Quiz 4

What is meant by the statement that a balance sheet provides a "snapshot" of a venture's financial position as of a point in time? Why must a balance sheet be in "balance?"

A balance sheet is known as a "snapshot" because it is the value of all the accounts at a certain point in time. A balance sheet must be in balance because the amount of total assets must be equivalent to the sum of the firm's total liabilities and the owner's equity.

Briefly describe what is meant by a statement of cash flows.

A statement of cash flows shows how cash, as reflected in accrual accounting, flowed into and out of a company during a specific period of operation.

What is accrual accounting? What are generally accepted accounting principles (GAAP)?

Accrual accounting is the practice of recording economic activity when it is recognized rather than waiting until it is realized. Generally accepted accounting principles (GAAP)are guidelinesthat set out the manner and form for presentingaccounting information.

What is meant by breakeven drivers? Identify two important drivers affecting the amount of revenues needed for ventures to break even.

Breakeven drivers are key elements of the firm's financial statements that affect breakeven. Two important drivers are the VCRR/contribution profit margin and the amount of fixed costs.

What is a venture's contribution profit margin?

Contribution profit margin is the portion of the sale of a product that contributes to covering the fixed costs.

What is meant by the terms "depreciation" and "accumulated depreciation"?

Depreciation refers to the amount of decrease in value of the firm's long-term depreciable assets based on a preset schedule of the individual assets. Accumulated depreciation is the accrued amount of depreciation the firm has on its existing assets.

Describe the meaning of EBDAT breakeven and survival revenues

EBDAT breakeven occurs when the firm's survival revenues cover all of its cash expenses

Define the term EBDAT

EBDAT is a firm's earnings before taxes, depreciation and amortization.

Define the term "EBIT." How does EBIT differ from a firm's net income or net profit?

EBIT is defined as the earnings of a company before accounting for any interest expense/income and the taxes to be paid. Net income results from subtracting interest expense and taxes from EBIT.

What types of liabilities might show up on a venture's balance sheet?

Liabilities might include: payables, accrued wages, bank loan, other current liabilities, long-term debts, and capital leases.

What is meant by net cash build and net cash burn?

Net Cash Build: exists when the sum of cash flows from operations and investing is positive Net Cash Burn: occurs when the sum of cash flows from operations and investing is negative

Describe and illustrate how an EBDAT (survival) breakeven chart is constructed

Refer to Figure 4.2. Costs and revenues are plotted on the vertical axis and revenues (in dollars and/or units) are plotted on the horizontal axis. Breakeven (in dollars or unit sales) exists when the total costs curve and the total revenues curve intersect or cross.

Describe the types of resources (assets) needed for a new product venture during its development and startup stages. Comment on the likely revenues and expenses during these early life cycle stages.

Refer to: Figure 4.1 Obtaining and Recording the Resources Necessary to Start and Build a New Venture Development Stage in Life Cycle: Assets: acquire initial assets (e.g., initial cash, office furniture, computer, etc.) Revenues: no sales (consequently no money is coming in) Expenses: e.g., rent, utilities, subsistence salary for entrepreneur Startup Stage in Life Cycle: Assets: acquire production assets (e.g., inventories and equipment to produce products and give credit to customers) Revenues: making sales (money begins flowing in) Expenses: additional expenses to produce and market products and to record business transactions

Define the term EBITDA.

The acronym EBITDA stands for earnings before interest, taxes, depreciation, and amortization.

What does an income statement measure or track over time?

The income statement is a performance measure of a firm's operations over a period of time. Many different accounts that make up the income statement are used to determine trends in costs and revenues.

What are the three internal operating schedules that most firms must prepare?

The three internal operating schedules prepared by most firms are the "cost of production schedule", the "cost of goods sold schedule" and the "inventories schedule."

Briefly describe the typical types of accounts that are found in the current assets of a new venture.

Typical current asset accounts are cash, which includes cash accounts and marketable securities, accounts receivable, inventory and other current assts.

Describe the differences between variable expenses and fixed expenses.

Variable expenses depend upon the level of production while fixed expenses are items that are independent from production levels and will be incurred regardless.