PRM EXAM 2 QUESTIONS AND ANSWERS
Capital needs for setup - Answers - (operations taking place before business opening)
Lease deposit and renovation
Equipment and fixtures
Inventory
Licenses and permits
Capital needs for start-up - Answers - (used just prior to business opening; 2-3 weeks
before and after opening)
Decorative fixtures
Office supplies
Promotional expenditure
Types of capital and definitions - Answers - Working capital: money available to carry
on day-to day activities
Short-term capital: money borrowed to finance obligations over short time period
Long-term capital: longer time period (as much as 10 years)
Sources for long-term capital - Answers - Personal funds
Equity financing (selling partial ownership to investors)
Debt financing: loans with interest
Sources of equity financing - Answers - Partner
-General: helps with management
-Limited: not involved in mgmt
Relative
Friend
Venture capitalist
Stocks
-Common: max return on investment
-Preferred: gives investor first prefernce on company assets after debtors receive their
money
-Convertible preferred stocks
Sources of debt financing - Answers - Commercial banks
Commercial finance companies
Life insurance companies
Consumer finance companes
Government (Samll Business Administration)
Suppliers
Miscellaneous
What is the business entity concept? - Answers - Every business is treated as a
separate entity, distinct from owners and every other business
, What is the cost principle? - Answers - All goods and services purchased are recorded
at cost (does not reflect current worth)
What is the stable dollar concept? - Answers - Books are not adjusted based on
changing value of the dollar (inflation, deflation...)
What is accrual accounting? - Answers - Revenues recognized when good/services
are rendered, not necessarily when cash is received
Prepaid expenses are considered what on the balance sheet? - Answers - Assets
(though they become expenses as they are used)
Define current assets - Answers - Cash assets or assets that will become cahs w/in a
year (cash, accounts receivable, inventory; short-term investments may be too)
Define long-term assets - Answers - Assets that would take a long time (over a year) to
turn into cash
Long-term asset types and definitions/examples - Answers - Fixed assets: property,
buildings, equipment, fixtures
Investments
Intangible assets (rarely included on a balance sheet)
Define unearned revenue; place on balance sheet - Answers - Business gets paid for
good/services before supplying those goods/services
Liability until those goods/services are delivered
Define current liabilities - Answers - Obligations that must be paid within a year
(accounts payabble, short-term notes payable, wages)
Define long-term liabilities - Answers - Obligations due more than a year from the
balance-sheet date
Owner's equity aka - Answers - Net worth
Net worth aka - Answers - Owner's equity
If you purchase building for $100,000 using $20,000 of your own money and $80,000
from bank, what is the owner's equity? - Answers - 20,000
Accounting equation - Answers - Assets = liabilities + owner's equity (assets - liabilities
= owner's equity)
What is the balance sheet based on? - Answers - Accounting equation
Assets = liabilities + owner's equity
Capital needs for setup - Answers - (operations taking place before business opening)
Lease deposit and renovation
Equipment and fixtures
Inventory
Licenses and permits
Capital needs for start-up - Answers - (used just prior to business opening; 2-3 weeks
before and after opening)
Decorative fixtures
Office supplies
Promotional expenditure
Types of capital and definitions - Answers - Working capital: money available to carry
on day-to day activities
Short-term capital: money borrowed to finance obligations over short time period
Long-term capital: longer time period (as much as 10 years)
Sources for long-term capital - Answers - Personal funds
Equity financing (selling partial ownership to investors)
Debt financing: loans with interest
Sources of equity financing - Answers - Partner
-General: helps with management
-Limited: not involved in mgmt
Relative
Friend
Venture capitalist
Stocks
-Common: max return on investment
-Preferred: gives investor first prefernce on company assets after debtors receive their
money
-Convertible preferred stocks
Sources of debt financing - Answers - Commercial banks
Commercial finance companies
Life insurance companies
Consumer finance companes
Government (Samll Business Administration)
Suppliers
Miscellaneous
What is the business entity concept? - Answers - Every business is treated as a
separate entity, distinct from owners and every other business
, What is the cost principle? - Answers - All goods and services purchased are recorded
at cost (does not reflect current worth)
What is the stable dollar concept? - Answers - Books are not adjusted based on
changing value of the dollar (inflation, deflation...)
What is accrual accounting? - Answers - Revenues recognized when good/services
are rendered, not necessarily when cash is received
Prepaid expenses are considered what on the balance sheet? - Answers - Assets
(though they become expenses as they are used)
Define current assets - Answers - Cash assets or assets that will become cahs w/in a
year (cash, accounts receivable, inventory; short-term investments may be too)
Define long-term assets - Answers - Assets that would take a long time (over a year) to
turn into cash
Long-term asset types and definitions/examples - Answers - Fixed assets: property,
buildings, equipment, fixtures
Investments
Intangible assets (rarely included on a balance sheet)
Define unearned revenue; place on balance sheet - Answers - Business gets paid for
good/services before supplying those goods/services
Liability until those goods/services are delivered
Define current liabilities - Answers - Obligations that must be paid within a year
(accounts payabble, short-term notes payable, wages)
Define long-term liabilities - Answers - Obligations due more than a year from the
balance-sheet date
Owner's equity aka - Answers - Net worth
Net worth aka - Answers - Owner's equity
If you purchase building for $100,000 using $20,000 of your own money and $80,000
from bank, what is the owner's equity? - Answers - 20,000
Accounting equation - Answers - Assets = liabilities + owner's equity (assets - liabilities
= owner's equity)
What is the balance sheet based on? - Answers - Accounting equation
Assets = liabilities + owner's equity
