Deck 8: Using Financial Statements to Guide a Business

Question 1

Define debt and equity and explain the difference between them. Where does each appear on financial statements?

Answer 1

Debt is money that is borrowed for use by an organization. It is expected to be paid back, normally with interest. Equity is an asset with a monetary value of cash that is put into an organization in exchange for ownership or as a gift. Debt is a liability (with short-term and potentially long-term aspects) while equity is part of the owner's equity, capital, or net worth. Debt appears in current and long-term liabilities on the balance sheet while equity is part of net worth. The interest portion of debt repayment appears as an expense on the income statement.

Question 2

What is the purpose of financial ratio analysis?

Answer 2

Financial ratio analysis also allows you to compare the income statements from different months, or years, more easily, even if the sales are different amounts. The percentages let you compare statements as if they were the "same size." For this reason, financial ratio analysis is sometimes called "same-size analysis." Relating each element of the income statement to sales in this fashion will help you notice changes in your costs from month to month and make adjustments to increase profits.

Question 3

The balance sheet equation tells us that assets - liabilities = net profit.

Answer 3

False

Question 4

The last line of an income statement shows a business's ________.

A) gross profit or gross loss
B) profit or loss
C) net profit or net loss
D) gross margin

Question 5

An income statement shows whether the difference between revenues (sales) and expenses (costs) is a profit or a ________.

A) loss
B) net profit
C) breakeven
D) semi-loss

Question 6

To see how costs are affecting net profit, try analyzing the income statement by expressing each ________.

A) as a percentage of costs
B) as a percentage of profit
C) as a percentage of sales
D) as a percentage of administrative expense

Question 7

Liabilities that will be paid over a period of more than one year are ________.

A) long-term assets
B) long-term liabilities
C) equity
D) None of the above.

Question 8

Because different types of assets depreciate at different rates, and because they are purchased at various points in time businesses keep a(n) ________ to track the valuation of each asset that is being depreciated.

A) income statement
B) balance sheet
C) depreciation schedule
D) cash flow statement

Question 9

Owner's equity is also called ________.

A) debt
B) assets
C) liabilities
D) net worth

Question 10

You can create ________ from your income statement that will help you analyze your business further.

A) financial ratios
B) asset categories
C) comparisons
D) None of the above.

Question 11

Ideally, you want to have a positive "double" bottom line. This means ________.

A) you are achieving twice the revenues you expected
B) you have twice the number of customers that you expected
C) you have twice the profit you expected
D) your profit allows you to stay in business and achieve your mission

Question 12

What must balance with assets on the balance sheet?

A) liabilities and owner's equity
B) net worth and owner's equity
C) capital and owner's equity
D) liabilities net profit

Question 13

Which of the following is not something that can be invested?

A) energy
B) time
C) expertise
D) money

Question 14

Jared analyzed the income statement for his independent label and found that for every dollar of sales, 30 cents were spent on cost of goods sold. The gross profit per dollar was 70 cents. If 20 cents were spent on operating costs and 10 cents on taxes, what is the net profit per dollar?

A) 60 cents
B) 40 cents
C) 30 cents
D) 20 cents

Question 15

Cash itself or items that could be quickly turned into cash or will be used within 1 year are called ________.

A) liquid assets
B) long-term assets
C) current assets
D) liquid cash

Question 16

The power of the income statement is that it will tell you whether you are fulfilling the formula of buying low, selling high, and meeting customer needs.

Question 17

Describe the parts of an income statement.

Question 18

Which of the following is not a basic financial document that entrepreneurs use to track their businesses?

A) income statement
B) cash flow statement
C) balance sheet
D) market share statement

Question 19

In the income statement, EBIT minus interest costs equals ________.

A) gross profit
B) pre-tax profit
C) net profit
D) COGS

Question 20

Owner's equity consists of ________.

A) common equity
B) preferred equity
C) retained earnings
D) All of the above.

Question 21

If you extend credit, it is critical to minimize this number to keep cash flowing.

A) receivable turnover ratio
B) inventory turnover ratio
C) collection-period ratio
D) debt-to-equity ratio

Question 22

ROI is always calculated for ________.

A) a month
B) a specific time period, such as month or a year
C) the length of a business's fiscal year
D) a period of time

Question 23

If you invest $1,525,000 in a business and earn a return of $775,000, what is your ROI?

A) 51%
B) 42%
C) 45%
D) 48%

Question 24

In a business formula such as Return on Investment, "on" means ________.

A) "divided by"
B) "on top of"
C) "deducted from"
D) "subtracted from"

Question 25

The return on sales ratio is ________.

A) net income/sales
B) also called the operating ratio
C) revenue/expenses
D) expenses/sales

Question 26

In the United Kingdom, the income statement is called the ________.

A) group profit and loss account
B) balance sheet
C) cash flow analysis
D) None of the above.

Question 27

A business's operating ratios are computed by ________.

A) cost of goods sold/sales
B) expense/sales
C) income/sales
D) income/profit

Question 28

How would you express a ratio as a percentage?

A) add a percentage sign
B) multiply it by 100
C) divide it by 100
D) None of the above.

Question 29

Return on Sales (ROS) is also called a(n) ________.

A) contribution margin
B) gross margin
C) profit margin
D) operating margin

Question 30

When the ratio of expenses versus sales is used to express expenses as a percentage of sales, it is called a(n) ________ ratio.

A) current
B) operating
C) quick
D) None of the above.

Question 31

To create a same-size analysis, calculate each line item as a percentage of ________.

A) sales
B) income
C) costs
D) profit

Question 32

Calculate the return on sales for a business that has net income of $25,000 and sales of $60,000.

A) 0.52
B) 4.2
C) 42%
D) 4.2%

Question 33

Firms are concerned about liquidity, which means the ability to convert inventory into credit sales.

Question 34

Steve has heard that formulating a common-sized statement for analysis is a good practice. Explain what he needs to do.

Question 35

Operating-efficiency ratios are important to a business. They include collection period, debt period, and inventory turnover.

Question 36

Debt ratios show the relationship between debts and equity.

Question 37

What analytic tool allows you to compare income statements from different periods, even if the dollar figures are very different?

A) income analyses
B) asset analyses
C) financial ratios
D) same-day statements

Question 38

The ________ ratio tells you whether you have enough cash to cover your current debt.

A) financial
B) operating
C) income
D) quick

Question 39

The expression, "What you made over what you paid, times one hundred," is a device to remember how to compute ________.

A) ROS
B) ROA
C) ROI
D) None of the above.

Question 40

How does a debt-to-equity ratio help describe the financial health of a company?