Here are a few statements we hear from our clients on a regular basis:

“I don’t know anything about accounting and I’m not going to take the time to learn.”

“When I open my business, I’ll concentrate on making money. I’ll hire an accountant to worry about the accounting,”

“I’m opening a very simple business. I give the customer a product. The customer gives me the cash. That’s it. I don’t need to know much about accounting.”

The simple fact is that the more a business owner knows about accounting, the better his or her chances of succeeding in business. A knowledge of accounting facilitates the planning of business growth, the maximization of business profit and the anticipation of operational or financial problems that might threaten the continuing existence of a business.

Knowing accounting does not guarantee entrepreneurial success. But not knowing accounting virtually guarantees business failure.

Hiring an accountant is not the solution to not knowing accounting. No matter how competent and honest an accountant is, a hired professional who keeps a company’s books on a periodic basis is never an adequate substitute for the business owner’s day-by-day monitoring of transactions and company performance. Moreover, if the business owner cannot interpret the financial statements the accountant provides, that owner will never know whether the accountant is providing accurate information.

Should you open a business without knowing accounting? We think not. Resolving to open a business without knowing accounting is a lot like resolving to become a heart surgeon without knowing biology or chemistry. It just isn’t possible!

How prepared are you to measure your own business success? Take our accounting quiz and find out. 23-25 correct answers is a good score. Getting fewer than 20 correct definitely suggests a need for more accounting and finance education before you open for business.

1) Which of the following equations is known as the “accounting equation”?

(a) A = ½*bh
(b) A = L + OE
(c) A = L * W
(d) A = L + OE – D

2) How frequently is a self-employed business man or woman required to make estimated income tax payments to the Internal Revenue Service?

(a) semi-annually
(b) annually
(c) when estimated profit exceeds the net worth of the business
(d) quarterly
(e) none of the above

3) What is the definition of “technical bankruptcy?”

(a) unable to pay bills as they fall due
(b) liabilities exceed assets
(c) can’t pay estimated income taxes as they come due
(d) go more than two years without filing income tax returns

4) Which one of the following best describes “gross profit?”

(a) “revenue” minus “cost of goods sold”
(b) “gross weight of products sold” times cost per pound
(c) “revenue” minus “all operating expenses”
(d) net profit with sales taxes added back
(e) none of the above

5) Identify the one statement below that is not true:

(a) the sale of merchandise impacts both the income statement and the balance sheet of a business
(b) when a business owner takes money out of the cash register to pay household expenses, the net worth of the business is reduced
(c) the lower the cost of sales margin, the better it is for the bottom line
(d) the depreciation of equipment has no impact on the profitability of a business
(e) the depreciation of equipment has no impact on the cash flow of a business.

6) Which of the following best defines an “entrepreneur?”

(a) is his/her “own boss”
(b) works like a dog regardless of whether he/she makes money
(c) takes personal financial risks in pursuit of personal profit
(d) none of the above
(e) all of the above

7) An entrepreneur’s compensation is known as

(a) a salary draw
(b) a living wage
(c) conditional draw
(d) profit
(e) none of the above

8) Which of the following are assets?

(a) leasehold improvements
(b) unearned revenue
(c) capitalized start-up costs
(d) (a) and (c)
(e) (a) and (b)
(f) none of the above

9) Which of the following are not direct expenses?

(a) rent
(b) insurance premiums
(c) administrative wages
(d) administrative salaries
(e) utility expenses
(f) all of the above
(g) (a) and (e)
(h) (e) and (d)
(i) none of the above

10) What does “GAAP” stand for?

(a) greatest asset accumulation possible
(b) greatest actual accountability in posting
(c) general asset assessment protocol
(d) generally accepted accounting principles
(e) none of the above
(f) (c) and (d) together because they mean the same thing

11) An automotive repair shop in its first year of business is likely to settle for which level of accounting oversight?

(a) audited
(b) compiled
(c) reviewed
(d) periodic intervention
(e) none of the above

12) If you wanted a dependable estimate of the amount of revenue you needed to generate in order to cover all operating expenses, you would:

(a) divide total operating expenses by your gross profit margin
(b) multiply operating expenses by your “efficiency coefficient”
(c) discount operating expenses by your gross profit margin
(d) divide total operating expenses by the reciprocal of your gross profit margin
(e) none of the above

13) What are the fundamental bases of accounting?

(a) cost basis and accrual basis
(b) cost basis and cash basis
(c) cash basis and tax basis
(d) accrual basis and cash basis
(e) accrual and funding basis

14) The term “Owner’s Equity” is best described as:

(a) the business owner’s “net investment” in the business
(b) the owner’s sense of honesty in reporting profit to the IRS
(c) the value of all that the business owns minus the sum total of
the business’ obligations to pay debt
(d) the business owner’s best estimate of the value of the
business’ equipment
(e) (a) and (c)
(f) none of the above

15) “Working capital” is best defined as:

(a) money reserved for capital improvements
(b) total current assets minus total current liabilities
(c) total assets minus loan payments due on capital equipment
(d) estimate of cash business expects to receive over the next 30
days of operation
(e) (a) and (c)
(f) (b) and (d)
(g) none of the above

16) “T Accounts”

(a) keep track of the increases and decreases in assets, liabilities and owners equity accounts
(b) keep track of state and federal tax liabilities
(c) keep track of technical assets used in business operations
(d) none of the above

17) To increase an asset, you:

(a) debit the appropriate asset account
(b) credit the appropriate asset account
(c) must first know the magnitude of the increase
(d) none of the above

18) A “Statement of Retained Earnings”

(a) summarizes changes in retained earnings during a specified period of time
(b) states the amount of retained earnings at the end of a specified period of time
(c) is always net of declared dividends
(d) is always net of distributed dividends only
(e) (a), (b) and (c )
(f) (a), (b) and (d)
(g) none of the above

19) The equivalent of a corporation declaring a dividend is:

(a) a proprietor taking cash out of his business’ checking account and using the money to buy himself golf clubs
(b) a partner being awarded a bonus for a year of good work
(c) a proprietor taking money out of the business’ savings
account and paying his child’s dental bill
(d) a proprietor giving an employee a bonus
(e) (a) and (d)
(f) (a) and (c)
(g) (c) and (d)

20) Which of the following are tax deductible?

(a) the gasoline expense of a business owner in traveling from
home to his/her office
(b) principal paid back on a credit card used for business lunches
(c) workers compensation premiums
(d) membership dues paid to the local chamber of commerce
(e) all of the above
(f) (a), (b) and (d)
(g) (a), (c) and (d)

21) A “Statement of Financial Condition” is also called:

(a) an income statement
(b) a statement of sources and uses
(c) a cash flow statement
(d) a balance sheet
(e) none of the above

22) A “Statement of Earnings” is also called:

(a) an income statement
(b) a statement of operations
(c) an operating financial profile
(d) (a) and (b)
(e) a reconciliation of net worth
(f) none of the above

23) If a pizza restaurant owner has fifty pounds of tomato paste delivered to her restaurant, and writes a check to pay for the delivered goods, the following changes take place in the accounting equation:

(a) cash decreases and inventory increases
(b) cash decreases and inventory decreases
(c) cash decreases and accounts payable decrease
(d) accounts payable increase and inventory increases
(e) none of the above

24) If a business owner promises to pay off an employee’s loan if the employee fails to do so, the business owner can be said to have:

(a) guaranteed the employee’s loan
(b) endorsed the employee’s personal liability
(c) insured payment of the employee’s loan
(d) satisfied a contingent liability of the employee
(e) (a) and (c)
(f) none of the above

25) A “current asset” is:

(a) an asset currently in demand by the marketplace
(b) an asset soon to be reviewed by the business owner
(c) an asset that the business owner expects to convert into cash
within the next 30 days.
(d) an asset that the business owner expects to convert into cash
within the next 12 months.
(e) an asset with an undetermined value

How did you do today? We invite you to visit this web page again soon and take a different quiz.

We also invite you to come in and discuss the answer to the most important question confronting you: “Am I ready to open my own business?”

Give us a call at (650) 991-5103 and set up an appointment.

Answer Key
1) b 2) c 3) b 4) a 5) d 6) e 7) a 8) d 9) f 10) d 11) b 12) a 13) d

14) e 15) b 16) a 17) a 18) a 19) a 20) g 21) d 22) a 23) a 24) e 25) c