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Exam 12: Creating a Successful Financial Plan

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Question 61

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Which of the following is not a liquidity ratio?

A) Current ratio
B) Total asset turnover ratio
C) Quick ratio
D) None of the above

E) None of the above
F) C) and D)

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Question 62

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Mini-Case 12-5: A Projected Income Statement You want to start your own retail furniture store, and you have already gathered a great deal of information on location, layout, form of ownership, business failure rates, etc. In applying for a loan, you notice that a projected income statement is required. Your problem is to complete this projected "P&L," given a desired income of $23,000 and the following published statistics. Show and clearly label all of your work! Cost of Goods Sold 60.3 percent of net sales Operating Expenses 36.4 percent of net sales Gross Profit Margin 39.7 percent of net sales -If a market survey indicates that your firm's sales would be $620,000, what net profit would you expect to earn?

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First, find net profit margin percentage...

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Question 63

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In start-up firms, one guideline is for the owner to draw a salary 25-30 percent below the market rate for a similar position.

Explain the three basic financial reports that a small business uses in building a financial plan: the balance sheet, the income statement, and the statement of cash flows. What information is contained in each, and of what value is it to the small business owner?

The ________ ratio tells how many times the company's earnings cover the interest payments on the debt it is carrying.

The difference between the total sources of funds and the total uses of funds represents the increase or decrease in a firm's working capital.

Michelle Becker's target income in her business for the upcoming year is $78,500. The company's gross profit margin averages 32.6 percent of sales, and its total operating expenses run 24.7 percent of sales. To achieve her target income, sales of Michelle's company should be ________.

The balance sheet provides owners with an estimate of the firm's worth for a specific moment in time, while the income statement presents a "moving picture" of its profitability over a period of time.

Which of the following associations is correct?

Float is the net number of days of cash flowing into or out of a company.

The net profit on sales ratio measures the owner's rate of return on the investment in the business.

To determine net profit, the owner records sales revenue for the year and subtracts liabilities.

Mini-Case 12-2: Bowden Brake Service (Part B) One day while you are in Bowden Brake Service getting your brakes repaired, Jim storms into his office, slamming doors and shouting about the local financial institutions. After a few minutes of building your courage, you approach Jim and ask him what the problem is. He shouts, "It's the financial institutions in this town! Not one of them will lend me the money I need to expand my business. They all said I needed to take a closer look at my financial position before I consider expanding. One of them said something about ratio analysis. I know a lot about cars and brakes, but what is ratio analysis?" You tell Jim you will perform a ratio analysis for the business if he gives you a free brake job. Jim provides you with the following financial statements. Bowden Brake Service Income Statement Year Ending December 31, 2007 Net Sales $780,000 Costs of Goods Sold: Beginning Inventory $104,000 Purchases 526,480 Goods Available for Sale $630,480 Ending Inventory 134,400 Costs of Goods Sold 496,080 Gross Margin $283,920 Operating Expenses: Rent 24,000 Insurance 5,250 Advertising 6,000 Travel 2,500 Interest 72,750 Taxes (Property, etc.) 2,500 Salaries & Admin. Expenses 97,000 Utilities 12,500 Supplies 1,360 Total Operating Expenses $223,860 Net Profit $60,060 Bowden Brake Service Balance Sheet December 31, 2007 Assets Current Assets: Cash $20,000 Accounts Receivable 10,000 Notes Receivable 5,000 Inventory 134,400 Total Current Assets $169,400 Fixed Assets: Land 147,000 Machinery 73,000 Equipment 160,800 Less Accumulated Depreciation (30,200) 203,600 Total Fixed Assets 350,600 Total Assets $520,000 Liabilities & Owner's Equity Current Liabilities: Accounts Payable 40,500 Notes Payable 20,200 Accrued Salaries Payable 4,300 Total Current Liabilities: 65,000 Long-term Liabilities: Long-term Loan 325,000 Total Liabilities $390,000 Owner's Equity, Jim Bowden $130,000 Total Liabilities and Net Worth $520,000 -Refer to the income statement and balance sheet. Prepare a ratio analysis for Bowden Brake Service. In addition, use the following industry statistics for firms like Jim's to explain and interpret what these ratios mean.

Assets represent what a business owns, while liabilities represent the claims creditors have against a company's assets.

Cash requirements can be determined by dividing cash expenses by ________.

Mini-Case 12-3: Birmingham's Stereo Shop Birmingham's Stereo Shop expects net sales of $280,000 in the upcoming year, with a cost of goods sold of $173,600 and total expenses of $76,200. Birmingham expects variable expenses (including cost of goods sold)to be $195,700 and fixed expenses to be $54,100. -What level of sales would Birmingham's have to achieve if it wanted to make a $25,000 profit?

Create a break-even chart for Harry.

The ________ ratio is a conservative measure of a firm's liquidity and shows the extent to which a firm's most liquid assets cover its current liabilities.

Refer to the following information to answer the question(s) regarding Port Royal: Net Sales $927,641 Gross Profit $301,483 Net Profit $48,457 Total Assets $203,869 Total Liabilities $74,325 -Port Royal's net profit-to-equity ratio is ________ percent.

A business that turns over its receivables 5.9 times a year would have an average collection period of about ________.