Exam 11: Creating a Successful Financial Plan

________ is one indication that a small business may be undercapitalized.

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

Compute a break-even point in dollars.

On the income statement, the cost of goods sold represents the total cost, excluding shipping, of the merchandise sold during the year.

Pro forma financial statements show a company's most recent financial position.

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?

Although sound cash management principles call for a business owner to keep her/his cash as long as possible, slowing accounts payable too drastically can severely damage a company's credit rating.

Mini-Case 11-3: Birmingham's Stereo Shop Birmingham's Stereo Shop expects net sales of $280,000 in the upcoming year, with a cost of goods sold of $173,600 and total expenses of $76,200. Birmingham expects variable expenses (including cost of goods sold) to be $195,700 and fixed expenses to be $54,100. -What level of sales would Birmingham's have to achieve if it wanted to make a $25,000 profit?

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.

Cash requirements can be determined by dividing cash expenses by ________.

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.

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

When a company is forced into liquidation, owners are most likely to incur a loss when selling ________.

Mini-Case 11-5: A Projected Income Statement You want to start your own retail furniture store, and you have already gathered a great deal of information on location, layout, form of ownership, business failure rates, etc. In applying for a loan, you notice that a projected income statement is required. Your problem is to complete this projected "P&L," given a desired income of $23,000 and the following published statistics. Show and clearly label all of your work! Cost of Goods Sold 60.3 percent of net sales Operating Expenses 36.4 percent of net sales Gross Profit Margin 39.7 percent of net sales -If a market survey indicates that your firm's sales would be $620,000, what net profit would you expect to earn?

If a company's average payable period ratio is significantly lower than the credit terms vendors offer, it may be a sign that the company is not using its cash most effectively.

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