financial statement material

Question 1

balance sheet

Answer 1

outlines where a business stands in terms of what it owns, what it owes, and how much investment the owners have in the business. It is the statement of the financial position of a business at particular point in time.

Question 2

income statement

Answer 2

shows the sales of the business over a period of time, what it cost to conduct business during that period, and how much profit (or loss) resulted during that period. It is the statement of a business’s profit or loss over a given period of time.

Question 3

cash flow statement

Answer 3

presents the same period as the income statement and given details of cash coming into the business, cash going out of the business. This is usually broken down on a monthly basis.

Question 4

pro forma balance sheet

Answer 4

these shows where the business with stand financially on opening day, at the end of first year, at the end of the second year, and at the end of the third year.

Question 5

pro forma income statement

Answer 5

3 of these, one for each of the first three years of business. They will show the years expected sales, costs, expenses, and profit (or loss). In a sense, they will explain why the balance sheet (the company’s financial position) will have changed each year.

Question 6

pro forma cash flow statement

Answer 6

three covering the same periods as the income statements. By planning when cash comes in and goes out of your business, you will demonstrate that you will always be able to pay the bills that are due.

Question 7

fixed assets

Answer 7

o Things that are owned and that tend to keep their value or form for long periods (in excess of a year). Examples are buildings, machinery, and equipment.

Question 8

current assets

Answer 8

o Things that are owned and tend to be impermanent in value or form examples are cash, inventory, and prepaid expenses.

Question 9

accounts receivable

Answer 9

o Assets in the form of money that is owed to a company by its customers.

Question 10

liabilities

Answer 10

legal debts with monetary value.

Question 11

current liabilities

Answer 11

any debts that will be paid off within a year. Including things like short-term loans, credit terms from suppliers, and even the final 12 months’ worth of payments on a long-term loan.

Question 12

long term liabilities

Answer 12

debts that will take more than a year to pay off and include things like long-term loans for buying vehicles or equipment as well as mortgages on land and buildings.

Question 13

equity

Answer 13

the amount of financial claim an owner has on asset. It measures wealth

equity = assets - liabilities

Question 14

assets

Answer 14

a persons equity + their liabiites

Question 15

gross profits =

Answer 15

sales of a business - costs of goods sold

Question 16

net profits =

Answer 16

gross profit - expenses

Question 17

deprication

Answer 17

the loss in value of an asset over time

Question 18

fixed expenses

Answer 18

things you would have to pay regardless of what goods you are selling. These include: rent, insurance, utilities, etc.

Question 19

variable expenses

Answer 19

these tend to vary with your sales (or go up as your sales go up) examples include packaging, delivery, travel, casual labour, and often advertising.
In order to calculate an annual break-even value, you must first figure out the contribution ratio. This just means the portion of each sale that is left after paying its cost of goods sold and variable expenses. This is the amount that can be used to either pay off the fixed expenses, or, when they are paid off, can be kept as profit

Question 20

contribution ratio =

Answer 20

gross profit - variable expenses /sales

Question 21

break even =

Answer 21

fixed expenses/ contribution ratio

Question 22

return on equity (profitability) =

Answer 22

Return on equity = net profit / owners’ equity

Question 23

current ratio (the position of a firm to keep paying the bills that are due) =

Answer 23

o Current ratio = current assets/ current liabilities

Question 24

quick ratio (when inventory is not counted because it may take some time to turn inventory into cash) =

Answer 24

♣ Quick ratio = current assets – inventory/ current liabilities

Question 25

return on assets =(indicate how efficiently the company is able to use its assets, as well as its purchasing and sales efficiency.)

Answer 25

Return on assets = net profit/ total assets

Question 26

gross margin = (indicate how efficiently the company is able to use its assets, as well as its purchasing and sales efficiency)

Answer 26

o Gross margin = gross profit/ sales

Question 27

debt to equity =

indicate the companies ability to pay all of its financial obligations.

Answer 27

o Debt to equity = total liabilities/ owners’ equity

Question 28

debt ratio = (indicate the companies ability to pay all of its financial obligations.)

Answer 28

• Debt ratio = total liabilities/ total assets

Question 29

average collection period =

how long it takes a company to collect money that is owed to it can affect its ability to pay the bills.

Answer 29

o Average collection period = accounts receivable/ average sales per day.