Business Finance Basics
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Questions and Answers

How will paying yourself a $4 salary in cash affect the cash balance on the Balance Sheet?

  • No effect
  • Increase by $8
  • Increase by $4
  • Decrease by $4 (correct)

    • What impact does a $4 salary payment have on earnings?

  • Double the earnings
  • No effect on earnings
  • Increase earnings by $4
  • Decrease earnings by $4 (correct)

    • After the salary is paid, how does this transaction reflect on cash flow management?

  • It eliminates all liabilities
  • It is a cash outflow (correct)
  • It improves liquidity
  • It reports profit

    • When preparing a Balance Sheet after the salary transaction, what change should be recorded in retained earnings?

    <p>Decrease by $4</p> Signup and view all the answers

    What distinction should be understood regarding profit versus cash in the case of paying a salary?

    <p>Cash can decrease while profit increases</p> Signup and view all the answers

    What is the total value of Current Assets?

    <p>$74.00</p> Signup and view all the answers

    Which entry represents the total amount depreciated on fixed assets to date?

    <p>Accumulated Depreciation</p> Signup and view all the answers

    What is the value of Total Equity?

    <p>$66.00</p> Signup and view all the answers

    What is implied by the company having relatively new fixed assets?

    <p>Accumulated Depreciation is less than Gross Fixed Assets.</p> Signup and view all the answers

    Which of the following best describes the difference between profit and cash?

    <p>Cash flow represents the liquid assets available, while profit includes revenues minus expenses.</p> Signup and view all the answers

    What does the term 'Net Fixed Assets' represent?

    <p>The value of fixed assets after accounting for depreciation.</p> Signup and view all the answers

    If Total Liabilities are $35.00 and includes a Tax Liability of $3, what is the remaining liabilities amount?

    <p>$30.00</p> Signup and view all the answers

    Why is it important to analyze both Total Assets and Total Liabilities?

    <p>To determine Total Equity and assess balance.</p> Signup and view all the answers

    What is a key issue identified with the business's financial situation?

    <p>Zero cash on hand</p> Signup and view all the answers

    Which of the following statements accurately describes retained earnings?

    <p>Retained earnings are a reflection of past profits not distributed as dividends.</p> Signup and view all the answers

    What is the primary risk indicated by having zero cash despite high retained earnings?

    <p>Inability to pay immediate obligations</p> Signup and view all the answers

    What can be inferred about cash flow when sales do not occur?

    <p>Cash flow will be negative.</p> Signup and view all the answers

    What does the balance sheet indicate when it shows plenty of assets but no cash?

    <p>The business has liquidity issues.</p> Signup and view all the answers

    Why is it misleading to interpret retained earnings as cash available for spending?

    <p>Retained earnings are tied up in various assets.</p> Signup and view all the answers

    What does having significant assets but no cash imply about the business's operations?

    <p>The business may not be converting its sales to cash.</p> Signup and view all the answers

    In financial statement analysis, what does the left side of the scorecard primarily reflect?

    <p>Assets such as cash and inventory</p> Signup and view all the answers

    What does accelerated depreciation allow a company to do in terms of tax savings?

    <p>Claim a higher depreciation expense earlier, reducing current taxes.</p> Signup and view all the answers

    What is the impact of inflation on saving future dollars compared to saving current dollars?

    <p>Current dollars are preferred over future dollars due to their present value.</p> Signup and view all the answers

    If a company has $12 in earnings and the tax rate is 25%, what amount is owed in taxes?

    <p>$3.00</p> Signup and view all the answers

    How does accelerated depreciation affect a company's financial statements?

    <p>It reduces current tax liabilities.</p> Signup and view all the answers

    What does the concept of tax liability refer to in a corporate profit scenario?

    <p>The total amount of taxes owed to the government.</p> Signup and view all the answers

    What type of asset is the wagon considered after purchase?

    <p>Fixed Asset</p> Signup and view all the answers

    What is the cost of the wagon that was purchased?

    <p>$20</p> Signup and view all the answers

    Why is the wagon not included with other fixed assets immediately after purchase?

    <p>It needs to be categorized separately.</p> Signup and view all the answers

    What might be a reason for slow business at the lemonade stand despite good weather?

    <p>Potential customers are attending an event at the park.</p> Signup and view all the answers

    What did the seller state about the wagon's expected lifespan?

    <p>10 years</p> Signup and view all the answers

    What payment method was used to buy the wagon?

    <p>Cash</p> Signup and view all the answers

    What is one suggested solution to improve lemonade sales when business is slow?

    <p>Set up a mobile lemonade stand.</p> Signup and view all the answers

    What kind of business strategy is implied by going to where the customers are?

    <p>Mobile marketing strategy</p> Signup and view all the answers

    Which of the following actions should be taken at the beginning of the new week in managing the lemonade stand?

    <p>Roll up last week's earnings.</p> Signup and view all the answers

    Who sold the wagon to the buyer?

    <p>Wonderful Willa Wagner</p> Signup and view all the answers

    What could be an underlying factor affecting the decision to make the lemonade stand mobile?

    <p>Inability to attract customers at the current location.</p> Signup and view all the answers

    What characteristic of the wagon was highlighted as a quality feature?

    <p>Rust-resistant paint</p> Signup and view all the answers

    What was the last recorded total for assets at the lemonade stand?

    <p>$80.00</p> Signup and view all the answers

    What is implied by no sales occurring despite the presence of many customers at the park?

    <p>Inaccessibility of the lemonade stand.</p> Signup and view all the answers

    What time of year is the lemonade stand expecting to close operations?

    <p>Towards the end of summer.</p> Signup and view all the answers

    What is a potential benefit of setting up a mobile lemonade stand compared to a stationary one?

    <p>Ability to reach more customers.</p> Signup and view all the answers

    What distinguishes equipment from buildings when categorized as Fixed Assets?

    <p>Equipment can be moved, whereas buildings cannot.</p> Signup and view all the answers

    Why might a company separate equipment from buildings on the Balance Sheet?

    <p>To apply different depreciation methods.</p> Signup and view all the answers

    What can be inferred about the wagon's classification as a Fixed Asset?

    <p>It is subject to a different depreciation rate compared to buildings.</p> Signup and view all the answers

    What is the primary reason for using different depreciation methods for equipment?

    <p>The nature of the asset's use often determines the depreciation method.</p> Signup and view all the answers

    What does the classification of Fixed Assets imply about a company's operational strategy?

    <p>The company has a diverse range of investment types.</p> Signup and view all the answers

    How does categorizing assets as Fixed Assets benefit financial reporting?

    <p>It allows for clearer understanding and analysis of asset depreciation.</p> Signup and view all the answers

    What is a potential impact of having a movable Fixed Asset like a wagon compared to an immovable asset?

    <p>The movable asset can fluctuate in value more significantly.</p> Signup and view all the answers

    In which scenario would the classification as equipment rather than a building matter most?

    <p>During tax assessments for depreciation.</p> Signup and view all the answers

    What is the Gross Profit for the week based on the income statement?

    <p>$20.00</p> Signup and view all the answers

    How much was the total cash collected from sales?

    <p>$50.00</p> Signup and view all the answers

    What percentage of net profit before taxes was paid in taxes?

    <p>25</p> Signup and view all the answers

    What is the Net Profit After Taxes for the week?

    <p>$9.00</p> Signup and view all the answers

    What was the total expenses incurred for the week?

    <p>$8.00</p> Signup and view all the answers

    What is the Change in Cash for the week?

    <p>$5.00</p> Signup and view all the answers

    What is the value of Cost of Goods Sold for the week?

    <p>$30.00</p> Signup and view all the answers

    What two items make up Total Expenses for the week?

    <p>Salary and Depreciation</p> Signup and view all the answers

    What was the amount of cash the clerk received for the lemonade?

    <p>$21.00</p> Signup and view all the answers

    Why did the clerk initially refuse to allow the balance to be charged?

    <p>The clerk was unsure of the buyer's ability to pay it back.</p> Signup and view all the answers

    What did the boy offer to leave as collateral for the balance of the lemonade?

    <p>A polished rock</p> Signup and view all the answers

    What reaction did the manager have when approving the opening of the account?

    <p>He acknowledged knowing Pappy and seemed to trust the boy.</p> Signup and view all the answers

    How much lemonade did the clerk give in exchange for the cash?

    <p>$30.00</p> Signup and view all the answers

    What effect does paying a $4 salary have on the company's earnings?

    <p>Earnings decrease by $4</p> Signup and view all the answers

    What remains unchanged on the balance sheet after recording the $4 salary transaction?

    <p>Total Liabilities</p> Signup and view all the answers

    Which of the following statements best describes how to account for the $4 salary in the balance sheet?

    <p>Subtract $4 from Cash and $4 from Owner's Equity</p> Signup and view all the answers

    How should the transaction of paying the salary be recorded in the cash flow statement?

    <p>As an outflow under operating activities</p> Signup and view all the answers

    What is the primary impact of the salary payment on the company's retained earnings?

    <p>Decreases retained earnings by $4</p> Signup and view all the answers

    What is one main reason business was initially slow for the lemonade stand?

    <p>Potential customers were at a softball tournament.</p> Signup and view all the answers

    What is the suggested solution to improve sales at the lemonade stand?

    <p>Move the lemonade stand to the park.</p> Signup and view all the answers

    What financial activity should be done at the start of the new week for the lemonade stand?

    <p>Roll up the earnings from the previous week.</p> Signup and view all the answers

    What could be inferred about the effectiveness of a stationary lemonade stand?

    <p>It limits access to broader customer bases.</p> Signup and view all the answers

    Why might having a mobile lemonade stand benefit the business?

    <p>It can reach more customers directly.</p> Signup and view all the answers

    What challenge faced by the lemonade stand illustrates a strategic problem in business?

    <p>Geographical constraints of operations.</p> Signup and view all the answers

    What can be a crucial factor in deciding to create a mobile lemonade stand?

    <p>The location of potential customers.</p> Signup and view all the answers

    What does the need for a mobile lemonade stand suggest about customer behavior?

    <p>Customers are more likely to buy from moving vendors.</p> Signup and view all the answers

    What distinguishes the wagon from being categorized alongside buildings on the Balance Sheet?

    <p>It is movable and not permanently fixed.</p> Signup and view all the answers

    Why might a company choose to depreciate a wagon differently than a building on the Balance Sheet?

    <p>Different asset types have different useful lives.</p> Signup and view all the answers

    What is one significant advantage of classifying the wagon as equipment on the Balance Sheet?

    <p>It can be depreciated for tax benefits.</p> Signup and view all the answers

    Which of the following effects does categorizing the wagon as movable equipment have on financial reporting?

    <p>It offers a clearer understanding of asset usage.</p> Signup and view all the answers

    How does the classification of the wagon impact the financial analysis of a company?

    <p>It allows for better resource allocation.</p> Signup and view all the answers

    What might be a consequence of treating all Fixed Assets the same on the Balance Sheet?

    <p>Misleading financial evaluations could occur.</p> Signup and view all the answers

    What aspect of financial management is significantly affected by distinguishing between movable and immovable Fixed Assets?

    <p>Tax strategies and liabilities.</p> Signup and view all the answers

    What financial characteristic does a movable Fixed Asset like a wagon suggest about a company’s operational strategy?

    <p>A commitment to flexibility and mobility.</p> Signup and view all the answers

    What problem arises when you discover Pappy's grocery store is closed?

    <p>You have insufficient inventory for your lemonade stand.</p> Signup and view all the answers

    Why is borrowing money from the bank not a viable solution?

    <p>The bank closes early on Saturdays.</p> Signup and view all the answers

    What alternative strategy do you consider when faced with a cash shortage?

    <p>Sell the mobile unit.</p> Signup and view all the answers

    What dilemma is created by finding a warehouse store open near the ball park?

    <p>The prices are higher than expected.</p> Signup and view all the answers

    What common solution seems ineffective in this situation, despite being a typical approach?

    <p>Pleading with your parents for help.</p> Signup and view all the answers

    How does your current cash balance impact potential business decisions at the lemonade stand?

    <p>It limits inventory purchases.</p> Signup and view all the answers

    In the scenario described, what is suggested about the ability to sell the mobile unit quickly?

    <p>It is unlikely to sell before the game starts.</p> Signup and view all the answers

    What characteristic of the business's situation is highlighted by the need for immediate cash?

    <p>A significant liquidity issue.</p> Signup and view all the answers

    Study Notes

    Current Assets

    • Current assets are assets easily converted to cash within a year.
    • Examples include cash, accounts receivable, inventory, and prepaid expenses.
    • Total current assets in this example are $74.

    Fixed Assets

    • Three entries for fixed assets: gross fixed assets, accumulated depreciation, and net fixed assets.
    • Gross fixed assets represent the total purchase price.
    • Accumulated depreciation is the total depreciation to date.
    • Net fixed assets (net book value) is the difference between gross fixed assets and accumulated depreciation. In this example, it's $27.
    • Comparing accumulated depreciation to gross fixed assets helps assess asset age.

    Balance Sheet

    • Total assets are $101.
    • Total liabilities, including 3intaxliability,are3 in tax liability, are 3intaxliability,are35.
    • Total equity is $66.
    • Assets = Liabilities + Equity (The balance sheet balances)

    Business Transactions and Financial Statements

    • Purchasing a lemonade stand for $20 cash is recorded.
    • Purchasing lemonade for $30 cash is recorded.
    • Accounts Payable is adjusted to maintain Balance sheet balance.
    • A crucial point is highlighted: earnings are not cash. Retained earnings are tied up in assets, not readily available as cash to spend.

    Cash Flow Concerns

    • The business has significant assets but zero cash.
    • This lack of cash is a critical issue, even with positive retained earnings. Retained earnings are not spendable cash.
    • The business faces risks if sales stop due to factors like bad weather.

    Business Owner's Salary

    • The owner pays themselves $4 in salary.
    • This is recorded as an expense, reducing retained earnings by $4.
    • A new balance sheet is needed to reflect this transaction.

    Week Five: Business Slowdown and Mobile Lemonade Stand

    • Business slows down despite good weather and a popular new stand.
    • The reason is discovered: many potential customers are at a softball tournament, but the lemonade stand is stationary.
    • A mobile lemonade stand (wagon) is purchased to address this issue.

    Fixed Assets and Depreciation

    • The existing lemonade stand is a fixed asset attached to the land (like a building).
    • The wagon is a movable fixed asset classified as equipment.
    • Different types of fixed assets can be depreciated differently.

    Balance Sheet Changes After Wagon Purchase

    • The balance sheet is updated to reflect the purchase of the wagon, increasing total assets.
    • The wagon is added as a separate fixed asset (equipment).

    Inventory Crisis at the Softball Tournament

    • The owner needs more lemonade for the tournament but Pappy's grocery store is closed.
    • A nearby store sells lemonade in bulk at a higher price (30vs.30 vs. 30vs.20).
    • The owner only has $21 in cash.

    Financial Problem Solving

    • The owner considers but rejects options like borrowing money (bank is closed) or floating a check.
    • Selling the mobile unit is also deemed impractical as it provides storage for lemonade.
    • The owner tries to use earnings to buy more lemonade but is informed that only cash can be spent.

    Credit and Accounts Payable

    • The owner approaches the warehouse store clerk to charge the lemonade, offering cash and credit references.
    • The clerk initially refuses but after a discussion agrees to open an account due to Pappy Parker's (grocer) recommendation.
    • A transaction is made: 21cashisgiven,andtheremainingbalancefor21 cash is given, and the remaining balance for 21cashisgiven,andtheremainingbalancefor30 worth of lemonade will be paid as a liability.

    Updated Balance Sheet After Lemonade Purchase

    • The balance sheet is updated reflecting $21 reduction in cash, an increase in Accounts Payable (a current liability) representing the credit for the lemonade purchased, and no change in owner's equity.

    Salary and Expenses

    • The owner pays themselves a $4 salary.
    • This is recorded as an expense and reduces earnings by the same amount.
    • A final balance sheet is prepared, reflecting the salary transaction.

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    Description

    This quiz covers essential concepts of business finance, focusing on current assets, fixed assets, and balance sheets. You will learn how to categorize assets and understand their roles in financial statements. Test your knowledge with practical examples like purchasing assets and tracking liabilities.

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