenue \div Cost = Profit

Answer explanation

The correct formula for calculating profit is Revenue - Cost = Profit. This means profit is the amount left after subtracting costs from total revenue.

Identify a disadvantage of debt financing.

• Loss of ownership

• Interest payments

• No obligation to repay

• Limited funding

Answer explanation

A disadvantage of debt financing is the requirement for interest payments, which can increase the overall cost of borrowing and impact cash flow, making it a financial burden for the borrower.

Compare and contrast debt and equity financing.

• Debt financing involves selling shares, while equity financing involves loans.

• Debt financing requires repayment with interest, while equity financing involves giving up ownership.

• Debt financing is interest-free, while equity financing requires repayment.

• Both debt and equity financing require giving up ownership.

Answer explanation

The correct choice highlights that debt financing requires repayment with interest, while equity financing involves giving up ownership in the company. This distinction is crucial for understanding the implications of each financing method.

What is bootstrapping in the context of entrepreneurship?

• Using venture capital to start a business

• Relying on personal finances or operating revenue to run a company

• Seeking funds from angel investors

• Applying for small business loans

Answer explanation

Bootstrapping refers to relying on personal finances or operating revenue to run a company, rather than seeking external funding like venture capital or loans. This approach emphasizes self-sufficiency in entrepreneurship.

Why is pitching important in the fundraising process?

• It guarantees funding from investors.

• It helps entrepreneurs communicate their business ideas effectively to potential investors.

• It eliminates the need for a business plan.

• It reduces the interest rates on loans.

Answer explanation

Pitching is crucial as it allows entrepreneurs to effectively communicate their business ideas to potential investors, increasing the chances of securing funding. It does not guarantee funding, nor does it replace a business plan.

Define a pro-forma financial statement.

• A statement showing actual revenue and expenses

• A projected statement of revenue and sources of revenue

• A historical record of past financial performance

• A statement of cash flows

Answer explanation

A pro-forma financial statement is a projected statement of revenue and sources of revenue, used for planning and forecasting future financial performance.

What is the purpose of sales and budget forecasting in business planning?

• To determine past financial performance

• To predict future financial needs and performance

• To calculate current profit margins

• To assess employee performance

Answer explanation

The purpose of sales and budget forecasting is to predict future financial needs and performance, enabling businesses to plan effectively and allocate resources efficiently.