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62 Cards in this Set

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  • Back
The cash breakeven point is the point in the venture's growth at which revenues exceed costs. (T or F)
False
The sales forecast, or revenue estimate, is necessary for an entrepreneur to produce the three basic financial statements. (T or F)
True
The ramp-up period is the period of time required by a start-up company before it achieves sales volumes near capacity levels. (T or F)
True
Depreciation is called a cash expense. (T or F)
False
All the operating costs of a company must be included in one of the three cost categories: cost of goods, selling costs, or general and administrative (G&A) costs. (T or F)
True
The cash breakeven point is the point in the venture's development at which the cash inflows exceed the cash outflows.(T or F)
True
The purpose of the balance sheet is to state accurately and fairly the profit or loss of the operations of a company for a given accounting period using GAAP rules. (T or F)
False
The GAAP rule states that revenue spent on any item that has a useful life of more than one year is considered a capital expense.
(T or F)
True
Spreading the cost of a capital good over the period of its useful life is called amortization. (T or F)
False
The cost of goods sold category includes all costs required to prepare the venture's products or services for sale.(T or F)
True
A venture's revenue minus cost of goods is defined as
A Gross Profit
Gross margin is gross profit expressed as a percentage of
Revenue
In a cash flow statement, the lowest negative ending cash position is the ________ amount of money needed to start the business
Minimum
In a balance sheet, assets = _____ + owners' equity.
Liabilites
Assets that are not expected to be available as liquid assets in less than a year are called
Fixed Assets
Starting points for the development of pro forma financial statements.

Provide a set of starting numbers–such as price per unit and sales volume–that are reasonable estimates.
Assumptions
A sales forecast that presents the most likely scenario barring unforeseen problems.
Base-Case Sales Forecast
Figure in the summary of a cash flow statement that represents the amount of cash available to the business at the beginning of each month.
Beginning Cash
A sales forecast that uses volume estimates that might be attainable if everything goes right in the opening and early stages of the venture and continues over the projection period.
Best-case sales forecast
The strategies and tactics a business uses to ensure that, at least at some point, its revenues will be greater than its costs, resulting in profit.
Business Model
Money spent to purchase a capital good.
Capital Cost
An item that has an expected life of more than one year.
Capital Good
The point in time at which the venture's cash flow crosses into and remains in positive territory.

is the point in the venture's growth at which cash inflows exceed cash outflows on a routine (monthly) basis.
Cash Breakeven Point
The intersection of a column and a row in a spreadsheet.
Cell
Items owned by the company that are cash or near cash, that is, something that could easily be converted to cash
Current Assets
Financial obligations of the firm that will be repaid within one year.
Current Liabilities
The loss of value of a capital good over its expected lifetime.
Depreciation
Figure in the summary of the cash flow statement that shows the cumulative cash position of the company at the end of each month
Ending Cash
The twelve-month period in which a firm records its operating performance.
Fiscal Year
Assets that are not expected to be available as liquid assets in less than a year.
Fixed Assets
Equations that are entered into cells of a spreadsheet to automatically update entries in the cell based on changes elsewhere in the spreadsheet
Formulas
State and federal taxes that are based on a company's income
Income Tax
The rows in a profit and loss statement.
Line Items
Amounts owed by companies that must be repaid more than one year from the balance sheet date.
Long-term liability
Figure in the summary of the cash flow statement that indicates the net cash change for the month, whether positive or negative.
Net change
A percentage calculated by dividing net income by revenue and multiplying times 100.
Net margin
An expense, such as depreciation, that is listed as an expense each month on the P&L but shows up only once in the cash flow statement, when the cash transaction occurs.
Noncash expense
Balance sheet category that includes assets and capitalized expenses not used in the daily business but not yet charged off to expenses.The customary accounts in this section are intangible assets such as goodwill, patents, and utility deposits. This section also indicates the amount of amortization of these nonphysical assets.
Other assets
Another term for general and administrative expenses, or costs that are incurred for the benefit of the entire operation.
Overhead
Projections of the three basic financial statements common to all ventures: the profit and loss statement, the cash flow statement, and the balance sheet.

In a business plan, entrepreneurs are typically required to provide pro forma statements that estimate operating activity for at least three years (36 months) and sometimes as much as five years (60 months).
Pro forma financial statements
Fair and accurate statement of the profit or loss of a company's operations for a given accounting period, using GAAP rules.
Profit and loss statement
The point in the venture's development at which the income calculated on the P & L basis is greater than the costs calculated on the same basis.
Profit breakeven point
A period of time in the sales forecast during which sales are increasing month by month to reach capacity levels.
Ramp-up period
Earnings that the owners do not pay to themselves but rather leave in the firm as an additional investment.
Retained Earnings
The estimate of how many units of each product or service type will be sold over a period of time and at what price.
Sales Forecast
State and federal taxes based on sales of covered items.
Sales Tax
Early-stage money usually obtained through personal funds, friends and family, or angel investors.
Seed Capital
A software-based system that enables the real-time entry and manipulation of figures into financial statements.
Spreadsheet
Expenses incurred to launch a new venture; examples include rent, marketing and advertising, initial inventory, utility expenses, and salaries.
Start-Up expenses
Changes in a spreadsheet that can be deliberately entered to determine what would happen if the change were to occur in reality.
What-if scenarios
The amount by which current assets exceed current liabilities.
Working capital
A sales forecast that uses ultraconservative estimates of sales volume.
Worst-case sales forecast
In general, investors and lenders look at four criteria when evaluating the assumptions that underlie financial statements:
1) Clarity of expression
2) Consistency with knowledge of commercial practices
3) Internal consistency
4) Comprehensiveness
In chapter 6, we explored entrepreneurial accounting, which is focused on recording and categorizing the operating results of the venture. Both types of analysis use the three basic financial statements
1) The profit and loss (P&L) statement (also called the income statement)
2) The cash flow statement
3) The balance sheet
The major headings for a P&L statement are:
- Revenue (based on sales forecast)
- Cost of goods sold
- Gross profit/gross margin
- Selling expenses
- General and administrative (G&A) costs
- Operating profit, or net income before taxes
___________ category includes all costs required to prepare the venture's products or services for sale. This category may include costs of raw materials, costs of shipping raw materials, production, production payroll, or costs to deliver a service. Many entrepreneurs list in this category all expenses that are not more clearly categorized as selling or G&A costs.
Cost of Goods Sold
______ is defined as the venture's revenue minus cost of goods sold. This figure represents the amount of money the business has for its operations. Looked at another way, ______ is the amount of money the entrepreneur has to spend on selling and G&A costs and to produce profit.
Gross Profit
______ is simply gross profit expressed as a percentage of revenue. It is easier to compare variations in accounting periods with one another using the percentage (gross margin) than it is to compare dollar amounts (gross profit). Slight variations in gross margins across accounting periods may warrant investigation. In most businesses, ____ margins have a steady trend. Large variations can indicate problems in purchasing or production costs.
Gross Margin
These expenses are associated with marketing and selling the venture's products and services. All marketing collateral and advertising are selling costs, as are salesperson salaries.
Sales and Marketing Expense
The ____ category is intended to include costs that are incurred for the benefit of the entire operation. Expense items normally listed here include salaries and benefits or expenditures not tied directly to production or sales, rent or lease payments, utilities, supplies, travel and entertainment, and other items required for operations. Another term that is often used for these expenses is overhead.
General and Administrative Expenses
____________ reflects the so-called bottom line for the accounting period. This figure is generated by subtracting total expenses from total revenues.

Net income can be positive or negative depending on whether revenues exceeded expenses for the period. Many income statements also calculate net margin, which is a percentage obtained by dividing net income by revenue and multiplying times 100.

The net margin figure enables the entrepreneur to compare the performance of the venture against others in the industry.

____ is the figure that tells the entrepreneur whether the business has been profitable and whether funds are available to distribute to investors or to reinvest into the venture
Profit or net income
Once pricing has been set, the number of units sold will determine revenue, as indicated in this equation:
P x V = R
(Price x Volume = Revenue)