FINC 3620 Exam 2

Give three reasons for an individual to form a sole proprietorship.

(1) Are unsure of their business ideas and want to see what happens (if the business proves successful these individuals will reform the business later). (2) Have a small business where the time limitations of the founder will keep the business from growing significantly. (3) Have a small business where the costs of equipment are low and, therefore, so are the risks.

Describe the four benefits of a Subchapter S Corporation.

(1) Limited liability. (2) The potential to consolidate financial statements for the tax benefit of the owners . (3) Relatively easy information compared with a Subchapter C Corporation. (4) Legitimacy in the market as a more established form of business (the ability to put "Inc." after the business name).

The _________ ratio provides information on the portion of a business owned by the lenders and that portion owned by the founders.

** debt-to-equity

. If the current ratio is just over 1.0, it reveals to the company they have just enough money to meet _________ percent of their short-term obligations.

*** D. 100 % If the current ratio is over 1.0, it tells us that the company has just enough money to meet all of its short-term obligations.

_________ examine the performance of a business and its ability to make economic returns over and above its costs.

*** Profitability ratios

The _________ ratio measures the percentage of the assets of a firm that are owned by the creditors.

*** debt-to-assets

The _________ ratio estimates the number of times that a business could repay the current interest owed on its debt.

*** times-interest-earned The times-interest-earned ratio estimates

The acid test is commonly known as the _________.

*****A. quick ratio The acid test is commonly known as the quick ratio.

_________ are used to measure the level of indebtedness of a small business.

*****C. Leverage ratios Leverage ratios are used to measure the level of indebtedness of a small business.

_________ measures the efficiency with which a company can handle its resources.

****D. Activity ratio Activity ratios measure the efficiency with which a company can handle its resources.

The advantage of FACTORING for a small business is:

***C. receiving money from accounts receivable immediately The advantage of factoring for a small business is that it receives money from accounts receivable immediately.

Grants

**GRANTS NOT EVERYBODY WILL QUALIFY FOR GRANTS NOT REQUIRED TO BE REPAID NOT AN EQUITY INVESTMENT NOT DEBT FINANCING (grants are not debt -you don't pay them back)

*** SHE SAID KNOW FOR TEST A SINGLE RATIO IS KIND OF USELESS IF ALL YOU KNOW IS YOUR CURRENT RATIO - IT DOESN'T HELP YOU - YOU'VE GOT TO BE ABLE TO COMPARE IT TO SOMETHING 3 BASIC WAYS YOU DO RATIO ANALYSIS (COMPARING RATIOS)

1. BENCHMARKING WITH YOUR INDUSTRY you want to know what is normal within your industry 2. COMPARATIVE ANALYSIS OF YOUR PREVIOUS HISTORY This is Horizontal analysis comparing to yourself - in the book they are looking at a company from 2013-14 3. COMPARE TO YOUR DIRECT COMPETITOR

What is an advantage of a sole proprietorship?

1. It is easy to form and dissolve

RATIO ANALYSIS 4 CATEGORIES

1. LIQUIDITIY 2. ACTIVITY 3. LEVERAGE 4. PROFITIBILITY

ESSAY QUESTION What are the three common forms of debt for a small business?

1. Loans from banks, individuals, or founder; 2. credit cards; 3. supplier credit.

To calculate maximum amount of outside financing needed (4 things):

1. Multiply 150% by lowest ending cash balance on the cash flow statement 2. Resulting balance is initial equity needed 3. Connect this with the percentage of the firm available to investors 4. These are your investment parameters

From handout Problems or things that prevent the business owner from getting the financing needed

1. NEED TO HAVE A GOOD BUSINESS PLAN IN ORDER TO GET EQUITY INVESTMENT OR DEBT FINANCING they talked about somebody having a "half baked" business plan

Three sources of equity funding include...

1. Other firms, 2. venture capitalists, and 3. business angels

****You need to follow her 2 rules for getting MONEY FROM FRIENDS AND FAMILY.

1. THEY MUST BE ABLE TO LOSE THE WHOLE AMOUNT. MEANING IF YOU NEVER PAY THEM BACK A PENNY, THEY WILL BE O.K. 2. MAKE SURE IT IS UNDERSTOOD IF IT IS AN EQUITY INVESTMENT OR A LOAN IN THE DOCUMENTS - WHEN THEY CAN START EXPECTING LOAN PAYMENTS

What are 3 disadvantages of a sole proprietorship?

1. Unlimited Personal Liability 2. limited access to cash 3. Only one owner allowed

List and describe the four classic techniques for financial analysis.

1.Ratio analysis is a tool for a small business to use to examine the overall health of the organization. 2. Deviation analysis is a chart tracking various performances from one time period to the next. 3. Sensitivity analysis examines the ability of an organization to handle changes in the future for the firm to perform. 4. Short surveys examine a business by nonfinancial data.

1. Loans from banks or finance companies, individuals, and founders 2. Credit Cards 3. Supplier Credit

3 most common forms of debt:

1. Liability 2. Bonding 3. Workers' Compensation

3 other types of insurance:

Deviation Chart

A ___________ ________ should be maintained for all important metrics.

Corporation

A _____________ is viewed as a separate entity. Founder(s) can only lose original investment.

Deviation/Trend/Horizontal Analysis

A chart tracking various performance measures from one time period to the next.

Sensitivity Analysis

A chart using current cash flow statement, income statement, or balance sheet to create a pro forma projection based on a dramatic increase in sales, a dramatic decrease in sales, or the complication of a major change in the business.

Draw

A distribution of funds from the business. It is usually in the form of a cash dispersion in advance of salary, bonus, expected year-end distribution, and the like.

Asset Leasing

A form of lease tied to a particular asset used by a business to conserve cash and maintain the latest versions of whatever equipment is available.

Venture Capital Fund

A fund that is organized to make significant equity investments in high growth new ventures.

Debt

A generic term to describe any type of non-equity funding tied to the business.

Business Angels and Crowdfunding

A relatively new way of raising capital, sites such as: GoFundMe, Kickstarter.com, streamline the process, it could be an equity investment, or a gift.

Partnership

A type of business formed between individuals directly. It includes both general and limited varieties.

_________ funds are received by a business in exchange for a percentage ownership of the company.

A. Asset-based B. Venture capital **C. Equity D. Tangible

_________ examines how fast a company turns credit sales into cash.

A. Inventory control turnover ****B. Account receivable turnover C. Total asset turnover D. Fixed asset turnover Account receivable turnover examines how fast a company turns credit sales into cash.

40. Investors can be:

A. active B. passive C. a minority ***D. all of these Investors can be active, passive, a minority, etc.

44. Dennis wants to measure the short-term ability of his company to meet its financial obligations. He would use _________.

A. activity ratios *****B. liquidity ratios C. leverage ratios D. profitability ratios

The legal means to protect intellectual property is _________.

A. copyright B. trademark C. patent *****D. all of these

31. A common form of debt for a small business can be classified as follows:

A. loans B. credit cards C. supplier credit **D. all of these The most common forms of debt for new businesses can be classified as follows: loans, credit cards, and supplier credit.

A classic technique for financial analysis is:

A. ratio analysis B. sensitivity analysis C. short surveys ***D. all of these

A firm's financial liquidity can be measured by its:

A. sensitivity ratio B. turnover ratio C. total asset ratio ****D. current ratio The current ratio measures those assets that can be quickly turned into cash and used to pay for immediate liabilities.

A(n) _________ is a listing of each type of activity (expense) and each asset within the company.

A. systems account B. accrual account ***C. chart of accounts D. inventory account A chart of accounts is a listing of each type of activity (expense) and each asset within a company.

Factoring

Accounts receivable that are sold at a discount to another company to receive immediate cash.

1. Owners report profit or losses on their personal income tax 2. Some business expenses may be claimed 3. Easy to establish and easy to dissolve

Advantages of a General Partnership (3)

Explain the advantages and disadvantages of a sole proprietorship.

Advantages: Businesses are very easy to form; Easy to dissolve no separation between owner and business; deduct business expenses from owner's income;

Describe the advantages and disadvantages of a general partnership.

Advantages: Owners report their share of losses or profits on their own personal income tax returns - personal tax rate; Easy to dissolve

Subchapter C Corporation

An organizational form that treats the firm as a unique entity responsible for its own taxes. There are no limitations to shareholder participation and the "owners" are protected beyond their equity investment.

Subchapter S Corporations

An organizational form that treats the firm as an entity separate from the individuals. This allows the owners to treat the income as they would if the firm were a sole proprietorship or a partnership. It has limitations in the number and type of shareholders. Reports taxes like a partnership.

_________ is a series of ratios along four areas of company performance (liquidity, activity, leverage, and profitability) that provides a picture of the health of the company.

B. Ratio analysis Ratio analysis is a series of ratios along four areas of company performance (liquidity, activity, leverage, and profitability) that provides a picture of the health of the company.

Asset-Based Lending

Banks provide: ______-_______ _________; a loan purchased for the purchase of a necessary asset for the business. Family is a source and founder(s) may choose to loan to the business.

^

Business angels are high-net-worth individuals who invest in businesses not as a business, but as an individual.

What is the difference between venture capital companies and business angels?

C. Venture capital companies usually invest in large businesses, whereas business angels usually invest in small businesses.

List and describe the two accounting systems available for a small business.

Cash-basis accounting system recognizes expenses as they are paid and recognizes revenue when it is generated.

Patent

Claim of intellectual property that covers a specific innovation.

Trademark

Claim of intellectual property that is associated with a specific business. This may be the name of the firm, a symbol representing the firm, or the names of its products.

Loans

Contractual agreements whereby the firm receives some amount of money that must be repaid over a specified period of time at a specified interest rate.

Explain the difference between copyright, trademark, and patent.

Copyright can be claimed on creative material generated such as books, magazines, music, artwork, etc. It is valid for the life of the author plus 70 years.

What information needs to be included in the charter of a Subchapter C Corporation?

Corporate name; location; general nature of business; name, address, and titles of corporate founders and investors; authorized stock and capital; and by-laws of the organization.

Inventory Turnover (Activity) FORMULA =

Cost of Goods Sold/Inventory COGS divided by inventory

Bonding

Covers damage done by employees. Either intentional or unintentional.

Liability Insurance

Covers lawsuits resulting from accidents. Product liability insurance is also obtainable.

Workers' Compensation Insurance

Covers liability for workers injured on the job. Can be a major expense.

Property Insurance

Covers the building, fixtures and inventory. At replacement cost? Or at current value? Coverage for fire, windstorms, hail, and smoke is standard. Special policies cover floods and earthquakes.

Account Receivable Turnover (Activity) formula =

Credit Sales/Accounts Receivable

Quick (or Acid Test), (Liquidity) FORMULA =

Current Assets - Inventory/Current Liabilities current assets minus inventory divided by current liabilities

Current Ratio (Liquidity)

Current Assets/Current Liabilities Measures those assets that can be turned quickly into cas

Patent

Currently granted on a "first to file" basis. Expensive to obtain and maintain. Can be a potent entry barrier. Only recognized in the countries where filed

What is NON EQUITY FUNDING? Money where the lender does not have "ownership" or "equity" in the company

DEBT: (loans to pay back) from: banks, credit cards, asset leasing companies, individuals GRANTS: (do not pay back - special government funds)

HANDOUT ANGEL INVESTORS: MAIN TAKEAWAY 1. DEFINITION 2. WHO IS LIKELY TO BE ANGEL INVESTORS 3. WHERE DO YOU FIND THEM-

DEFINITION - THEY ARE INVESTING THEIR OWN MONEY tend to be well off some invest as a group professional well to do people who want to make some money and better their community sometimes

1. Partners are jointly liable for all debts 2. Partners have a responsibility to watch out for the best interests of other partners.

Disadvantages of General Partnership (2)

^

Disadvantages: Cannot involve more than one person; Unlimited personal liability a debt for the firm is a personal debt for the business owner; suppliers require personal guarantees for debts.

Credit Card

Entitling one to revolving credit that is not tied to any particular asset, does not have a set repayment schedule, typically has a set upper limit, and is usually tied to a much higher interest rate than that of a bank loan.

Investors

Equity funding needs to be evaluated before admitting __________. (Make sure they have the money, and they are on same page with level of activity they want in business)

Government and private foundation

Explore both _____________ and ________ __________ grants.

**** possible exam question FACTORING Offering a discount for your customer to get them to pay quicker. setting up an account with a customer and they pay you monthly who would do this? restaurants -no manufacturing - yes

FIND A BANK OR ANOTHER FINANCING COMPANY THAT DOES THIS -SET IT UP WHERE YOU HAVE THIS ACCOUNT -GENERATE THE ACCOUNT RECEIVABLE, SEND IT TO FINANCING COMPANY - MAIL BILL TO CUSTOMER - THE FINANCING COMPANY IMMEDIATELY DEPOSITS A PERCENTAGE OF THAT RECEIVABLE INTO YOUR CHECKING - BANK ACCOUNT

Extraordinary

Focus on areas providing competitive advantage. Concentrate analysis efforts on ____________ areas of the business.

General Partnership

Formed by two or more people, formation is simple but may require a partnership agreement specifying: who is involved and their contributions, how profits, losses, and dividends are to be treated, how one partner can buyout the other, how new partners are brought in, and how disputes are to be settled.

Personal Resources

Funding starts with the founder(s) and his or her __________ __________.

Crowdfunding

Funds received by a business by soliciting a large number of very small investors usually via the Internet. ex. Gofundme

Equity Investment

Funds received by a business in exchange for a percentage ownership of the business.

Patent

Good for 20 years.

Debt

High levels of _____ are dangerous when the economy turns down.

Business Angels

High-net-worth individuals who invest in businesses not as a business, but as an individual.

General Partner

In an LLP, the individual considered the manager of the firm, who as such, has unlimited liability for the debts or judgements against the firm.

This is summary of what is said above -

Industry is kind of broad - competitor is more focused - and the you want to see how you are doing over time so you would do that comparative analysis to compare yourself to yourself in a horizontal analysis

Competitive Advantage

Key measures of a financial foundation should focus on aspects giving a _______________ ____________, if the mission is low-cost, then control of expenses is the focus, with outcomes measured daily.

Copyright

Life of the author + 70 years

Define liquidity ratios and detail the two liquidity ratios.

Liquidity ratios measure the short-term ability of a firm to meet its obligations. 1. Current ratios measure those assets that can be quickly turned into cash and used to pay for immediate liabilities. 2. Quick ratio removes the ability to sell inventory and examines the pure cash position relative to current liabilities.

Accounts Receivable

Maintain a separate record for each creditor, all invoices should be recorded with a record of payment, including: Date paid, Amount paid, and Check number/transfer tracking number.

1. Debt-to-Equity 2. Debt-to-Assets 3. Times Interest Earned

Name the 3 leverage ratios of interest:

1. Inventory Turnover 2. Account Receivable Turnover 3. Total/Fixed Asset Turnover

Name the 3 specific activity ratios:

1. Gross Profit Margin 2. Operating Profit Margin 3. Net Profit Margin 4. Return on Assets (ROA) 5. Return on Equity (ROE)

Name the 5 profitability ratios of interest:

Total/Fixed Asset Turnover (Activity)

Net Sales/Fixed Assets or Total Assets

Times Interest Earned

Operating Income/Interest

Who are sole proprietorships popular with?

People who are 1. Unsure, 2. Have a very small business 3. Have low costs and low risks

List and define the five profitability ratios.

Profitability ratios examine the performance of a company and its ability to make economic returns over and above its costs. Gross profit margin. Operating profit margin. Net profit margin. Return on assets. Return on equity.

Financial

Ratios analyze __________ information.

1. Industry 2. Competitors 3. Deviation/Trend Analysis

Ratios have no meaning unless you compare them to something. What are the 3 things you can compare them to?

Leverage (Solvency) Ratios

Ratios that are used to examine the relative level of indebtedness of entrepreneurial business.

Profitability Ratios

Ratios that examine the performance of the firm and its ability to make economic rents over and above its costs.

Liquidity Ratios

Ratios that measure the short-term ability of the firm to meet its obligations.

LLC 1.Both have liability protection 2. no limit in number of owners (or can have just 1 member) 3. both pay taxes on the owners personal tax return 4. More flexible on draw payments (can pay different amounts to different people) 5. Has MEMBERS not shareholders 6. Have to get permission from 100% of members to sell any ownership 7. Can have a foreign member or owner 8. Cannot issue stock

S Corp 1. has liability protection 2. limited to 100 owners 3. Pay taxes on owners personal tax return 4. If a dividend is paid everyone gets same amount 5. Has OWNERS or Shareholders 6. Can sell shares- no permission needed 7. No foreign shareholders (owners) allowed 78 Only COMMON STOCK allowed

Business Angels

Seek _________ ______ with relevant knowledge.

Petty Cash Fund

Some expenses are too small to write a check, a ______ ______ _____ operates like a savings account. PETTY CASH FOR EXPENSES THAT ARE TOO SMALL TO WRITE A CHECK Set an amount - if you have to buy anything the receipt is put in the petty cash bag.

1. Debt - Banks, credit cards, asset leasing companies, individuals, suppliers 2. Grants

Sources for non-equity capital funding:

Grants

Special funds that do not require repayment and are designed to aid businesses in specific areas.

Supplier Credit

Suppliers often will provide credit on both physical assets (refrigerators, molding equipment, etc.) and the actual suppliers provided.

1. Subchapter S Corporations 2. Subchapter C Corporations 3. Limited Liability Company (not a corporation) It is a cross between

The 3 most common forms of corporations:

1. Chart of accounts 2. Petty cash register 3. Check register 4. Expense accounts 5. Inventory accounts 6. Accounts payable 7. Payroll

The 7 key reports that an entrepreneur may be asked to generate when starting a business:

Ownership Interest

The firm may need other sources of funds. Sources may be small or may or may not be tied to an ____________ ________.

1. The funding level of the firm 2. The establishment of an accounting system 3. Attention to the flow of information

The key financial issues involved with starting a business: what are the 3 financial issues that are intertwined?

Copyright

The legal means to protect intellectual property. It grants ownership on creative materials generated, such as books, magazines, advertising copy, music, artwork, or virtually any other creative product, whether published or unpublished.

Sole Proprietorship

The simplest form of business organization, characterized by the fact that the person who owns the business and the business itself are treated as the same entity (single legal entity)

1. How will the entrepreneur fund the new business, and what funding level is needed for the venture? 2. What accounting records should be maintained, and how will they be maintained? 3. How should the business manage the paper and data flow of the new company?

The three questions examined about financing and accounting?

Limited Liability Company

This business form is still relatively new, limited liability features, allows more investors, allows other corporations to hold stock, may have as few as one "member", flexible profits, owners avoid double taxation, cost of formation is low, and some states apply limits.

1. Utility 2. Design 3. Plant

Three types of patents:

Debt-to-Assets

Total Liabilities/Total Assets

Debt-to-Equity

Total Liabilities/Total Assets - Total Liabilities

Ownership and profit

Use an attorney to clearly specify how ___________, and ________, will be managed.

Trademark

Valid for 10 years

ESSAY QUESTION * List and describe two types of equity investors.

Venture capitalists are investors who want to invest in high-growth new ventures. They look for high-growth businesses that have opportunity to cash out quickly, with an IPO(first time stock offering) or sale to a large company within a short period of time.

1. Employer Identification Number 2. Payroll Requirements

What 2 regulations apply regardless the size of the business?

1. Sole Proprietorship 2. Partnership - general and limited 3. Corporation - C Corp, S Corp, LLC

What are the 3 legal forms of business?

1. Limit analysis to those areas critical to profit 2. Move from the general to specific 3. Four classis analysis techniques - Ratio analysis, deviation analysis, sensitivity analysis, and short surveys

What are the 3 techniques for measuring performance?

1. Owner's limited liability 2. Potential tax benefit 3. Relatively easy formation - compared to the Subchapter C 4. Legitimacy in the market

What are the advantages of a subchapter S corporation? (4)

1. Formation process is cumbersome and expensive 2. Limited shareholder numbers - currently limited to 75, significant limitation for a company that wishes to go public

What are the disadvantages of a subchapter S corporation? (2)

Sole Proprietorship

What form of business is taxed at the personal level?

1. Showing actual change 2. Showing percentage

What two columns does a deviation chart have?

Cash or accrual basis

When starting a business the entrepreneur must determine if they will use _______ or ________ ________ accounting. (almost everybody has to be ACCRUAL -BASIS ACCOUNTING)

EQUITY FUNDING

YOU GET MONEY IN RETURN FOR OWNERSHIP OR "EQUITY" IN THE BUSINESS

Debt

______ is any form of capital infusion that must be paid back with interest.

Survey Data

_______ _____ can be tabulated and examined with simple statistics, such as percentages.

Ratios

_______ are valuable tools to the firm.

Short Surveys

________ __________ gather more contextual information that is subject to interpretation.

Limited Liability Partnership (LLP)

__________ partners who can work for the firm but cannot actively manage, one partner must be the general partner.

Insurance

___________ is one way to limit liability concerns.

Financial

____________ liquidity is critical for success.