Chapter 8a: Using Financial Statements to Guide a Business

Question 1

What are the Four Basic Financial Statements?

Answer 1

Income Statements
Statement of Owners’ Equity
Balance Sheet
Cash Flow Statement

Question 2

Cash Flow Statement

Answer 2

-Shows concise financial picture

Question 3

Income Statement

Answer 3

-Shows whether the difference between sales and costs is a profit/loss

Question 4

Parts of an Income Statement

Answer 4

Net Revenue
COGS
Gross Profit
Expenses
Operating Income before interest/taxes
Other Expenses/Income
Income before taxes
Taxes
Net Income/Profit

Question 5

The Balance Sheet

Answer 5

Shows assets, liabilities, and net worth of a business.

Question 6

Parts of Balance Sheet

Answer 6

Assets
Liabilities
Owner’s Equity

Question 7

Balance Sheet Equation

Answer 7

Assets= Liabilities + Capital

Question 8

Net Worth being positive/negative

Answer 8

If Assets>Liabilities, Net Worth= positive

If Assets

Question 9

Analyzing a Balance Sheet

Answer 9

Done by Comparing balance sheets from two points in time

Question 10

Depreciation

Answer 10

A certain portion of an asset is subtracted each year until the asset’s book value=0

-Balance sheets with Long-Term Assets, less depreciation

Question 11

Income Statement Ratios- (ROI)

Answer 11

(Net Profit/Start-Up Investment) x 100

Question 12

Wealth

Answer 12

The value of assets owned vs value of liabilities owned.

Question 13

Things you need to know to find ROI

Answer 13

Total Investment: Start-up + all later funding on investment

Period for calculating ROI- Typically 1 month/year.

Question 14

Return on Sales

Answer 14

(Net Income/Sales for particular time period) x 100

Question 15

Balance Sheet Ratios- Liquidity

Answer 15

Current Ratio: Current Assets/Current Liabilities

Quick Ratio: (Cash + Marketable Securities)/Current Liabilities
- Assess current cash to cover current debts

Question 16

Debt Ratios

Answer 16

Debt-to-Equity: Debt/Equity

Debt Ratio: Total Debt/Total Assets
- A debt ratio of 55%, means that you are in debt for 55% of your assets

Question 17

Operating Ratios

Answer 17

1. Collection Period: 365/Total Credit Sales = #days it takes to collect credit sales
2. Receivable Turnover: Net Total Sales/ Average A/c Rec. = #times A/c rec. was collected in a given period
   A/c Rec= Opening A/c Rec. + Closing A/c Rec.)/2
3. Inventory Turn Over: COGS/Avg. Inventory= #Times company needs to restock
   ( Opening Stock + Closing Stock)/2