Chapter 6: Analyzing Cash Flow and Other Financial Information

_______ are easier to accurately forecast than _______

expenses; revenue

Marcus performs an analysis of his new business to anticipate its future requirements. He makes a list of the various assets the firm must account for. He categorizes each asset in two lists: one for assets that can be easily converted into cash and the other for assets that have a physical presence. In this scenario, Marcus is analyzing his new business by

Creating a balance sheet

A cash flow statement is the same as a budget

False

True or false: In developing a cash flow projection, a new business owner should contact vendors and suppliers to ask about payments terms.

True

A(n) ______ analysis examines the differences between the business's predicted cash flow and the actual cash flow performance.

deviation

A pro forma _______ _____ projects the future income of an entrepreneurial firm.

income statement

Entrepreneurs can use their credit cards for their payments that give them a leverage of 25 days to repay the amount. This is a _______ situation for the entrepreneurs.

positive cash flow

Businesses earn _______ when sales revenues are higher than expenses.

profit

The balance sheets should ________ the relevant types of current and fixed asset.

separate

Cash flow statements for new businesses are very similar to the typical publicly traded corporate annual reports.

False

The cash crunch for a new business with negative cash flow is resolved when sales are growing.

False

A ____ is used by entrepreneurs to judge whether their business can survive the worst-case or successfully implement the best-case cash flow scenarios.

Sensitivity analysis

Cash flow statements are the ________ a budget

exact opposite of

Businesses often offer credit to their customer with terms that range between ______-

30 to 90 days

Which of the following are examples of current liabilities?

Accounts payable, notes payable (bank notes), and accrued payroll

The three types of financial statements that are generated on a monthly or quarterly basis include which of the following?

Balance sheet Cash flow Income statement

Which of the following statements are true about a float?

Banks typically have free use of the funds during the float period. It is the period of time between a business's bank deposits and when the bank gives access to the funds. Banks usually hold state checks and wire transfers for a period of time.

______ assets are those assets that have a physical presence.

Fixed

____ is the situation where there is a difference between when the money goes out to pay business expenses and when it comes in from sales.

Float

______ is the difference between when cash leaves the business and when it comes in.

Float

Which of the following are examples of fixed costs?

Insurance Equipments leases Rent

Which of the following are examples of fixed assets?

Land Machinery Buildings

The accounting equation is defined as Assets=_____

Liabilities + Equity

Which of the following are examples of long-term liabilties?

Mortgages payable, owner's equity, and stockholders' equity

Which of the following statements are true about the role of cash in new businesses?

New businesses usually utilize cash to pay for their goods and supplies. Carrying inventory of any type for new businesses result in payments for supplies taking place long before any cash is received by these businesses.

Which of the following statements regarding a cash flow statement's revenues are correct?

Revenue come from a wide variety of sources. Cash inflows should be separated into many categories to provide insight to the owner. Separating revenue lines aids both in predicting where the firm's revenue come from and in analyzing revenue sources.

Which of the following statements are true of the financial analysis aspect of the due diligence process?

The financial analysis determines whether there is an actual financial opportunity. The financial analysis of a business is the most critical step of the due diligence process.

In the context of the financial tools used by entrepreneurs, the time value of money is calculated as ________.

The value of an entrepreneur's investment in time and money if he or she did not do the proposed venture.

Which of the following techniques can be used by entrepreneurs to predict sales for their firms when developing income statements?

They can study similar enterprises and try to estimate or research their sales levels. They can talk with other entrepreneurs in the same domain against whom they will not compete.

Which of the following are ways to manage the business's cash flow?

Use a business credit card to pay some expenses to take advantage of up to a 25-day delay in paying expenses Ensure that products and services are priced high enough Seek the longest time to pay for expenses without hurting the business's reputation.

In the context of the financial tools used for entrepreneurs, the time value of money refers to the ________

Value of money over time at a given rate of inflation or other types of return.

_______ costs are costs that vary according to the number of units produced.

Variable

A _______ analysis is a tool for estimating when a business's income will exceed its expenses.

break-even

A(n) ______ statement projects all the costs that will be incurred by a business over some point of time and allocate those expenses evenly over that time.

budget

The focus on _______ in a new business is due in part of the firm's management also being the firm's owners.

cash flow

The financial analysis for a proposed business focuses on _________.

the business's ability to generate positive cash flow quickly.

The firm's assets minus its liabilities should equal ______

zero

Which of the following is true about the process of accounting?

It involves judgement

Which accounting document is a summary of a company's assets and liabilities?

The balance sheet

A budget details all the expenses incurred by a company within a specified period.

True

Everything in cash flow in a small business is related to one activity: operations.

True

In order to determine a firm's cash flow, the firm's owner must calculate the entire cash flow projection and multiply that by 150 percent to determine if the firm can meet its financial obligations.

True

Entrepreneurs breakeven by a new business is achieved when _________.

a new venture's net cash flow is more than the initial investment plus the time value of the money invested.

New business owners should ________ to prevent a cash crunch.

accurately forecast the business's cash flow.

All ______ expenses must be accounted for in the cash flow statement.

actual

Entrepreneurs must ______ to avoid going out of business.

understand adn monitor the business's cash flow

Which of the following are examples of a current asset?

Cash Notes receivable Accounts receivable

Which type of accountant typically summarizes financial information for outside parties such as potential investors?

Financial accountants

Which of the following statements about cash flow analysis statements for an established business are true?

Owners will run several other statements in addition to the cash flow statement to provide a more complete picture of the business. The data generated will include an actual cash flow statement. Owners will develop a series of financial reports for either themselves or for investors over some time period such as a month or quarter.

The term used for financial documents created for a potential start-up company is called

Pro forma balance sheet

________ costs change according to how many good are produced.

Variable

Cash flow _____ as a business's profit.

is not the same

________ is an investment into the business made by the firm's owners.

Equity

Pro forma financial statements help entrepreneurs _____

Estimate what the business's financial position will look like in the future.

Which of the following statements regarding pro forma statements are correct?

Pro forma means "as a matter of form" Pro forma statements are helpful in planning the business's future financial situation. Pro forma statements are estimates

Which is the definition of equity as it pertains to a business?

The money put into a business by the founders and other investors.

Entrepreneur of a new firm should focus on the viability of the firm; the firm's viability will be decided by _________, not ________.

cash flow; profitability

Accounting is the process of recording, categorizing, and ______financial transactions.

interpreting

Which of the following statements about deviation analysis are correct?

It helps to maximize flexibility in making charges as the business grows. It should be done each month. It assists entrepreneurs in developing realistic forecasts.

Which of the following statements are true of the balance sheet?

It is a summary of a firm's assets and liabilities It helps understand the types of assets and liabilities a business can expect.