46 Questions
What must an entrepreneur do if disbursements are greater than receipts?
Borrow funds or have cash in a bank
Where should large positive cash flows be directed?
Invested or deposited in a bank
What is one challenge in creating a pro forma cash flow?
Determining exact monthly receipts and disbursements
On what basis is pro forma cash flow created?
Best estimates
What should entrepreneurs do monthly regarding cash flow?
Make monthly projections of cash
What does the financial plan provide an entrepreneur with?
A complete picture of funds coming into the organization
Before developing the pro forma income statement, which budget should be developed?
Sales budget
In manufacturing ventures, what is compared to determine costs?
Internal production and subcontracting
The financial plan explains how the entrepreneur intends to:
Maintain the venture's liquidity
What is included in the sales budget?
Estimated ending inventory as a buffer
Which statement is true regarding the financial plan?
It includes details on how to meet financial obligations.
Which expense category has the same amount each month for the three months shown?
Rent
What is the total expense for February?
$47.4
Which expense increases from January to March?
Salaries
Which of the following is considered a fixed expense?
Salaries
What type of budget evaluates expenditures that impact the business for more than one year?
Capital budget
What is the first step in calculating pro forma income?
Projecting monthly sales
Which of the following is used as a basis for figures in calculating pro forma income?
Marketing research
What should be taken into account when calculating selling expenses for later years?
Increase as sales increase
Why might month-by-month illustrations be necessary during the first year?
To manage changing expenses
For which years should projections be made when preparing pro forma income statements?
Years 1, 2, and 3
What is the total amount of current assets for MPP Plastics Inc. at the end of the first year?
$94.7
What is the value of equipment before depreciation for MPP Plastics Inc.?
$72.0
What is the total amount of liabilities at the end of the first year for MPP Plastics Inc.?
$13.6
How much has K. Peters invested in MPP Plastics Inc.?
$100.0
What is the total amount of owners' equity at the end of the first year?
$148.7
What are the retained earnings for MPP Plastics Inc. at the end of the first year?
$(151.3)
Which of the following is a source of funds in a pro forma statement?
Operations
Which of these is an application of funds?
Increasing assets
What is the most suitable software for completing pro forma statements?
A spreadsheet program
Why is a spreadsheet program useful for pro forma statements?
It helps present different scenarios
Which of the following statements about software packages is correct?
A simple and easy-to-use software is useful in the start-up stage
What is projected cash available calculated from?
Projected cash accumulations minus projected cash disbursements
Why can the use of profit as a measure of success be deceiving?
Because there may be significant negative cash flow
Which of the following is not considered cash in the context of pro forma cash flow?
Sales
Which method cannot be used to project cash flow?
Accrual method
Which of these is included in the adjustments to net income in the indirect method?
Depreciation and amortization
Which item would be subtracted from net income in the Cash Flow from Other Activities section?
Capital expenditures
In terms of cash flow, how would an increase in accounts receivable be accounted for?
As a negative in operating activities
What does the net cash provided by operating activities exclude?
Capital expenditures
What does the break-even point represent?
The volume of sales where the venture neither makes a profit nor incurs a loss
Which of the following is a major weakness in calculating the break-even point?
Determining if a cost is fixed or variable
In the break-even formula $B/E(Q) = \frac{TFC}{SP-VC/unit}$, what does SP represent?
Selling price per unit
What is indicated by the y-intercept of the Total Cost (TC) line in Figure 10.1?
Fixed cost
At what point is a business operating at a loss according to Figure 10.1?
To the left of the break-even point
What does the slope of the Total Revenue (TR) line represent in Figure 10.1?
Selling price per unit
Study Notes
Operating and Capital Budgets
- Operating budgets include fixed expenses and variable expenses linked to sales volume and business strategy
- Capital budgets evaluate expenditures that impact the business for more than one year
Sample Operating Budget
- Example budget outline: salaries, rent, utilities, advertising, selling expenses, insurance, payroll taxes, depreciation, office expenses
- Total expenses for each month: January, February, March
Pro Forma Income Statement
- Provides a complete picture of: funds coming in, where funds are going, and projected financial position
- Explains how to meet financial obligations and maintain liquidity
- Calculated by subtracting projected costs and expenses from projected revenue
Budgeting and Cash Flow
- Sales budget: estimate of expected sales volume by month
- Cost of sales can be determined from sales forecasts
- Pro forma cash flow: projected cash receipts and disbursements, not the same as profit
- Cash flow can be projected using indirect or direct method
Pro Forma Balance Sheet
- Summarizes projected assets, liabilities, and net worth of a new venture
- Assets: items owned or available for venture operations (current or fixed)
- Liabilities: money owed to creditors (current or long-term debt)
- Owner's equity: amount invested or retained from venture operations
Pro Forma Sources and Applications of Funds
- Sources: operations, new investments, long-term borrowing, sale of assets
- Uses/Applications: increasing assets, retiring long-term liabilities, reducing owner/shareholder equity, paying dividends
Break-Even Analysis
- Break-even point: volume of sales where the venture neither makes a profit nor incurs a loss
- Break-even formula: B/E(Q) = TFC / (SP-VC/unit)
- Major weakness: determining if a cost is fixed or variable
This quiz covers the basics of operating costs, including fixed and variable expenses, and capital budgets, which evaluate expenditures that impact the business for more than one year. Learn how to create an effective operating budget for your business.
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