Deck 8: Building Your Pro Forma Financial Statements

Question 1

The income statement shows the standing of a company at any given point of time.

Answer 1

False

Question 2

Most pro-forma projections for new companies show monthly income figures for the first two years.

Answer 2

True

Question 3

Under rare occasions, we may introduce additional elements to the balance sheet equation.

Answer 3

False

Question 4

It is possible to have negative earnings on the income statement and a positive statement of cash flows.

Question 5

Investors often predict the market share of startups as 3% after Year 3, because of the ease with which 3% can be captured.

Question 6

Revenue projections help you to understand the company's revenue drivers.

Question 7

When we graph costs over time, we see them decreasing exponentially.

Question 8

It is better to let your accountant articulate the numbers of your business idea to potential investors.

Question 9

Entrepreneurs who claim their estimates are "conservative" are usually overly optimistic about their ventures' future.

Question 10

An optimistic attitude about your business's future helps achieve positive cash flow sooner.

Question 11

You should attempt to calculate your operating costs before you start a business.

Question 12

In the build-up method, you look at the revenue you might generate and the cost you might incur in a typical day.

Question 13

For an asset to appear on the balance sheet it must generate revenue.

Question 14

Gross profit margin can be calculated by dividing the Cost of Goods Sold by Total Revenues.

Question 15

Financial analysis is simply the mathematical expression of an overall business strategy.

Question 16

Pro-forma financials often project sales occurring 5 years in the future.

Question 17

The expenses that a business incurred appear on a different financial document than the amount of cash that it spent.

Question 18

Typically, a business begins to generate revenue within the first two months after it launches.

Question 19

The first step in Revenue Projections is to calculate the median revenue of your products in the product mix.

Question 20

Many noncash transactions are represented in the balance sheet.

Question 21

Which of the following is not a common mistake of entrepreneurs?

A)Underestimating costs
B)Finding a lack of comparable companies
C)Underestimating the time required to secure financing
D)Underestimating power of going public
E)Expecting to generate revenues within too short of a timeframe

Question 22

The build-up method drills down revenue projections to a typical ______.

A)hour
B)day
C)month
D)quarter
E)year

Question 23

An income statement will never include a line for:

A)Depreciation
B)COGS
C)SG&A costs
D)Taxes on profits
E)Accounts payable

Question 24

It is critical to show the first two years of pro-forma projections on a monthly basis because this is when a company is most vulnerable to failure.

Question 25

Seldom are revenues in retail spread evenly across the calendar year.

Question 26

Businesses should expect to build their sales and start operating efficiently within a five-year period.

Question 27

Which of the following equations is true about the Balance Sheet under GAAP?

A)Assets = Liabilities
B)Shareholder Equity + Assets = Liabilities
C)Assets = Liabilities + Shareholder Equity
D)Liabilities + Assets = Shareholder Equity
E)None of the above

Question 28

The process of examining and reexamining your assumptions over and over is a waste of time

Question 29

Under the Build-Up Method, you should start with the:

A)Income statement
B)Balance Sheet
C)Statement of Cash Flows
D)Industry averages
E)None of the above

Question 30

In the comparable method, you look at how your company compares to industry averages and benchmark companies.

Question 31

Which of the following columns is not included in the revenue worksheet?

A)Product/Service Description
B)Price
C)Units Sold
D)Units Ordered
E)Total Revenue

Question 32

The expense of acquiring land should appear in full on your annual income statement.

Question 33

If, after all calculations, your balance sheet does not balance, you should adjust retained earnings accordingly.

Question 34

In the build-up method, after you identify all your revenue sources, what is the next step?

A)Identify all your costs
B)Think about how much revenue you can generate in a year
C)Determine operating expenses by the most appropriate time frame
D)Break down revenue into a typical day
E)Write a two- to three- page description of financial statements

Question 35

By closing your sales for credit, you can increase your company's cash flow.

Question 36

The bottom line of the income statement states the company's _______.

A)net size
B)net income
C)revenue less expenses
D)net assets value
E)gross profit margin

Question 37

Different companies may calculate COGS differently, even if their actual costs are identical.

Question 38

The statement of cash flows starts with which of the following?

A)Net Income
B)Costs
C)Expenses
D)Net Assets
E)Net Liabilities

Question 39

In financial analysis, the step that follows forecasting revenues and expenses is formulating a cash flow statement from those forecasts.

Question 40

Gross margin is calculated with the formula

A)Revenue plus COGS
B)Gross Profit times COGS
C)Price plus Gross Profit
D)Revenue minus COGS
E)Revenue times profit

Question 41

What is the best way to validate costs?

A)Validating costs is not necessary.
B)Adjust your business model.
C)Ask your customers.
D)Compare your balance sheet with your competitors' balance sheets.
E)Compare your common-sized income statement with the industry averages or some benchmark companies.

Question 42

The following are examples of operating expenses, except:

A)Property purchases
B)Rent expenses
C)Interest expenses
D)Salaries
E)Administrative expenses

Question 43

It is critical to show the pro-forma projections on a monthly basis when a company is:

A)Experiencing negative cash flow
B)Not earning any revenue
C)Most vulnerable to failure
D)Facing strong competition
E)Managing an inventory-to-asset ratio of 10% or higher

Question 44

According to the chapter, the process of creating a detailed schedule of every operating expense is called:

A)Clarifying
B)Purifying
C)Refining
D)Polishing
E)Improving

Question 45

What effect can selling on credit have on your business?

A)Reduce assets
B)Decrease accounts payable
C)Delay cash inflows
D)Reduce liabilities
E)Increase inventory

Question 46

Explain why it is important to construct pro forma financial statements for new ventures.

Question 47

According to the chapter, it takes time to:

A)Build up your clientele
B)Learn to operate efficiently
C)Develop track record
D)Understand seasonality
E)All of the above

Question 48

How long should the explanation of the financial statements be?

A)1 page
B)2 - 3 pages
C)10 - 15 pages
D)Approximately 20 pages
E)25 - 30 pages

Question 49

If a business is profitable and growing, which of the following is most likely to be a reason for failure?

A)High COGS
B)Low clientele
C)Strong competition
D)Failure to estimate the size of the market
E)Insufficient financing

Question 50

An accumulated depreciation line item on your balance sheet shows how much of the asset has been:

A)Used up
B)Acquired
C)Written-off
D)None of the above
E)All of the above

Question 51

Approximately how many subsections in the section of the planning process should your explanation of the financial statements have, if you follow the model in the chapter?

A)1
B)3
C)4
D)7
E)8

Question 52

The standard term for most business plans is:

A)2 years
B)4 years
C)5 years
D)8 years
E)Until the break-even date

Question 53

What does the Comparable Method help an entrepreneur to do?

A)Estimate project cost
B)Research the industry
C)Benchmark competitors
D)Calculate operating expenses
E)Validate projections

Question 54

A financial statement that displays each item as a percentage of a common-base figure is called:

A)A Keynesian statement
B)A common-size statement
C)A statement of residuals
D)A comparable statement
E)A matching statement

Question 55

The chapter recommends that you should construct monthly income and cash flow statements for the first:

A)1 year
B)2 years
C)3 years
D)4 years
E)5 years

Question 56

Which of the following can be used to strengthen your assumptions?

A)Industry research
B)Competitor analysis
C)Own observations
D)Surveying customers
E)All of the above

Question 57

What is a "hockey stick" projection and what is so unrealistic about it?

Question 58

Seasonality is important because it affects which of the following:

A)Product or service demand
B)Financial decisions
C)Key operations and decisions such as hiring
D)A & C
E)All of the above

Question 59

An entrepreneur must be able to ___________, if his income statement does not match the industry average?

A)remove any information that deviates from the average
B)adjust and refine your metrics accordingly
C)understand and explain the differences
D)change the metrics to more appropriate ones
E)rewrite your projections from scratch

Question 60

Under the Comparable Method, you can see how the model changes overall when you:

A)Increase your revenues
B)Leverage your drivers
C)Tweak your inventories
D)Change one of the assumptions
E)Decrease your costs

Question 61

The chapter says financial statements are obsolete immediately after they come off the printer.Why?

Question 62

What are examples of revenue drivers?

Question 63

What is the purpose of creating a headcount table?

Question 64

What is the importance of building integrated financial statements?

Question 65

What is the difference between the respective purposes of the balance sheet and the income statement?

Question 66

Explain the comparable method.

Question 67

Briefly describe the principle of the build-up method and its advantages.

Question 68

Explain what a "brief description of your financial spreadsheets" should include.

Question 69

When building a revenue worksheet, an entrepreneur has to begin with certain assumptions.What are three ways for an entrepreneur to later strengthen those initial assumptions?