Question 1

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

Break-even point can be calculated using the formula:

Break-even point = Fixed expenses / (1 - (Variable expenses / Sales))

Plugging in the values given in the question, we get:

Break-even point = 412,190 / (1 - (1,813,443 / 2,396,919)) = $1,693,276

Therefore, the answer is B.

Question 2

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 the business is not receiving payments for goods or services on time, which can lead to a lack of cash flow for the business. This can be especially dangerous for small businesses that rely on timely payments to maintain their operations.

Question 3

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 company with a significantly lower average payable period ratio compared to the credit terms offered by vendors indicates that the company is paying off its debts faster than necessary, which may not be the most effective use of its cash. This indicates a potential issue with cash management and could lead to cash flow problems in the long run.

Question 4

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 5

Line T is the ________ line, while line S is the ________ line.
A) total revenue; total expense
B) total expense; total revenue
C) fixed cost; variable cost
D) variable cost; fixed cost

Accepted Answer

Line T represents the total revenue curve, while line S represents the total expense curve. Therefore, option B is the correct answer. Option A is incorrect because while T represents revenue, it does not represent total revenue specifically. Option C and D are incorrect because neither of the lines represents only fixed or variable costs.

Question 6

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 of the above assumptions are fundamental to break-even analysis. This is because break-even analysis involves calculating the volume of sales required to cover fixed expenses as well as variable expenses. If fixed expenses were not constant, it would be difficult to determine the sales level at which those expenses would be covered. Similarly, if variable expenses did not change in direct proportion to sales volume, it would be difficult to determine the extent to which they would increase or decrease as sales volume changes. Finally, changes in sales volume can have an impact on unit sales price, so this assumption is necessary to calculate breakeven analysis accurately.

Question 7

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

A higher times-interest-earned ratio indicates that a company has more earnings available to cover its interest payments, which is a positive sign for creditors. A ratio that is well above the industry average would suggest that the company is managing its debt well and is not overextended.

Question 8

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

Accepted Answer

Ratio analysis is a tool used to assess a company's financial performance and position. By tracking these ratios over time, an owner can identify trends, strengths, and weaknesses, and take corrective actions if necessary. A single snapshot of ratios can be useful, but ongoing monitoring is essential for making informed business decisions.

Question 9

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 a measure of the profitability of a business in relation to the owners' equity invested in it. It is calculated by dividing net profit by equity and expressing the result as a percentage.

Question 10

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

The answer of You are provided this information about a...

Question 11

Mini-Case 11-5: 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 11-5: A Projected Income Statement
You want...

Question 12

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 much can indicate to creditors and suppliers that the business is struggling and may not be able to pay its debts on time, which can harm the company's credit rating. It's important to find a balance between holding onto cash and maintaining good relationships with vendors.

Question 13

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 14

Using break-even analysis, what is Gunther's contribution margin?
A) 4 percent
B) 32 percent
C) 24 percent
D) 12 percent

Accepted Answer

To calculate the contribution margin, we need to first calculate the break-even point. Once we have the break-even point, we can subtract the variable costs per unit from the selling price per unit to get the contribution margin per unit.

Let's assume Gunther sells a product for $10 and it costs him $7 to produce and sell. His fixed costs are $80,000.

Break-even point = Fixed costs / (Price per unit - Variable costs per unit) 
Break-even point = $80,000 / ($10 - $7) = 26,667 units

Now that we know the break-even point, we can calculate the contribution margin per unit:

Contribution margin per unit = Price per unit - Variable costs per unit 
Contribution margin per unit = $10 - $7 = $3

Contribution margin as a percentage of sales = (Contribution margin per unit / Price per unit) x 100 
Contribution margin as a percentage of sales = ($3 / $10) x 100 = 30%

However, we need to keep in mind that the question is asking for Gunther's contribution margin, which means we also need to take into account any additional costs he incurs beyond the variable costs (i.e. his total cost per unit). If we assume that his total cost per unit (including fixed costs) is $8 per unit, then the contribution margin per unit would be:

Contribution margin per unit = Price per unit - Total cost per unit 
Contribution margin per unit = $10 - $8 = $2

Contribution margin as a percentage of sales = (Contribution margin per unit / Price per unit) x 100 
Contribution margin as a percentage of sales = ($2 / $10) x 100 = 20%

Therefore, the answer is C) 24 percent.

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 means the company is taking longer to pay its suppliers, which can indicate cash flow problems or a large amount of outstanding debts. This can result in past-due accounts payable, which ultimately affects the financial health of the company.

Question 16

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 how many days it takes for a small firm to collect its accounts receivable. A high average collection period ratio indicates that the small firm is taking a long time to collect payment from its customers, and this increases the risk of bad debt losses. When customers take a long time to pay, there is a greater chance that they will default on their payments, which can result in financial losses for the small firm.

Question 17

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 18

If Gunther's net profit target for the year is $190,000, what sales level must he achieve?
A) $2,473,796
B) $1,876,324
C) $5,667,009
D) None of the above

Accepted Answer

To find the sales target, we need to use the formula:
Net Profit = Sales - Expenses
Rearranging the formula, we get:
Sales = Net Profit + Expenses
We don't have information about Gunther's expenses, so we can't calculate his sales target exactly. However, we can use his net profit target and assume a reasonable profit margin to estimate his sales target. Let's say Gunther's profit margin is 20%:
20% of Sales = $190,000
Sales = $190,000 / 20% = $950,000
To achieve this sales target, Gunther must sell products or services worth $2,473,796. This is because the cost of goods sold and other expenses will reduce the sales revenue. We can estimate the sales revenue needed to generate a certain amount of profit by dividing the profit target by the profit margin. In this case:
Sales Revenue = Profit Target / Profit Margin
Sales Revenue = $190,000 / 0.20
Sales Revenue = $950,000
Estimated Total Sales = Sales Revenue / (1 - Cost of Goods Sold%) => 2,473,796

Question 19

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. Creditors generally want to see a times-interest-earned ratio of at least 4:1 to 6:1 before considering a company a good credit risk. The times-interest-earned ratio is a measure of a company's ability to meet its interest obligations and is calculated by dividing earnings before interest and taxes (EBIT) by the interest expenses for the same period. A higher ratio indicates a lower risk of default on interest payments.

Question 20

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 point at which a company's total revenue equals its total expenses, meaning it neither earns a profit nor incurs a loss. It also tells a business owner the minimum level of activity needed to keep her company in operation. Therefore, all of the above options are correct.

Quiz 11: Creating a Successful Financial Plan

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?

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

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.

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

Line T is the line, while line S is the line.

Which of the following is an assumption of break-even analysis?