Business Foundations A Changing World 11th Edition Ferrel – Test Bank

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Chapter 05

Small Business, Entrepreneurship, and Franchising

 

True / False Questions

1. Entrepreneurship is the process of creating and managing a business to achieve desired objectives.

True    False

 

2. One of the most significant drawbacks of small businesses is their inability to innovate and to bring significant benefits to customers.

True    False

 

3. Retailing attracts entrepreneurs because gaining experience and exposure in retailing is relatively easy.

True    False

 

4. Industries such as wholesaling, services, and manufacturing are unattractive to entrepreneurs because these fields tend to be relatively difficult to enter and require high initial financing.

True    False

 

5. A drawback of franchising is the need for franchisees to strictly adhere to standardized operations.

True    False

 

 

Multiple Choice Questions

6. All of the following are ways innovative entrepreneurs can use emerging trends to provide products that serve customer needs EXCEPT

A. inventing a major new technology.

 

B. taking advantage of technology to create new markets.

 

C. improving a familiar product.

 

D. delivering features that consumers in a particular market segment could not find anywhere else.

 

E. placing a familiar product in a unique retail environment.

 

7. Megha is a taekwondo expert who starts her own martial arts training academy. She conducts taekwondo classes for women and teaches them the art of self-defense. Megha can be regarded as a(n)

A. shareholder.

 

B. entrepreneur.

 

C. investor.

 

D. intrapreneur.

 

E. inventor.

 

8. Carol and Evan recently had their first child. As two working parents, they struggled to find good, economical child care. As a result, they developed their own software to link parents with licensed, fairly priced child care providers. This is an example of the

A. sharing economy.

 

B. market segment economy.

 

C. service economy.

 

D. retail economy.

 

E. consumer economy.

 

9. Growing up, Cameron noticed that many families in his community struggled to make ends meet and provide for their children’s education. As a result, after he finished school, he started a business to provide low-cost tutoring and scholarship opportunities for low-income families in his community. As his company has grown, Cameron has been able to extend free tutoring and college scholarships to five impoverished students per year. Cameron is a

A. nonprofit entrepreneur.

 

B. profit entrepreneur.

 

C. social entrepreneur.

 

D. sharing entrepreneur.

 

E. macroentrepreneur.

 

10. A _____ is best described as any independently owned and operated business that is not dominant in its competitive area and does not employ more than 500 people.

A. publicly owned business

 

B. limited liability company

 

C. small business

 

D. publicly traded company

 

E. conglomerate

 

11. Michael owns a small catering business that mostly serves his community. He has been hired for company picnics, backyard barbecues, and family celebrations. As word of mouth has spread about his delicious food, good service, and fair prices, he has started getting more business. To handle this, he has hired four employees to help cook and serve food at these events. What kind of entrepreneur is Michael?

A. a macroentrepreneur

 

B. a social entrepreneur

 

C. a sharing entrepreneur

 

D. a gig entrepreneur

 

E. a microentrepreneur

 

12. Vernon runs Buzz, his own event management company, which frequently organizes large corporate events. He has built a good reputation for organizing corporate events with a fair degree of professionalism at reasonable costs. He works out of his own house with a staff of about 55 employees. Vernon’s company can be categorized as a

A. multinational corporation.

 

B. limited liability company.

 

C. franchise.

 

D. public sector holding.

 

E. small business.

 

13. The Small Business Administration is a(n)

A. body established by the U.S. Chamber of Commerce to encourage the intrapreneurial spirit in small businesses.

 

B. independent agency of the federal government that offers managerial and financial assistance to small businesses.

 

C. independent agency created under the General Agreement on Tariffs and Trade to protect small businesses against competition from larger companies.

 

D. division of the federal government that is responsible for ensuring that newly formed businesses adhere to the law.

 

E. U.S. congressional agency that regulates the issue of stocks by small businesses.

 

14. Salma owns a Lebanese restaurant that employs around 25 people. She is solely responsible for the management of the restaurant. Her business has to compete with a larger chain of restaurants that offer the same cuisine. Salma’s restaurant can be classified as a

A. multinational corporation.

 

B. conglomerate.

 

C. franchise.

 

D. public sector holding.

 

E. small business.

 

15. Which of the following is true about the role of small businesses in the American economy?

A. They employ about 20 percent of private workers.

 

B. They represent only 20 percent of U.S. exporters.

 

C. They provide opportunities for women to succeed in business.

 

D. They are always operated as subsidies of large companies.

 

E. There has been a decline in the number of small businesses owned by minorities.

 

16. When Miguel first moved from Mexico to the United States, he struggled to find and keep work because he couldn’t speak English fluently. After learning English, he started a new business to help other Mexican Americans learn English and to help place them in jobs. Miguel’s business is a

A. minority-owned conglomerate.

 

B. minority-owned small business.

 

C. small exporting business.

 

D. small importing business.

 

E. minority entrepreneurship.

 

17. Which of the following businesses has created a majority of net new jobs annually?

A. multinational corporations

 

B. publicly traded companies

 

C. small businesses

 

D. conglomerates

 

E. public sector holdings

 

18. Strings and Keys, an independent music store, acquires instruments and other music equipment from producers and wholesalers and sells them to consumers. Strings and Keys is a

A. manufacturer.

 

B. wholesaler.

 

C. retailer.

 

D. direct sales company.

 

E. direct marketing company.

 

19. Megan and Chris are entrepreneurs who want to start their own business. Which of the following would attract them to retailing?

A. Gaining experience in retail is a challenge, so they would have less competition.

 

B. There are no costs associated with opening a retail business.

 

C. Retailing doesn’t require interacting directly with consumers.

 

D. Retailing requires low initial financing.

 

E. Retailing limits a firm’s need to focus on specific groups of consumers.

 

20. Many opportunities exist for _____, which involves selling products outside of a retail facility.

A. external retailing

 

B. wholesaling

 

C. direct retailing

 

D. manufacturing

 

E. nonstore retailing

 

21. Carolyn makes unique clothing pieces, jewelry, and hair accessories. To avoid the costs of opening a store, she sells these pieces on Etsy. This is an example of

A. providing services.

 

B. manufacturing.

 

C. wholesaling.

 

D. direct selling.

 

E. direct marketing.

 

22. Clothes Horse, a clothing store in the mall, wants to give customers an opportunity to place orders. What is one form of direct marketing the store can use to provide this service?

A. It can send catalogs to its customers.

 

B. It can send sales associates door-to-door to sell its clothing.

 

C. It can open additional store locations.

 

D. It can create call centers to contact customers at home.

 

E. It can customize its clothing to meet specific customer needs.

 

23. While Tyler attends college, he is working part-time for a life insurance company. He goes door-to-door and offers consumers face-to-face presentations in their homes. This is an example of

A. direct selling.

 

B. direct marketing.

 

C. wholesaling.

 

D. manufacturing.

 

E. providing a service.

 

24. All of the following are true of direct selling EXCEPT

A. the cost of getting involved is low.

 

B. it can be done part-time.

 

C. it requires buying a lot of inventory.

 

D. those who do it can receive commissions on their sales.

 

E. those who do it have the opportunity to recruit other distributors.

 

25. Which of the following best illustrates a small business operating in a retail industry as opposed to wholesaling its products?

A. Janet bakes cakes and sells them to other restaurants and cafes in malls.

 

B. BC Inc. manufactures stationery and sells it in bulk to book shops and supermarkets.

 

C. Pink Cult, an apparel company, sells its merchandise through True deals.com.

 

D. Neon Love Inc. imports candles and directly sells them to customers through kiosks.

 

E. Auto Line Inc. manufactures component parts of cars and sells them to automobile companies.

 

26. Which of the following is true of wholesalers?

A. Wholesalers cannot be eliminated because their functions are too important.

 

B. Wholesalers receive their products from retailers.

 

C. Wholesalers do not provide management or merchandising assistance to clients.

 

D. Wholesalers do not perform marketing activities.

 

E. Wholesalers are extremely important because of the marketing activities they perform.

 

27. Many service providers are considered retailers because they

A. require a high initial start-up cost.

 

B. provide their services directly to ultimate consumers.

 

C. sell their services from a single store location.

 

D. focus on large market segments and institutional buyers.

 

E. employ only a small number of people.

 

28. Jack owns a barbershop that specializes in men’s haircuts and shaving. This is an example of a

A. manufacturing business.

 

B. wholesaler.

 

C. retailer.

 

D. service business.

 

E. direct selling business.

 

29. In the manufacturing sector, small businesses sometimes have an advantage over large firms because small businesses

A. are exempted from paying taxes in most countries.

 

B. can customize products to meet specific customer needs and wants.

 

C. have a better access to highly skilled workers.

 

D. can mass produce and supply goods in bulk.

 

E. have better access to funds and can invest on sophisticated equipment.

 

30. Which of the following is a difference between high technology businesses and other small businesses?

A. High technology businesses never start in garages, basements, kitchens, or dorm rooms, while some other types of small businesses can start in these places.

 

B. High technology businesses require greater capital and have higher initial startup costs than other small businesses.

 

C. High technology businesses are less innovative than other small businesses.

 

D. High technology businesses are the only type of small business that uses technology.

 

E. High technology businesses have lower initial startup costs than other small businesses.

 

31. Ben and Molly live and work in Texas, but they love vacationing in Hawaii, and they go there as often as time and money will allow. Finally, they take the plunge and buy a vacation home in Hawaii. When they aren’t there, they rent the property to other people for $1000 per week. This is an example of

A. a service business.

 

B. direct selling.

 

C. social entrepreneurship.

 

D. the sharing economy.

 

E. retailing.

 

32. Which of the following is a challenge associated with the sharing economy?

A. pressure over whether workers are independent contractors or employees

 

B. the higher cost of services through this model

 

C. competition from established firms

 

D. inability to set rates

 

E. lack of flexibility

 

33. Which of the following traits will help entrepreneurs succeed?

A. risk aversion

 

B. introversion

 

C. persistence

 

D. impulsiveness

 

E. neuroticism

 

34. One of the major reasons people want to own and operate their own business is to

A. avoid the risk of competition.

 

B. be their own boss.

 

C. avoid multitasking.

 

D. reduce stress levels.

 

E. avoid direct responsibility of the operations.

 

35. Which of the following is an advantage of a small business?

A. greater adaptability to changing market demands

 

B. the support that an office provides

 

C. more money available for wages and salaries, rent, utilities, and other expenses

 

D. the opportunity to compete in the mass market or for large market segments

 

E. multiple layers of management to help make difficult decisions

 

36. Simon has worked for a large corporation for years, and he feels like he just doesn’t fit in the “corporate mold” anymore. He decides to start his own business because he wants the freedom to choose whom he works with and when and where he works. What advantage of small business ownership seems the most prevalent in this example?

A. costs

 

B. independence

 

C. flexibility

 

D. focus

 

E. reputation

 

37. All of the following are ways small businesses can maintain low costs EXCEPT

A. hiring and maintaining a large finance department.

 

B. hiring separate firms to supply services as needed.

 

C. relying on friends and family to help with difficult projects.

 

D. maintaining a smaller staff to save money on wages and salaries.

 

E. maintaining a smaller factory to save money on rent and utilities.

 

38. Red Carpet Inc. is a small apparel store started by an aspiring designer. The store needs to compete against larger, well-established multinational brands. Which of the following strategies will most help Red Carpet Inc. avoid competition from larger firms?

A. Red Carpet Inc. should have multiple levels of management like the larger firms.

 

B. Red Carpet Inc. should target large market segments that the competitors serve.

 

C. Red Carpet Inc. should expand the scale of production to enjoy greater economies of scale.

 

D. Red Carpet Inc. should start to work with customers only when the products are ready for sale.

 

E. Red Carpet Inc. should focus on and target small market niches or product needs.

 

39. Kristen is an animal lover and vegetarian. Frustrated by trying to find vegetarian substitutes for commonly needed items, she has started her own vegetarian boutique. Her store sells vegetarian food, shoes, toiletries, and many other items. Which advantage of small-business ownership is this scenario most closely related to?

A. reputation

 

B. independence

 

C. focus

 

D. costs

 

E. flexibility

 

40. Which of the following is true regarding the reputation of small businesses?

A. Small businesses are less well known than large businesses, so they need to prove themselves more to get a good reputation.

 

B. Because of their capacity to focus on narrow niches, small businesses can develop enviable reputations for quality and service.

 

C. Since small business employees are often stretched thin by the amount of work they have, their reputations are not as good as larger businesses with more employees.

 

D. Small businesses often have to cut corners in creating their products, so they have a poor reputation for quality.

 

E. Small businesses tend to focus more on service than quality, so their reputation is inconsistent.

 

41. Which of the following is one of the difficulties faced by small business owners?

A. high cost of formation

 

B. bureaucratic decision-making process

 

C. inability to focus on specific groups of customers

 

D. worries about employee problems or competition

 

E. limited scope for innovation

 

42. Matt owns his own small bakery. In addition to being the owner, he also serves as the manager, sales force, head baker, shipping and receiving clerk, bookkeeper, and custodian. Matt is the first person to arrive at the bakery every morning and the last to leave every night. Which of the following is the most applicable challenge Matt faces?

A. lack of funding

 

B. pricing mistakes

 

C. a high stress level

 

D. underestimating the time commitment for success

 

E. having poor business concepts

 

43. If a small business has to cope with growth, it requires the owner to

A. give up a certain amount of direct authority.

 

B. decrease the levels of management.

 

C. disregard narrow niches.

 

D. reduce the workforce.

 

E. delay decision making.

 

44. Which of the following is a reason behind the failure of small businesses?

A. overcapitalization

 

B. coping with growth

 

C. managerial experience

 

D. poor business concept

 

E. high costs of start-up

 

45. Colin is an avid scrapbooker. He wants to start a scrapbooking store and workshop, where people can buy their supplies and scrapbook together as a community. What must he do to make sure this business will succeed?

A. He must find suppliers who are willing to take a chance on his scrapbooking business.

 

B. He must identify whether a genuine market niche exists for scrapbooking.

 

C. He must convince the community that scrapbooking is a worthwhile hobby.

 

D. He must convince the community to donate funds to help him start his scrapbooking business.

 

E. He must find partners to help him fund his scrapbooking business.

 

46. Carol has decided to open a Vietnamese restaurant in her neighborhood. She will be solely responsible for the management of the restaurant. Which of the following problems is she likely to face while running the business?

A. She will find it difficult to make quick decisions.

 

B. Her business will not be able to quickly adapt to changing market demands.

 

C. Her restaurant may not be able to focus on specific group of customers.

 

D. She will not have the flexibility to take critical decisions independently.

 

E. She may find it difficult to deal with the stress of rent increase.

 

47. _____ is best described as the lack of funds to operate a business normally.

A. Debt financing

 

B. Trade credit

 

C. Franchising

 

D. Trade deficit

 

E. Undercapitalization

 

48. Mark and Stephanie run a small farm stand on their property, selling vegetables, fruits, plants, and eggs to support themselves. During a particularly bad season, they tried to get financing from a small rural bank in their community. However, they were unable to obtain financing because

A. the small rural bank believed that their business lacked the flexibility to adapt to changing market demands.

 

B. they required a huge sum of money to compete in the mass market.

 

C. government regulations do not permit financing small rural businesses.

 

D. the small rural bank lacked the necessary financial expertise to counter the risks involved with small-business loans.

 

E. rural communities have various business guidelines that prohibit rural banks from financing small businesses.

 

49. Jason is an artist who wants to turn his art into a small business. He had the great idea to go to other hobby-based businesses in his community and give painting lessons to their clients. First, he went to a local stable and taught its boarders how to paint portraits of their horses. Then, he went to a local dance studio and taught its patrons how to paint their dream dance costumes. Based on the buzz created by his new business, several other local businesses want to hire Jason. What is one area where he may struggle in managing his new business?

A. He may get stuck in a market niche.

 

B. He may lack the flexibility to adapt to changing market demands.

 

C. He may have trouble managing all the money he will make from the start.

 

D. He may lack the skills and experience to make good management decisions.

 

E. He may focus too much on management and not enough on his great product ideas.

 

50. Gerald started a business using the savings from his previous job. He planned to run his business on the revenue generated from sales. However, a few months later, he found it difficult to pay his staff, rent, and other expenses. Seasonal sales and inability to secure sufficient credit from local banks made it difficult for Gerald to operate the business normally. Which of the following causes of small-business failure does this scenario best illustrate?

A. undercapitalization

 

B. trade credit

 

C. economies of scale

 

D. debt financing

 

E. debt factoring

 

51. Which of the following is the shortest path to failure in business?

A. inflexibility

 

B. undercapitalization

 

C. rent increases

 

D. competition

 

E. changing market demand

 

52. Penelope is a very talented software engineer who starts her own small software development firm. She finances the firm from her savings. Initially, she is able to get many projects from customers and completes them successfully. However, as her business grows, she fails to make good decisions in hiring new employees, billing the clients, and negotiating prices. She eventually ends up liquidating the business. Which of the following causes of small-business failure does this scenario best illustrate?

A. undercapitalization

 

B. managerial inexperience

 

C. economies of scale

 

D. debt financing

 

E. debt factoring

 

53. Catalina opens a fashion boutique with the money she inherited from her parents. She is successful in creating a strong brand image and a loyal customer base. In order to meet the increasing demands of her business, she hires a store manager. However, she finds it hard to let the manager make important decisions about the store. She often finds herself disagreeing with the manager’s decisions, and in the process, she loses a lot of existing customers. Which of the following causes of small-business failure does this scenario best illustrate?

A. undercapitalization

 

B. inability to cope with growth

 

C. diseconomies of scale

 

D. debt financing

 

E. debt factoring

 

54. The principal immediate threats to small and mid-sized businesses include

A. rapidly advancing technology.

 

B. rising entrepreneurial spirit.

 

C. reducing imports.

 

D. escalating costs.

 

E. increasing exports.

 

55. Tiffany recently started a small firm that contract manufactures for leading fashion brands in the United States. Which of the following would likely be a principal immediate threat to this firm?

A. rapidly advancing technology

 

B. rising entrepreneurial spirit

 

C. reducing imports

 

D. rising inflation

 

E. increasing exports

 

56. It has often been said that the greatest impediment to the success of a small business is the

A. entrepreneur.

 

B. government.

 

C. competition.

 

D. business environment.

 

E. lack of funding.

 

57. Candace started a small house cleaning company, Neat and Tidy, and hired a few of her friends to help her. When the business started, most of its clients were having their houses cleaned to prepare them to sell. However, as more people hired Neat and Tidy and saw what a good job they did, the company started to see more repeat clients who wanted their houses cleaned on a weekly or biweekly basis. As this company grows, all of the following are changes that might occur EXCEPT

A. specialized management skills may be needed in areas such as credit analysis and promotion.

 

B. Candace may need to give up some control of the company.

 

C. if the cleaning staff doesn’t arrive on time, this could quickly reverse the company’s success.

 

D. the company’s reputation will suffer, no matter how well the growth is managed.

 

E. Candace may need to hire more experience managers to help this company through growing pains.

 

58. Meredith wants to start her own small business. All of the following are things she needs to do to start a business EXCEPT

A. hire employees to work for the business.

 

B. have a general idea for the business.

 

C. devise a strategy to guide planning and development in the business.

 

D. make decisions about form of ownership.

 

E. make decisions about financial resources needed.

 

59. A precise statement of the rationale for a business and a step-by-step explanation of how it will achieve its goals is known as a(n)

A. promissory note.

 

B. article of incorporation.

 

C. business plan.

 

D. business agreement.

 

E. article of partnership.

 

60. Which of the following statements is true of a business plan?

A. Small businesses do not need a business plan.

 

B. It does not have to be revised periodically.

 

C. Every business needs to mandatorily maintain a business plan as per government regulations.

 

D. It should establish a strategy for acquiring sufficient funds to keep a business going.

 

E. It is created to limit a business’s flexibility and decision-making ability.

 

61. Sarah is starting her own small house painting company, Pickett Fence Painting. She is working on developing the company’s business plan. Which of the following is something the business plan should accomplish?

A. limiting the business’s flexibility

 

B. estimating the business’s income and expenses

 

C. permanently setting the business’s goals and strategies

 

D. establishing rules and regulations for how the business will be run

 

E. eliminating any future weaknesses of the business

 

62. Arnold approached a bank to get a loan for a business he planned to launch later that year. He explained his business idea and its capital requirements to the bank manager. The manager asked Arnold to provide a formal document that included a rationale for the business, an explanation of how it will achieve its goals, an analysis of the competition, and estimates of income and expenses, among other information. Which of the following documents does the bank expect from Arnold, in this scenario?

A. a business plan

 

B. a cash flow statement

 

C. a promissory note

 

D. a balance sheet

 

E. a marketing plan

 

63. In the process of starting a business, the step that immediately follows the development of a business plan involves

A. organizing resources like labor and supplies.

 

B. developing some general business ideas.

 

C. deciding an appropriate legal form of business ownership.

 

D. promoting the business to the customers.

 

E. filing for tax returns for the business with the Internal Revenue Service.

 

64. To make profits from a small business, the owner must first provide or obtain _____ to start the business and keep it running smoothly.

A. products

 

B. employees

 

C. profits

 

D. supplies

 

E. capital

 

65. Megan is opening her own small retail store that sells women’s purses and accessories. To start her business, she needs at least $50,000 in initial financing to do all of the following EXCEPT

A. pay off any debts so they don’t affect her business.

 

B. rent space.

 

C. purchase or lease equipment and furnishings.

 

D. buy the initial inventory.

 

E. provide working capital.

 

66. Stanley has started a new zip line business in Jamaica. What is the most important source of funds for this new business?

A. Stanley, the owner

 

B. the government

 

C. a financial institution

 

D. the Small Business Administration

 

E. a venture capitalist

 

67. The act of financing one’s business by using real personal assets is known as

A. debt financing.

 

B. factoring.

 

C. franchising.

 

D. equity financing.

 

E. bootlegging.

 

68. Which of the following is a source of equity financing?

A. securing government loans

 

B. selling personal assets to raise funds

 

C. borrowing money from friends

 

D. securing short-term loans from a family member

 

E. receiving trade credit from suppliers

 

69. Walter sold a piece of land he inherited from his grandparents and started a business with the proceeds. Which of the following sources has Walter used to raise funds for his business?

A. equity financing

 

B. debt financing

 

C. venture capital

 

D. initial public offering

 

E. angel investment

 

70. Matt wants to start a small moving company. He has enough funds to start the business, but not enough to run it effectively. What is one thing he can do to provide working capital to his company?

A. He can use his profits to pay his salary.

 

B. He can borrow funds from outside sources.

 

C. He can refrain from drawing a full salary.

 

D. He can invest his profits into other businesses.

 

E. He can work to find venture capitalists to support his business.

 

71. Derek borrowed $50,000 from his mother for his new business venture. He promised that she would be a partner in the business and would be entitled to a significant percent of profits from the business at the end of the year. This is an example of

 

A. franchising.

 

B. bartering.

 

C. equity financing.

 

D. initial public offering.

 

E. bootlegging.

 

72. Janice works in a factory that manufactures decorative accessories for office spaces, hotels, and designer homes. She wants to start her own business because she believes that the market for decorative products has a great growth potential. However, she does not want to depend on anyone else for procuring the initial capital and would like to raise the amount herself. In this scenario, which of the following methods could Janice adopt to raise funds through equity financing?

A. Janice could secure a mortgage from a family member or friend.

 

B. Janice could secure a loan from the Small Business Administration.

 

C. Janice could ask for a line of credit from her bank.

 

D. Janice could invest her savings in the new business.

 

E. Janice could ask suppliers for a longer trade credit.

 

73. Jacob and Harry are business partners, and their company manufactures portable solar panels. They initially started the business with their savings. However, now the company plans to expand its operations and the required amount of capital cannot be raised through savings or by reinvesting profits. Thus, the partners have decided to sell stock in their business to family members, friends, and employees. Which of the following sources of capital have Jacob and Harry planned to use for the expansion of their business?

A. debt financing

 

B. bootstrapping

 

C. equity financing

 

D. mortgaging

 

E. factoring

 

74. Persons or organizations that agree to provide some funds for a new business in exchange for ownership interest or stock are called

A. intrapreneurs.

 

B. category captains.

 

C. venture capitalists.

 

D. trade debtors.

 

E. franchisers.

 

75. Ramon funds small businesses that he believes have the potential to grow large. When these companies are still in their initial stages and need investment, he buys their stocks at a low price and later sells them at higher prices when they are successful. Thus, Ramon is a(n)

A. intrapreneur.

 

B. trade creditor.

 

C. franchisee.

 

D. venture capitalist.

 

E. franchiser.

 

76. Shawna’s small flooring business requires more financing than she can provide from her savings. As a result, she is looking for investors to provide financing in exchange for stock ownership. What is a disadvantage of this arrangement?

A. Shawna may lose her business to venture capitalists.

 

B. Shawna will have to give complete control of her business to the investors until she can pay them back.

 

C. Shawna will have to share the profits of her business.

 

D. Shawna may not be able to find venture capitalists who will pay the high prices she is asking for her stock.

 

E. Shawna could lose her personal assets if the company isn’t profitable.

 

77. Obtaining money from venture capitalists to start a new business venture is an example of

A. debt financing.

 

B. bootstrapping.

 

C. equity financing.

 

D. mortgaging.

 

E. factoring.

 

78. What is the main supplier of external financing to small businesses?

A. venture capitalists

 

B. banks

 

C. family members

 

D. friends

 

E. the Small Business Administration

 

79. Securing a mortgage from a bank for a new business venture is an example of

A. equity financing.

 

B. venture capitalism.

 

C. debt financing.

 

D. trade credits.

 

E. collaterals.

 

80. Jordan has requested financing from the bank for his small automobile parts store. The bank requires Jordan to put up a financial interest in the property or fixtures of the business to guarantee payment of the debt. What is this financial interest called?

A. collateral

 

B. venture capital

 

C. trade credit

 

D. business plan

 

E. cash flow statement

 

81. If a small business fails to repay a bank loan, what will the lending institution do to recover its loss?

A. take over the business and run it for profits

 

B. claim and rent out the business

 

C. sell stock in the business

 

D. claim and sell the collateral or mortgage

 

E. claim and sell all the owner’s personal property

 

82. Banks and other financial institutions can grant a small business a _____, which is an agreement by which a financial institution promises to lend a business a predetermined sum on demand.

A. line of credit

 

B. trade credit

 

C. mutual fund

 

D. non-recourse loan

 

E. trust fund

 

83. Small businesses may obtain funding from their suppliers in the form of a _____, which means that suppliers allow the business to take possession of the needed goods and services and pay for them at a later date or in installments.

A. trust fund

 

B. trade credit

 

C. stock dividend

 

D. non-recourse loan

 

E. mutual fund

 

84. Anisha, an entrepreneur, starts a real estate firm with very limited funds. In order to conduct business, she purchases a few laptops, LED screens, and other office equipment from a local electronics wholesaler. The wholesaler understands her financial situation and allows her to pay for the goods in installments. In this scenario, the type of funding obtained by Anisha can be regarded as a

A. line of credit.

 

B. trade credit.

 

C. business subsidy.

 

D. non-recourse loan.

 

E. working capital loan.

 

85. Neehara recently opened a premium bakery. She did not have enough savings and hence she applied for a loan to obtain the additional funds required to start the bakery. She had to provide her house as collateral to obtain the loan. The type of financing obtained by Neehara can be regarded as a

A. mortgage.

 

B. trade credit.

 

C. mutual fund.

 

D. non-recourse loan.

 

E. dividend.

 

86. Which of the following statements best describes bartering?

A. It is the practice of small businesses trading their own products for the goods and services offered by other businesses.

 

B. It is an agreement by which a financial institution promises to lend a business a predetermined sum on demand.

 

C. It is the process in which suppliers allow a business to acquire needed goods and pay for them at a later date.

 

D. It is the process in which a small-business owner provides personal property as collateral for a loan.

 

E. It is a process by which an individual acquires the license to sell another’s products or to use another’s name in business.

 

87. Chang is an interior designer who starts his own consulting firm. His friend Rachel is the owner of a coffee shop. Chang decorates Rachel’s new coffee shop in exchange for a supply of coffee whenever his clients visit his office. Which of the following sources of funding does this scenario best illustrate?

A. mortgaging

 

B. bartering

 

C. trade credit

 

D. line of credit

 

E. equity financing

 

88. Lara, a single mother, borrowed some capital for her business from Women Progress Council at an extremely low rate of interest. Which of the following forms of funding a new small business does this scenario best illustrate?

A. trade credit

 

B. equity financing

 

C. venture capital

 

D. debt financing

 

E. crowd sourcing

 

89. Andrew, a pharmacist, realized that he should stock extra supplies of a particular medicine to respond to an outbreak of a particular infection in the city. Lacking sufficient capital to purchase the extra inventory, he borrowed a predetermined sum of money from his bank. Which of the following sources of funding does this scenario best illustrate?

A. trade credit

 

B. initial public offering

 

C. venture capital

 

D. equity financing

 

E. line of credit

 

90. Heather wants to run her own picture framing business, but she doesn’t want to start it from scratch. She decides to buy an existing business. What is one advantage of doing this?

A. It allows her to know the problems the business already has.

 

B. It gives her the freedom to develop exactly the business she wants.

 

C. It eliminates all the costs Heather would normally have in starting a business.

 

D. It provides a built-in network of customers, suppliers, and distributors.

 

E. It eliminates all the guesswork inherent in starting a new business.

 

91. Gary decides to buy an existing home goods store, instead of starting his own from scratch. Once he takes over the business, he learns that several customers have complained that one of the company’s distributors doesn’t pack items sufficiently for shipping, and their items arrived broken. What is Gary’s responsibility in resolving this problem?

A. Gary is responsible for taking on and resolving any problems the business already has.

 

B. Gary is not responsible for problems that existed before he bought the company.

 

C. Gary can require the previous owner to resolve this problem.

 

D. Gary can expect the customers and distributor to resolve the problem themselves.

 

E. Neither Gary nor the previous owner is responsible for resolving this problem.

 

92. A license to sell another’s products or to use another’s name in business, or both, is called a

A. franchise.

 

B. cartel.

 

C. collateral.

 

D. mortgage.

 

E. collusion.

 

93. Since Eva has decided to use her savings to purchase the rights to own and operate a McDonald’s outlet rather than starting her own restaurant, she is most likely to be a(n)

A. trade creditor.

 

B. franchisee.

 

C. category captain.

 

D. intrapreneur.

 

E. venture capitalist.

 

94. Nathan started the first outlet of Dynamix Gym in New York City in 1995. The business expanded over time, and he became the owner of a chain of gyms in New York State. Though the business had potential to expand outside New York, Nathan did not want to take the risk or responsibility. Hence, he decided to sell the license to own and operate gyms under the brand name Dynamix Gym to independent owners. In return, he charged them an initial fee and a small share in the monthly profits. In this scenario, Nathan is a(n)

A. trade creditor.

 

B. intrapreneur.

 

C. angel investor.

 

D. franchiser.

 

E. venture capitalist.

 

95. Which of the following statements is true of franchising?

A. An individual only acquires the rights to a name and not the rights to methods of operation.

 

B. An individual experiences the most freedom in this form of business ownership.

 

C. A franchisee receives cash payments from the franchiser on a monthly basis.

 

D. A franchisee does not receive accounting support from the franchiser.

 

E. A franchisee often receives building specifications and designs from the franchiser.

 

96. Which of the following statements describes an advantage of franchising instead of building an independent business from scratch?

A. The time required to set up an independent business is much lower than obtaining a franchise.

 

B. A franchise outlet often reaches the break-even point faster than an independent business would.

 

C. A franchisee would experience more flexibility in decision making than the owner of an independent business.

 

D. The quality of goods and services needs to be more standardized and uniform in an independent business than in franchises.

 

E. Access to managerial and financial assistance is more limited in franchises than in independent businesses.

 

97. All of the following are advantages of franchising EXCEPT

A. more freedom in purchasing goods.

 

B. brand-name appeal.

 

C. national and local advertising programs.

 

D. proven products and business formats.

 

E. centralized buying power.

 

98. Stephanie has always dreamed of owning and managing a hotel. Instead of starting her own independent hotel, she decides to buy a franchise from the Marriott. What is one thing she should keep in mind about becoming a franchisee?

A. It will take a long time to set up her franchise.

 

B. It will take longer for her franchise to reach its break-even point than it would take for an independent business.

 

C. She will need to buy equipment, pay for training, and obtain a mortgage or lease.

 

D. She will have to develop her own processes for operations.

 

E. She will have the freedom to make all the necessary business decisions, which may be overwhelming.

 

99. Which of the following is one of the commonly reported disadvantages of franchising?

A. lack of management training and assistance

 

B. decentralized buying power

 

C. low rate of success

 

D. restrictions on purchasing

 

E. lack of financial assistance

 

100. Steven opened his own Subway franchise in his community. He is pleased with how quickly he was able to open his franchise and that he was able to establish a good customer base from the start because of name recognition. However, since he started this business to be his own boss, he is likely to

A. resent the management training and support the franchiser provides.

 

B. take sole responsibility for all decisions in the business.

 

C. get frustrated with the restrictions of the franchise.

 

D. embrace the franchiser’s restrictions because they lead to a greater chance for success.

 

E. invest his own capital in national and local advertising programs.

 

101. Paul has recently quit his job as an investment banker. He plans to open a restaurant. He has two options: he can either start his own new restaurant from scratch or purchase a franchise from an already established restaurant or fast food chain. His wife Lisa supports the former plan. Which of the following statements strengthens the argument in favor of Lisa’s choice of opening a restaurant independently?

A. It is easier and faster to build a business from scratch.

 

B. It is easier to reach the break-even point through an independent business.

 

C. It is more difficult to attract customers in a franchise business as the entrepreneur has to personally build the brand appeal.

 

D. It is easier and more flexible to make and execute decisions in an independent business.

 

E. It is easier to succeed in a business built from scratch as the products and the business format are already proven.

 

102. _____ are often the Small Business Administration’s principal means of providing direct management assistance to small businesses and entrepreneurs.

A. Local Chambers of Commerce

 

B. Small Business Development Centers

 

C. Service Corps of Retired Executives

 

D. Small Business Institutes

 

E. Active Corps of Executives

 

103. _____ is a volunteer agency funded by the Small Business Administration to provide advice for owners of small firms.

A. Local Chambers of Commerce

 

B. Small Business Development Centers

 

C. Service Corps of Retired Executives

 

D. Small Business Institutes

 

E. Business Executive Council

 

104. Chris has started his own small photography business. All of the following are programs and resources he can use to improve his ability to compete with other businesses EXCEPT

A. classified files from his competitors.

 

B. entrepreneurial training programs.

 

C. seminars and college courses.

 

D. local chambers of commerce.

 

E. national publications and weekly business journals.

 

105. Samantha owns a small office supply company. In setting up her business, she asks a few other small-business owners she knows for advice on dealing with employees and government regulation, improving processes, and solving problems. What does this scenario exemplify?

A. consulting

 

B. incubating

 

C. socializing

 

D. relating

 

E. networking

 

106. Which of the following statements is true of baby boomers?

A. They represent people born between 1930 and 1945.

 

B. They are economically backward compared to other Americans.

 

C. They are not actively pursued by small businesses.

 

D. They consist of 50 million Americans.

 

E. They are an unprofitable market segment.

 

107. Millennials number around 83 million and represent a huge business opportunity in the United States. Which of the following is a defining feature of the millennials?

A. This cohort is solely concerned about money.

 

B. This cohort is opposed to working remotely.

 

C. This cohort prefers face-to-face meetings over virtual communication.

 

D. This cohort consists of people born between 1946 and 1964.

 

E. This cohort is concerned with advancement, recognition, and improved capabilities.

 

108. Margaret was born in 1952. She is a wealthy Florida native. As she ages, Margaret spends more of her money on travel, financial planning, and health care. Margaret is a(n)

A. millennial.

 

B. echo boomer.

 

C. baby boomer.

 

D. immigrant.

 

E. member of Generation Y.

 

109. Sally is a human resource (HR) manager at a company. A survey of the company’s employees reveals that more than 80 percent of the employees belong to the demographic segment Generation Y. In this scenario, which of the following HR strategies should Sally implement in order to best serve the needs of the employees?

A. Sally should solely use financial rewards to motivate the employees to improve their productivity.

 

B. Sally should keep the training sessions highly formal with no scope for entertainment.

 

C. Sally should restrict the employees from using work from home or telecommuting options.

 

D. Sally should avoid giving regular, direct feedback to the employees.

 

E. Sally should use recognition and advancement as the driving forces to motivate employees.

 

110. Which of the following demographic segments should both small retailers and small-service providers specializing in ethnic products target?

 

A. immigrants

 

B. echo boomers

 

C. baby boomers

 

D. Generation X

 

E. drivers

 

111. Marco is a Latino who lives in Boston, Massachusetts. Over the years, he has noticed that more stores in his community specialize in ethnic products. This has made Boston feel more like home to him. What trend might explain this recent influx in stores that cater to the Latino population?

A. In the United States, all the minority groups combined are expected to grow by 86 percent between 2015 and 2050.

 

B. In the United States, the Latino population is expected to grow by 86 percent between 2015 and 2050.

 

C. Since there aren’t many Latino immigrants in the United States, more of an effort is being made to attract this minority population.

 

D. Research has shown that most immigrants in the United States enjoy Latino products.

 

E. In the United States, Latino immigrants represent 50 percent of the population.

 

112. Which of the following demographic trends has made health care and financial planning industries attractive for small businesses in the United States?

A. decreasing population of millennials

 

B. increasing income among Generation X

 

C. increasing aged baby boomers who are wealthy

 

D. reducing entrepreneurial spirit among young generations

 

E. increasing imports into the economy

 

113. Which of the following is an implication of technological advances to small businesses?

A. It fails to make any significant changes as small businesses cannot afford to use sophisticated technology in their operations.

 

B. It reduces a small business’s ability to adapt to changing trends and market demands.

 

C. It increases the ratio of baby boomers as employees in small businesses.

 

D. It provides new opportunities for small businesses to expand their operations abroad.

 

E. It reduces a small company’s ability to customize its services and products.

 

114. Which of the following is true of home-based businesses?

A. Most of today’s largest businesses started in offices and eventually moved into their owners’ homes.

 

B. Approximately 75 percent of all small businesses are based out of the home.

 

C. Approximately 52 percent of all small businesses are based out of the home.

 

D. Technology has not had a substantial impact on home-based businesses.

 

E. Approximately 25 percent of all small businesses are based out of the home.

 

115. Kevin makes rustic wood furniture and home accessories. During a recent time of economic turbulence, when well-funded dot-coms were failing, Kevin learned how to

A. recover from an oversupply of Internet infrastructure products.

 

B. build other types of furniture so he could work for a larger furniture company.

 

C. recover from an economic slowdown.

 

D. use the Internet to promote himself and sell his products online.

 

E. hold steady in the face of change.

 

116. All of the following have provided new opportunities for small businesses EXCEPT

A. deregulation of the energy market and interest in alternative fuels.

 

B. technological advances and an increase in service exports.

 

C. free trade agreements and trade alliances.

 

D. economic turbulence.

 

E. the success of large information technology companies.

 

117. Norton is a human resource manager at a large multinational company. After a drastic drop in revenue, his company thinks of ways to correct the situation. At a meeting with the top management, the CEO suggested that the company should reduce its workforce by 20 percent. This move would help the company cut costs and continue functioning on the current projects. In this scenario, which of the following strategies is Norton’s company planning to use?

A. off shoring

 

B. outsourcing

 

C. crowd sourcing

 

D. franchising

 

E. downsizing

 

118. Downsizing is an effective way to

A. gain the advantages of small businesses.

 

B. increase organizational tasks.

 

C. reduce entrepreneurial spirit among employees.

 

D. increase the management layers.

 

E. gain employee trust.

 

119. Paula works for a large company that is trying to function like a smaller company. Which of the following is something the company can do to achieve this goal?

A. The company can increase its management layers.

 

B. The company can increase its work tasks.

 

C. The company can make its operating units function more like independent small businesses.

 

D. The company can increase its corporate staff.

 

E. The company can split each operating unit into a separate business.

 

120. Which of the following statements accurately describes intrapreneurs?

A. Employees who become a part of a company’s board of directors through internal promotions are referred to as intrapreneurs.

 

B. Entrepreneurs who sell the rights to use their products to independent owners are intrapreneurs.

 

C. Entrepreneurs who are involved in international business are referred to as intrapreneurs.

 

D. Independent investors who help a company raise capital through internal financing are intrapreneurs.

 

E. Individuals in large firms who take responsibility for the development of innovations within the organizations are intrapreneurs.

 

121. Jason works for a large sporting goods corporation. He champions a new hockey helmet with advanced concussion protection. Jason is a(n)

A. entrepreneur.

 

B. intrapreneur.

 

C. innovator.

 

D. product leader.

 

E. independent contractor.

 

122. George is an employee at a company that provides information technology solutions to other firms. Recognizing his potential to innovate, the top management of the company has given him the complete liberty to develop a new smart phone application using the resources of the company. In this scenario, George best illustrates a(n)

A. franchiser.

 

B. venture capitalist.

 

C. intrapreneur.

 

D. category captain.

 

E. trade creditor.

 

 

Essay Questions

123. How do small businesses contribute to the American economy?

 

 

 

 

 

 

124. What is undercapitalization? How does it contribute to the failure of a business?

 

 

 

 

 

 

125. What is a business plan and why is it important?

 

 

 

 

 

 

Chapter 05 Small Business, Entrepreneurship, and Franchising Answer Key

True / False Questions

1. Entrepreneurship is the process of creating and managing a business to achieve desired objectives.

TRUE

Entrepreneurship is the process of creating and managing a business to achieve desired objectives. Some entrepreneurs who start small businesses have the ability to see emerging trends; in response, they create a company to provide a product that serves customer needs.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-01 Define entrepreneurship and small business.
Topic: Define Entrepreneurship

 

2. One of the most significant drawbacks of small businesses is their inability to innovate and to bring significant benefits to customers.

FALSE

One of the most significant strengths of small businesses is their ability to innovate and to bring significant benefits to customers. Small firms produce more than half of all innovations.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Understand
Difficulty: 2 Medium
Learning Objective: 05-01 Define entrepreneurship and small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

3. Retailing attracts entrepreneurs because gaining experience and exposure in retailing is relatively easy.

TRUE

Retailing attracts entrepreneurs because gaining experience and exposure in retailing is relatively easy. Additionally, an entrepreneur opening a new retail store does not have to spend the large sums of money for the equipment and distribution systems that a manufacturing business requires.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-02 Investigate the importance of small business in the U.S. economy and why certain fields attract small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

4. Industries such as wholesaling, services, and manufacturing are unattractive to entrepreneurs because these fields tend to be relatively difficult to enter and require high initial financing.

FALSE

Retailing, wholesaling, services, manufacturing, and high technology are attractive to entrepreneurs because these fields tend to be easy to enter, require low initial financing, and suffer less from heavy competition, at least in the early stages.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-02 Investigate the importance of small business in the U.S. economy and why certain fields attract small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

5. A drawback of franchising is the need for franchisees to strictly adhere to standardized operations.

TRUE

In franchising, a shortcoming experienced by franchisees include strict adherence to standardized operations. Entrepreneurs who want to be their own bosses are often frustrated with the restrictions of a franchise.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Franchising

 

Multiple Choice Questions

6. All of the following are ways innovative entrepreneurs can use emerging trends to provide products that serve customer needs EXCEPT

A. inventing a major new technology.

 

B. taking advantage of technology to create new markets.

 

C. improving a familiar product.

 

D. delivering features that consumers in a particular market segment could not find anywhere else.

 

E. placing a familiar product in a unique retail environment.

Some entrepreneurs have the ability to see emerging trends and respond by creating a company to provide a product that serves customer needs. Rather than inventing a major new technology, an innovative company may take advantage of technology to create new markets. Additionally, a company may improve a familiar product or place it in a unique retail environment. Further, a company may innovate by focusing on a particular market segment and delivering a combination of features that consumers in that segment could not find anywhere else.

 

 

Accessibility: Keyboard Navigation
Bloom’s: Understand
Difficulty: 2 Medium
Learning Objective: 05-01 Define entrepreneurship and small business.
Topic: Define Entrepreneurship

 

7. Megha is a taekwondo expert who starts her own martial arts training academy. She conducts taekwondo classes for women and teaches them the art of self-defense. Megha can be regarded as a(n)

A. shareholder.

 

B. entrepreneur.

 

C. investor.

 

D. intrapreneur.

 

E. inventor.

Megha can be regarded as an entrepreneur. Entrepreneurs are people involved in entrepreneurship, which is the process of creating and managing a business to achieve desired objectives.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-01 Define entrepreneurship and small business.
Topic: Define Entrepreneurship

 

8. Carol and Evan recently had their first child. As two working parents, they struggled to find good, economical child care. As a result, they developed their own software to link parents with licensed, fairly priced child care providers. This is an example of the

A. sharing economy.

 

B. market segment economy.

 

C. service economy.

 

D. retail economy.

 

E. consumer economy.

This is an example of the sharing economy, or gig economy, which uses technology to connect consumers with the service providers they need. In this scenario, Carol and Evan develop software to connect parents with licensed, fairly priced child care providers.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-01 Define entrepreneurship and small business.
Topic: Define Entrepreneurship

 

9. Growing up, Cameron noticed that many families in his community struggled to make ends meet and provide for their children’s education. As a result, after he finished school, he started a business to provide low-cost tutoring and scholarship opportunities for low-income families in his community. As his company has grown, Cameron has been able to extend free tutoring and college scholarships to five impoverished students per year. Cameron is a

A. nonprofit entrepreneur.

 

B. profit entrepreneur.

 

C. social entrepreneur.

 

D. sharing entrepreneur.

 

E. macroentrepreneur.

Cameron is a social entrepreneur because he uses entrepreneurship to address a social problem. These entrepreneurs operate nonprofit or for-profit organizations committed to creating social change.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-01 Define entrepreneurship and small business.
Topic: Define Entrepreneurship

 

10. A _____ is best described as any independently owned and operated business that is not dominant in its competitive area and does not employ more than 500 people.

A. publicly owned business

 

B. limited liability company

 

C. small business

 

D. publicly traded company

 

E. conglomerate

A small business is defined as any independently owned and operated business that is not dominant in its competitive area and does not employ more than 500 people. A local Mexican restaurant may be the most patronized Mexican restaurant in your community, but because it does not dominate the restaurant industry as a whole, the restaurant can be considered a small business.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-01 Define entrepreneurship and small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

11. Michael owns a small catering business that mostly serves his community. He has been hired for company picnics, backyard barbecues, and family celebrations. As word of mouth has spread about his delicious food, good service, and fair prices, he has started getting more business. To handle this, he has hired four employees to help cook and serve food at these events. What kind of entrepreneur is Michael?

A. a macroentrepreneur

 

B. a social entrepreneur

 

C. a sharing entrepreneur

 

D. a gig entrepreneur

 

E. a microentrepreneur

Michael is a microentrepreneur because he employs five or fewer employees. Sometimes called micropreneurs, this type of business is growing rapidly.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-01 Define entrepreneurship and small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

12. Vernon runs Buzz, his own event management company, which frequently organizes large corporate events. He has built a good reputation for organizing corporate events with a fair degree of professionalism at reasonable costs. He works out of his own house with a staff of about 55 employees. Vernon’s company can be categorized as a

A. multinational corporation.

 

B. limited liability company.

 

C. franchise.

 

D. public sector holding.

 

E. small business.

Vernon’s company can be categorized as a small business. A small business is independently owned and operated, is not dominant in its competitive area, and does not employ more than 500 employees.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-01 Define entrepreneurship and small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

13. The Small Business Administration is a(n)

A. body established by the U.S. Chamber of Commerce to encourage the intrapreneurial spirit in small businesses.

 

B. independent agency of the federal government that offers managerial and financial assistance to small businesses.

 

C. independent agency created under the General Agreement on Tariffs and Trade to protect small businesses against competition from larger companies.

 

D. division of the federal government that is responsible for ensuring that newly formed businesses adhere to the law.

 

E. U.S. congressional agency that regulates the issue of stocks by small businesses.

The Small Business Administration is an independent agency of the federal government that offers managerial and financial assistance to small businesses. On its website, the SBA outlines the first steps in starting a small business and offers a wealth of information to current and potential small-business owners.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-01 Define entrepreneurship and small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

14. Salma owns a Lebanese restaurant that employs around 25 people. She is solely responsible for the management of the restaurant. Her business has to compete with a larger chain of restaurants that offer the same cuisine. Salma’s restaurant can be classified as a

A. multinational corporation.

 

B. conglomerate.

 

C. franchise.

 

D. public sector holding.

 

E. small business.

Salma’s restaurant can be classified as a small business. A small business is independently owned and operated, is not dominant in its competitive area, and does not employ more than 500 employees.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-01 Define entrepreneurship and small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

15. Which of the following is true about the role of small businesses in the American economy?

A. They employ about 20 percent of private workers.

 

B. They represent only 20 percent of U.S. exporters.

 

C. They provide opportunities for women to succeed in business.

 

D. They are always operated as subsidies of large companies.

 

E. There has been a decline in the number of small businesses owned by minorities.

Small businesses provide opportunities for minorities and women to succeed in business. Women own more than 9 million businesses nationwide, with great success in the professional services, retail, communication, and administrative services areas.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Understand
Difficulty: 1 Easy
Learning Objective: 05-02 Investigate the importance of small business in the U.S. economy and why certain fields attract small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

16. When Miguel first moved from Mexico to the United States, he struggled to find and keep work because he couldn’t speak English fluently. After learning English, he started a new business to help other Mexican Americans learn English and to help place them in jobs. Miguel’s business is a

A. minority-owned conglomerate.

 

B. minority-owned small business.

 

C. small exporting business.

 

D. small importing business.

 

E. minority entrepreneurship.

Miguel’s business is a minority-owned small business. This type of business has been growing faster than other classifiable firms, representing 28.6 percent of all small businesses.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-01 Define entrepreneurship and small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

17. Which of the following businesses has created a majority of net new jobs annually?

A. multinational corporations

 

B. publicly traded companies

 

C. small businesses

 

D. conglomerates

 

E. public sector holdings

More than 99 percent of all U.S. firms are classified as small businesses, and they employ about half of private workers. About 63 percent of net new jobs annually were created by small businesses.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-01 Define entrepreneurship and small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

18. Strings and Keys, an independent music store, acquires instruments and other music equipment from producers and wholesalers and sells them to consumers. Strings and Keys is a

A. manufacturer.

 

B. wholesaler.

 

C. retailer.

 

D. direct sales company.

 

E. direct marketing company.

Strings and Keys is a retailer. Retailers acquire goods from producers or wholesalers and sell them to consumers. Main streets, shopping centers, and malls are generally lined with independent music stores, sporting-goods stores, dry cleaners, boutiques, drugstores, restaurants, caterers, service stations, and hardware stores that sell directly to consumers.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-02 Investigate the importance of small business in the U.S. economy and why certain fields attract small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

19. Megan and Chris are entrepreneurs who want to start their own business. Which of the following would attract them to retailing?

A. Gaining experience in retail is a challenge, so they would have less competition.

 

B. There are no costs associated with opening a retail business.

 

C. Retailing doesn’t require interacting directly with consumers.

 

D. Retailing requires low initial financing.

 

E. Retailing limits a firm’s need to focus on specific groups of consumers.

Retailing attracts entrepreneurs, like Megan and Chris, because gaining experience and exposure in retailing is relatively easy. Additionally, an entrepreneur opening a new retail store does not have to spend large sums of money for the equipment and distribution systems that a manufacturing business requires. However, it is important for entrepreneurs to anticipate the costs of opening a retail business beforehand.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-02 Investigate the importance of small business in the U.S. economy and why certain fields attract small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

20. Many opportunities exist for _____, which involves selling products outside of a retail facility.

A. external retailing

 

B. wholesaling

 

C. direct retailing

 

D. manufacturing

 

E. nonstore retailing

Many opportunities exist for nonstore retailing, which involves selling products outside of a retail facility. There are two types of nonstore retailing: direct marketing and direct selling.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-02 Investigate the importance of small business in the U.S. economy and why certain fields attract small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

21. Carolyn makes unique clothing pieces, jewelry, and hair accessories. To avoid the costs of opening a store, she sells these pieces on Etsy. This is an example of

A. providing services.

 

B. manufacturing.

 

C. wholesaling.

 

D. direct selling.

 

E. direct marketing.

This is an example of direct marketing, which gives consumers the opportunity to place orders by mail, telephone, or the Internet. This is a type of nonstore retailing, which provides a great opportunity for entrepreneurs because of the lower cost of entry. Smaller business can engage in direct marketing by featuring their products on eBay, Amazon, and Etsy.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-02 Investigate the importance of small business in the U.S. economy and why certain fields attract small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

22. Clothes Horse, a clothing store in the mall, wants to give customers an opportunity to place orders. What is one form of direct marketing the store can use to provide this service?

A. It can send catalogs to its customers.

 

B. It can send sales associates door-to-door to sell its clothing.

 

C. It can open additional store locations.

 

D. It can create call centers to contact customers at home.

 

E. It can customize its clothing to meet specific customer needs.

A direct marketing activity Clothing Horse can use to encourage customers to order its clothing by mail, telephone, or the Internet is sending catalogs to its customers. Market research findings suggest that catalog users are more inspired to purchase items online.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-02 Investigate the importance of small business in the U.S. economy and why certain fields attract small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

23. While Tyler attends college, he is working part-time for a life insurance company. He goes door-to-door and offers consumers face-to-face presentations in their homes. This is an example of

A. direct selling.

 

B. direct marketing.

 

C. wholesaling.

 

D. manufacturing.

 

E. providing a service.

This is an example of direct selling, which involves the marketing of products to ultimate consumers through face-to-face sales presentations at home, in the workplace, and in party environments. Many people view direct selling as a part-time business opportunity.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-02 Investigate the importance of small business in the U.S. economy and why certain fields attract small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

24. All of the following are true of direct selling EXCEPT

A. the cost of getting involved is low.

 

B. it can be done part-time.

 

C. it requires buying a lot of inventory.

 

D. those who do it can receive commissions on their sales.

 

E. those who do it have the opportunity to recruit other distributors.

The cost of getting involved in direct selling is low and often involves buying enough inventory to get started. Many people view direct selling as a part-time business opportunity. Often, those who become involved in direct selling are enthusiastic about the product and have the opportunity to recruit other distributors and receive commissions on their sales.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 Investigate the importance of small business in the U.S. economy and why certain fields attract small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

25. Which of the following best illustrates a small business operating in a retail industry as opposed to wholesaling its products?

A. Janet bakes cakes and sells them to other restaurants and cafes in malls.

 

B. BC Inc. manufactures stationery and sells it in bulk to book shops and supermarkets.

 

C. Pink Cult, an apparel company, sells its merchandise through True deals.com.

 

D. Neon Love Inc. imports candles and directly sells them to customers through kiosks.

 

E. Auto Line Inc. manufactures component parts of cars and sells them to automobile companies.

Neon Love Inc. illustrates a small business operating in a retail industry as opposed to wholesaling its products. Retailers acquire goods from producers or wholesalers and sell them to consumers. Wholesalers supply products to industrial, retail, and institutional users for resale or for use in making other products.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-02 Investigate the importance of small business in the U.S. economy and why certain fields attract small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

26. Which of the following is true of wholesalers?

A. Wholesalers cannot be eliminated because their functions are too important.

 

B. Wholesalers receive their products from retailers.

 

C. Wholesalers do not provide management or merchandising assistance to clients.

 

D. Wholesalers do not perform marketing activities.

 

E. Wholesalers are extremely important because of the marketing activities they perform.

Wholesalers provide goods and services to producers and retailers. Their activities range from planning and negotiating for supplies, promoting, and distributing to providing management and merchandising assistance to clients. Wholesalers are extremely important for many products because of the marketing activities they perform. Wholesalers can be eliminated, but their functions must be passed on to some other organization or intermediary.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 Investigate the importance of small business in the U.S. economy and why certain fields attract small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

27. Many service providers are considered retailers because they

A. require a high initial start-up cost.

 

B. provide their services directly to ultimate consumers.

 

C. sell their services from a single store location.

 

D. focus on large market segments and institutional buyers.

 

E. employ only a small number of people.

The service sector includes businesses that do not actually produce tangible goods. Many of these service providers are retailers who provide their services to ultimate consumers.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 Investigate the importance of small business in the U.S. economy and why certain fields attract small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

28. Jack owns a barbershop that specializes in men’s haircuts and shaving. This is an example of a

A. manufacturing business.

 

B. wholesaler.

 

C. retailer.

 

D. service business.

 

E. direct selling business.

This is a service business because it does not produce tangible goods. Services attract individuals like beauticians whose skills are not usually required by large firms.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-02 Investigate the importance of small business in the U.S. economy and why certain fields attract small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

29. In the manufacturing sector, small businesses sometimes have an advantage over large firms because small businesses

A. are exempted from paying taxes in most countries.

 

B. can customize products to meet specific customer needs and wants.

 

C. have a better access to highly skilled workers.

 

D. can mass produce and supply goods in bulk.

 

E. have better access to funds and can invest on sophisticated equipment.

Small businesses sometimes have an advantage over large firms because they can customize products to meet specific customer needs and wants. Such products include custom artwork, jewelry, clothing, and furniture.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 Investigate the importance of small business in the U.S. economy and why certain fields attract small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

30. Which of the following is a difference between high technology businesses and other small businesses?

A. High technology businesses never start in garages, basements, kitchens, or dorm rooms, while some other types of small businesses can start in these places.

 

B. High technology businesses require greater capital and have higher initial startup costs than other small businesses.

 

C. High technology businesses are less innovative than other small businesses.

 

D. High technology businesses are the only type of small business that uses technology.

 

E. High technology businesses have lower initial startup costs than other small businesses.

High technology businesses require greater capital and have higher initial startup costs than other small businesses. Nonetheless, many of the biggest started out in garages, basements, kitchens, and dorm rooms.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 Investigate the importance of small business in the U.S. economy and why certain fields attract small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

31. Ben and Molly live and work in Texas, but they love vacationing in Hawaii, and they go there as often as time and money will allow. Finally, they take the plunge and buy a vacation home in Hawaii. When they aren’t there, they rent the property to other people for $1000 per week. This is an example of

A. a service business.

 

B. direct selling.

 

C. social entrepreneurship.

 

D. the sharing economy.

 

E. retailing.

This is an example of the sharing economy, an economic model involving the sharing of underutilized resources. Under this model, entrepreneurs can earn income by renting out an underutilized resource such as lodging or vehicles.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-02 Investigate the importance of small business in the U.S. economy and why certain fields attract small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

32. Which of the following is a challenge associated with the sharing economy?

A. pressure over whether workers are independent contractors or employees

 

B. the higher cost of services through this model

 

C. competition from established firms

 

D. inability to set rates

 

E. lack of flexibility

In the sharing economy, companies can control variables such as rates, and they hire independent contractors who have the flexibility to take on work when it is convenient for them. Services offered through this model often cost less than more traditional services, and it is even taking market share away from established firms. Despite the opportunities in the sharing economy, firms have been experiencing pressure over whether workers are independent contractors or employees.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 Investigate the importance of small business in the U.S. economy and why certain fields attract small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

33. Which of the following traits will help entrepreneurs succeed?

A. risk aversion

 

B. introversion

 

C. persistence

 

D. impulsiveness

 

E. neuroticism

Entrepreneurs should be intuitive, persistent, productive, resourceful, charismatic, innovative, friendly, and risk-taking to succeed.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-03 Specify the advantages of small-business ownership.
Topic: Attributes of Successful Entrepreneurs

 

34. One of the major reasons people want to own and operate their own business is to

A. avoid the risk of competition.

 

B. be their own boss.

 

C. avoid multitasking.

 

D. reduce stress levels.

 

E. avoid direct responsibility of the operations.

Independence is probably one of the leading reasons that entrepreneurs choose to go into business for themselves. Being a small-business owner means being one’s own boss.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-03 Specify the advantages of small-business ownership.
Topic: The Advantages and Disadvantages of Small Business Ownership

 

35. Which of the following is an advantage of a small business?

A. greater adaptability to changing market demands

 

B. the support that an office provides

 

C. more money available for wages and salaries, rent, utilities, and other expenses

 

D. the opportunity to compete in the mass market or for large market segments

 

E. multiple layers of management to help make difficult decisions

With small size comes the flexibility to adapt to changing market demands. Small businesses usually have only one layer of management—the owners. Decisions therefore can be made and executed quickly.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 Specify the advantages of small-business ownership.
Topic: The Advantages and Disadvantages of Small Business Ownership

 

36. Simon has worked for a large corporation for years, and he feels like he just doesn’t fit in the “corporate mold” anymore. He decides to start his own business because he wants the freedom to choose whom he works with and when and where he works. What advantage of small business ownership seems the most prevalent in this example?

A. costs

 

B. independence

 

C. flexibility

 

D. focus

 

E. reputation

Independence is the most prevalent advantage of a small business in this example. Often, small business owners want the freedom to choose whom they work with, the flexibility to pick where and when to work, and the option of working in a family setting. Many people choose to start their own business because they don’t fit in the “corporate mold.”

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-03 Specify the advantages of small-business ownership.
Topic: The Advantages and Disadvantages of Small Business Ownership

 

37. All of the following are ways small businesses can maintain low costs EXCEPT

A. hiring and maintaining a large finance department.

 

B. hiring separate firms to supply services as needed.

 

C. relying on friends and family to help with difficult projects.

 

D. maintaining a smaller staff to save money on wages and salaries.

 

E. maintaining a smaller factory to save money on rent and utilities.

Small businesses require less money to start and maintain than larger ones. A firm with less employees and a smaller factory spends less money on wages and salaries, rent, utilities, and other expenses. Rather than maintaining the expense of keeping separate departments for accounting, advertising, and legal counseling, small businesses can hire other firms to supply these services as needed. Additionally, small business owners can sometimes rely on friends and family to help with difficult projects.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 Specify the advantages of small-business ownership.
Topic: The Advantages and Disadvantages of Small Business Ownership

 

38. Red Carpet Inc. is a small apparel store started by an aspiring designer. The store needs to compete against larger, well-established multinational brands. Which of the following strategies will most help Red Carpet Inc. avoid competition from larger firms?

A. Red Carpet Inc. should have multiple levels of management like the larger firms.

 

B. Red Carpet Inc. should target large market segments that the competitors serve.

 

C. Red Carpet Inc. should expand the scale of production to enjoy greater economies of scale.

 

D. Red Carpet Inc. should start to work with customers only when the products are ready for sale.

 

E. Red Carpet Inc. should focus on and target small market niches or product needs.

Red Carpet Inc. should focus on and target small market niches or product needs to avoid competition from larger firms. By targeting small niches or product needs, small businesses can sometimes avoid competition from larger firms, helping them to grow into stronger companies. Small firms, because of their capacity to focus on narrow niches, can develop enviable reputations for quality and service.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-03 Specify the advantages of small-business ownership.
Topic: The Advantages and Disadvantages of Small Business Ownership

 

39. Kristen is an animal lover and vegetarian. Frustrated by trying to find vegetarian substitutes for commonly needed items, she has started her own vegetarian boutique. Her store sells vegetarian food, shoes, toiletries, and many other items. Which advantage of small-business ownership is this scenario most closely related to?

A. reputation

 

B. independence

 

C. focus

 

D. costs

 

E. flexibility

This scenario is most closely related to focus. Small firms can focus their efforts on a precisely defined market niche, that is, a specific group of customers. In this scenario, Kristen’s business focuses on vegetarians and animal lovers.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-03 Specify the advantages of small-business ownership.
Topic: The Advantages and Disadvantages of Small Business Ownership

 

40. Which of the following is true regarding the reputation of small businesses?

A. Small businesses are less well known than large businesses, so they need to prove themselves more to get a good reputation.

 

B. Because of their capacity to focus on narrow niches, small businesses can develop enviable reputations for quality and service.

 

C. Since small business employees are often stretched thin by the amount of work they have, their reputations are not as good as larger businesses with more employees.

 

D. Small businesses often have to cut corners in creating their products, so they have a poor reputation for quality.

 

E. Small businesses tend to focus more on service than quality, so their reputation is inconsistent.

Since small firms have the capacity to focus on narrow niches, they can develop enviable reputations for quality and service.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Understand
Difficulty: 2 Medium
Learning Objective: 05-03 Specify the advantages of small-business ownership.
Topic: The Advantages and Disadvantages of Small Business Ownership

 

41. Which of the following is one of the difficulties faced by small business owners?

A. high cost of formation

 

B. bureaucratic decision-making process

 

C. inability to focus on specific groups of customers

 

D. worries about employee problems or competition

 

E. limited scope for innovation

Entrepreneurs experience a great deal of independence but also a great deal of stress. There are ongoing worries about competition, employee problems, new equipment, expanding inventory, rent increases, or changing market demand.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-04 Summarize the disadvantages of small-business ownership and analyze why many small businesses fail.
Topic: The Advantages and Disadvantages of Small Business Ownership

 

42. Matt owns his own small bakery. In addition to being the owner, he also serves as the manager, sales force, head baker, shipping and receiving clerk, bookkeeper, and custodian. Matt is the first person to arrive at the bakery every morning and the last to leave every night. Which of the following is the most applicable challenge Matt faces?

A. lack of funding

 

B. pricing mistakes

 

C. a high stress level

 

D. underestimating the time commitment for success

 

E. having poor business concepts

In this scenario, Matt has to multitask, which can result in long hours and a high stress level. Many creative persons fail, not because of their business concepts, but rather because of difficulties in managing their business.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-04 Summarize the disadvantages of small-business ownership and analyze why many small businesses fail.
Topic: The Advantages and Disadvantages of Small Business Ownership

 

43. If a small business has to cope with growth, it requires the owner to

A. give up a certain amount of direct authority.

 

B. decrease the levels of management.

 

C. disregard narrow niches.

 

D. reduce the workforce.

 

E. delay decision making.

Sometimes, the very factors that are advantages for a small business turn into serious disadvantages when the time comes to grow. Growth often requires the owner to give up a certain amount of direct authority, and it is frequently hard for someone who has called all the shots to give up control.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 Summarize the disadvantages of small-business ownership and analyze why many small businesses fail.
Topic: The Advantages and Disadvantages of Small Business Ownership

 

44. Which of the following is a reason behind the failure of small businesses?

A. overcapitalization

 

B. coping with growth

 

C. managerial experience

 

D. poor business concept

 

E. high costs of start-up

A poor business concept will produce disaster for a small business nearly every time. Other notable causes of small-business failure include the burdens imposed by government regulation, insufficient funds to withstand slow sales, vulnerability to competition from larger companies, undercapitalization, managerial inexperience or incompetence, and inability to cope with growth.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-04 Summarize the disadvantages of small-business ownership and analyze why many small businesses fail.
Topic: The Advantages and Disadvantages of Small Business Ownership

 

45. Colin is an avid scrapbooker. He wants to start a scrapbooking store and workshop, where people can buy their supplies and scrapbook together as a community. What must he do to make sure this business will succeed?

A. He must find suppliers who are willing to take a chance on his scrapbooking business.

 

B. He must identify whether a genuine market niche exists for scrapbooking.

 

C. He must convince the community that scrapbooking is a worthwhile hobby.

 

D. He must convince the community to donate funds to help him start his scrapbooking business.

 

E. He must find partners to help him fund his scrapbooking business.

Colin wants to expand his scrapbooking hobby into a business, which may work if a genuine market niche exists. Before he starts his business, he must identify a real need for the service he will provide.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-04 Summarize the disadvantages of small-business ownership and analyze why many small businesses fail.
Topic: The Advantages and Disadvantages of Small Business Ownership

 

46. Carol has decided to open a Vietnamese restaurant in her neighborhood. She will be solely responsible for the management of the restaurant. Which of the following problems is she likely to face while running the business?

A. She will find it difficult to make quick decisions.

 

B. Her business will not be able to quickly adapt to changing market demands.

 

C. Her restaurant may not be able to focus on specific group of customers.

 

D. She will not have the flexibility to take critical decisions independently.

 

E. She may find it difficult to deal with the stress of rent increase.

Carol may find it difficult to deal with the stress of rent increase. Small-business owners tend to be the victims of physical and psychological stress. There are ongoing worries about competition, employee problems, new equipment, expanding inventory, rent increases, or changing market demand.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-04 Summarize the disadvantages of small-business ownership and analyze why many small businesses fail.
Topic: The Advantages and Disadvantages of Small Business Ownership

 

47. _____ is best described as the lack of funds to operate a business normally.

A. Debt financing

 

B. Trade credit

 

C. Franchising

 

D. Trade deficit

 

E. Undercapitalization

The shortest path to failure in business is undercapitalization, which is the lack of funds to operate a business normally.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-04 Summarize the disadvantages of small-business ownership and analyze why many small businesses fail.
Topic: The Advantages and Disadvantages of Small Business Ownership

 

48. Mark and Stephanie run a small farm stand on their property, selling vegetables, fruits, plants, and eggs to support themselves. During a particularly bad season, they tried to get financing from a small rural bank in their community. However, they were unable to obtain financing because

A. the small rural bank believed that their business lacked the flexibility to adapt to changing market demands.

 

B. they required a huge sum of money to compete in the mass market.

 

C. government regulations do not permit financing small rural businesses.

 

D. the small rural bank lacked the necessary financial expertise to counter the risks involved with small-business loans.

 

E. rural communities have various business guidelines that prohibit rural banks from financing small businesses.

Many small rural operations, like this one, cannot obtain financing within their own communities because small rural banks often lack the necessary financing expertise or assets sizable enough to counter the risks involved with small-business loans.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-04 Summarize the disadvantages of small-business ownership and analyze why many small businesses fail.
Topic: The Advantages and Disadvantages of Small Business Ownership

 

49. Jason is an artist who wants to turn his art into a small business. He had the great idea to go to other hobby-based businesses in his community and give painting lessons to their clients. First, he went to a local stable and taught its boarders how to paint portraits of their horses. Then, he went to a local dance studio and taught its patrons how to paint their dream dance costumes. Based on the buzz created by his new business, several other local businesses want to hire Jason. What is one area where he may struggle in managing his new business?

A. He may get stuck in a market niche.

 

B. He may lack the flexibility to adapt to changing market demands.

 

C. He may have trouble managing all the money he will make from the start.

 

D. He may lack the skills and experience to make good management decisions.

 

E. He may focus too much on management and not enough on his great product ideas.

Although Jason has a brilliant vision for his small business, that does not mean he has the knowledge or experience to manage his growing business effectively. Often, a person who is good at creating great product ideas and marketing them may lack the skills and experience to make good management decisions in hiring, negotiating, finance, and control.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-04 Summarize the disadvantages of small-business ownership and analyze why many small businesses fail.
Topic: The Advantages and Disadvantages of Small Business Ownership

 

50. Gerald started a business using the savings from his previous job. He planned to run his business on the revenue generated from sales. However, a few months later, he found it difficult to pay his staff, rent, and other expenses. Seasonal sales and inability to secure sufficient credit from local banks made it difficult for Gerald to operate the business normally. Which of the following causes of small-business failure does this scenario best illustrate?

A. undercapitalization

 

B. trade credit

 

C. economies of scale

 

D. debt financing

 

E. debt factoring

The scenario best illustrates undercapitalization. The shortest path to failure in business is undercapitalization, which is the lack of funds to operate a business normally. Too many entrepreneurs think that all they need is enough money to get started, that the business can survive on cash generated from sales soon thereafter. But almost all businesses suffer from seasonal variations in sales, which make cash tight, and few businesses make money from the start.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-04 Summarize the disadvantages of small-business ownership and analyze why many small businesses fail.
Topic: The Advantages and Disadvantages of Small Business Ownership

 

51. Which of the following is the shortest path to failure in business?

A. inflexibility

 

B. undercapitalization

 

C. rent increases

 

D. competition

 

E. changing market demand

The shortest path to failure in business is undercapitalization, the lack of funds to operate a business normally and sustain it through slow initial sales and seasonal variations.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-04 Summarize the disadvantages of small-business ownership and analyze why many small businesses fail.
Topic: The Advantages and Disadvantages of Small Business Ownership

 

52. Penelope is a very talented software engineer who starts her own small software development firm. She finances the firm from her savings. Initially, she is able to get many projects from customers and completes them successfully. However, as her business grows, she fails to make good decisions in hiring new employees, billing the clients, and negotiating prices. She eventually ends up liquidating the business. Which of the following causes of small-business failure does this scenario best illustrate?

A. undercapitalization

 

B. managerial inexperience

 

C. economies of scale

 

D. debt financing

 

E. debt factoring

The scenario best illustrates Penelope’s managerial inexperience. Poor management is the cause of many business failures. Just because an entrepreneur has a brilliant vision for a small business does not mean he or she has the knowledge or experience to manage a growing business effectively. A person who is good at creating great product ideas and marketing them may lack the skills and experience to make good management decisions in hiring, negotiating, finance, and control.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-04 Summarize the disadvantages of small-business ownership and analyze why many small businesses fail.
Topic: The Advantages and Disadvantages of Small Business Ownership

 

53. Catalina opens a fashion boutique with the money she inherited from her parents. She is successful in creating a strong brand image and a loyal customer base. In order to meet the increasing demands of her business, she hires a store manager. However, she finds it hard to let the manager make important decisions about the store. She often finds herself disagreeing with the manager’s decisions, and in the process, she loses a lot of existing customers. Which of the following causes of small-business failure does this scenario best illustrate?

A. undercapitalization

 

B. inability to cope with growth

 

C. diseconomies of scale

 

D. debt financing

 

E. debt factoring

The scenario best illustrates Catalina’s inability to cope with growth. Sometimes, the very factors that are advantages for a small business turn into serious disadvantages when the time comes to grow. Growth often requires the owner to give up a certain amount of direct authority, and it is frequently hard for someone who has called all the shots to give up control.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-04 Summarize the disadvantages of small-business ownership and analyze why many small businesses fail.
Topic: The Advantages and Disadvantages of Small Business Ownership

 

54. The principal immediate threats to small and mid-sized businesses include

A. rapidly advancing technology.

 

B. rising entrepreneurial spirit.

 

C. reducing imports.

 

D. escalating costs.

 

E. increasing exports.

The principal immediate threats to small and mid-sized businesses include rising inflation, energy and other supply shortages or cost escalations, and excessive household and/or corporate debt.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-04 Summarize the disadvantages of small-business ownership and analyze why many small businesses fail.
Topic: The Advantages and Disadvantages of Small Business Ownership

 

55. Tiffany recently started a small firm that contract manufactures for leading fashion brands in the United States. Which of the following would likely be a principal immediate threat to this firm?

A. rapidly advancing technology

 

B. rising entrepreneurial spirit

 

C. reducing imports

 

D. rising inflation

 

E. increasing exports

The principal immediate threats to small and mid-sized businesses include rising inflation, energy and other supply shortages or cost escalations, and excessive household and/or corporate debt.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-04 Summarize the disadvantages of small-business ownership and analyze why many small businesses fail.
Topic: The Advantages and Disadvantages of Small Business Ownership

 

56. It has often been said that the greatest impediment to the success of a small business is the

A. entrepreneur.

 

B. government.

 

C. competition.

 

D. business environment.

 

E. lack of funding.

It has often been said that the greatest impediment to the success of a small business is the entrepreneur.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-04 Summarize the disadvantages of small-business ownership and analyze why many small businesses fail.
Topic: The Advantages and Disadvantages of Small Business Ownership

 

57. Candace started a small house cleaning company, Neat and Tidy, and hired a few of her friends to help her. When the business started, most of its clients were having their houses cleaned to prepare them to sell. However, as more people hired Neat and Tidy and saw what a good job they did, the company started to see more repeat clients who wanted their houses cleaned on a weekly or biweekly basis. As this company grows, all of the following are changes that might occur EXCEPT

A. specialized management skills may be needed in areas such as credit analysis and promotion.

 

B. Candace may need to give up some control of the company.

 

C. if the cleaning staff doesn’t arrive on time, this could quickly reverse the company’s success.

 

D. the company’s reputation will suffer, no matter how well the growth is managed.

 

E. Candace may need to hire more experience managers to help this company through growing pains.

Growth often requires the owner to give up a certain amount of direct authority. Similarly, growth requires specialized management skills in areas such as credit analysis and promotion, which the founder may lack or not have time to apply. Often, the founders of small businesses have to bring in more experienced managers to help manage their companies through growing pains. Poorly managed growth probably affects a company’s reputation more than anything else. In this scenario, if the cleaning staff doesn’t arrive on time or if the quality of Neat and Tidy’s service declines, this can quickly reverse the company’s success.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-04 Summarize the disadvantages of small-business ownership and analyze why many small businesses fail.
Topic: The Advantages and Disadvantages of Small Business Ownership

 

58. Meredith wants to start her own small business. All of the following are things she needs to do to start a business EXCEPT

A. hire employees to work for the business.

 

B. have a general idea for the business.

 

C. devise a strategy to guide planning and development in the business.

 

D. make decisions about form of ownership.

 

E. make decisions about financial resources needed.

To start any business, large or small, Meredith must have some kind of general idea. Next, she needs to devise a strategy to guide planning and development in the business. Finally, she must make decisions about the form of ownership; the financial resources needed; and whether to acquire an existing business, start a new one, or buy a franchise.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: The Business Plan

 

59. A precise statement of the rationale for a business and a step-by-step explanation of how it will achieve its goals is known as a(n)

A. promissory note.

 

B. article of incorporation.

 

C. business plan.

 

D. business agreement.

 

E. article of partnership.

A key element of business success is a business plan—a precise statement of the rationale for a business and a step-by-step explanation of how it will achieve its goals.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: The Business Plan

 

60. Which of the following statements is true of a business plan?

A. Small businesses do not need a business plan.

 

B. It does not have to be revised periodically.

 

C. Every business needs to mandatorily maintain a business plan as per government regulations.

 

D. It should establish a strategy for acquiring sufficient funds to keep a business going.

 

E. It is created to limit a business’s flexibility and decision-making ability.

A business plan should act as a guide and reference document, not a shackle to limit the business’s flexibility and decision-making ability. It should also establish a strategy for acquiring sufficient funds to keep the business going.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: The Business Plan

 

61. Sarah is starting her own small house painting company, Pickett Fence Painting. She is working on developing the company’s business plan. Which of the following is something the business plan should accomplish?

A. limiting the business’s flexibility

 

B. estimating the business’s income and expenses

 

C. permanently setting the business’s goals and strategies

 

D. establishing rules and regulations for how the business will be run

 

E. eliminating any future weaknesses of the business

A business plan should act as a guide and reference document, not a shackle to limit the business’s flexibility and decision-making ability. The business plan should include an explanation of the business, an analysis of the competition, estimates of income and expenses, and other information. The business plan must be revised periodically to ensure that the firm’s goals and strategies adapt to changes in the environment.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: The Business Plan

 

62. Arnold approached a bank to get a loan for a business he planned to launch later that year. He explained his business idea and its capital requirements to the bank manager. The manager asked Arnold to provide a formal document that included a rationale for the business, an explanation of how it will achieve its goals, an analysis of the competition, and estimates of income and expenses, among other information. Which of the following documents does the bank expect from Arnold, in this scenario?

A. a business plan

 

B. a cash flow statement

 

C. a promissory note

 

D. a balance sheet

 

E. a marketing plan

The bank expects Arnold to present a business plan. A key element of business success is a business plan—a precise statement of the rationale for the business and a step-by-step explanation of how it will achieve its goals. Many financial institutions decide whether to loan a small business money based on its business plan.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: The Business Plan

 

63. In the process of starting a business, the step that immediately follows the development of a business plan involves

A. organizing resources like labor and supplies.

 

B. developing some general business ideas.

 

C. deciding an appropriate legal form of business ownership.

 

D. promoting the business to the customers.

 

E. filing for tax returns for the business with the Internal Revenue Service.

After developing a business plan, the entrepreneur next must decide on an appropriate legal form of business ownership—whether it is best to operate as a sole proprietorship, partnership, or corporation—and to examine the many factors that affect that decision.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

64. To make profits from a small business, the owner must first provide or obtain _____ to start the business and keep it running smoothly.

A. products

 

B. employees

 

C. profits

 

D. supplies

 

E. capital

To make money from a small business, the owner must first provide or obtain money (capital) to get started and to keep it running smoothly. Often, the small-business owner has to put up a significant percentage of the necessary capital. Few new business owners have a large amount of their own capital and must look to other sources for additional financing.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

65. Megan is opening her own small retail store that sells women’s purses and accessories. To start her business, she needs at least $50,000 in initial financing to do all of the following EXCEPT

A. pay off any debts so they don’t affect her business.

 

B. rent space.

 

C. purchase or lease equipment and furnishings.

 

D. buy the initial inventory.

 

E. provide working capital.

To make money from a small business, the owner must first provide or obtain money to get started and keep it running smoothly. Even a small retail store, like Megan’s, will probably need at least $50,000 in initial financing to rent space, purchase or lease necessary equipment and furnishings, buy the initial inventory, and provide working capital.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Debt and Equity Financing

 

66. Stanley has started a new zip line business in Jamaica. What is the most important source of funds for this new business?

A. Stanley, the owner

 

B. the government

 

C. a financial institution

 

D. the Small Business Administration

 

E. a venture capitalist

The most important source of funds for any new business is the owner. Many owners include among their personal resources ownership of a home, the accumulated value in a life insurance policy, or a savings account. A new business owner may sell or borrow against the value of such assets to obtain funds to operate a business.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Debt and Equity Financing

 

67. The act of financing one’s business by using real personal assets is known as

A. debt financing.

 

B. factoring.

 

C. franchising.

 

D. equity financing.

 

E. bootlegging.

A new business owner may sell or borrow against the value of his or her assets to obtain funds to operate a business. Additionally, the owner may bring useful personal assets—such as a computer, desks and other furniture, a car or truck—as part of his or her ownership interest in the firm. Such financing is referred to as equity financing because the owner uses real personal assets rather than borrowing funds from outside sources to get started in a new business.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Debt and Equity Financing

 

68. Which of the following is a source of equity financing?

A. securing government loans

 

B. selling personal assets to raise funds

 

C. borrowing money from friends

 

D. securing short-term loans from a family member

 

E. receiving trade credit from suppliers

A loan—from a family member or a financial institution—is a form of debt financing. In equity financing, the owner uses real personal assets rather than borrowing funds from outside sources to get started in a new business.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Debt and Equity Financing

 

69. Walter sold a piece of land he inherited from his grandparents and started a business with the proceeds. Which of the following sources has Walter used to raise funds for his business?

A. equity financing

 

B. debt financing

 

C. venture capital

 

D. initial public offering

 

E. angel investment

Walter has used equity financing to raise funds for his business. In equity financing, the owner uses real personal assets rather than borrowing funds from outside sources to get started in a new business.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Debt and Equity Financing

 

70. Matt wants to start a small moving company. He has enough funds to start the business, but not enough to run it effectively. What is one thing he can do to provide working capital to his company?

A. He can use his profits to pay his salary.

 

B. He can borrow funds from outside sources.

 

C. He can refrain from drawing a full salary.

 

D. He can invest his profits into other businesses.

 

E. He can work to find venture capitalists to support his business.

Matt can provide working capital by reinvesting profits into the business or simply by not drawing a full salary.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Debt and Equity Financing

 

71. Derek borrowed $50,000 from his mother for his new business venture. He promised that she would be a partner in the business and would be entitled to a significant percent of profits from the business at the end of the year. This is an example of

 

A. franchising.

 

B. bartering.

 

C. equity financing.

 

D. initial public offering.

 

E. bootlegging.

This is an example of equity financing. Small businesses can obtain equity financing by finding investors for their operations. They may sell stock in the business to family members, friends, employees, or other investors.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Debt and Equity Financing

 

72. Janice works in a factory that manufactures decorative accessories for office spaces, hotels, and designer homes. She wants to start her own business because she believes that the market for decorative products has a great growth potential. However, she does not want to depend on anyone else for procuring the initial capital and would like to raise the amount herself. In this scenario, which of the following methods could Janice adopt to raise funds through equity financing?

A. Janice could secure a mortgage from a family member or friend.

 

B. Janice could secure a loan from the Small Business Administration.

 

C. Janice could ask for a line of credit from her bank.

 

D. Janice could invest her savings in the new business.

 

E. Janice could ask suppliers for a longer trade credit.

Janice could invest her savings in the new business to raise funds through equity financing. Many owners include among their personal resources ownership of a home, the accumulated value in a life-insurance policy, or a savings account. A new business owner may sell or borrow against the value of such assets to obtain funds to operate a business. In equity financing, the owner uses real personal assets rather than borrowing funds from outside sources to get started in a new business.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Debt and Equity Financing

 

73. Jacob and Harry are business partners, and their company manufactures portable solar panels. They initially started the business with their savings. However, now the company plans to expand its operations and the required amount of capital cannot be raised through savings or by reinvesting profits. Thus, the partners have decided to sell stock in their business to family members, friends, and employees. Which of the following sources of capital have Jacob and Harry planned to use for the expansion of their business?

A. debt financing

 

B. bootstrapping

 

C. equity financing

 

D. mortgaging

 

E. factoring

Jacob and Harry have planned to use equity financing for their business’s expansion. Small businesses can obtain equity financing by finding investors for their operations. They may sell stock in the business to family members, friends, employees, or other investors.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Debt and Equity Financing

 

74. Persons or organizations that agree to provide some funds for a new business in exchange for ownership interest or stock are called

A. intrapreneurs.

 

B. category captains.

 

C. venture capitalists.

 

D. trade debtors.

 

E. franchisers.

Venture capitalists are persons or organizations that agree to provide some funds for a new business in exchange for an ownership interest or stock. Venture capitalists hope to purchase the stock of a small business at a low price and then sell the stock for a profit after the business has grown successful.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Debt and Equity Financing

 

75. Ramon funds small businesses that he believes have the potential to grow large. When these companies are still in their initial stages and need investment, he buys their stocks at a low price and later sells them at higher prices when they are successful. Thus, Ramon is a(n)

A. intrapreneur.

 

B. trade creditor.

 

C. franchisee.

 

D. venture capitalist.

 

E. franchiser.

Ramon is a venture capitalist. Venture capitalists are persons or organizations that agree to provide some funds for a new business in exchange for an ownership interest or stock. Venture capitalists hope to purchase the stock of a small business at a low price and then sell the stock for a profit after the business has grown successful.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Debt and Equity Financing

 

76. Shawna’s small flooring business requires more financing than she can provide from her savings. As a result, she is looking for investors to provide financing in exchange for stock ownership. What is a disadvantage of this arrangement?

A. Shawna may lose her business to venture capitalists.

 

B. Shawna will have to give complete control of her business to the investors until she can pay them back.

 

C. Shawna will have to share the profits of her business.

 

D. Shawna may not be able to find venture capitalists who will pay the high prices she is asking for her stock.

 

E. Shawna could lose her personal assets if the company isn’t profitable.

Although finding investors to finance the business in exchange for stock ownership has helped many small businesses, it requires the small-business owner to share the profits of the business—and sometimes control, as well—with the investors.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Debt and Equity Financing

 

77. Obtaining money from venture capitalists to start a new business venture is an example of

A. debt financing.

 

B. bootstrapping.

 

C. equity financing.

 

D. mortgaging.

 

E. factoring.

Venture capitalists hope to purchase the stock of a small business at a low price and then sell the stock for a profit after the business has grown successful. This form of equity financing requires that a small-business owner share the profits of the business—and sometimes control, as well—with the investors.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Debt and Equity Financing

 

78. What is the main supplier of external financing to small businesses?

A. venture capitalists

 

B. banks

 

C. family members

 

D. friends

 

E. the Small Business Administration

New businesses sometimes borrow more than half of their financial resources. Banks are the main suppliers of external financing to small businesses.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Debt and Equity Financing

 

79. Securing a mortgage from a bank for a new business venture is an example of

A. equity financing.

 

B. venture capitalism.

 

C. debt financing.

 

D. trade credits.

 

E. collaterals.

Banks are the main suppliers of external financing or debt financing to small businesses. A small-business owner may have to provide personal property as collateral when borrowing money from a bank, in which case the loan is called a mortgage.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Debt and Equity Financing

 

80. Jordan has requested financing from the bank for his small automobile parts store. The bank requires Jordan to put up a financial interest in the property or fixtures of the business to guarantee payment of the debt. What is this financial interest called?

A. collateral

 

B. venture capital

 

C. trade credit

 

D. business plan

 

E. cash flow statement

A lending bank will often require the entrepreneur to put up collateral, a financial interest in the property or fixtures of the business, to guarantee payment of the debt.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Debt and Equity Financing

 

81. If a small business fails to repay a bank loan, what will the lending institution do to recover its loss?

A. take over the business and run it for profits

 

B. claim and rent out the business

 

C. sell stock in the business

 

D. claim and sell the collateral or mortgage

 

E. claim and sell all the owner’s personal property

The bank will often require the entrepreneur to put up collateral, a financial interest in the property or fixtures of the business, to guarantee payment of the debt. A small-business owner may have to provide personal property as collateral, such as his or her home, in which case the loan is called a mortgage. If the small business fails to repay the loan, the lending institution may eventually claim and sell the collateral or mortgage to recover its loss.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Debt and Equity Financing

 

82. Banks and other financial institutions can grant a small business a _____, which is an agreement by which a financial institution promises to lend a business a predetermined sum on demand.

A. line of credit

 

B. trade credit

 

C. mutual fund

 

D. non-recourse loan

 

E. trust fund

Banks and other financial institutions can grant a small business a line of credit—an agreement by which a financial institution promises to lend a business a predetermined sum on demand. A line of credit permits an entrepreneur to take quick advantage of opportunities that require external funding.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Debt and Equity Financing

 

83. Small businesses may obtain funding from their suppliers in the form of a _____, which means that suppliers allow the business to take possession of the needed goods and services and pay for them at a later date or in installments.

A. trust fund

 

B. trade credit

 

C. stock dividend

 

D. non-recourse loan

 

E. mutual fund

Small businesses may obtain funding from their suppliers in the form of a trade credit—that is, suppliers allow the business to take possession of the needed goods and services and pay for them at a later date or in installments.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Debt and Equity Financing

 

84. Anisha, an entrepreneur, starts a real estate firm with very limited funds. In order to conduct business, she purchases a few laptops, LED screens, and other office equipment from a local electronics wholesaler. The wholesaler understands her financial situation and allows her to pay for the goods in installments. In this scenario, the type of funding obtained by Anisha can be regarded as a

A. line of credit.

 

B. trade credit.

 

C. business subsidy.

 

D. non-recourse loan.

 

E. working capital loan.

In this scenario, the type of funding obtained by Anisha is referred to as a trade credit. Small businesses may obtain funding from their suppliers in the form of a trade credit—that is, suppliers allow the business to take possession of the needed goods and services and pay for them at a later date or in installments.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Debt and Equity Financing

 

85. Neehara recently opened a premium bakery. She did not have enough savings and hence she applied for a loan to obtain the additional funds required to start the bakery. She had to provide her house as collateral to obtain the loan. The type of financing obtained by Neehara can be regarded as a

A. mortgage.

 

B. trade credit.

 

C. mutual fund.

 

D. non-recourse loan.

 

E. dividend.

The type of financing obtained by Neehara can be regarded as a mortgage. A small-business owner may have to provide personal property as collateral, such as his or her home, in which case the loan is called a mortgage. If the small business fails to repay the loan, the lending institution may eventually claim and sell the collateral or mortgage to recover its loss.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Debt and Equity Financing

 

86. Which of the following statements best describes bartering?

A. It is the practice of small businesses trading their own products for the goods and services offered by other businesses.

 

B. It is an agreement by which a financial institution promises to lend a business a predetermined sum on demand.

 

C. It is the process in which suppliers allow a business to acquire needed goods and pay for them at a later date.

 

D. It is the process in which a small-business owner provides personal property as collateral for a loan.

 

E. It is a process by which an individual acquires the license to sell another’s products or to use another’s name in business.

Occasionally, small businesses engage in bartering—trading their own products for the goods and services offered by other businesses. For example, an accountant may offer accounting services to an office supply firm in exchange for office supplies and equipment.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Debt and Equity Financing

 

87. Chang is an interior designer who starts his own consulting firm. His friend Rachel is the owner of a coffee shop. Chang decorates Rachel’s new coffee shop in exchange for a supply of coffee whenever his clients visit his office. Which of the following sources of funding does this scenario best illustrate?

A. mortgaging

 

B. bartering

 

C. trade credit

 

D. line of credit

 

E. equity financing

The scenario best illustrates bartering. Occasionally, small businesses engage in bartering—trading their own products for the goods and services offered by other businesses. For example, an accountant may offer accounting services to an office supply firm in exchange for office supplies and equipment.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 2 Medium
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Debt and Equity Financing

 

88. Lara, a single mother, borrowed some capital for her business from Women Progress Council at an extremely low rate of interest. Which of the following forms of funding a new small business does this scenario best illustrate?

A. trade credit

 

B. equity financing

 

C. venture capital

 

D. debt financing

 

E. crowd sourcing

The scenario best illustrates debt financing. In debt financing, some community groups sponsor loan funds to encourage the development of particular types of businesses. State and local agencies may guarantee loans, especially to minority business people or for development in certain areas.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Debt and Equity Financing

 

89. Andrew, a pharmacist, realized that he should stock extra supplies of a particular medicine to respond to an outbreak of a particular infection in the city. Lacking sufficient capital to purchase the extra inventory, he borrowed a predetermined sum of money from his bank. Which of the following sources of funding does this scenario best illustrate?

A. trade credit

 

B. initial public offering

 

C. venture capital

 

D. equity financing

 

E. line of credit

Andrew is using a line of credit to meet his capital requirement. Banks and other financial institutions can grant a small business a line of credit—an agreement by which a financial institution promises to lend a business a predetermined sum on demand. A line of credit permits an entrepreneur to take quick advantage of opportunities that require external funding.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Debt and Equity Financing

 

90. Heather wants to run her own picture framing business, but she doesn’t want to start it from scratch. She decides to buy an existing business. What is one advantage of doing this?

A. It allows her to know the problems the business already has.

 

B. It gives her the freedom to develop exactly the business she wants.

 

C. It eliminates all the costs Heather would normally have in starting a business.

 

D. It provides a built-in network of customers, suppliers, and distributors.

 

E. It eliminates all the guesswork inherent in starting a new business.

Buying an existing business has the advantage of providing a built-in network of customers, suppliers, and distributors and reducing some of the guesswork inherent in starting a new business from the ground up.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Franchising

 

91. Gary decides to buy an existing home goods store, instead of starting his own from scratch. Once he takes over the business, he learns that several customers have complained that one of the company’s distributors doesn’t pack items sufficiently for shipping, and their items arrived broken. What is Gary’s responsibility in resolving this problem?

A. Gary is responsible for taking on and resolving any problems the business already has.

 

B. Gary is not responsible for problems that existed before he bought the company.

 

C. Gary can require the previous owner to resolve this problem.

 

D. Gary can expect the customers and distributor to resolve the problem themselves.

 

E. Neither Gary nor the previous owner is responsible for resolving this problem.

An entrepreneur, like Gary, who buys an existing business also takes on any problems the business already has. As a result, in this scenario, Gary would be responsible to resolve this problem between his distributor and customers.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Franchising

 

92. A license to sell another’s products or to use another’s name in business, or both, is called a

A. franchise.

 

B. cartel.

 

C. collateral.

 

D. mortgage.

 

E. collusion.

A license to sell another’s products or to use another’s name in business, or both, is a franchise. The company that sells a franchise is the franchiser. The purchaser of a franchise is called a franchisee.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Franchising

 

93. Since Eva has decided to use her savings to purchase the rights to own and operate a McDonald’s outlet rather than starting her own restaurant, she is most likely to be a(n)

A. trade creditor.

 

B. franchisee.

 

C. category captain.

 

D. intrapreneur.

 

E. venture capitalist.

Eva is most likely to be a franchisee. A license to sell another’s products or to use another’s name in business, or both, is a franchise. A franchisee is a purchaser of a franchise.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Franchising

 

94. Nathan started the first outlet of Dynamix Gym in New York City in 1995. The business expanded over time, and he became the owner of a chain of gyms in New York State. Though the business had potential to expand outside New York, Nathan did not want to take the risk or responsibility. Hence, he decided to sell the license to own and operate gyms under the brand name Dynamix Gym to independent owners. In return, he charged them an initial fee and a small share in the monthly profits. In this scenario, Nathan is a(n)

A. trade creditor.

 

B. intrapreneur.

 

C. angel investor.

 

D. franchiser.

 

E. venture capitalist.

In this scenario, Nathan is a franchiser. A license to sell another’s products or to use another’s name in business, or both, is a franchise. The company that sells a franchise is the franchiser.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Franchising

 

95. Which of the following statements is true of franchising?

A. An individual only acquires the rights to a name and not the rights to methods of operation.

 

B. An individual experiences the most freedom in this form of business ownership.

 

C. A franchisee receives cash payments from the franchiser on a monthly basis.

 

D. A franchisee does not receive accounting support from the franchiser.

 

E. A franchisee often receives building specifications and designs from the franchiser.

In franchising, the franchisee pays the franchiser a monthly or annual fee based on a percentage of sales or profits. In return, the franchisee often receives building specifications and designs, site recommendations, management and accounting support, and perhaps most importantly, immediate name recognition.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Franchising

 

96. Which of the following statements describes an advantage of franchising instead of building an independent business from scratch?

A. The time required to set up an independent business is much lower than obtaining a franchise.

 

B. A franchise outlet often reaches the break-even point faster than an independent business would.

 

C. A franchisee would experience more flexibility in decision making than the owner of an independent business.

 

D. The quality of goods and services needs to be more standardized and uniform in an independent business than in franchises.

 

E. Access to managerial and financial assistance is more limited in franchises than in independent businesses.

Franchising allows a franchisee the opportunity to set up a small business relatively quickly, and because of its association with an established brand, a franchise outlet often reaches the break-even point faster than an independent business would.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Franchising

 

97. All of the following are advantages of franchising EXCEPT

A. more freedom in purchasing goods.

 

B. brand-name appeal.

 

C. national and local advertising programs.

 

D. proven products and business formats.

 

E. centralized buying power.

Advantages of franchising include management training and support, brand-name appeal, standardized quality of goods and services, national and local advertising programs, financial assistance, proven products and business formats, centralized buying power, site selection and territorial protection, and greater chance for success.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Franchising

 

98. Stephanie has always dreamed of owning and managing a hotel. Instead of starting her own independent hotel, she decides to buy a franchise from the Marriott. What is one thing she should keep in mind about becoming a franchisee?

A. It will take a long time to set up her franchise.

 

B. It will take longer for her franchise to reach its break-even point than it would take for an independent business.

 

C. She will need to buy equipment, pay for training, and obtain a mortgage or lease.

 

D. She will have to develop her own processes for operations.

 

E. She will have the freedom to make all the necessary business decisions, which may be overwhelming.

Stephanie will acquire the rights to the franchiser’s name, logo, methods of operation, national advertising, products, and other elements associated with the business in return for a financial commitment and the agreement to conduct business in accordance with the franchiser’s standard of operations. As a franchisee, Stephanie will have to buy equipment, pay for training, and obtain a mortgage or lease.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Franchising

 

99. Which of the following is one of the commonly reported disadvantages of franchising?

A. lack of management training and assistance

 

B. decentralized buying power

 

C. low rate of success

 

D. restrictions on purchasing

 

E. lack of financial assistance

Some of the disadvantages of franchises include franchise fees and profit sharing with the franchiser, strict adherence to standardized operations, restrictions on purchasing, limited product line, possible market saturation, and less freedom in business decisions.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Franchising

 

100. Steven opened his own Subway franchise in his community. He is pleased with how quickly he was able to open his franchise and that he was able to establish a good customer base from the start because of name recognition. However, since he started this business to be his own boss, he is likely to

A. resent the management training and support the franchiser provides.

 

B. take sole responsibility for all decisions in the business.

 

C. get frustrated with the restrictions of the franchise.

 

D. embrace the franchiser’s restrictions because they lead to a greater chance for success.

 

E. invest his own capital in national and local advertising programs.

In franchising, strict uniformity is the rule rather than the exception. Since Steven wants to be his own boss, he would likely get frustrated with the restrictions of a franchise.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Franchising

 

101. Paul has recently quit his job as an investment banker. He plans to open a restaurant. He has two options: he can either start his own new restaurant from scratch or purchase a franchise from an already established restaurant or fast food chain. His wife Lisa supports the former plan. Which of the following statements strengthens the argument in favor of Lisa’s choice of opening a restaurant independently?

A. It is easier and faster to build a business from scratch.

 

B. It is easier to reach the break-even point through an independent business.

 

C. It is more difficult to attract customers in a franchise business as the entrepreneur has to personally build the brand appeal.

 

D. It is easier and more flexible to make and execute decisions in an independent business.

 

E. It is easier to succeed in a business built from scratch as the products and the business format are already proven.

It is easier and more flexible to make and execute decisions in an independent business. In franchising, the franchisee must sacrifice some freedom to the franchiser. Franchisees experience less freedom in business decisions.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: Franchising

 

102. _____ are often the Small Business Administration’s principal means of providing direct management assistance to small businesses and entrepreneurs.

A. Local Chambers of Commerce

 

B. Small Business Development Centers

 

C. Service Corps of Retired Executives

 

D. Small Business Institutes

 

E. Active Corps of Executives

The Small Business Administration (SBA) funds Small Business Development Centers (SBDCs). These are business clinics, usually located on college campuses, that provide counseling at no charge and training at only a nominal charge. SBDCs are often the SBA’s principal means of providing direct management assistance.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

103. _____ is a volunteer agency funded by the Small Business Administration to provide advice for owners of small firms.

A. Local Chambers of Commerce

 

B. Small Business Development Centers

 

C. Service Corps of Retired Executives

 

D. Small Business Institutes

 

E. Business Executive Council

The Service Corps of Retired Executives and the Active Corps of Executives are volunteer agencies funded by the Small Business Administration to provide advice for owners of small firms.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

104. Chris has started his own small photography business. All of the following are programs and resources he can use to improve his ability to compete with other businesses EXCEPT

A. classified files from his competitors.

 

B. entrepreneurial training programs.

 

C. seminars and college courses.

 

D. local chambers of commerce.

 

E. national publications and weekly business journals.

Because of the crucial role that small businesses and entrepreneurs play in the U.S. economy, a number of organizations offer programs to improve the small-business owner’s ability to compete. These include entrepreneurial training programs and programs sponsored by the SBA. Additional resources include seminars and college courses, local chambers of commerce, national publications, and weekly business journals.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

105. Samantha owns a small office supply company. In setting up her business, she asks a few other small-business owners she knows for advice on dealing with employees and government regulation, improving processes, and solving problems. What does this scenario exemplify?

A. consulting

 

B. incubating

 

C. socializing

 

D. relating

 

E. networking

This scenario exemplifies networking, building relationships and sharing information with colleagues. Small-business owners often obtain advice from other small-business owners, suppliers, and even customers. Communicating with other business owners is a great way to find ideas for dealing with employees and government regulation, improving processes, or solving problems.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

106. Which of the following statements is true of baby boomers?

A. They represent people born between 1930 and 1945.

 

B. They are economically backward compared to other Americans.

 

C. They are not actively pursued by small businesses.

 

D. They consist of 50 million Americans.

 

E. They are an unprofitable market segment.

America’s baby boom started in 1946 and ended in 1964. The baby boomer generation consists of 75 million Americans. This segment of the population is wealthy, but many small businesses do not actively pursue it.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-06 Evaluate the demographic, technological, and economic trends that are affecting the future of small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

107. Millennials number around 83 million and represent a huge business opportunity in the United States. Which of the following is a defining feature of the millennials?

A. This cohort is solely concerned about money.

 

B. This cohort is opposed to working remotely.

 

C. This cohort prefers face-to-face meetings over virtual communication.

 

D. This cohort consists of people born between 1946 and 1964.

 

E. This cohort is concerned with advancement, recognition, and improved capabilities.

Millennials, born between the early 1980s and the early 2000s, are also known as echo boomers or Generation Y, and represent a large market for small businesses. This cohort is not solely concerned about money. They are also concerned with advancement, recognition, and improved capabilities. Working remotely is more acceptable to this group than previous generations, and virtual communication may become as important as face-to-face meetings.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-06 Evaluate the demographic, technological, and economic trends that are affecting the future of small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

108. Margaret was born in 1952. She is a wealthy Florida native. As she ages, Margaret spends more of her money on travel, financial planning, and health care. Margaret is a(n)

A. millennial.

 

B. echo boomer.

 

C. baby boomer.

 

D. immigrant.

 

E. member of Generation Y.

Margaret is a baby boomer. America’s baby boom started in 1946 and ended in 1964. This segment of the population is wealthy. As baby boomers age, industries such as travel, financial planning, and health care will continue to grow.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-06 Evaluate the demographic, technological, and economic trends that are affecting the future of small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

109. Sally is a human resource (HR) manager at a company. A survey of the company’s employees reveals that more than 80 percent of the employees belong to the demographic segment Generation Y. In this scenario, which of the following HR strategies should Sally implement in order to best serve the needs of the employees?

A. Sally should solely use financial rewards to motivate the employees to improve their productivity.

 

B. Sally should keep the training sessions highly formal with no scope for entertainment.

 

C. Sally should restrict the employees from using work from home or telecommuting options.

 

D. Sally should avoid giving regular, direct feedback to the employees.

 

E. Sally should use recognition and advancement as the driving forces to motivate employees.

Generation Y, those born between the early 1980s and the early 2000s, is not solely concerned about money. Those that fall into this group are also concerned with advancement, recognition, and improved capabilities. They need direct, timely feedback and frequent encouragement and recognition.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-06 Evaluate the demographic, technological, and economic trends that are affecting the future of small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

110. Which of the following demographic segments should both small retailers and small-service providers specializing in ethnic products target?

 

A. immigrants

 

B. echo boomers

 

C. baby boomers

 

D. Generation X

 

E. drivers

Immigrants, who now represent about 14 percent of the U.S. population, represent an underserved market for small businesses. This vast group provides a greatly untapped market for small businesses. Retailers who specialize in ethnic products, and service providers who offer bi- or multilingual employees, will find a large amount of business in this market.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-06 Evaluate the demographic, technological, and economic trends that are affecting the future of small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

111. Marco is a Latino who lives in Boston, Massachusetts. Over the years, he has noticed that more stores in his community specialize in ethnic products. This has made Boston feel more like home to him. What trend might explain this recent influx in stores that cater to the Latino population?

A. In the United States, all the minority groups combined are expected to grow by 86 percent between 2015 and 2050.

 

B. In the United States, the Latino population is expected to grow by 86 percent between 2015 and 2050.

 

C. Since there aren’t many Latino immigrants in the United States, more of an effort is being made to attract this minority population.

 

D. Research has shown that most immigrants in the United States enjoy Latino products.

 

E. In the United States, Latino immigrants represent 50 percent of the population.

The Latino population, the largest minority group in the United States, is expected to grow by 86 percent between 2015 and 2050. Retailers who specialize in ethnic products will find a large amount of business potential in this market.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-06 Evaluate the demographic, technological, and economic trends that are affecting the future of small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

112. Which of the following demographic trends has made health care and financial planning industries attractive for small businesses in the United States?

A. decreasing population of millennials

 

B. increasing income among Generation X

 

C. increasing aged baby boomers who are wealthy

 

D. reducing entrepreneurial spirit among young generations

 

E. increasing imports into the economy

Many boomers are over 50, and in the next few years, millions more will pass that mark. Industries such as travel, financial planning, and health care will continue to grow as boomers age.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Understand
Difficulty: 2 Medium
Learning Objective: 05-06 Evaluate the demographic, technological, and economic trends that are affecting the future of small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

113. Which of the following is an implication of technological advances to small businesses?

A. It fails to make any significant changes as small businesses cannot afford to use sophisticated technology in their operations.

 

B. It reduces a small business’s ability to adapt to changing trends and market demands.

 

C. It increases the ratio of baby boomers as employees in small businesses.

 

D. It provides new opportunities for small businesses to expand their operations abroad.

 

E. It reduces a small company’s ability to customize its services and products.

Technological advances and an increase in service exports have created new opportunities for small companies to expand their operations abroad. Changes in communications and technology can allow small companies to customize their services quickly for international customers.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Understand
Difficulty: 2 Medium
Learning Objective: 05-06 Evaluate the demographic, technological, and economic trends that are affecting the future of small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

114. Which of the following is true of home-based businesses?

A. Most of today’s largest businesses started in offices and eventually moved into their owners’ homes.

 

B. Approximately 75 percent of all small businesses are based out of the home.

 

C. Approximately 52 percent of all small businesses are based out of the home.

 

D. Technology has not had a substantial impact on home-based businesses.

 

E. Approximately 25 percent of all small businesses are based out of the home.

Technology has enabled the substantial growth of entrepreneurs working out of their houses, known as home-based businesses. Many of today’s largest businesses started out from their homes. Approximately 52 percent of all small businesses are based out of the home.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Understand
Difficulty: 2 Medium
Learning Objective: 05-06 Evaluate the demographic, technological, and economic trends that are affecting the future of small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

115. Kevin makes rustic wood furniture and home accessories. During a recent time of economic turbulence, when well-funded dot-coms were failing, Kevin learned how to

A. recover from an oversupply of Internet infrastructure products.

 

B. build other types of furniture so he could work for a larger furniture company.

 

C. recover from an economic slowdown.

 

D. use the Internet to promote himself and sell his products online.

 

E. hold steady in the face of change.

In recent years, economic turbulence has provided both opportunities and threats for small businesses. While well-funded dot-coms were failing, many small businesses were learning how to use the Internet to promote themselves and sell products online. For example, makers of specialty products, like Kevin, could sell their wares on existing websites, such as eBay.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-06 Evaluate the demographic, technological, and economic trends that are affecting the future of small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

116. All of the following have provided new opportunities for small businesses EXCEPT

A. deregulation of the energy market and interest in alternative fuels.

 

B. technological advances and an increase in service exports.

 

C. free trade agreements and trade alliances.

 

D. economic turbulence.

 

E. the success of large information technology companies.

Technological advances and an increase in service exports have created new opportunities for small companies to expand their operations abroad. Also, free trade agreements and trade alliances are helping to create an environment in which small businesses have fewer regulatory and legal barriers. In recent years, economic turbulence has provided both opportunities and threats for small businesses. Further, deregulation of the energy market and interest in alternative fuels and in fuel conservation have spawned many small businesses.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Understand
Difficulty: 2 Medium
Learning Objective: 05-06 Evaluate the demographic, technological, and economic trends that are affecting the future of small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

117. Norton is a human resource manager at a large multinational company. After a drastic drop in revenue, his company thinks of ways to correct the situation. At a meeting with the top management, the CEO suggested that the company should reduce its workforce by 20 percent. This move would help the company cut costs and continue functioning on the current projects. In this scenario, which of the following strategies is Norton’s company planning to use?

A. off shoring

 

B. outsourcing

 

C. crowd sourcing

 

D. franchising

 

E. downsizing

Norton’s company is planning to use downsizing. Downsizing is an effective way to gain the advantages of small businesses. Large firms downsize or right-size to reduce management layers, corporate staff, and work tasks in order to make the firm more flexible, resourceful, and innovative.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-07 Explain why many large businesses are trying to “think small.”
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

118. Downsizing is an effective way to

A. gain the advantages of small businesses.

 

B. increase organizational tasks.

 

C. reduce entrepreneurial spirit among employees.

 

D. increase the management layers.

 

E. gain employee trust.

Downsizing is an effective way to gain the advantages of small businesses. Large firms downsize or right-size to reduce management layers, corporate staff, and work tasks in order to make the firm more flexible, resourceful, and innovative.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-07 Explain why many large businesses are trying to “think small.”
Topic: The Advantages and Disadvantages of Small Business Ownership

 

119. Paula works for a large company that is trying to function like a smaller company. Which of the following is something the company can do to achieve this goal?

A. The company can increase its management layers.

 

B. The company can increase its work tasks.

 

C. The company can make its operating units function more like independent small businesses.

 

D. The company can increase its corporate staff.

 

E. The company can split each operating unit into a separate business.

More and more firms are emulating small businesses in an effort to improve their own bottom line. To do so, a company can downsize, reducing management layers, corporate staff, and work tasks in order to make the firm more flexible, resourceful, and innovative. Other firms have sought to make their businesses smaller by making their operating units function more like independent small businesses, each responsible for its profits, losses, and resources.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-07 Explain why many large businesses are trying to “think small.”
Topic: The Advantages and Disadvantages of Small Business Ownership

 

120. Which of the following statements accurately describes intrapreneurs?

A. Employees who become a part of a company’s board of directors through internal promotions are referred to as intrapreneurs.

 

B. Entrepreneurs who sell the rights to use their products to independent owners are intrapreneurs.

 

C. Entrepreneurs who are involved in international business are referred to as intrapreneurs.

 

D. Independent investors who help a company raise capital through internal financing are intrapreneurs.

 

E. Individuals in large firms who take responsibility for the development of innovations within the organizations are intrapreneurs.

In major corporations, intrapreneurs take responsibility for, or “champion,” the development of innovations of any kind within the larger organization.

 

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Bloom’s: Remember
Difficulty: 1 Easy
Learning Objective: 05-07 Explain why many large businesses are trying to “think small.”
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

121. Jason works for a large sporting goods corporation. He champions a new hockey helmet with advanced concussion protection. Jason is a(n)

A. entrepreneur.

 

B. intrapreneur.

 

C. innovator.

 

D. product leader.

 

E. independent contractor.

Jason is an intrapreneur, an individual who takes responsibility for, or “champions,” the development of innovations of any kind within the larger organization.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-07 Explain why many large businesses are trying to “think small.”
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

122. George is an employee at a company that provides information technology solutions to other firms. Recognizing his potential to innovate, the top management of the company has given him the complete liberty to develop a new smart phone application using the resources of the company. In this scenario, George best illustrates a(n)

A. franchiser.

 

B. venture capitalist.

 

C. intrapreneur.

 

D. category captain.

 

E. trade creditor.

In this scenario, George best illustrates an intrapreneur. In major corporations, intrapreneurs, like entrepreneurs, take responsibility for, or “champion,” the development of innovations of any kind within the larger organization. Often, they use company resources and time to develop a new product for the company.

 

 

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Bloom’s: Apply
Difficulty: 3 Hard
Learning Objective: 05-07 Explain why many large businesses are trying to “think small.”
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

Essay Questions

123. How do small businesses contribute to the American economy?

 

 

Small businesses are vital to the American economy. A huge percentage of all U.S. firms are classified as small businesses, and they employ 50 percent of private workers. Small firms are also important as exporters. In addition, small businesses are largely responsible for fueling job creation and innovation. Small businesses also provide opportunities for minorities and women to succeed in business.

The energy, creativity, and innovative abilities of small-business owners have resulted in jobs for many people. Many small businesses today are being started because of encouragement from larger ones. Many new jobs are also created by big-company/small-company alliances. Whether through formal joint ventures, supplier relationships, or product or marketing cooperative projects, the rewards of collaborative relationships are creating many jobs for small-business owners and their employees.

Perhaps one of the most significant strengths of small businesses is their ability to innovate and to bring significant benefits to customers. Small firms produce more than half of all innovations.

 

AACSB: Analytical Thinking
Bloom’s: Understand
Difficulty: 2 Medium
Learning Objective: 05-02 Investigate the importance of small business in the U.S. economy and why certain fields attract small business.
Topic: The Importance of Small Business Ownership to the U.S. Economy

 

124. What is undercapitalization? How does it contribute to the failure of a business?

 

 

The shortest path to failure in business is undercapitalization, which is the lack of funds to operate a business normally. Too many entrepreneurs think that all they need is enough money to get started, that the business can survive on cash generated from sales soon thereafter. But most businesses do not start making a profit right away, and many have seasonal variations in sales, which make cash tight. Without sufficient funds, the best small-business idea in the world will fail.

 

AACSB: Analytical Thinking
Bloom’s: Understand
Difficulty: 2 Medium
Learning Objective: 05-04 Summarize the disadvantages of small-business ownership and analyze why many small businesses fail.
Topic: The Advantages and Disadvantages of Small Business Ownership

 

125. What is a business plan and why is it important?

 

 

A key element of any business success is a business plan. A business plan is a precise statement of the rationale for a business and a step-by-step explanation of how it will achieve its goals. The business plan should include an explanation of the business, an analysis of the competition, estimates of income and expenses, and other information.

The business plan may be used by a financial institution to determine whether to loan money to the small business. It acts as a guide and reference document and helps companies assess market potential, determine price and manufacturing requirements, identify optimal distribution channels, and refine product selection.

 

AACSB: Analytical Thinking
Bloom’s: Understand
Difficulty: 2 Medium
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are needed.
Topic: The Business Plan

 

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