Question 1

A high inventory turnover ratio relative to the industry average could mean that a business has too little inventory and is experiencing stockouts.

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Question 2

The net profit to equity ratio reports the percentage of the owners' investment in the business that is being returned through profits annually.

Accepted Answer

The net profit to equity ratio is calculated by dividing the net profit by the shareholder's equity and multiplying by 100 to get a percentage. It reflects the profitability of a company in terms of the equity invested by the shareholders.

Question 3

Ratio analysis provides an owner with a "snapshot" of the company's financial picture at a single instant; therefore,she should track these ratios over time,looking for trends that otherwise might go undetected.

Accepted Answer

Ratio analysis is a tool used to analyze a company's financial performance over time. By comparing ratios from different periods, an owner can identify trends and areas of improvement or concern. Therefore, it is important to track these ratios over time.

Question 4

Explain what ratio analysis is.Name the four categories of ratios and describe the type of information each group provides the small business owner.

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Question 5

Why is it important for an entrepreneur,about to launch a business,to perform a break-even analysis? Describe the steps in calculating it.

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Question 6

Explain the three basic financial reports that a small business uses in building a financial plan: the balance sheet,the income statement,and the statement of cash flows.What information is contained in each,and of what value is it to the small business owner?

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Question 7

If a company's average payable period ratio is significantly lower than the credit terms vendors offer,it may be a sign that the company is not using its cash most effectively.

Accepted Answer

A lower payable period ratio indicates that the company is not taking full advantage of the credit terms offered by vendors and may not be using its cash effectively. It could mean that the company is paying its bills too quickly and not optimizing its cash flow.

Question 8

An inventory turnover ratio above the industry average suggests that a business is overstocked with obsolete,stale,overpriced,or unpopular merchandise.

Accepted Answer

An inventory turnover ratio above the industry average suggests that a business is able to sell its merchandise quickly and efficiently, indicating a healthy business. It does not necessarily mean that the merchandise is overstocked or obsolete.

Question 9

The average inventory turnover ratio measures the number of times a company's inventory is sold out during the accounting period.

Accepted Answer

The average inventory turnover ratio is calculated by dividing the cost of goods sold by the average inventory. It reflects how quickly a company is able to sell its inventory and replace it with new inventory. A high ratio indicates that a company is able to sell its inventory quickly, whereas a low ratio indicates that a company is holding onto inventory for too long.

Question 10

Fixed expenses are those that do not vary with changes in the volume of sales,but do vary with production.

Accepted Answer

Fixed expenses are those that do not vary with changes in the volume of sales or production. They are constant over a given period of time, regardless of the level of sales or production.

Question 11

The net profit on sales ratio measures the owner's rate of return on the investment in the business.

Accepted Answer

The net profit on sales ratio (also known as net profit margin) measures the percentage of revenue that remains as profit after all expenses are deducted, not the owners' rate of return on their investment.

Question 12

Slow accounts receivable are a real danger to a small business because they often lead to cash crises.

Accepted Answer

Slow accounts receivable means customers are taking a longer time to pay and this can create cash flow problems for the business. As a result, it can lead to a cash crisis and make it difficult for the business to operate.

Question 13

Define what a pro forma financial statement is.What are the two types a small business owner uses,and how are they created?

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Question 14

List the 12 key ratios outlined in the text and explain the type of information they provide the small business owner.

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Question 15

An excessively high average payable period ratio indicates the possibility of the presence of a significant amount of past-due accounts payable.

Accepted Answer

An excessively high average payable period ratio indicates that accounts payable are taking longer to be paid, which may be due to a significant amount of past-due accounts payable.

Question 16

On a break-even chart,the break-even point occurs at the intersection of the fixed expense line and the total revenue line.

Accepted Answer

The break-even point occurs at the intersection of the total expense line (which includes both fixed and variable expenses) and the total revenue line, not just the fixed expense line.

Question 17

A company's average collection period ratio tells the average number of days it takes to collect its accounts receivable.

Accepted Answer

The average collection period ratio is a financial ratio that measures the average number of days it takes a company to collect its accounts receivable. It is calculated by dividing the ending accounts receivable by the average daily sales. The resulting number represents the average number of days it takes a company to collect payment from its customers.

Question 18

Generally,the higher the small firm's average collection period ratio,the greater the chance of bad debt losses.

Accepted Answer

A longer average collection period indicates that the small firm is taking longer to collect its accounts receivables, which increases the likelihood of customers defaulting on their payments and ultimately resulting in bad debt losses.

Question 19

The break-even point is the level of operation at which a business neither earns a profit nor incurs a loss,and lets the business owner know the minimum level of activity required to keep the firm in operation.

Accepted Answer

The statement is true. The break-even point is the level of activity at which the total revenues of a business equal its total expenses, resulting in zero profit or loss. It is an important metric for businesses to understand as it informs them of the minimum level of output needed to cover their costs and stay in operation.

Question 20

Although sound cash management principles call for a business owner to keep her cash as long as possible,slowing accounts payable too drastically can severely damage a company's credit rating.

Accepted Answer

Slowing accounts payable too drastically can result in missed or late payments, which can negatively impact a company's credit rating. It is important to find a balance between keeping cash on hand and maintaining good payment practices to suppliers and vendors.

Quiz 11: Creating a Successful Financial Plan