Principle of Business

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. It is difficult to define small business because smallness is relative.

True
False
3. Any business that is independently owned and operated can be classified as a small
business.
True
False
4. The Small Business Administration offers managerial and financial assistance to small
businesses.
True
False
5. The entrepreneurship movement is declining because of technological advances.

True
False
Multiple Choice Questions
6. Of minority groups in the United States, ________ own the most small businesses.
A.
B.
C.
D.
E.
Asians
African Americans
American Indians
Hispanics
Pacific Islanders
5-1
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7. ________ has helped small businesses compete with larger businesses.
A.
B.
C.
D.
E.
Well-managed inventory
Friendly customer service
Technology
Good management
A diverse workforce
8. Your textbook uses the term small business to refer to an owner-managed business
that employs not more than
A.
B.
C.
D.
E.
100 people.
500 people.
15,000 people.
25 people.
1,000 people.
9. Which of the following is not part of the definition of a small business?
A.
B.
C.
D.
E.
It employs 1,000 or more employees.

It employs fewer than 500 employees.
It is independently owned.
It is not dominant in its field.
It is independently operated.
10. The Small Business Administration
A. was established by the U.S. Chamber of Commerce to encourage the

entrepreneurial spirit.
B. is an independent agency of the federal government to provide managerial and
financial assistance to small businesses.
C.
is a subsidiary of the Better Business Bureau.
D. is a division of the federal government that is responsible for ensuring that newly
formed businesses adhere to the law.
E. is a U.S. Congressional agency that fosters the establishment of new businesses.
5-2
11. Which of the following groups is increasing their presence in the business world at
the greatest rate?
A.
B.
C.
D.
E.
Women
Minorities
White males
People under 30
People over 65
12. Which of the following is an advantage of a small business?
A.
Greater flexibility to change
B.
Highly trained staff
C.
Better products
D.
More diverse employees
E. Small businesses have no advantages over large ones
Essay Questions
13. What is a small business?
5-3
14. Why are minority-owned and women-owned small businesses growing so rapidly in
the United States?
15. In recent years, small businesses generated very few new jobs in the U.S.
True
False
16. Retailing, services, manufacturing, and high technology are attractive to

entrepreneurs because these fields tend to be relatively easy to enter and require low
initial financing.
True
False
17. Retailers purchase goods and resell them to consumers and some distributors.
True
False
18. People who operate service businesses are almost never considered to be retailers.
True
False
19. A number of very successful high technology businesses began as small

entrepreneurial ventures.
True
False
5-4
20. The majority of all new jobs created in the United States in recent years were
generated by
A.
B.
C.
D.
E.
medium businesses.
small businesses.
large businesses.
corporations.
state governments.
21. Perhaps one of the most significant strengths of small businesses is
A. their ability to innovate and bring significant changes and benefits to customers.
B.
the entrepreneurial spirit they foster.
C. the encouragement they receive from larger businesses.
D.
the competition they encourage.
E.
the ease of starting one.
22. Which of the following fields are most attractive to small businesses?
A.
Wholesaling, retailing, medical, and services
B. Retailing, distribution, education, and services
C. Retailing and wholesaling, services, manufacturing, and high technology
D. Wholesaling, services, education, and high technology
E. Services, distribution, medical, and high technology
23. Which of the following is not a reason why small businesses choose to become
retailers?
A.
Starting a retail business is relatively easy.
B. Retailing does not require a large capital investment.
C.
It is easy to compete with large chains.
D. Gaining knowledge and experience in retailing is relatively easy.
E. The owner can capitalize on personal expertise or interests.
24. In the context of starting a new business, a retailer differs from a manufacturer in
that the retailer is less likely to make a heavy investment in
A.
B.
C.
D.
E.
equipment and distribution systems.

space and storage.
bookkeeping.
stationery.
advertising.
5-5
25. Many service businesses are considered retailers because they
A.
sell small quantities of goods.
B.
sell their services to consumers.
C.
sell from a single store location.
D. open their businesses for the same hours that most retailers are open.
E.
employ only a small number of people.
26. The ______ sector accounts for the majority of jobs in the United States.
A.
B.
C.
D.
E.
manufacturing
retail
export
wholesale
service
Essay Questions
27. How important is small business to the U.S. economy?
28. Relatively low start-up costs are an advantage of a small business.

True
False
5-6
29. Small businesses cannot be operated from an individual's home.

True
False
30. The ability to develop a reputation for quality and service is an advantage of a small
business.
True
False
31. Targeting small niches or product needs is a dangerous strategy for a small business
to follow.
True
False
32. Small businesses usually only have one layer of management, making them more
______ and able to adapt to market demands.
A.
B.
C.
D.
E.
flexible
reputable
expensive
independent
inefficient
33. One of the major reasons people want to own and operate their own business is to
A.
B.
C.
D.
E.
make a fortune.
be their own boss.
have lots of personal time.
have an easy life.
eliminate all pressure.
34. A small business's ability to focus on narrow niches can help it develop
A.
B.
C.
D.
E.
a poor reputation.
lower startup costs.
higher costs.
flexibility.
an enviable reputation for quality and service.
5-7
35. Which of the following is an advantage of small-business ownership?
A.
B.
C.
D.
E.
Lower cost of formation

Stress level
Failure rate
Lack of flexibility
Poor reputation
36. Which of the following is not an advantage of small-business ownership?
A.
B.
C.
D.
E.

Flexibility in decision making
Ability to focus on specific groups of customers
Low failure rate
Ability to gain a solid reputation
37. One advantage that small businesses have over large businesses is that they
A. are better able to focus on a few key customers.

B.
have well-defined goals and objectives.
C. can arrange financial help easily because their capital needs are much smaller.
D. know what they want to do and have the ability to do it.
E. have specialized knowledge about the various areas of business concern.
38. When market conditions change rapidly, a small business usually has fewer layers of
management to work through in making decisions. This advantage of small business
is
A.
B.
C.
D.
E.
focus.
flexibility.
reputation.
hierarchical organization.
standardization.
Essay Questions
5-8
39. What are some of the advantages of small-business ownership?
40. Small businesses have a high success rate.

True
False
41. Managerial inexperience can lead to business failure.

True
False
42. The shortest path to small-business failure is undercapitalization.

True
False
43. Insufficient funds to withstand slow sales may cause a small business to fail.
True
False
44. Worries about new equipment, expanding inventory, rent increases, competition,
changing market conditions, and the like may contribute to
A.
B.
C.
D.
E.
overoptimism.
a high stress level.
decreasing costs.
undercapitalization.
a low stress level.
5-9
45. Although some businesses are less risky than others, overall the financial risks of
running a small business are
A.
B.
C.
D.
E.
very low.
moderate.
insurmountable.
low.
very high.
46. Which of the following is a disadvantage of small-business ownership?
A.
B.
C.
D.
E.
Little flexibility
Low stress level
High failure rate
Low failure rate
Inability to focus
47. All of the following concerns contribute to high stress levels for small-business
owners except
A.
B.
C.
D.
E.
rent increases.
changing market demand.
competition.
expanding inventory.
reputation.
48. Small business success
A.
B.
C.
D.
E.
rarely lasts more than two years.

is not guaranteed.
is not really attainable.
happens only in the United States.
is a sure thing.
49. Which of the following is not a common cause of small business failure?
A.
B.
C.
D.
E.
Poor business concept

Managerial inexperience
Entrepreneurial vision
Inability to cope with growth
Undercapitalization
5-10
50. The lack of funds to operate a business normally is called
A.
B.
C.
D.
E.
discounting.
creative financing.
financial pessimism.
overcapitalization.
Essay Questions
51. Why do small businesses have a high failure rate?
52. What is undercapitalization, and why would it contribute to the failure of a small
business?
5-11
53. To start any business, large or small, you must first have a general idea.
True
False
54. A key element of business success is a business plan.

True
False
55. The most important source of funds for any new business is the employees.
True
False
56. Franchisees pay the franchiser a monthly or annual fee based on a percentage of
sales or profits.
True
False
57. To start any business you must first have
A.
B.
C.
D.
E.
investors.
an idea.
capital.
employees.
a business plan.
58. The business plan should do all of the following except
A.
explain the business.
B.
include estimates of income and expenses.
C. establish a strategy for acquiring sufficient funds.
D.
include an analysis of the competition.
E. act as a constraint that limits the business's flexibility and decision making.
5-12
59. Many financial institutions decide whether to loan a small business money based on
its
A.
B.
C.
D.
E.
general idea.
business plan.
owners.
employees.
goals.
60. The money used to start a business and keep it running is also called
A.
B.
C.
D.
E.
capital.
trade.
currency.
leverage.
stock.
61. Which of the following is not a source of equity financing?
A.
B.
C.
D.
E.
Reinvested profits
Personal computer
Personal vehicle
Loan from a family member
Venture capitalists
62. A mortgage is an example of
A.
B.
C.
D.
E.
owners' equity.
debt financing.
venture capitalism.
equity financing.
franchising.
63. A license to sell another's products or to use another's name in business is called a
A.
B.
C.
D.
E.
franchise.
franchisee.
venture capital.
mortgage.
franchiser.
5-13
64. Since Eva Chang has decided to use her capital to purchase the rights to own and
operate a McDonald's fast-food restaurant rather than start her own operation from
scratch, she is probably a(n)
A.
B.
C.
D.
E.
trade creditor.
franchisee.
industrialist.
franchiser.
venture capitalist.
65. A precise statement of the rationale for a business and a step-by-step explanation of
how it will achieve its goals is a
A.
B.
C.
D.
E.
mission statement.
corporate charter.
business plan.
corporate statement.
balance sheet.
66. The most important source of funds for any new business is
A.
B.
C.
D.
E.
the Chamber of Commerce.

the venture capitalist.
stockholders.
the owner.
donations.
67. Persons or organizations that agree to provide some funds for a new business in
exchange for ownership interest or stock are called
A.
B.
C.
D.
E.
entrepreneurs.
corporate raiders.
venture capitalists.
stockholders.
shareholders.
Essay Questions
5-14
68. What is a business plan and why is it important?
69. Small businesses typically are not vulnerable to turbulence and change in the
marketplace.
True
False
70. Echo boomers are sometimes called millennials or Generation Y and are an important
market for small businesses.
True
False
71. Technological advances have resulted in fewer opportunities for small businesses
abroad.
True
False
72. The future for small business looks bleak.

True
False
5-15
73. Recently, _________ have (has) spawned many small businesses.
A.
the decline of the high technology market
B. deregulation of energy markets and interest in alternative energy sources
C.
increased sales at large chain retailers
D.
increases in Chinese demand for coal
E.
a period of economic prosperity
74. Advances in _____ have opened many new markets for small businesses, allowing
them to more effectively expand their businesses and marketing efforts into new
markets.
A.
B.
C.
D.
E.
government regulation
demand for manufacturing
technology
consumer tastes
chain retail stores
75. Which segment of the population is one of the wealthiest in the U.S.?
A.
B.
C.
D.
E.
Echo boomers
Generation Y
Baby boomers
Millennials
Generation Z
76. Millennials number around 75 million and represent a huge business opportunity in
the US. Who are they?
A.
It is another term for baby boomer
B.
First generation immigrants
C. People born at the turn of the millennium between 1999-2001
D.
People born between 1977 and 1994
E.
It is a synonym for Generation X
5-16
77. Small retailers who specialize in ethnic products and small service providers who
have bi- or multilingual employees will be able to tap the business potential of which
of the following demographic segments?
A.
B.
C.
D.
E.
Immigrants
Echo boomers
Baby boomers
Generation X
Generation Y
78. All of the following have helped to create new opportunities abroad for small
businesses except
A.
B.
C.
D.
E.
technological advances.
an increase in service exports.
free trade agreements.
communication advances.
deregulation.
79. Which industries will likely continue to grow as baby boomers age?
A.
B.
C.
D.
E.
Clothing and entertainment

Travel, financial planning, and health care
Cosmetics and food
Clothing, travel, and cosmetics
Recreation and sports equipment
Essay Questions
80. What demographic trends will have the most impact on small business in the future?
5-17
81. Small business principles cannot be transferred to larger organizations.

True
False
82. Downsizing is one way firms try to enhance their competitiveness.

True
False
83. Large firms avoid entrepreneurship.

True
False
84. Intrapreneurs take responsibility for the development of innovations of any kind
within larger organizations.
True
False
85. What are intrapreneurs?
A.
They are introverted executives.
B. They champion innovation from within larger organizations.
C.
They are another term for entrepreneurs.
D. They are integral members of corporate boards of directors.
E. They are executives who try to downsize their firms.
86. Downsizing helps firms to become
A.
B.
C.
D.
E.
more flexible.
larger.
less innovative.
less resourceful.
independent.
5-18
87. Some larger corporations have acted like small businesses from their inception with
great success. Which company is a famous example cited in your text?
A.
B.
C.
D.
E.
General Electric
IBM
Southwest Airlines
American Airlines
3M
88. Individuals who "champion" the development of innovations of any kind within larger
organizations are called
A.
B.
C.
D.
E.
disruptors.
entrepreneurs.
inventors.
intrapreneurs.
engineers.
Essay Questions
89. What are intrapreneurs and what role do they play in corporations?
5-19
90. Why would a big business want to "act small?"
91. What is not a decision that Jack and Bruce have to make before starting their
business?
A.
B.
C.
D.
E.
What organizational form to use

How to market their product
How to determine what to sell
The general idea for their business
The target market
92. What is one thing Jack and Bruce know that a good startup company does not need?
A.
B.
C.
D.
E.
Undercapitalization
A quality product
A written business plan
Outside financial support
A good promotion program
Essay Questions
5-20
93. Evaluate the idea of a low-fat cookie and muffin retail store.
94. Are there any concerns in connection with starting a small business that Jack and
Bruce have not considered?
95. What advice would you give Jack and Bruce as they start up their business?
5-21
Chapter 05 Small Business, Entrepreneurship, and Franchising

Answer Key
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.
AACSB: Reflective Thinking

Blooms: Remember
Learning Objective: 05-01 Define entrepreneurship and small business.
Level of Difficulty: 1 Easy
Topic: The Nature of Entrepreneurship and Small Business
2.
It is difficult to define small business because smallness is relative.

TRUE
It is difficult to define small because it is relative.

Blooms: Remember
3.
Any business that is independently owned and operated can be classified as a

small business.
FALSE
A small business is independently owned and operated, is not dominant in its
competitive area, and does not employee more than 500 employees.

Blooms: Remember
5-22
Level of Difficulty: 2 Medium

4.
The Small Business Administration offers managerial and financial assistance to

small businesses.
TRUE
The Small Business Administration (SBA) is an independent agency of the federal
government that offers managerial and financial assistance to small businesses.

Blooms: Remember
5.
The entrepreneurship movement is declining because of technological advances.

FALSE
The entrepreneurship movement is accelerating because technologies once
available only to the largest firms are now available to smaller businesses.

Blooms: Remember
5-23
6.
Of minority groups in the United States, ________ own the most small businesses.
A.
B.
C.
D.
E.
Asians
African Americans
American Indians
Hispanics
Pacific Islanders
The number of minority-owned businesses is increasing at a rate of 30 percent.

Hispanics own the most small businesses (8.3 percent) followed by African
Americans (7.1 percent), Asians (5.7 percent), American Indians and Native
Alaskans (0.9 percent), and Native Hawaiians and other Pacific Islanders (0.1
percent).
AACSB: Diversity
Blooms: Remember
7.
________ has helped small businesses compete with larger businesses.
A.
B.
C.
D.
E.
Well-managed inventory
Friendly customer service
Technology
Good management
A diverse workforce
Technology, such as websites and cell phones, has helped small businesses reach
out to customers and inexpensively compete with larger companies.

Blooms: Remember
5-24
8.
Your textbook uses the term small business to refer to an owner-managed business
that employs not more than
A.
B.
C.
D.
E.
100 people.
500 people.
15,000 people.
25 people.
1,000 people.


Blooms: Remember
Level of Difficulty: 3 Hard
9.
Which of the following is not part of the definition of a small business?
A.
B.
C.
D.
E.
It employs 1,000 or more employees.

It employs fewer than 500 employees.
It is independently owned.
It is not dominant in its field.
It is independently operated.


Blooms: Remember
5-25
10.
The Small Business Administration
A. was established by the U.S. Chamber of Commerce to encourage the

entrepreneurial spirit.
B. is an independent agency of the federal government to provide managerial and
financial assistance to small businesses.
C.
is a subsidiary of the Better Business Bureau.
D. is a division of the federal government that is responsible for ensuring that
newly formed businesses adhere to the law.
E. is a U.S. Congressional agency that fosters the establishment of new
businesses.
The Small Business Administration (SBA) is an independent agency of the federal
government that offers managerial and financial assistance to small businesses.

Blooms: Remember
11.
Which of the following groups is increasing their presence in the business world at
the greatest rate?
A.
B.
C.
D.
E.
Women
Minorities
White males
People under 30
People over 65
The number of minority-owned businesses is increasing at a rate of 30 percent,

even higher than for women-owned businesses.
AACSB: Diversity
Blooms: Remember
5-26
12.
Which of the following is an advantage of a small business?
A.
B.
C.
D.
E.
Greater flexibility to change

Highly trained staff
Better products
More diverse employees
Small businesses have no advantages over large ones
Entrepreneurs provide fresh ideas and usually have greater flexibility to change
than do large companies.

Blooms: Remember
Essay Questions
13.
What is a small business?
Small business is defined in your textbook as any business that is independently

owned and operated, does not dominate in its competitive area, and employs
fewer than 500 people.

Blooms: Understand
5-27
14.
Why are minority-owned and women-owned small businesses growing so rapidly in

the United States?
Students answers may vary, but they should discuss the changing demographics
in the United States and how this is reflected in small businesses. As the country
becomes more diverse in general, so have the owners of businesses in the U.S.
Small businesses make up the majority of businesses in the United States, and
they necessarily reflect the changing face of the country as a whole. As consumers
become more diverse, so do their needs and wants.
AACSB: Diversity
Blooms: Understand
15.
In recent years, small businesses generated very few new jobs in the U.S.
FALSE
In the last fifteen years, 65 percent of net new jobs annually were created by small
businesses.

Blooms: Remember
Learning Objective: 05-02 Investigate the importance of small business in the U.S. economy and why certain
fields attract small business.
16.
Retailing, services, manufacturing, and high technology are attractive to

entrepreneurs because these fields tend to be relatively easy to enter and require
low initial financing.
TRUE
Retailing, 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.

5-28
Blooms: Remember
17.
Retailers purchase goods and resell them to consumers and some distributors.
FALSE
Retailers acquire goods from producers and wholesalers and sell them to
consumers (distributors sell to retailers).

Blooms: Remember
18.
People who operate service businesses are almost never considered to be

retailers.
FALSE
Many service providers are also retailers because they provide their services to the
end-user.

Blooms: Remember
19.
A number of very successful high technology businesses began as small

entrepreneurial ventures.
TRUE
Although startup costs are higher in the high technology industry, many
entrepreneurs in the high tech industry (Facebook, Google, Myspace, Yahoo!)
started out in garages, basements, kitchens, and dorm rooms.

Blooms: Remember
5-29
20.
The majority of all new jobs created in the United States in recent years were
generated by
A.
B.
C.
D.
E.
medium businesses.
small businesses.
large businesses.
corporations.
state governments.
In the last fifteen years, 65 percent of net new jobs annually were created by small
businesses.

Blooms: Remember
21.
Perhaps one of the most significant strengths of small businesses is
A. their ability to innovate and bring significant changes and benefits to

customers.
B.
the entrepreneurial spirit they foster.
C. the encouragement they receive from larger businesses.
D.
the competition they encourage.
E.
the ease of starting one.
Although small businesses possess a number of strengths, such as low initial cost
and creation of jobs, the most significant strength of small businesses is their
ability to innovate and bring significant changes and benefits to customers.

Blooms: Remember
5-30
22.
Which of the following fields are most attractive to small businesses?
A.
Wholesaling, retailing, medical, and services
B.
Retailing, distribution, education, and services
C. Retailing and wholesaling, services, manufacturing, and high technology
D. Wholesaling, services, education, and high technology
E.
Services, distribution, medical, and high technology
Retailing and 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.

Blooms: Remember
23.
Which of the following is not a reason why small businesses choose to become
retailers?
A.
B.
C.
D.
E.
Starting a retail business is relatively easy.

Retailing does not require a large capital investment.
It is easy to compete with large chains.
Gaining knowledge and experience in retailing is relatively easy.
The owner can capitalize on personal expertise or interests.
Entrepreneurs are attracted to retailing because gaining exposure and experience

is easy, they do not have to spend large sums of money to open (as in
manufacturing), and they can capitalize on personal expertise or interests.

Blooms: Remember
5-31
24.
In the context of starting a new business, a retailer differs from a manufacturer in

that the retailer is less likely to make a heavy investment in
A.
B.
C.
D.
E.
equipment and distribution systems.

space and storage.
bookkeeping.
stationery.
advertising.
An entrepreneur opening a new retailing store does not have to spend the large
sums of money for the equipment and distribution systems that a manufacturing
business requires.

Blooms: Remember
25.
Many service businesses are considered retailers because they
A.
sell small quantities of goods.
B.
sell their services to consumers.
C.
sell from a single store location.
D. open their businesses for the same hours that most retailers are open.
E.
employ only a small number of people.
Many service providers, such as veterinarians, doctors, and jewelers are
considered retailers because they sell their services to the end-user.

Blooms: Remember
5-32
26.
The ______ sector accounts for the majority of jobs in the United States.
A.
B.
C.
D.
E.
manufacturing
retail
export
wholesale
service
The service sector accounts for 80 percent of jobs in the U.S.

Blooms: Remember
Essay Questions
27.
How important is small business to the U.S. economy?
Small businesses are vital to the American economy. More than 99 percent of all
U.S. firms are classified as small businesses. Small businesses create most new
jobs in the United States and provide significant opportunities for women and
minorities.

Blooms: Understand
5-33
28.
Relatively low start-up costs are an advantage of a small business.

TRUE
The advantages of starting a small business are independence, low start-up costs,
the ability to focus on specified market niches, the flexibility to adapt to change,
and the ability to develop highly reputable goods and services.

Blooms: Remember
Learning Objective: 05-03 Specify the advantages of small-business ownership.
Topic: Advantages of Small Business Ownership
29.
Small businesses cannot be operated from an individual's home.

FALSE
The availability of the computer, copy machine, fax, and the Internet has
permitted many small business owners to work at home.

Blooms: Remember
30.
The ability to develop a reputation for quality and service is an advantage of a

small business.
TRUE

Blooms: Remember
5-34
31.
Targeting small niches or product needs is a dangerous strategy for a small

business to follow.
FALSE
By targeting small niches or product needs, small businesses sometimes can avoid
fierce competition from larger firms, helping them grow into stronger companies.

Blooms: Remember
32.
Small businesses usually only have one layer of management, making them more
______ and able to adapt to market demands.
A.
B.
C.
D.
E.
flexible
reputable
expensive
independent
inefficient
With small size comes the flexibility to adapt to changing market demands.
Because small businesses usually have only one layer of managementthe
ownersdecisions therefore can be made and executed quickly.

Blooms: Remember
5-35
33.
One of the major reasons people want to own and operate their own business is to
A.
B.
C.
D.
E.
make a fortune.
be their own boss.
have lots of personal time.
have an easy life.
eliminate all pressure.
Independence (being your own boss) is the most advantageous component of

starting a small business.

Blooms: Remember
34.
A small business's ability to focus on narrow niches can help it develop
A.
B.
C.
D.
E.
a poor reputation.
lower startup costs.
higher costs.
flexibility.
an enviable reputation for quality and service.
Small firms, because of their capacity to focus on narrow niches, can develop
enviable reputations for quality and service.

Blooms: Remember
5-36
35.
Which of the following is an advantage of small-business ownership?
A.
B.
C.
D.
E.

Stress level
Failure rate
Lack of flexibility
Poor reputation

Blooms: Remember
36.
Which of the following is not an advantage of small-business ownership?
A.
B.
C.
D.
E.

Flexibility in decision making
Ability to focus on specific groups of customers
Low failure rate
Ability to gain a solid reputation

Blooms: Remember
5-37
37.
One advantage that small businesses have over large businesses is that they
A.
are better able to focus on a few key customers.
B.
have well-defined goals and objectives.
C. can arrange financial help easily because their capital needs are much smaller.
D. know what they want to do and have the ability to do it.
E. have specialized knowledge about the various areas of business concern.
Many large corporations must compete in the mass market or for large market
segments, but smaller firms can develop products for particular groups of
customers or to satisfy a need that other companies have not addressed.

Blooms: Remember
38.
When market conditions change rapidly, a small business usually has fewer layers
of management to work through in making decisions. This advantage of small
business is
A.
B.
C.
D.
E.
focus.
flexibility.
reputation.
hierarchical organization.
standardization.
When a business is small in size it can respond quickly to changing market

demands because there are few layers of management (the owners) and they can
therefore make decisions promptly.

Blooms: Remember
Essay Questions
5-38
39.
What are some of the advantages of small-business ownership?
Independence is probably one of the leading reasons that entrepreneurs go into

business for themselves. It costs less to start and maintain small businesses than
larger businesses. Small businesses can be more flexible in adapting to changing
market demands. Also, small businesses can focus their efforts on a few key
customers to avoid competition from larger firms. They have the opportunity to
develop an excellent reputation for quality and service.

Blooms: Understand
40.
Small businesses have a high success rate.

FALSE
Small businesses have a very high failure rate.

Blooms: Remember
Learning Objective: 05-04 Summarize the disadvantages of small-business ownership; and analyze why many
small businesses fail.
Topic: Disadvantages of Small Business Ownership
41.
Managerial inexperience can lead to business failure.

TRUE
Three major causes of small business failure are undercapitalization, managerial
inexperience or incompetence, and inability to cope with growth.

Blooms: Remember
5-39
42.
The shortest path to small-business failure is undercapitalization.

TRUE
Undercapitalization is the lack of funds to operate a business normally which can
quickly lead to bankruptcy.

Blooms: Remember
43.
Insufficient funds to withstand slow sales may cause a small business to fail.
TRUE
Almost all businesses suffer from seasonal variations in sales, which make cash
tight and may lead to insufficient funds during these variations.

Blooms: Remember
5-40
44.
Worries about new equipment, expanding inventory, rent increases, competition,

changing market conditions, and the like may contribute to
A.
B.
C.
D.
E.
overoptimism.
a high stress level.
decreasing costs.
a low stress level.
The small business owner is often the manager, sales force, shipping and receiving
clerk, bookkeeper, and custodian which leads to worries about new equipment,
expanding inventory, rent increases, competition, changing market conditions, and
the like. This may contribute to high stress levels.

Blooms: Remember
45.
Although some businesses are less risky than others, overall the financial risks of
running a small business are
A.
B.
C.
D.
E.
very low.
moderate.
insurmountable.
low.
very high.
About half of all new employer firms fail with the first five years, which means the
owners may lose all of their investments into the business.

Blooms: Understand
5-41
46.
Which of the following is a disadvantage of small-business ownership?
A.
B.
C.
D.
E.
Little flexibility
Low stress level
High failure rate
Low failure rate
Inability to focus
About half of all new employer firms fail within five years.

Blooms: Remember
47.
All of the following concerns contribute to high stress levels for small-business
owners except
A.
B.
C.
D.
E.
rent increases.
changing market demand.
competition.
expanding inventory.
reputation.
Usually small firms develop enviable reputations for quality and service.

Blooms: Remember
5-42
48.
Small business success
A.
B.
C.
D.
E.
rarely lasts more than two years.

is not guaranteed.
is not really attainable.
happens only in the United States.
is a sure thing.
About half of new businesses fail within five years, but the ones that do succeed
sometimes do very well and become multinational corporations such as Google
and Dell.

Blooms: Understand
49.
Which of the following is not a common cause of small business failure?
A.
B.
C.
D.
E.
Poor business concept

Managerial inexperience
Entrepreneurial vision
Inability to cope with growth
Undercapitalization
Entrepreneurial vision won't cause a small business to fail or succeed, although

managerial inexperience or incompetence may.

Blooms: Remember
5-43
50.
The lack of funds to operate a business normally is called
A.
B.
C.
D.
E.
discounting.
creative financing.
financial pessimism.
overcapitalization.
Undercapitalization is the lack of funds to operate a business normally which would

quickly lead to bankruptcy.

Blooms: Remember
Essay Questions
51.
Why do small businesses have a high failure rate?
There are many reasons small businesses fail, but some of the major reasons
include the inability to cope with growth, undercapitalization, and managerial
inexperience or incompetence. Additional reasons include burdens imposed by
government regulation, insufficient funds to withstand slow sales, and vulnerability
to competition from larger companies.

Blooms: Understand
5-44
52.
What is undercapitalization, and why would it contribute to the failure of a small

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.

Blooms: Understand
53.
To start any business, large or small, you must first have a general idea.
TRUE
To start any business, large or small, you must first have some kind of general
idea, even if it is not a fully-formed good or service.

Blooms: Remember
Learning Objective: 05-05 Describe how you go about starting a small business and what resources are
needed.
Topic: Starting a Small Business
54.
A key element of business success is a business plan.

TRUE
After identifying a business idea, the next step is to develop a business plan to
guide planning and describe how the business will achieve its goals.

Blooms: Remember
5-45
needed.
55.
The most important source of funds for any new business is the employees.
FALSE
The most important source of funds for any new business is the owner.

Blooms: Remember
needed.
56.
Franchisees pay the franchiser a monthly or annual fee based on a percentage of

sales or profits.
TRUE
The franchisee acquires the rights to a name, logo, methods of operation, national
advertising, products, and other elements associated with the franchiser's
business in return for a financial commitment (including a monthly or annual fee
based on a percentage of sales or profits).

Blooms: Remember
needed.
5-46
57.
To start any business you must first have
A.
B.
C.
D.
E.
investors.
an idea.
capital.
employees.
a business plan.
To start any business, large or small, you must first have some kind of general
idea.

Blooms: Remember
needed.
58.
The business plan should do all of the following except
A.
explain the business.
B.
include estimates of income and expenses.
C.
establish a strategy for acquiring sufficient funds.
D.
include an analysis of the competition.
E. act as a constraint that limits the business's flexibility and decision making.
The business plan should act as a guide and reference document, not a shackle to
limit the business's flexibility and decision making.

Blooms: Remember
needed.
5-47
59.
Many financial institutions decide whether to loan a small business money based
on its
A.
B.
C.
D.
E.
general idea.
business plan.
owners.
employees.
goals.
Many financial institutions decide whether to loan a small business money based
on its business plan.

Blooms: Remember
needed.
60.
The money used to start a business and keep it running is also called
A.
B.
C.
D.
E.
capital.
trade.
currency.
leverage.
stock.
Capital is the wealth, owned or employed, in a business by an individual or firm.

Blooms: Remember
needed.
5-48
61.
Which of the following is not a source of equity financing?
A.
B.
C.
D.
E.
Reinvested profits
Personal computer
Personal vehicle
Loan from a family member
Venture capitalists
A loanfrom a family member or a financial institutionis a form of debt

financing.

Blooms: Understand
needed.
62.
A mortgage is an example of
A.
B.
C.
D.
E.
owners' equity.
debt financing.
venture capitalism.
equity financing.
franchising.
Debt financing is obtaining capital through borrowing money from an external

source, such as a bank.

Blooms: Remember
needed.
5-49
63.
A license to sell another's products or to use another's name in business is called

a
A.
B.
C.
D.
E.
franchise.
franchisee.
venture capital.
mortgage.
franchiser.
A franchise is a license to sell another's products or to use another's name in

business such as Dunkin' Donuts, McDonald's and Jiffy Lube.

Blooms: Remember
needed.
64.
Since Eva Chang has decided to use her capital to purchase the rights to own and
operate a McDonald's fast-food restaurant rather than start her own operation
from scratch, she is probably a(n)
A.
B.
C.
D.
E.
trade creditor.
franchisee.
industrialist.
franchiser.
venture capitalist.
A franchisee is a purchaser of a franchise (McDonald's, Subway, Curves, etc).

Blooms: Understand
needed.
5-50
65.
A precise statement of the rationale for a business and a step-by-step explanation

of how it will achieve its goals is a
A.
B.
C.
D.
E.
mission statement.
corporate charter.
business plan.
corporate statement.
balance sheet.
The business plan is a key component of a business's success that is a detailed

explanation of how it will achieve its goals.

Blooms: Remember
needed.
66.
The most important source of funds for any new business is
A.
B.
C.
D.
E.
the Chamber of Commerce.

the venture capitalist.
stockholders.
the owner.
donations.
Usually the small business owner has to put up a significant percentage of the
necessary capital or funds.

Blooms: Remember
needed.
5-51
67.
Persons or organizations that agree to provide some funds for a new business in
exchange for ownership interest or stock are called
A.
B.
C.
D.
E.
entrepreneurs.
corporate raiders.
venture capitalists.
stockholders.
shareholders.
Venture capitalists are persons or organizations that agree to provide some funds
for a new business in exchange for an ownership interest or stock.

Blooms: Remember
needed.
Essay Questions
68.
What is a business plan and why is it important?
The key element of any business success is the business plan. The business plan is
a precise statement of the rationale for the 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
make a loan to the small business. It acts as a guide and reference document and
help companies assess market potential, determine price and manufacturing
requirements, identify optimal distribution channels, and refine product selection.

Blooms: Understand
needed.
5-52
69.
Small businesses typically are not vulnerable to turbulence and change in the
marketplace.
FALSE
Although small businesses are crucial to the economy, they can be more
vulnerable to turbulence and change in the marketplace than large businesses.

Blooms: Remember
Learning Objective: 05-06 Evaluate the demographic; technological; and economic trends that are affecting the
future of small business.
Topic: The Future for Small Business
70.
Echo boomers are sometimes called millennials or Generation Y and are an

important market for small businesses.
TRUE
Echo boomers, born between 1977 and 1994, are also known as millennials or
Generation Y.

Blooms: Remember
71.
Technological advances have resulted in fewer opportunities for small businesses

abroad.
FALSE
Advances in technology have opened up many new markets to small businesses.

Blooms: Remember
5-53
72.
The future for small business looks bleak.

FALSE
The future for small business remains promising because the opportunities to
apply creativity and entrepreneurship to serve customers are unlimited.

Blooms: Remember
73.
Recently, _________ have (has) spawned many small businesses.
A.
the decline of the high technology market
B. deregulation of energy markets and interest in alternative energy sources
C.
increased sales at large chain retailers
D.
increases in Chinese demand for coal
E.
a period of economic prosperity
Deregulation of the energy market and interest in alternative fuels and in fuel
conservation have spawned many small businesses.

Blooms: Understand
5-54
74.
Advances in _____ have opened many new markets for small businesses, allowing
them to more effectively expand their businesses and marketing efforts into new
markets.
A.
B.
C.
D.
E.
government regulation
demand for manufacturing
technology
consumer tastes
chain retail stores
Advances in technology have opened new markets for small businesses.

Blooms: Understand
75.
Which segment of the population is one of the wealthiest in the U.S.?
A.
B.
C.
D.
E.
Echo boomers
Generation Y
Baby boomers
Millennials
Generation Z
America's Baby Boom generation, one of the wealthiest segments in the U.S.,
began in 1946 and ended in 1964.

Blooms: Understand
5-55
76.
Millennials number around 75 million and represent a huge business opportunity in

the US. Who are they?
A.
B.
C.
D.
E.
It is another term for baby boomer

First generation immigrants
People born at the turn of the millennium between 1999-2001
People born between 1977 and 1994
It is a synonym for Generation X
Echo boomers, born between 1977 and 1994, are also known as millennials or
Generation Y and represent a large market for businesses.
AACSB: Diversity
Blooms: Understand
77.
Small retailers who specialize in ethnic products and small service providers who
have bi- or multilingual employees will be able to tap the business potential of
which of the following demographic segments?
A.
B.
C.
D.
E.
Immigrants
Echo boomers
Baby boomers
Generation X
Generation Y
Immigrants, who now represent 16 percent of the U.S. population, represent an

underserved market for small businesses.
AACSB: Diversity
Blooms: Remember
5-56
78.
All of the following have helped to create new opportunities abroad for small
businesses except
A.
B.
C.
D.
E.
technological advances.
an increase in service exports.
free trade agreements.
communication advances.
deregulation.
Deregulation is country-specific and therefore only creates new opportunities

domestically.

Blooms: Remember
79.
Which industries will likely continue to grow as baby boomers age?
A.
B.
C.
D.
E.
Clothing and entertainment

Travel, financial planning, and health care
Cosmetics and food
Clothing, travel, and cosmetics
Recreation and sports equipment
Due to the retirement age of the Baby Boomer generation, which represents 27
percent of the American population, the travel, financial planning, and health care
industries will continue to grow.

Blooms: Remember
Essay Questions
5-57
80.
What demographic trends will have the most impact on small business in the
future?
The aging baby boom generation (those born between 1946 and 1964) will provide
opportunities in the travel, financial planning, and health care industries. The echo
boom market (those born between 1977 and 1994) is not overly concerned with
money, but they do want advancement, recognition, and improved capabilities.
Small businesses that specialize in ethnic products or have bi- or multilingual
employees may find great potential in the growing number of immigrants in the
U.S.

Blooms: Understand
81.
Small business principles cannot be transferred to larger organizations.

FALSE
More and more companies are trying to instill an entrepreneurial spirit into the
company culture in order to capitalize on small business success in introducing
innovative new products.

Blooms: Remember
Learning Objective: 05-07 Explain why many large businesses are trying to "think small."
Topic: Making Big Businesses Act "Small"
82.
Downsizing is one way firms try to enhance their competitiveness.

TRUE
Since the 1980s, the buzzword in business has been to downsize, which makes a
firm more flexible, resourceful, and innovative like a small business.

Blooms: Remember
5-58
83.
Large firms avoid entrepreneurship.

FALSE
More and more companies are trying to instill an entrepreneurial spirit into the
company culture in order to capitalize on small business success in introducing
innovative new products.

Blooms: Remember
84.
Intrapreneurs take responsibility for the development of innovations of any kind

within larger organizations.
TRUE
Intrapreneurs, similar to entrepreneurs, champion the development of innovations
of any kind within larger organizations.

Blooms: Remember
5-59
85.
What are intrapreneurs?
A.
B.
C.
D.
E.
They are introverted executives.

They champion innovation from within larger organizations.
They are another term for entrepreneurs.
They are integral members of corporate boards of directors.
They are executives who try to downsize their firms.
Within major corporations, intrapreneurs take responsibility for, or "champion," the

development of innovations of any kind within the larger organization.

Blooms: Remember
86.
Downsizing helps firms to become
A.
B.
C.
D.
E.
more flexible.
larger.
less innovative.
less resourceful.
independent.
Since the 1980s, the buzzword in business has been to downsize, which makes a
firm more flexible, resourceful, and innovative like a small business.

Blooms: Remember
5-60
87.
Some larger corporations have acted like small businesses from their inception
with great success. Which company is a famous example cited in your text?
A.
B.
C.
D.
E.
General Electric
IBM
Southwest Airlines
American Airlines
3M
Southwest Airlines has acted like a smaller business from the inception by putting
employees and customers first.

Blooms: Understand
88.
Individuals who "champion" the development of innovations of any kind within

larger organizations are called
A.
B.
C.
D.
E.
disruptors.
entrepreneurs.
inventors.
intrapreneurs.
engineers.
Intrapreneurs are similar to entrepreneurs in that they champion a new idea or

innovation but intrapreneurs do this within the construct of an established, larger
organization.

Blooms: Remember
Essay Questions
5-61
89.
What are intrapreneurs and what role do they play in corporations?
Within major corporations, intrapreneurs take responsibility for, or "champion," the

development of innovations of any kind within the larger organization. They act
like entrepreneurs, but work within large organizations to help them think more
like smaller businesses.

Blooms: Understand
90.
Why would a big business want to "act small?"
Continuing success and competitiveness of small businesses through rapidly

changing business conditions have caused many larger firms to take notice. More
and more firms are emulating small businesses to improve their own bottom line.
Some firms have done this through downsizing, while others have made their
operating units function more like independent small businesses responsible for
their own profits, losses, and resources.

Blooms: Understand
5-62
91.
What is not a decision that Jack and Bruce have to make before starting their
business?
A.
B.
C.
D.
E.
What organizational form to use

How to market their product
How to determine what to sell
The general idea for their business
The target market
Jack and Bruce had many decisions to make, but the one they had already
determined was the general idea for their business.

Blooms: Apply
Learning Objective: 05-08 Assess two entrepreneurs' plans for starting a small business.
Topic: Solve the Dilemma
92.
What is one thing Jack and Bruce know that a good startup company does not
need?
A.
B.
C.
D.
E.
Undercapitalization
A quality product
A written business plan
Outside financial support
A good promotion program
They knew that a startup company needs a quality product, adequate funds, a
written business plan, some outside financial support, and a good promotion
program.

Blooms: Apply
Essay Questions
5-63
93.
Evaluate the idea of a low-fat cookie and muffin retail store.
Students' answers will vary but most will agree that a low-fat cookie and muffin
retail store certainly meets the demand of an increasing portion of the population
that is concerned both with health and weight issues. However, lovers of such
products are likely to believe that low-fat cookies and muffins cannot taste good.
Thus, Jack and Bruce will have to make a special promotional effort to convince
consumers to the contrary.

Blooms: Apply
94.
Are there any concerns in connection with starting a small business that Jack and
Bruce have not considered?
Jack and Bruce have not tackled the question of the location of the store: It could
be located in a mall, as an independent store along a main road, or in some other
place. They also need to determine whether they intend to limit their activities to
one store or to several stores. In the second case, the question of the form of
development (for example by franchises) needs to be answered. In addition,
personnel issues have to be addressed.

Blooms: Apply
95.
What advice would you give Jack and Bruce as they start up their business?
Interactions with local authorities and associations dealing with small business
management may be advisable for Bruce and Jack to create ties with other smallbusiness owners. Also, Bruce and Jack should maintain a very strict management
of their operations and ensure that they forecast their financial situation regularly.
They should probably not hesitate to rely on outside providers (accountants or
financial advisors) to perform some of the managerial tasks they may not be able
to conduct themselves.

5-64
Blooms: Apply
5-65

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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

2. It is difficult to define small business because smallness is relative.

5. The entrepreneurship movement is declining because of technological advances.

Multiple Choice Questions

7. ________ has helped small businesses compete with larger businesses.

9. Which of the following is not part of the definition of a small business?

It employs 1,000 or more employees.

10. The Small Business Administration

A. was established by the U.S. Chamber of Commerce to encourage the

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

13. What is a small business?

True / False Questions

16. Retailing, services, manufacturing, and high technology are attractive to

19. A number of very successful high technology businesses began as small

Multiple Choice Questions

21. Perhaps one of the most significant strengths of small businesses is

equipment and distribution systems.

25. Many service businesses are considered retailers because they

27. How important is small business to the U.S. economy?

True / False Questions

28. Relatively low start-up costs are an advantage of a small business.

29. Small businesses cannot be operated from an individual's home.

Multiple Choice Questions

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

Lower cost of formation

36. Which of the following is not an advantage of small-business ownership?

Lower cost of formation

A. are better able to focus on a few key customers.

39. What are some of the advantages of small-business ownership?

True / False Questions

40. Small businesses have a high success rate.

41. Managerial inexperience can lead to business failure.

42. The shortest path to small-business failure is undercapitalization.

Multiple Choice Questions

46. Which of the following is a disadvantage of small-business ownership?

48. Small business success

rarely lasts more than two years.

Poor business concept

50. The lack of funds to operate a business normally is called

51. Why do small businesses have a high failure rate?

True / False Questions

54. A key element of business success is a business plan.

Multiple Choice Questions

57. To start any business you must first have

58. The business plan should do all of the following except

61. Which of the following is not a source of equity financing?

62. A mortgage is an example of

the Chamber of Commerce.

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

True / False Questions

72. The future for small business looks bleak.

Multiple Choice Questions

73. Recently, _________ have (has) spawned many small businesses.

Clothing and entertainment

True / False Questions

81. Small business principles cannot be transferred to larger organizations.

82. Downsizing is one way firms try to enhance their competitiveness.

83. Large firms avoid entrepreneurship.

Multiple Choice Questions

85. What are intrapreneurs?