Deck 9: Building Your Pro Forma Financial Statements

Question 1

It is better to let your accountant articulate the numbers of your business idea to potential investors.

Answer 1

False

Question 2

Revenue projections help you to understand the company's revenue drivers.

Answer 2

True

Question 3

Investors often predict the market share of startups as 3% after Year 3, because of the ease with which 3% can be captured.

Answer 3

False

Question 4

For an asset to appear on the balance sheet it must generate revenue.

Question 5

Gross profit margin can be calculated by dividing the Cost of Goods Sold by Total Revenues.

Question 6

It is possible to have positive earnings on the income statement and a negative statement of cash flows.

Question 7

When we graph costs over time, we see them decreasing exponentially.

Question 8

The expenses that a business incurred appear on a different financial document than the amount of cash that it spent.

Question 9

The process of examining and reexamining your assumptions over and over is a waste of time

Question 10

Entrepreneurs who claim their estimates are "conservative" are usually overly optimistic about their ventures' future.

Question 11

Many noncash transactions are represented in the balance sheet.

Question 12

In the build-up method, you look at the revenue you might generate and the cost you might incur in a typical day.

Question 13

The income statement shows the standing of a company at any given point of time.

Question 14

An optimistic attitude about your business's future helps achieve positive cash flow sooner.

Question 15

Financial analysis is simply the mathematical expression of an overall business strategy.

Question 16

The first step in Revenue Projections is to calculate the median revenue of your products in the product mix.

Question 17

Pro-forma financials often project sales occurring 5 years in the future.

Question 18

You should attempt to calculate your operating costs before you start a business.

Question 19

Typically, a business begins to generate revenue within the first two months after it launches.

Question 20

Most pro-forma projections for new companies show monthly income figures for the first two years.

Question 21

In financial analysis, the step that follows forecasting revenues and expenses is formulating a cash flow statement from those forecasts.

Question 22

Different companies may calculate COGS differently, even if their actual costs are identical.

Question 23

Which of the following columns is not included in the revenue worksheet?

A) Product/Service Description
B) Price
C) Units Sold
D) Units Ordered
E) Total Revenue

Question 24

Which of the following equations is true about the Balance Sheet under GAAP?

A) Assets = Liabilities
B) Shareholder Equity + Assets = Liabilities
C) Assets = Liabilities + Shareholder Equity
D) Liabilities + Assets = Shareholder Equity
E) None of the above

Question 25

Gross margin is calculated with the formula

A) Revenue plus COGS
B) Gross Profit times COGS
C) Price plus Gross Profit
D) Revenue minus COGS
E) Revenue times profit

Question 26

If, after all calculations, your balance sheet does not balance, you should adjust retained earnings accordingly.

Question 27

By closing your sales for credit, you can increase your company's cash flow.

Question 28

It is critical to show the first two years of pro-forma projections on a monthly basis because this is when a company is most vulnerable to failure.

Question 29

Which of the following can be used to strengthen your assumptions?

A) Industry research
B) Competitor analysis
C) Own observations
D) Surveying customers
E) All of the above

Question 30

Businesses should expect to build their sales and start operating efficiently within a five-year period.

Question 31

The following are examples of operating expenses, except:

A) Property purchases
B) Rent expenses
C) Interest expenses
D) Salaries
E) Administrative expenses

Question 32

An income statement will never include a line for:

A) Depreciation
B) COGS
C) SG&A costs
D) Taxes on profits
E) Accounts payable

Question 33

Seldom are revenues in retail spread evenly across the calendar year.

Question 34

In the comparable method, you look at how your company compares to industry averages and benchmark companies.

Question 35

The statement of cash flows starts with which of the following?

A) Net Income
B) Costs
C) Expenses
D) Net Assets
E) Net Liabilities

Question 36

The build-up method drills down revenue projections to a typical ______.

A) hour
B) day
C) month
D) quarter
E) year

Question 37

The expense of acquiring land should appear in full on your annual income statement.

Question 38

In the build-up method, after you identify all your revenue sources, what is the next step?

A) Identify all your costs
B) Think about how much revenue you can generate in a year
C) Determine operating expenses by the most appropriate time frame
D) Break down revenue into a typical day
E) Write a two- to three- page description of financial statements

Question 39

The bottom line of the income statement states the company's _______.

A) net size
B) net income
C) revenue less expenses
D) net assets value
E) gross profit margin

Question 40

Under the Build-Up Method, you should start with the:

A) Income statement
B) Balance Sheet
C) Statement of Cash Flows
D) Industry averages
E) None of the above

Question 41

The standard term for most business plans is:

A) 2 years
B) 4 years
C) 5 years
D) 8 years
E) Until the break-even date

Question 42

An entrepreneur must be able to ___________, if his income statement does not match the industry average?

A) remove any information that deviates from the average
B) adjust and refine your metrics accordingly
C) understand and explain the differences
D) change the metrics to more appropriate ones
E) rewrite your projections from scratch

Question 43

What effect can selling on credit have on your business?

A) Reduce assets
B) Decrease accounts payable
C) Delay cash inflows
D) Reduce liabilities
E) Increase inventory

Question 44

It is critical to show the pro-forma projections on a monthly basis when a company is:

A) Experiencing negative cash flow
B) Not earning any revenue
C) Most vulnerable to failure
D) Facing strong competition
E) Managing an inventory-to-asset ratio of 10% or higher

Question 45

What does the Comparable Method help an entrepreneur to do?

A) Estimate project cost
B) Research the industry
C) Benchmark competitors
D) Calculate operating expenses
E) Validate projections

Question 46

According to the chapter, it takes time to:

A) Build up your clientele
B) Learn to operate efficiently
C) Develop track record
D) Understand seasonality
E) All of the above

Question 47

If a business is profitable and growing, which of the following is most likely to be a reason for failure?

A) High COGS
B) Low clientele
C) Strong competition
D) Failure to estimate the size of the market
E) Insufficient financing

Question 48

The chapter recommends that you should construct monthly income and cash flow statements for the first:

A) 1 year
B) 2 years
C) 3 years
D) 4 years
E) 5 years

Question 49

A financial statement that displays each item as a percentage of a common-base figure is called:

A) A Keynesian statement
B) A common-size statement
C) A statement of residuals
D) A comparable statement
E) A matching statement

Question 50

Approximately how many subsections in the section of the planning process should your explanation of the financial statements have, if you follow the model in the chapter?

A) 1
B) 3
C) 4
D) 7
E) 8

Question 51

What is the best way to validate costs?

A) Validating costs is not necessary.
B) Adjust your business model.
C) Ask your customers.
D) Compare your balance sheet with your competitors' balance sheets.
E) Compare your common-sized income statement with the industry averages or some benchmark companies.

Question 52

An accumulated depreciation line item on your balance sheet shows how much of the asset has been:

A) Used up
B) Acquired
C) Written-off
D) None of the above
E) All of the above

Question 53

Under the Comparable Method, you can see how the model changes overall when you:

A) Increase your revenues
B) Leverage your drivers
C) Tweak your inventories
D) Change one of the assumptions
E) Decrease your costs

Question 54

Seasonality is important because it affects which of the following:

A) Product or service demand
B) Financial decisions
C) Key operations and decisions such as hiring
D) A & C
E) All of the above