Question 1

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 significantly lower average payable period ratio than the credit terms offered by vendors may indicate that the company is paying its bills too quickly, which could suggest poor cash management practices. It may be using its cash less effectively than it could be if it extended payment terms and invested the funds elsewhere in the business.

Question 2

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

Accepted Answer

The average collection period ratio measures the number of days it takes a small firm to collect its accounts receivable. A higher ratio indicates that the firm is taking longer to collect payments from its customers, which increases the risk of bad debt losses. Customers may have financial difficulties or be unwilling to pay, which can result in unpaid invoices and lost revenue for the small firm. Therefore, a higher average collection period ratio is a warning sign for potential bad debt losses.

Question 3

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

Accepted Answer

Tracking ratios over time can help identify trends and changes in the company's financial performance that may not be easily visible in a single snapshot.

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.

Accepted Answer

The answer of Explain what ratio analysis is. Name the...

Question 5

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 measures how much profit a company generates for each dollar of equity, thus indicating the percentage of the owners' investment that is being returned through profits annually.

Question 6

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 means that a company is taking too long to pay off its suppliers, which may indicate that they have a significant amount of past-due accounts payable. This can put a strain on the business's relationship with its suppliers and affect its creditworthiness.

Question 7

The break-even point ________.
A)occurs where a company's total revenue equals its total expenses
B)is the point at which a company neither earns a profit nor incurs a loss
C)tells a business owner the minimum level of activity needed to keep her company in operation
D)All of the above

Accepted Answer

The break-even point is the level of production or sales at which a company neither earns a profit nor incurs a loss. It occurs where a company's total revenue equals its total expenses. Knowing the break-even point is crucial for a business owner because it tells her the minimum level of activity needed to keep her company in operation. Therefore, all of the options are correct.

Question 8

Refer to the following Gunther's Emporium information to answer the question(s)below:
Gunther's Emporium expects net sales of $2,396,919 for the upcoming year, with variable expenses totaling $1,813,443 and fixed expenses of $412,190.
-Using break-even analysis, what is Gunther's contribution margin?
A)4 percent
B)32 percent
C)24 percent
D)12 percent

Accepted Answer

Contribution margin is calculated by subtracting variable expenses from net sales:

Contribution Margin = Net Sales - Variable Expenses

Contribution Margin = $2,396,919 - $1,813,443

Contribution Margin = $583,476

The contribution margin as a percentage of net sales is calculated by dividing the contribution margin by net sales:

Contribution Margin % = (Contribution Margin / Net Sales) x 100

Contribution Margin % = ($583,476 / $2,396,919) x 100

Contribution Margin % = 24.34%, which is closest to 24% (option C).

Question 9

Although sound cash management principles call for a business owner to keep her/his 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 damage a company's credit rating because it gives the impression that the company is having cash flow problems and cannot pay its bills on time. This can make suppliers hesitant to extend credit in the future and may also lower the company's credit score. Therefore, it's important to balance cash management with maintaining good relationships with suppliers and preserving the company's creditworthiness.

Question 10

Mini-Case 12-2: Bowden Brake Service (Part B)
One day while you are in Bowden Brake Service getting your brakes repaired, Jim storms into his office, slamming doors and shouting about the local financial institutions. After a few minutes of building your courage, you approach Jim and ask him what the problem is. He shouts, "It's the financial institutions in this town! Not one of them will lend me the money I need to expand my business. They all said I needed to take a closer look at my financial position before I consider expanding. One of them said something about ratio analysis. I know a lot about cars and brakes, but what is ratio analysis?"
You tell Jim you will perform a ratio analysis for the business if he gives you a free brake job. Jim provides you with the following financial statements.
Bowden Brake Service
Income Statement
Year Ending December 31, 2007
Net Sales $780,000
Costs of Goods Sold:
Beginning Inventory $104,000
Purchases 526,480
Goods Available for Sale $630,480
Ending Inventory 134,400
Costs of Goods Sold 496,080
Gross Margin $283,920
Operating Expenses:
Rent 24,000
Insurance 5,250
Advertising 6,000
Travel 2,500
Interest 72,750
Taxes (Property, etc.) 2,500
Salaries & Admin. Expenses 97,000
Utilities 12,500
Supplies 1,360
Total Operating Expenses $223,860
Net Profit $60,060
Bowden Brake Service
Balance Sheet
December 31, 2007
Assets
Current Assets:
Cash $20,000
Accounts Receivable 10,000
Notes Receivable 5,000
Inventory 134,400
Total Current Assets $169,400
Fixed Assets:
Land 147,000
Machinery 73,000
Equipment 160,800
Less Accumulated Depreciation (30,200) 203,600
Total Fixed Assets 350,600
Total Assets $520,000
Liabilities & Owner's Equity
Current Liabilities:
Accounts Payable 40,500
Notes Payable 20,200
Accrued Salaries Payable 4,300
Total Current Liabilities: 65,000
Long-term Liabilities: Long-term Loan 325,000
Total Liabilities $390,000
Owner's Equity, Jim Bowden $130,000
Total Liabilities and Net Worth $520,000
-Refer to the income statement and balance sheet. Prepare a ratio analysis for Bowden Brake Service. In addition, use the following industry statistics for firms like Jim's to explain and interpret what these ratios mean.

Accepted Answer

The answer of Mini-Case 12-2: Bowden Brake Service (Part B)
One...

Question 11

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

Accepted Answer

The answer of List the 12 key ratios outlined in...

Question 12

Refer to the following Gunther's Emporium information to answer the question(s)below:
Gunther's Emporium expects net sales of $2,396,919 for the upcoming year, with variable expenses totaling $1,813,443 and fixed expenses of $412,190.
-Gunther's Emporium expects net sales of $2,396,919 for the upcoming year, with variable expenses totaling $1,813,443 and fixed expenses of $412,190. What is Gunther's break-even point?
A)$1,876,324
B)$1,693,276
C)$5,667,009
D)Insufficient information given to determine.

Accepted Answer

The break-even point can be calculated using the formula: 
Break-even point = (Fixed expenses) / (Contribution margin)
Contribution margin = (Net sales) - (Variable expenses)

Substituting the values given:
Contribution margin = $2,396,919 - $1,813,443 = $583,476
Break-even point = $412,190 / $583,476 = $1,693,276

Therefore, the answer is B.

Question 13

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

Accepted Answer

Slow accounts receivable mean that customers take a longer time to pay for products or services, which can cause a delay in the cash flow of a business. This delay can lead to a cash crisis, making it difficult for the small business to cover its expenses, pay its employees, and maintain its operations.

Question 14

Creditors often look for a times-interest-earned ratio of at least 4:1 to 6:1 before pronouncing a company a good credit risk.

Accepted Answer

This statement is true. A times-interest-earned ratio of 4:1 to 6:1 indicates that a company's earnings are sufficient to cover its interest payments at least four to six times over, which is considered a stable and safe level for creditors to consider extending credit to the company.

Question 15

You are provided this information about a retail store called "BoardSports:" BoardSports Industry Mean
Current Ratio 1.5 : 1 2: 1
Quick Ratio .75 : 1 1 : 1
Debt Ratio 0.87 : 1 0.75 : 1
Average Collection Ratio 46 days 33 days
Net Profit on Sales Ratio 5.5% 8.2%
Net Profit to Equity Ratio 7.7% 13.2%
What can you reasonably assess about the current financial status of this company?
A)The company is in excellent financial condition with no changes required.
B)The company is in respectable financial condition with no changes required.
C)The company is in questionable financial condition with minor changes required.
D)The company is in poor financial condition with significant changes required.

Accepted Answer

BoardSports has a weaker financial position compared to the industry averages, with lower liquidity ratios, higher debt ratio, slower collection period, and lower profitability ratios. These indicate potential financial difficulties and the need for significant changes.

Question 16

Mini-Case 12-2: Bowden Brake Service (Part B)
One day while you are in Bowden Brake Service getting your brakes repaired, Jim storms into his office, slamming doors and shouting about the local financial institutions. After a few minutes of building your courage, you approach Jim and ask him what the problem is. He shouts, "It's the financial institutions in this town! Not one of them will lend me the money I need to expand my business. They all said I needed to take a closer look at my financial position before I consider expanding. One of them said something about ratio analysis. I know a lot about cars and brakes, but what is ratio analysis?"
You tell Jim you will perform a ratio analysis for the business if he gives you a free brake job. Jim provides you with the following financial statements.
Bowden Brake Service
Income Statement
Year Ending December 31, 2007
Net Sales $780,000
Costs of Goods Sold:
Beginning Inventory $104,000
Purchases 526,480
Goods Available for Sale $630,480
Ending Inventory 134,400
Costs of Goods Sold 496,080
Gross Margin $283,920
Operating Expenses:
Rent 24,000
Insurance 5,250
Advertising 6,000
Travel 2,500
Interest 72,750
Taxes (Property, etc.) 2,500
Salaries & Admin. Expenses 97,000
Utilities 12,500
Supplies 1,360
Total Operating Expenses $223,860
Net Profit $60,060
Bowden Brake Service
Balance Sheet
December 31, 2007
Assets
Current Assets:
Cash $20,000
Accounts Receivable 10,000
Notes Receivable 5,000
Inventory 134,400
Total Current Assets $169,400
Fixed Assets:
Land 147,000
Machinery 73,000
Equipment 160,800
Less Accumulated Depreciation (30,200) 203,600
Total Fixed Assets 350,600
Total Assets $520,000
Liabilities & Owner's Equity
Current Liabilities:
Accounts Payable 40,500
Notes Payable 20,200
Accrued Salaries Payable 4,300
Total Current Liabilities: 65,000
Long-term Liabilities: Long-term Loan 325,000
Total Liabilities $390,000
Owner's Equity, Jim Bowden $130,000
Total Liabilities and Net Worth $520,000
-Were the bankers correct? Do you think Jim should expand the business?

Accepted Answer

The answer of Mini-Case 12-2: Bowden Brake Service (Part B)
One...

Question 17

A company with a times-interest-earned ratio that is well above the industry average would likely have difficulty making the interest payments on its loans, as creditors would see that it was overextended in its debts.

Accepted Answer

The statement is incorrect. A company with a times-interest-earned ratio that is well above the industry average would indicate that the company is profitable and has a strong ability to cover its interest payments on its loans. A high ratio indicates that the company generates enough earnings to easily pay its interest expenses.

Question 18

Mini-Case 12-5: A Projected Income Statement
You want to start your own retail furniture store, and you have already gathered a great deal of information on location, layout, form of ownership, business failure rates, etc. In applying for a loan, you notice that a projected income statement is required. Your problem is to complete this projected "P&L," given a desired income of $23,000 and the following published statistics. Show and clearly label all of your work!
Cost of Goods Sold 60.3 percent of net sales
Operating Expenses 36.4 percent of net sales
Gross Profit Margin 39.7 percent of net sales
-If a market survey indicates that your firm's sales would be $620,000, what net profit would you expect to earn?

Accepted Answer

The answer of Mini-Case 12-5: A Projected Income Statement
You want...

Question 19

Refer to the following information: Smith Office Supply Industry Mean
Current Ratio 2.3 1.8
Quick Ratio .4 .8
Average Inventory Turnover 2.0 3.9
Net Sales-to-Working Capital 4.0 7.8
Debt-to-Net Worth Ratio 3.0 1.7
Net Profit to Equity Ratio 40.1 percent 22.2 percent
Which of the following statements is most likely false?
A)Smith relies heavily on inventory to meet its debt obligations.
B)Smith is sufficiently capitalized.
C)Smith's sales are inadequate.
D)Smith's prices may be too high and/or the inventory too "stale."

Accepted Answer

The answer of Refer to the following information: Smith Office...

Question 20

Which of the following is an assumption of break-even analysis?
A)Fixed expenses remain constant for all levels of sales volume.
B)Variable expenses change in direct proportion to changes in sales volume.
C)Changes in sales volume have no effect on unit sales price.
D)All of the above

Accepted Answer

All three statements are assumptions of break-even analysis. Fixed expenses must remain constant for all levels of sales volume in order to accurately calculate the break-even point. Variable expenses are assumed to change proportionally to changes in sales volume, as it is based on the assumption of a linear relationship between sales and expenses. Finally, changes in sales volume should not affect the unit sales price, as break-even analysis assumes that the price remains constant.

Quiz 12: Creating a Successful Financial Plan