Operating and Capital Budgets
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Questions and Answers

What must an entrepreneur do if disbursements are greater than receipts?

  • Reduce production costs
  • Borrow funds or have cash in a bank (correct)
  • Increase marketing efforts
  • Hire more employees

    • Where should large positive cash flows be directed?

  • Used to offer staff bonuses
  • Spent on marketing
  • Used to expand operations
  • Invested or deposited in a bank (correct)

    • What is one challenge in creating a pro forma cash flow?

  • Forecasting employee turnover
  • Predicting consumer behavior
  • Identifying future competitors
  • Determining exact monthly receipts and disbursements (correct)

    • On what basis is pro forma cash flow created?

    <p>Best estimates</p> Signup and view all the answers

    What should entrepreneurs do monthly regarding cash flow?

    <p>Make monthly projections of cash</p> Signup and view all the answers

    What does the financial plan provide an entrepreneur with?

    <p>A complete picture of funds coming into the organization</p> Signup and view all the answers

    Before developing the pro forma income statement, which budget should be developed?

    <p>Sales budget</p> Signup and view all the answers

    In manufacturing ventures, what is compared to determine costs?

    <p>Internal production and subcontracting</p> Signup and view all the answers

    The financial plan explains how the entrepreneur intends to:

    <p>Maintain the venture's liquidity</p> Signup and view all the answers

    What is included in the sales budget?

    <p>Estimated ending inventory as a buffer</p> Signup and view all the answers

    Which statement is true regarding the financial plan?

    <p>It includes details on how to meet financial obligations.</p> Signup and view all the answers

    Which expense category has the same amount each month for the three months shown?

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

    What is the total expense for February?

    <p>$47.4</p> Signup and view all the answers

    Which expense increases from January to March?

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

    Which of the following is considered a fixed expense?

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

    What type of budget evaluates expenditures that impact the business for more than one year?

    <p>Capital budget</p> Signup and view all the answers

    What is the first step in calculating pro forma income?

    <p>Projecting monthly sales</p> Signup and view all the answers

    Which of the following is used as a basis for figures in calculating pro forma income?

    <p>Marketing research</p> Signup and view all the answers

    What should be taken into account when calculating selling expenses for later years?

    <p>Increase as sales increase</p> Signup and view all the answers

    Why might month-by-month illustrations be necessary during the first year?

    <p>To manage changing expenses</p> Signup and view all the answers

    For which years should projections be made when preparing pro forma income statements?

    <p>Years 1, 2, and 3</p> Signup and view all the answers

    What is the total amount of current assets for MPP Plastics Inc. at the end of the first year?

    <p>$94.7</p> Signup and view all the answers

    What is the value of equipment before depreciation for MPP Plastics Inc.?

    <p>$72.0</p> Signup and view all the answers

    What is the total amount of liabilities at the end of the first year for MPP Plastics Inc.?

    <p>$13.6</p> Signup and view all the answers

    How much has K. Peters invested in MPP Plastics Inc.?

    <p>$100.0</p> Signup and view all the answers

    What is the total amount of owners' equity at the end of the first year?

    <p>$148.7</p> Signup and view all the answers

    What are the retained earnings for MPP Plastics Inc. at the end of the first year?

    <p>$(151.3)</p> Signup and view all the answers

    Which of the following is a source of funds in a pro forma statement?

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

    Which of these is an application of funds?

    <p>Increasing assets</p> Signup and view all the answers

    What is the most suitable software for completing pro forma statements?

    <p>A spreadsheet program</p> Signup and view all the answers

    Why is a spreadsheet program useful for pro forma statements?

    <p>It helps present different scenarios</p> Signup and view all the answers

    Which of the following statements about software packages is correct?

    <p>A simple and easy-to-use software is useful in the start-up stage</p> Signup and view all the answers

    What is projected cash available calculated from?

    <p>Projected cash accumulations minus projected cash disbursements</p> Signup and view all the answers

    Why can the use of profit as a measure of success be deceiving?

    <p>Because there may be significant negative cash flow</p> Signup and view all the answers

    Which of the following is not considered cash in the context of pro forma cash flow?

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

    Which method cannot be used to project cash flow?

    <p>Accrual method</p> Signup and view all the answers

    Which of these is included in the adjustments to net income in the indirect method?

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

    Which item would be subtracted from net income in the Cash Flow from Other Activities section?

    <p>Capital expenditures</p> Signup and view all the answers

    In terms of cash flow, how would an increase in accounts receivable be accounted for?

    <p>As a negative in operating activities</p> Signup and view all the answers

    What does the net cash provided by operating activities exclude?

    <p>Capital expenditures</p> Signup and view all the answers

    What does the break-even point represent?

    <p>The volume of sales where the venture neither makes a profit nor incurs a loss</p> Signup and view all the answers

    Which of the following is a major weakness in calculating the break-even point?

    <p>Determining if a cost is fixed or variable</p> Signup and view all the answers

    In the break-even formula $B/E(Q) = \frac{TFC}{SP-VC/unit}$, what does SP represent?

    <p>Selling price per unit</p> Signup and view all the answers

    What is indicated by the y-intercept of the Total Cost (TC) line in Figure 10.1?

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

    At what point is a business operating at a loss according to Figure 10.1?

    <p>To the left of the break-even point</p> Signup and view all the answers

    What does the slope of the Total Revenue (TR) line represent in Figure 10.1?

    <p>Selling price per unit</p> Signup and view all the answers

    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

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    Description

    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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