Entrepreneurism. Chapter 7

Front 1

The cash breakeven point is the point in the venture's growth at which revenues exceed costs. (T or F)

Back 1

False

Front 2

The sales forecast, or revenue estimate, is necessary for an entrepreneur to produce the three basic financial statements. (T or F)

Back 2

True

Front 3

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)

Back 3

True

Front 4

Depreciation is called a cash expense. (T or F)

Back 4

False

Front 5

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)

Back 5

True

Front 6

The cash breakeven point is the point in the venture's development at which the cash inflows exceed the cash outflows.(T or F)

Back 6

True

Front 7

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)

Back 7

False

Front 8

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)

Back 8

True

Front 9

Spreading the cost of a capital good over the period of its useful life is called amortization. (T or F)

Back 9

False

Front 10

The cost of goods sold category includes all costs required to prepare the venture's products or services for sale.(T or F)

Back 10

True

Front 11

A venture's revenue minus cost of goods is defined as

Back 11

A Gross Profit

Front 12

Gross margin is gross profit expressed as a percentage of

Back 12

Revenue

Front 13

In a cash flow statement, the lowest negative ending cash position is the ________ amount of money needed to start the business

Back 13

Minimum

Front 14

In a balance sheet, assets = _____ + owners' equity.

Back 14

Liabilites

Front 15

Assets that are not expected to be available as liquid assets in less than a year are called

Back 15

Fixed Assets

Front 16

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.

Back 16

Assumptions

Front 17

A sales forecast that presents the most likely scenario barring unforeseen problems.

Back 17

Base-Case Sales Forecast

Front 18

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.

Back 18

Beginning Cash

Front 19

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.

Back 19

Best-case sales forecast

Front 20

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.

Back 20

Business Model

Front 21

Money spent to purchase a capital good.

Back 21

Capital Cost

Front 22

An item that has an expected life of more than one year.

Back 22

Capital Good

Front 23

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.

Back 23

Cash Breakeven Point

Front 24

The intersection of a column and a row in a spreadsheet.

Back 24

Cell

Front 25

Items owned by the company that are cash or near cash, that is, something that could easily be converted to cash

Back 25

Current Assets

Front 26

Financial obligations of the firm that will be repaid within one year.

Back 26

Current Liabilities

Front 27

The loss of value of a capital good over its expected lifetime.

Back 27

Depreciation

Front 28

Figure in the summary of the cash flow statement that shows the cumulative cash position of the company at the end of each month

Back 28

Ending Cash

Front 29

The twelve-month period in which a firm records its operating performance.

Back 29

Fiscal Year

Front 30

Assets that are not expected to be available as liquid assets in less than a year.

Back 30

Fixed Assets

Front 31

Equations that are entered into cells of a spreadsheet to automatically update entries in the cell based on changes elsewhere in the spreadsheet

Back 31

Formulas

Front 32

State and federal taxes that are based on a company's income

Back 32

Income Tax

Front 33

The rows in a profit and loss statement.

Back 33

Line Items

Front 34

Amounts owed by companies that must be repaid more than one year from the balance sheet date.

Back 34

Long-term liability

Front 35

Figure in the summary of the cash flow statement that indicates the net cash change for the month, whether positive or negative.

Back 35

Net change

Front 36

A percentage calculated by dividing net income by revenue and multiplying times 100.

Back 36

Net margin

Front 37

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.

Back 37

Noncash expense

Front 38

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.

Back 38

Other assets

Front 39

Another term for general and administrative expenses, or costs that are incurred for the benefit of the entire operation.

Back 39

Overhead

Front 40

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).

Back 40

Pro forma financial statements

Front 41

Fair and accurate statement of the profit or loss of a company's operations for a given accounting period, using GAAP rules.

Back 41

Profit and loss statement

Front 42

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.

Back 42

Profit breakeven point

Front 43

A period of time in the sales forecast during which sales are increasing month by month to reach capacity levels.

Back 43

Ramp-up period

Front 44

Earnings that the owners do not pay to themselves but rather leave in the firm as an additional investment.

Back 44

Retained Earnings

Front 45

The estimate of how many units of each product or service type will be sold over a period of time and at what price.

Back 45

Sales Forecast

Front 46

State and federal taxes based on sales of covered items.

Back 46

Sales Tax

Front 47

Early-stage money usually obtained through personal funds, friends and family, or angel investors.

Back 47

Seed Capital

Front 48

A software-based system that enables the real-time entry and manipulation of figures into financial statements.

Back 48

Spreadsheet

Front 49

Expenses incurred to launch a new venture; examples include rent, marketing and advertising, initial inventory, utility expenses, and salaries.

Back 49

Start-Up expenses

Front 50

Changes in a spreadsheet that can be deliberately entered to determine what would happen if the change were to occur in reality.

Back 50

What-if scenarios

Front 51

The amount by which current assets exceed current liabilities.

Back 51

Working capital

Front 52

A sales forecast that uses ultraconservative estimates of sales volume.

Back 52

Worst-case sales forecast

Front 53

In general, investors and lenders look at four criteria when evaluating the assumptions that underlie financial statements:

Back 53

1) Clarity of expression
2) Consistency with knowledge of commercial practices
3) Internal consistency
4) Comprehensiveness

Front 54

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

Back 54

1) The profit and loss (P&L) statement (also called the income statement)
2) The cash flow statement
3) The balance sheet

Front 55

The major headings for a P&L statement are:

Back 55

- 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

Front 56

___________ 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.

Back 56

Cost of Goods Sold

Front 57

______ 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.

Back 57

Gross Profit

Front 58

______ 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.

Back 58

Gross Margin

Front 59

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.

Back 59

Sales and Marketing Expense

Front 60

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.

Back 60

General and Administrative Expenses

Front 61

____________ 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

Back 61

Profit or net income

Front 62

Once pricing has been set, the number of units sold will determine revenue, as indicated in this equation:

Back 62

P x V = R
(Price x Volume = Revenue)