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Exam 12: Creating a Successful Financial Plan

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Question 31

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A current ratio of 2.4:1 means that a small company has $2.40 in current liabilities for every $1 in current assets.

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Question 32

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Refer to the following break-even chart to answer the question(s) below: -The area labeled ________ represents the firm's fixed expenses, while ________ represents its variable expenses.

A) Z; W
B) X; Y
C) Y; X
D) W; Z

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Question 33

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According to one study, 23 percent of small business owners lack financial literacy to identify the cost that has the greatest impact on their companies.

A technique that allows the small business owner to perform financial analysis by understanding the relationship between two accounting elements is called ________.

Mini-Case 12-7: Sharps and Flats Anthony Gray has been interested in music since he was old enough to sit at the piano. He literally grew up with music, and he used his talent to earn his way through college. Anthony has grown tired of his job at a large music house in Houston and is seriously considering moving back to his hometown in Massachusetts to open his own small music shop. In researching this venture, Anthony notices that he must include a projected income statement in his loan application. Use the following statistics from Robert Morris Associates' Annual Statement Studies to answer the following question(s). Net Sales 100.0 percent Cost of Sales 59.9 percent Gross Profit 40.1 percent Operating Expenses 31.2 percent Net Profit (Before Taxes) 8.9 percent -Suppose that a market survey indicates that Anthony's proposed business is likely to generate only $190,000 in sales. What net profit should Anthony expect to earn?

To reach profit objectives, entrepreneurs must be aware of their firms' ________.

The average inventory turnover ratio ________.

________ are those items of value the business owns; ________ are those things the business owes.

Liquidity ratios (such as the current and the quick ratios)tell whether a small business will be able to meet its short-term obligations as they come due.

________ ratios tell whether or not the small company will be able to meet its short-term obligations.

A company with a times-interest-earned ratio that is well above the industry average would likely have difficulty making the interest payments on its loans, as creditors would see that it was overextended in its debts.

The income statement is based on the fundamental accounting equation: Assets = Liabilities + Owner's Equity.

Refer to the following information: Smith Office Supply Industry Mean Current Ratio 2.3 1.8 Quick Ratio .4 .8 Average Inventory Turnover 2.0 3.9 Net Sales-to-Working Capital 4.0 7.8 Debt-to-Net Worth Ratio 3.0 1.7 Net Profit to Equity Ratio 40.1 percent 22.2 percent Which of the following statements is most likely false?

Mini-Case 12-2: Bowden Brake Service (Part B) One day while you are in Bowden Brake Service getting your brakes repaired, Jim storms into his office, slamming doors and shouting about the local financial institutions. After a few minutes of building your courage, you approach Jim and ask him what the problem is. He shouts, "It's the financial institutions in this town! Not one of them will lend me the money I need to expand my business. They all said I needed to take a closer look at my financial position before I consider expanding. One of them said something about ratio analysis. I know a lot about cars and brakes, but what is ratio analysis?" You tell Jim you will perform a ratio analysis for the business if he gives you a free brake job. Jim provides you with the following financial statements. Bowden Brake Service Income Statement Year Ending December 31, 2007 Net Sales $780,000 Costs of Goods Sold: Beginning Inventory $104,000 Purchases 526,480 Goods Available for Sale $630,480 Ending Inventory 134,400 Costs of Goods Sold 496,080 Gross Margin $283,920 Operating Expenses: Rent 24,000 Insurance 5,250 Advertising 6,000 Travel 2,500 Interest 72,750 Taxes (Property, etc.) 2,500 Salaries & Admin. Expenses 97,000 Utilities 12,500 Supplies 1,360 Total Operating Expenses $223,860 Net Profit $60,060 Bowden Brake Service Balance Sheet December 31, 2007 Assets Current Assets: Cash $20,000 Accounts Receivable 10,000 Notes Receivable 5,000 Inventory 134,400 Total Current Assets $169,400 Fixed Assets: Land 147,000 Machinery 73,000 Equipment 160,800 Less Accumulated Depreciation (30,200) 203,600 Total Fixed Assets 350,600 Total Assets $520,000 Liabilities & Owner's Equity Current Liabilities: Accounts Payable 40,500 Notes Payable 20,200 Accrued Salaries Payable 4,300 Total Current Liabilities: 65,000 Long-term Liabilities: Long-term Loan 325,000 Total Liabilities $390,000 Owner's Equity, Jim Bowden $130,000 Total Liabilities and Net Worth $520,000 -Were the bankers correct? Do you think Jim should expand the business?

Construct a break-even chart for Birmingham's.

The net-sales-to-total assets ratio measures a company's ability to generate sales in relation to its asset base.

Explain what ratio analysis is. Name the four categories of ratios and describe the type of information each group provides the small business owner.

The break-even point ________.

Creditors often look for a times-interest-earned ratio of at least 4:1 to 6:1 before pronouncing a company a good credit risk.

An inventory turnover ratio above the industry average suggests that a business is overstocked with obsolete, stale, overpriced, or unpopular merchandise.