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Chapter Six: Analyzing Cash Flow and Other Financial Information
Table of Contents
Brief Chapter Outline.................................................................................................. 2
Chapter Outline and Lecture notes.............................................................................3
Key Terms................................................................................................................... 7
Suggested Text Responses
9
Class Activities and Sample Assignments.................................................................11
Discussion Questions for Online/Hybrid classes.......................................................12
Lecture Links............................................................................................................ 15
Lecture Link 6.1: Social Responsibility and the Entrepreneur............................15
Lecture Link 6.2: Inc. Magazine’s Fastest Growing Companies..........................17
Lecture Link 6.3: The Human Development Index.............................................18
Lecture Link 6.4: Community Stakeholders........................................................19
Bonus Internet Exercises.......................................................................................... 20
Bonus Internet Exercise 6.1: Financial Resources and the New Entrepreneur...20
Bonus Internet Exercise 6.2: Entrepreneurs Establish Business Ethics for
Financial Decisions.............................................................................................22
Bonus Internet Exercise 6.3: The Balance Sheet: Balances for the New
Entrepreneur...................................................................................................... 24
Critical Thinking Exercises........................................................................................26
Critical Thinking Exercise 6.1: Budgeting for the Entrepreneur..........................26
Critical Thinking Exercise 6.2: Analyzing Cash Flow...........................................29
Critical Thinking Exercise 6.3: Balancing the Books...........................................31
Bonus Cases............................................................................................................. 33
Bonus Case 6.1: Cash Flow and the New Entrepreneur......................................33
Bonus Case 6.2: Ethics and Financial Planning..................................................34
Bonus Case 6.3: Sensitivity Analysis..................................................................36
Bonus Case 6.4: UPC Codes...............................................................................38
Endnotes.................................................................................................................. 40
Brief Chapter Outlin
IM 6-1
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Six: Analyzing Cash Flow and Other Financial Information
I. Learning Objectives (text page 101)
Recognize the fundamental importance of cash flow analysis.
Prepare a cash flow statement and a budget.
Identify other financial tools.
II. Importance of Cash Flow Analysis (text page 102)
Learning Objective 6-1: Recognize the fundamental importance of cash flow
analysis.
III. Developing Cash Flow Statements and Budgets (text page 110)
Learning Objective 6-2: Prepare a cash flow statement and a budget.
IV. Other Financial Tools (text page 114)
Learning Objective 6-3: Identify other financial tools.
V. For Review (text page 120)
Chapter Outline and Lecture notes
1. Learning Objectives (text page 101)
Recognize the fundamental importance of cash flow analysis.
Prepare a cash flow statement and a budget.
Identify other financial tools.
2. Importance of Cash Flow Analysis (text pages (102 through110)
Learning Objective 6-1:Recognize the fundamental importance of cash flow
analysis
A. Defining cash flow (text page 102)
i. Actual cash that flows into the firm, minus the cash that goes out of
the firm.
B. Defining equity (text page 104)
i. Investment into the entrepreneurial business by the owners of the
firm.
C. Defining float (text page (105)
i. The difference between when the money goes out and when it
comes in.
D. Cash flow versus budgets (text page 105)
E. Defining budget (text page 105)
i. Statement that projects all the costs that will be incurred by the
organization over a period of time and allocates that expenses
IM 6-2
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Six: Analyzing Cash Flow and Other Financial Information
evenly over a period of time and allocates those expenses evenly
over the relevant time period
F. Defining deviation analysis (text page 108)
i. Analysis of the differences between the predicted and the actual
performanc
3. Developing Cash Flow Statements and Budgets (text pages 110 through 114)
Learning Objective 6-2:Prepare a cash flow statement and a budget
A. The cash flow statement for a new business is different than a cash flow
statement for a publicly traded annual report (text page 110)
i. No finance activity for new business
ii. No investment activity for new business
1. Interest on loans is included in the operations section of new
business cash flow statements
B. Cash Flow Statement
i. It documents the operating activity related to cash in and cash out
ii. A new business should generate cash flow statements monthly
iii. It is used to analyze the financial viability of a firm
iv. It summarizes where and when cash is disbursed and when and
where it is received
v. It displays the ability of the new business to meet its financial
obligations
vi. It provides a summary used for loan approval and other financial
analysis
vii. Expenses are included on the cash flow statement (text page 111)
1. Advertising expense
2. Benefit expense (basic benefits)
3. Cleaning services and supplies
4. Computer and furniture expenses
5. Cost of goods sold
a. Direct labor
b. Manufacturing
c. Packaging
d. Shipping
6. Insurance
7. Maintenance related to equipment
8. Office supplies
9. Rent and/or mortgage
10.Salaries
11. Security systems
12.Taxes/fees
a. Business
b. Income
IM 6-3
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Six: Analyzing Cash Flow and Other Financial Information
c. Licenses
d. Local
e. Payroll
f. State
13.Telephone
14.Tools/Machinery
15.Travel expense
16.Utility
a. Electric
b. Gas
c. Phone service provider
17.All other expenses
C. Revenues (text page 111)
i. The types of revenue may differ depending on the business.
D. Sensitivity Analysis (text page 112)
i. An analysis or examination of the best and worst-case scenarios
4. Other Financial Tools (text pages 114 to 119)
Learning objective 6-3: Identify other financial tool
A. Pro forma (text page 114)
i. A term describing estimates of what the balance sheets and
income statements will look like in the future
B. Balance sheet (text page 114)
i. A summary of the assets and liabilities of the entrepreneurial
business.
C. Current assets (text page 115)
i. Assets such as cash or those assets that can easily be converted
to cash, such as accounts receivable and notes receivable
D. Fixed assets (text page 115)
i. Assets that have a physical presence, including land, buildings,
office equipment, machinery, and vehicles
E. Current liabilities (text page 115)
i. Liabilities or debts that the entrepreneurial business has to pay
within one year. These include accounts payable, notes payable
such as bank notes, and accrued payroll
F. Long-term liabilities (text page 115)
i. Liabilities that are owned by the business and are ultimately due
more than a year from the current date. These include mortgages
payable, owners’ equity, and stockholders’ equity (the latter are the
investment by these individuals in the business)
G. Income statement (text page 116)
i. Revenue of the firm minus expenses
ii. It provides both the gross profit and net profit figures
IM 6-4
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Six: Analyzing Cash Flow and Other Financial Information
iii. Gross profit equals the sales of the organization minus the cost of
goods sold.
iv. Net profit is revenue minus all costs including taxes.
H. Break-even analysis (text page 117)
i. Tool for the estimation of when a business’s income exceeds its
expenses
I. Fixed costs (text page 117)
i. Costs that must be paid no matter how many goods are sold, such
as rent for the building
J. Variable costs (text page 117)
i. Costs that vary according to how many goods are produced
K. Entrepreneurial breakeven (text page 119)
i. When a new venture’s net cash flow exceeds the initial investment
plus the time value of the money invested.
L. Time value of money (text page 119)
i. The value of money over time at a given rate of inflation or other
type of return. Calculated as the value of your investment in time
and money if you did not do the proposed venture
5. For Review (text page 120)
IM 6-5
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written consent of McGraw-Hill Education.
