Exam 12: Creating a Successful Financial Plan

Slow accounts receivable are a real danger to a small business because they often lead to cash crises.

Refer to the following Gunther's Emporium information to answer the question(s)below: Gunther's Emporium expects net sales of $2,396,919 for the upcoming year, with variable expenses totaling $1,813,443 and fixed expenses of $412,190. -If Gunther's net profit target for the year is $190,000, what sales level must he achieve?

________ ratios measure the extent to which an entrepreneur relies on debt capital rather than equity capital to finance a business.

The average inventory turnover ratio measures the number of times a company's inventory is sold out during the accounting period.

An excessively high average payable period ratio ________.

The ________ ratio is a measure of the small company's ability to pay current debts from current assets and is the liquidity ratio most commonly used as a measure of short-term solvency.

The net profit to equity ratio reports the percentage of the owners' investment in the business that is being returned through profits annually.

Gaither Mack is preparing projected financial statements to include in the business plan he is preparing for the launch of a specialty retail store. Using published financial statistics, Mack finds that the typical net profit margin for a store like his is 7.3 percent. If Mack's target income for his first year of operation is $32,000, what level of sales must he achieve to reach it?

The ________ ratio shows the portion of each sales dollar remaining after deducting all expenses.

Taking on debt destroys a business; therefore, small business owners should avoid it at all costs.

Mini-Case 12-1: Bowden Brake Service (Part A) Jim Bowden, owner of Bowden Brake Service, is planning to expand his six-year-old brake service to include tune-ups and tire services. Based on budget estimates for the upcoming year, Jim expects net sales to be $825,000 with a cost of goods sold of $530,000 and total operating expenses of $210,000. From the budget he created, Jim computes fixed expenses to be $168,000, while variable expenses (including cost of goods sold)are $572,000. Jim is concerned that the new cost structure may damage his ability to produce a profit and he wants to perform a break-even analysis for the upcoming year to gain insight. -If Jim were to reduce his fixed costs by 10 percent by reducing a middle management position, what benefit would that be to him and the company? What would his new contribution margin be?

Small businesses with high leverage ratios are more vulnerable to economic downturns, but they have greater potential for large profits.

The times-interest-earned ratio tells how many times the company's earnings cover the interest payments on the debt it is carrying.

Which of the following items would not be listed as a current asset in a company's financial reports?

Ratio analysis is a useful managerial tool that can help business owners maintain financial control over their businesses, but it is of no use to a business owner trying to obtain a bank loan.

For Meters, Inc., refer to the following information to answer the question(s)below: Meters, Inc., reported net sales of $874,916 and a net profit of $74,563 on its most recent income statement. The company's balance sheet shows total assets of $342,742 and total liabilities of $88,367. -What is the net profit margin for Meters, Inc.?

The ________ ratio measures the percentage of total assets financed by a small company's creditors compared to its owners.

Analyzing financial ratios could alert a business owner to which of these problems?

The statement of cash flows ________.

Refer to the following information to answer the question(s)regarding Port Royal: Net Sales $927,641 Gross Profit $301,483 Net Profit $48,457 Total Assets $203,869 Total Liabilities $74,325 -Port Royal's profit margin on sales is ________ percent.