978-1259912191 Chapter 6 Solutions Manual Part 1

Chapter Six: Analyzing Cash Flow and Other Financial Information

Key Terms

Balance sheet: A summary of the assets and liabilities of the entrepreneurial business.

(LO 6-3)

Break-even analysis: Tool for the estimation of when a business’s income exceeds its

expenses. (LO 6-3)

Budget: Statement that projects all the costs that will be incurred by the organization

over a period of time and allocates those expenses evenly over the relevant time period.

(LO 6-1)

Cash flow: Actual cash that flows into the firm, minus the cash that goes out of the firm.

(LO 6-1)

Current assets: Assets such as cash or those assets that can easily be converted to

cash, such as accounts receivable and notes receivable. (LO 6-3)

Current liabilities: 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. (LO 6-3)

Deviation analysis: Analysis of the differences between the predicted and the actual

performance. (LO 6-1)

Entrepreneurial breakeven: When a new venture’s net cash flow exceeds the initial

investment plus the time value of the money invested. (LO 6-3)

Equity: Investment into the entrepreneurial business by the owners of the firm. (LO 6-1)

Fixed assets: Assets that have a physical presence, including land, buildings, office

equipment, machinery, and vehicles. (LO 6-3)

Fixed costs: Costs that must be paid no matter how many goods are sold, such as rent

for the building. (LO 6-3)

Float: The difference between when the money goes out and when it comes in. For

example, if you deposit a check or receive an electronic transfer today in payment for

some good, you typically do not receive cash when you deposit it. Instead, there is a

period of float before it is credited to your account. (LO 6-1)

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Chapter Six: Analyzing Cash Flow and Other Financial Information

Income statement: Revenue of the firm minus expenses. (LO 6-3)

Long-term liabilities: Liabilities that are owed 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 two are the investment by these individuals in

the business. (LO 6-3)

Pro forma: A term describing estimates of what the balance sheets and income

statements will look like in the future. (LO 6-3)

Sensitivity analysis: An examination of the best-and worst-case cash flow scenarios,

(LO 6-2)

Time value of money: 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. (LO 6-3)

Variable costs: Costs that vary according to how many goods are produced. (LO 6-3)

Suggested Text Responses

Opening Vignette – “Partpic” – p. 101

Student responses will vary.

Exercise 1 – p. 104

Student responses will vary.

Exercise 2 – p. 112

Student’ responses will vary.

Review Questions – p. 116

1. Why is cash flow so important for a new business? Without cash a business

2. How are cash flow and profit related? Generating profit does not put cash in the

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Chapter Six: Analyzing Cash Flow and Other Financial Information

3. What are the basic elements of a cash flow statement for an entrepreneurial

4. Why is a budget statement not a cash flow statement? How do they differ? A

5. How does float affect a cash flow statement? A business owner may deposit a

6. How does the balance sheet relate to a cash flow statement? The balance sheet

7. Why is break-even analysis so important to a new business? The break even

8. What elements make up a break-even analysis? The break-even analysis

9. How is an income statement used by a new business? The income statement

10. What is Entrepreneurial Breakeven? The point at which a firm’s costs equal its

Class Activities and Sample Assignments

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Chapter Six: Analyzing Cash Flow and Other Financial Information

1. In groups, ask students to discuss the role of the cash flow statement. Next, ask

students to discuss the advantages to a new entrepreneurial business that has a

positive cash flow versus the disadvantages to a business that has a negative cash

2. Ask students to discuss the time value of money. Next, ask students to describe how

inflation affects the time value of money. Also discuss the expected future returns of

the investments that you make in the new business now. What can new small

business owners do to assure they account for the time value of money? (LO 6-3)

3. Divide the students into groups. Ask each group of students to create a hypothetical

business. Next, ask students to list the expenses they would anticipate if they started

this business. Ask students to compare these expenses to those of a large

established organization. How do the expenses differ? List them on a flip chart or the

blackboard. (LO 6.2)

4. Ask students to discuss the differences between a budget and a cash flow

statement. Next, ask students to discuss how small business owners can develop a

budget over a period of one year. Discuss the components of a budget as it relates

to a new small business owner. List the possible categories on a flip chart or the

blackboard. (LO 6-1)

5. Ask students to discuss the different sections in a cash flow statement. Next, ask the

students to list the components and different categories within each section. Ask the

students why entrepreneurs develop a sensitivity analysis. What does it reveal? (LO

6-2)

6. In groups, ask the students to discuss the components of the balance sheet. Next,

ask the students to discuss the differences between fixed assets and current assets;

and the differences between current liabilities and long-term liabilities. Provide

specific examples of each and list them on the blackboard or a flip chart. (LO 6-3)

7. Ask the students to discuss the income statement. Ask students to research the

income statement of an existing firm and report their findings. The students can

present their data in a written report or a formal report to the class. (LO 6-3)

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Chapter Six: Analyzing Cash Flow and Other Financial Information

Discussion Questions for Online/Hybrid classes

1. What is the time value of money? Why is it important that an entrepreneur consider

it? (LO 6-3)

2. Explain the similarities and differences between fixed costs and variable costs.

Provide specific examples of each and explain how they relate to the break-even

analysis calculations. (LO 6-3)

3. Discuss the differences between cash flow and profit. When does a firm obtain a

profit? (LO 6-1)

4. Discuss the purpose of a cash flow statement. What are the key issues associated

with developing a cash flow statement? (LO 6-2)

5. What is a balance sheet? Why is it useful? What is the difference between a pro

forma balance sheet and a balance sheet? (LO 6-3)

6. What is equity? Discuss the advantages and disadvantages of equity to the business

owner. Be specific. (LO 6-1)

7. What is a budget? Why is it important? Discuss the differences between a budget

and cash flow. Be specific. (LO 6-1)

8. What is deviation analysis? When is it used? Discuss how it is useful to a new small

business owner. (LO 6-1)

9. Summarize the categories of expenses in a cash flow statement. Provide specific

examples. (LO 6-2)

10.What are the categories in a cash flow statement? What are revenues? Summarize

the categories of revenues in a cash flow statement. (LO 6-2)

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Chapter Six: Analyzing Cash Flow and Other Financial Information

Discussion Questions for Online/Hybrid classes – Notes

1. What is the time value of money? Why is it important that an entrepreneur

consider it? (LO 6-3) The time value of money is the value of money over time

2. Explain the similarities and differences between fixed costs and variable

costs. Provide specific examples of each and explain how they relate to the

break-even analysis calculations. (LO 6-3) Fixed costs are costs that must

3. Discuss the differences between cash flow and profit. When does a firm

obtain a profit? (LO 6-1) Cash flow is the money coming in and out of a firm.

4. Discuss the purpose of a cash flow statement. What are the key issues

associated with developing a cash flow statement? (LO 6-2) The cash flow

5. What is a balance sheet? Why is it useful? What is the difference between a

pro forma balance sheet and a balance sheet? (LO 6-3) A balance sheet is a

6. What is equity? Discuss the advantages and disadvantages to the business

owner. Be specific. (LO 6-1) Equity is the investment into the entrepreneurial

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Chapter Six: Analyzing Cash Flow and Other Financial Information

7. What is a budget? Why is it important? Discuss the differences between a

budget and cash flow. Be specific. (LO 6-1) A budget is a statement that

8. What is deviation analysis? When is it used? Discuss how it is useful to a

new small business owner. (LO 6-1) A deviation analysis is an analysis of the

9. Summarize the categories of expenses in a cash flow statement. Provide

specific examples. (LO 6-2) A cash flow statement will include revenues when

10.What are the categories in a cash flow statement? What are revenues?

Summarize the categories of revenues in a cash flow statement. (LO 6-2)

Lecture Links

Lecture Link 6.1: Social Responsibility and the Entrepreneur

(LO 6-1, 6-2, 6-3)

Social responsibility should be part of the entrepreneur’s business. Go to the website

www.bsr.org and research how the entrepreneurial business owner can be socially

responsible and profitable.

1. What topics does this website highlight?

2. What is transparency?

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Chapter Six: Analyzing Cash Flow and Other Financial Information

3. How can the entrepreneurial business be socially responsible?

Lecture Link 6.1: Social Responsibility and the Entrepreneur (LO 6-1, 6-.2, 6-3) – Notes

1. What topics does this website highlight? Topics include human rights,

transparency, climate leadership, and sustainability across the world.

2. What is transparency? Transparency implies openness, communication and

accountability.

3. How can the entrepreneurial business be socially responsible? Responses will

vary but could include being “green”, honest and concerned about others in our

society.

Lecture Link 6.2: Inc. Magazine’s Fastest Growing Companies

(LO 6-1, 6-2, 6-3)

Every year, Inc. Magazine comes out with a list of the 500 fastest growing companies.

Find the latest list.

1. How many on the list provide a manufactured good versus a service product?

2. How many are technical/computer companies?

3. Are any of these companies located in your geographic area? Find more information

on them.

Lecture Link 6.3: The Human Development Index

(LO 6-1, 6-.2, 6-3)

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Chapter Six: Analyzing Cash Flow and Other Financial Information

The Human Development Indexi is a way to measure the standard of living in various

countries. The index is developed by The United Nations Development Program. The

data is based on economic factors and social progress, such as education levels.

1. What factors do you think contribute to high development versus low development?

2. Why do you think the standard of living is better in some countries versus others?

Lecture Link 6.4: Community Stakeholders

(LO 6-1, 6-2, 6-3)

There is no doubt that one of the most important stakeholders in businesses is the

community in which they operate. For example, when Panamanian Airline ordered

737’s from Boeing, a deal worth $1 billionii, the Chicago based company executives

weren’t the only happy ones. Portions of the plane are built in Gresham, Oregon which

could help keep jobs in this area.

On the other hand, a community can suffer when a company isn’t doing well. When

Harley Davidson, Inc announced lower than expected revenues, it also announced it

would be cutting jobs and closing plants in the York, Pennsylvania area, where some of

the motorcycles are built. While on the surface this would only seem to affect those laid

off workers, it can affect everyone in the community. When workers are laid off, they

don’t have money to spend in stores, restaurants and on entertainment, affecting the

entire community.

“Closing these plants will be the worst thing,” says Liviu Hotea, the manager of the

Round the Clock Diner just down the road from the Harley plant. The diner feeds many

plant workers as they head to or off of their shifts. Even tourists stop in before or after

touring the plant. Other businesses believe they will be affected too, since 70% of their

business comes from the plantiii.

Suppliers will also be affected by the plant closings, as Harley Davidson will not need as

many raw materials to produce their products when the plant closes. The idea of

stakeholders being an important part of business decision rings true, whether the news

is positive or negative.

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Chapter Six: Analyzing Cash Flow and Other Financial Information

1. Have any businesses in your area closed? What effect did the closing have on the

community?

2. Describe a business near your college or home. What would be the effect of their

closing on your school?

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i /en/reports/

ii Portland Business Journal. (July 16, 2009). Panamanian Airline Orders 21 737’s. Retrieved July 16,

2009 from Portland Business Journal:

http://www.bizjournals.com/portland/stories/2009/07/13/daily38.html

iii Burfer, T.W. (May 18, 2009). Closing of York County Harley Davidson plant would Impact Entire

Community. Retrieved July 16, 2009 from Patriot News:

http://www.pennlive.com/midstate/index.ssf/2009/05/shutting_down_york_harleydavid.html