Finance

Question 1

What do balance sheets do?

Answer 1

They provide a picture of the company’s assets, liabilities, and owners’ equity.

Question 2

What type of assets are there?

Answer 2

Fixed Costs (Property, buildings, equipment, and furniture)
Current Assets- Cash or items that can be readily converted to cash.

Question 3

What type of liabilities are there?

Answer 3

Long-Term Liabilities- Mortgages on property the company is purchasing, and notes the company has signed promising to pay certain sums at certain times.
Current Liabilities (payable within a year)

Question 4

What are owners equity (in balance sheets)?

Answer 4

Financial investment that owners invested in the company plus accumulated earnings that have been retained by the business if any.

Question 5

What key things do balance sheets do?

Answer 5

Debt ratio can be readily derived from this statement. The debt ratio is the total assets divided by the total debt.

Question 6

What do income statements reflect?

Answer 6

The results of a company’s operations during a specific period of time.

Question 7

What are net sales?

Answer 7

Sales minus returned goods and discounts the company offered to customers.

Question 8

What are cost of sales?

Answer 8

How much the company spent to produce and deliver its products or services.

Question 9

What do operating expenses include?

Answer 9

Administrative costs, marketing, and everything else not directly linked to producing and selling the company’s products or services.

Question 10

What is the key thing income statements show?

Answer 10

Profit margins or return sales. This ratio is calculated by dividing net income by net sales and is expressed as a percentage figure. The higher the figure the more profitable a company is.

Question 11

What does the statement of cash flow show?

Answer 11

Shows changes in the company’s cash during a specific period of time. Deposits and debits are indicated, and the statement indicates the change in your cash balance during the month.

Question 12

What operating activities are show in income statements?

Answer 12

A specific period of time (net income or loss, depreciation, other changes in current assets or liabilities)

Question 13

What are investing activities in income statements?

Answer 13

Any purchases or sales fixed assets such as equipment and real estate.

Question 14

What take place during financing activities?

Answer 14

Cash raised during the period by borrowing money or selling stock, and funds spent for paying dividends– a rare thing in new ventures)

Question 15

What is the name for projected financial statements?

Answer 15

Forecasts of financial statements are called, “Proforma” Financial statements

Question 16

What does a proforma balance sheet show?

Answer 16

Current assets and liabilities

Question 17

What does proforma income statement show?

Answer 17

Projected sales, costs of sales, and operating expenses to project future net income (or losses)

Question 18

What does proforma statement of cash flows show?

Answer 18

Projected inflows and outflows of cash

Question 19

What are mandatory redemption rights?

Answer 19

Requires the entrepreneur to give investors their investment back at any time.

Question 20

What are convertible securities?

Answer 20

Financial instruments that allow investors to convert preferred stock, which gets preferential treatment in the event of a liquidation, into common stock, at the investor’s option.

Question 21

What are forfeiture provisions?

Answer 21

Require entrepreneurs to lose a portion of the ownership of their ventures if they fail to meet agreed upon milestones.

Question 22

What is an anti-dilution provision?

Answer 22

Transfers shares from entrepreneurs to the investors if the venture fails to meet performance targets.

Question 23

What are vesting periods?

Answer 23

Time in which entrepreneurs cannot cash out of their investments.

Question 24

What are techniques that protect investors?

Answer 24

• Self-Financing
• Contract Provisions
• Specialization
• Geographically localized investing
• Syndication

Question 25

What do entrepreneurs need to start asking?

Answer 25

• How much money do we need?
• Where should we obtain it?
• What kind of arrangements would be best?

Question 26

What is the key to avoiding negative cash flow?

Answer 26

Look for money when its not needed.

Question 27

What four tools do entrepreneurs use to estimate amount needed?

Answer 27

1) Start-up costs and use of proceeds
2) Proforma financial statements
3) Cash flow statements
4) Break even analysis

Question 28

What are the 4- steps in start-up costs and use of proceeds?

Answer 28

1) Identify costs that will be incurred to get the business off the ground.
2) Long-term costs include purchase of a building in which to operate or a lease on property.
3) Estimate amount needed
4) Draw up a plan for how the capital will be spent.

Question 29

What are the steps required in the proforma financial statements?

Answer 29

1) Estimates of profit and loss shown in income statements depend on the quality of the entrepreneurs
2) Estimates of P & L’s shown in income statements also depend on accurate estimates of costs.

Question 30

What are convertible securities?

Answer 30

Financial instruments that allow investors to convert preferred stock, which gets preferential treatment in the event of a liquidation, into common stock, at the investor’s option.

Question 31

How to do you convert from income statements to cash flow?

Answer 31

1) Take your net profit and add back depreciation.
2) Subtract increases in inventory or add decreases in inventory.
3) Add increases in accounts payable or subtract decreases in accounts payable.
4) Subtract decreases in notes/loans payable or add increases in notes/loans payable.
5) The resulting figure is your net cash flow.

Question 32

How do you improve cash flow?

Answer 32

1) Minimize accounts receivable
2) Reduce inventory: raw materials and finished products.
3) Reduce spending
4) Delay accounts receivable.

Question 33

What does a breakeven analysis show?

Answer 33

1) Amount of sales needed to cover all costs.

2) Indicates the increase in sales volume that would be necessary to cover increased costs.