Module 5: How to Know How Much My Business is Making, Income Statement, Statement of Cashflow, Balance Sheet, Money, Financially Sound, Financial Forecasting

Question 1

Income Statement/Profit and Loss Statement

Answer 1

• A financial report showing the amount of profits or losses from a firm’s operations over a given time period.
• The income statement answers the question, “How profitable is
  the business?”
• This statement reports sales (revenue), cost of producing or acquiring the goods or services sold by the company, operating expenses, interest expense, and tax payments
• Allows business owner to consider how decisions affect the
  company’s profits

Question 2

Income Equation

Answer 2

Sales (revenue) – Expenses = Profits (income)

Question 3

Cost of Goods Sold

Answer 3

• Part of Income Statement
• The cost of producing or acquiring goods or service to be sold by a firm.

Question 4

Gross Profit

Answer 4

• Part of Income Statement
• Sales less the cost of goods sold.

Question 5

Operating Expenses

Answer 5

• Part of Income Statement
• Costs related to marketing and selling a firm’s product or service, general and administrative expenses, and depreciation

Question 6

Operating Profits

Answer 6

• Part of Income Statement
• Gross profits less operating expenses.

Question 7

Interest Expense

Answer 7

• Part of Income Statement
• The cost of borrowed money

Question 8

Profits Before Taxes/ Taxable Income

Answer 8

• Part of Income Statement
• Operating profits less interest
  expense.

Question 9

Net Profits

Answer 9

• Part of Income Statement
• Earnings that may be distributed to the owners or reinvested in the company.

Question 10

Depreciation Expense

Answer 10

• Part of Income Statement
• The cost of a firm’s building and
  equipment, allocated over the asset’s useful life.

Question 11

Profit Margins

Answer 11

• Part of Income Statement
• Profits as a percentage of sales.

Question 12

Dividends

Answer 12

• Part of Income Statement
• A distribution of a firm’s profits to the owners.

Question 13

Statement of Cash Flows

Answer 13

• A financial report showing a firm’s sources of cash as well as its uses of cash.

Question 14

Accrual-Basis Accounting

Answer 14

An accounting method of
recording profits when earned and expenses when incurred,
whether the profits have been received in cash or the expense paid

Question 15

Cash-Basis Accounting

Answer 15

An accounting method of recording profits when cash is received and recording expenses when they are paid

Question 16

Profits based on an accrual accounting system will differ from
the firm’s cash flows.

Answer 16

a) Sales reported in an income statement include both case
sales and credit sales; total sales do not correspond to the
actual case collected.
b) Some inventory purchases are financed by credit, so
inventory purchases do not exactly equal cash spent for
inventory.
c) Depreciation expense shown in the income statement is a
noncash expense.

Question 17

Cash Flow Activities

Answer 17

• Operating, investing, and financing activities that result in cash inflows or outflows.
• Includes:
• Generating cash flows from day-to-day business operations
  (operating activities)
• Buying or selling fixed assets (investing activities)
• Financing the business (financing activities)

Question 18

Liquidity

Answer 18

The degree to which a firm has cash available to meet maturing debt obligations.

Question 19

Current Ratio

Answer 19

A measure of a company’s relative liquidity, determined by dividing current assets by current liabilities.

Question 20

Return on Assets

Answer 20

A measure of a firm’s profitability relative to the amount of its assets, determined by dividing operating profits by total assets.

Question 21

Operating Profit Margin

Answer 21

A measure of how well a firm is
controlling its cost of goods sold and operating expenses
relative to sales, determined by dividing operating profits by
sales.

Question 22

Total Asset Turnover

Answer 22

A measure of how efficiently a firm is using its assets to generate sales, calculated by dividing sales
by total assets.

Question 23

Debt Ratio

Answer 23

A measure of what percentage of a firm’s assets is financed by debt, determined by dividing total debt by total assets.

Question 24

Return on Equity

Answer 24

A measure of the rate of return that owners receive on their equity investment, calculated by dividing net profits by owners’ equity.

Question 25

Pro Forma Financial Statements

Answer 25

Statements that project a firm’s financial performance and
condition, including a firm’s projected profits, assets and
financing requirements, and cash flows

Question 26

Five Drivers of a Firm’s Profits

Answer 26

• Amount of sales
• Cost of goods sold
• Operating expenses
• Interest expense
• Taxes

Question 27

Working Capital or Current Assets

Answer 27

Cash, accounts receivable, and inventory required in day-to-day operations.

Question 28

Net Working Capital

Answer 28

• A measure of a company’s liquidity, equal to current assets less current liabilities.
• Tendency in small firms to underestimate the amount of
  capital the business requires (undercapitalizing)

Question 29

Percentage of Sales Technique

Answer 29

A method of forecasting asset requirements using a ratio of assets to sales.

Question 30

Current Ratio

Answer 30

Measure of a company’s relative liquidity, that compares a firm’s current assets to its current liabilities on a relative basis.

Question 31

Debt Ratio

Answer 31

Measure of the fraction of a firm’s assets that are financed by debt, determined by dividing total debt by total assets.

Question 32

Spontaneous Debt Financing

Answer 32

Short-term debts, such as
accounts payable, that automatically increase in proportion to a firm’s sales.

Question 33

Cash Budget

Answer 33

A listing of cash receipts and cash
disbursements, usually for a relatively short time period, such
as a week or a month.