978-1259912191 Chapter 6 Solutions Manual Part 2

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Chapter Six: Analyzing Cash Flow and Other Financial Information

Bonus Internet Exercises

Bonus Internet Exercise 6.1: Financial Resources and the New Entrepreneur

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

In this chapter the authors focused on cash flow, budgets, and other financial tools to

assist the new entrepreneur with the financial planning needs for a new business. It is

important to recognize that cash flow represents the cash that moves into the business

and cash that moves out of the business. You can see why profits and a positive cash

flow are important goals for the new small business.

New small business owners utilize their resources to learn specific details about

finance, financial management, and other beneficial tools to assist them with their

planning needs. Visit the Institute for Management Accountant’s (IMA) website at

http://www.imanet.org/ and review the information that might help a new small business

owners with their financial needs.

Discussion Questions:

1. What information did you discover that might be beneficial to new small business

owners to help them analyze cash flow? List at least three resources that are

available at this website and explain why these resources are important. Be

specific.

2. Summarize the publications that are available on the website. Discuss how they

can assist a new small business owner.

3. Review the Core Values tab on the website. List them and explain how these

values could be relative to the new small business owner.

4. What other resources did you find on the website? Why are they important?

Bonus Internet Exercise 6.1: Financial Resources and the New Entrepreneur

(LO 6-1, 6-2, 6-3) – Notes

Discussion Questions:

1. What information did you discover that might be beneficial to new small

business owners to help them analyze cash flow? List at least three

resources that are available on this website and explain why these

resources are important. Be specific. The site lists several resources and

2. Summarize the publications that are available on the website. Discuss how

they can assist a new small business owner. Publications include “The

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Chapter Six: Analyzing Cash Flow and Other Financial Information

3. Review the Core Values tab on the website. List them and explain how

these values could be relative to the new small business owner. The core

4. What other resources did you find on the website? Why are they

important? Responses will vary.

Bonus Internet Exercise 6.2: Entrepreneurs Establish Business Ethics for Financial

Decisions

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

New entrepreneurs initiate their financial planning and discover the cash flow relative to

their new small business. Founders create equity when they invest their personal assets

in the new small business. In addition, they develop a balance sheet and other financial

tools that assist them with their finance needs.

Sound business practices ensure that the future financial functions of the new small

business are in compliance with stakeholders, partners, investors, regulatory agencies,

and, of course, the IRS. As a result, new small business owners must assure that they

make honest business decisions that enhance their new small business.

Study the “International Business Ethics (International Business Ethics Institute (IBEI))i”

website at http://www.business-ethics.org/. and discuss the following questions.

Discussion Questions:

1. Why should a new small business owner understand the concept of ethics as it

applies to the financial functions of the new small business?

2. How can new small business owners utilize this site to learn about ethical

decisions for their new small businesses when they consider how the new

businesses will be financed?

3. What professional services can a new small business owner use to assure that

the owner will make ethical business decisions?

4. Review the publication section on the website. What publications can new small

business owners use to enhance their ethical business practices?

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Chapter Six: Analyzing Cash Flow and Other Financial Information

Bonus Internet Exercise 6.2: Entrepreneurs Establish Business Ethics for Financial

Decisions (LO 6-1, 6-2, 6-3) – Notes

This website titled “International Business Ethics” has some very interesting articles.

The site also lists several resources related to business ethics. The articles are current

and change often. The students should select an article of interest and see how it

relates to the previous questions.Bonus Internet Exercise 6.-3: The Balance Sheet:

Balances for the New Entrepreneur

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

One part of the business environment is the population in a given area. Visit

www.census.gov and answer the following question using the research provided on this

website.

1. What is the American Community Survey? How is it different from the Census

survey taken every ten years?

2. What are the projections for the population during 2010-2050? Is the population

expected to increase or decrease?

3. What are infant mortality rate projections for 2010-2050? How might this data be

useful if you were starting a business?

4. Find the most recent data for the economic census. How many establishments

are involved in oil and gas extraction? How many establishments are involved in

food manufacturing? How many retail bakeries are there?

5. What other information would be useful to the new entrepreneurial business

owner on this site?

Bonus Internet Exercise 6.3: The Balance Sheet: Balances for the New Entrepreneur

(LO 6-1, 6-2, 6-3) – Notes

1. What is the American Community Survey? How is it different from the

Census survey taken every ten years? The American Community Survey is a

2. What are the projections for the population during 2010-2060? Is the

population expected to increase or decrease? The population in the US is

3. What is infant mortality rate for your state? How might this data be useful

if you were starting a business? If the business is related to infants or

4. Find the most recent data for the economic census. How would you find

the number of establishments that are involved in oil and gas extraction?

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Chapter Six: Analyzing Cash Flow and Other Financial Information

5. What other information would be useful to the new entrepreneurial

business owner on this site? Responses could include geographic maps,

Critical Thinking Exercises

Critical Thinking Exercise 6.1: Budgeting for the Entrepreneur

(LO 6-1, 6-2)

Recall that the authors in the text revealed that the purpose of a budget is to project the

costs that are expected to be incurred over a predetermined period of time. One way a

new entrepreneur can establish new budgeting skills is to evaluate their personal,

individual budgets. Complete the following personal budget and consider how a

personal budget differs from a budget for a new small business.

PERSONAL BUDGET

January

Februar

y March April May June

Income

Total Income:

Payment/Debt Rent/Mortgage

Automotive

Insurance

Gas

Maintenance

Groceries

Clothing/Shoes

Utilities

Medication

Health Ins.

Taxes

Savings

IRA

401(k)

Misc.

Personal

Total Payments

Ending Cash

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Chapter Six: Analyzing Cash Flow and Other Financial Information

1. List your income for each month in the designated column. Be sure to use the

amount you actually receive, not the amount before taxes.

2. List your payments and expenses for each month in the designated column.

3. Subtract the expenses from the income and list your remaining cash figure.

4. How much money do you expect to have left over at the end of each month?

Compare your budget to your actual expenditures.

5. Next, discuss how your personal budget will vary from the budget you create for

your new small business. Be specific.

6. Create a budget for your new small businessCritical Thinking Exercise 6.1:

Personal Budgeting – Notes

The purpose of this lesson is to introduce the budgeting process to the students. In this

exercise the students develop skills to assure they understand the concepts related to a

budget. The students analyze their personal income, personal debt, and where their

money is spent during a period of six months. Students learn to develop the personal

budget and apply the skills they learn to the budget of their new small business.

Students are expected to discuss the variances between a personal budget and a

budget for a new small business. Students are encouraged to create a budget for their

new small businesses.

Critical Thinking Exercise 6.2: Analyzing Cash Flow

(LO 6-1, 6-2)

As we learned in this chapter, cash flow is the actual cash that flows into the business

subtracted from the cash that flows out of the business. It is imperative that the new

entrepreneurial business maintains a positive cash flow to ensure that the business can

operate at an optimal level of efficiency. Imagine you are ready to start the business and

apply these questions to your new small business.

Assignment:

1. Evaluate the sources of cash flow that you will use in your new business.

2. Describe the sources of equity that a new business owner might use to invest in

the new small business. List at least three sources of equity.

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Chapter Six: Analyzing Cash Flow and Other Financial Information

3. Summarize the advantages and disadvantages of equity. Discuss the benefits

and risks associated with this type investment?

4. Discuss how the new small business owner benefits from float. List the

advantages and disadvantages of float.

Critical Thinking Exercise 6.2: Analyzing Cash Flow – Notes

The purpose of this exercise is to ensure that the students gain the essential skills to

recognize the sources of cash flow that are available to the new small business owner.

In addition, the students discuss the benefits and risks associated with equity as a form

of investment.

Critical Thinking Exercise 6.3: Balancing the Books

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

The authors of the text discussed that the balance sheet provides a summary of the

assets, liabilities, and equity associated with the business. You learned that the pro

forma balance sheet provides a comparison for the new small business owner to

evaluate how each asset is utilized in the business.

Discussion Questions:

1. Discuss the two types of assets that are included in the balance sheet. List three

examples of each asset. Why they are important.

2. Discuss the two types of liabilities that are included in the balance sheet. List

three examples of each liability. Why are they important?

3. Why are assets subtracted from liabilities on the balance sheet? Be specific.

4. Why is the estimate of the current assets limited for a new small business?

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Chapter Six: Analyzing Cash Flow and Other Financial Information

5. What is working capital? How is it calculated?Critical Thinking Exercise 6.3:

Balancing the Books – Notes

The purpose of this exercise is to teach the students the components of the balance

sheet. The students are expected to learn the two types of assets, the two types of

liabilities, and how they are calculated on the balance sheet.

In addition, the students discover that the estimates of the firm’s assets are limited on

the balance sheet because the new small business has not generated any assets from

the operations of the new business.

Students also learn how to calculate working capital and they understand why it is

important to the business.

Bonus Cases

Bonus Case 6.1: Cash Flow and the New Entrepreneur

(LO 6-1, 6-2)

One the most interesting areas of business is the social aspect. How can companies

provide benefits that meet the needs of single people, single parents and married

couples? One of those ways is to introduce a cafeteria style benefits program. This

program gives each employee a specific dollar amount in which to spend on benefits,

and each family can review their situation and choose the right selection of benefits for

them.

This flexible approach to benefits can address the changing social structure in our

economy. For example a cafeteria style benefits program might provide the following

options:

Car insurance Life Insurance

Pet Insurance Tuition reimbursement

Health benefits Dental benefits

On –site daycare Extra vacation days

401k or retirement plan Bus or metro pass

In other words, an employee would receive X amount per year, and can pick and

choose the benefits he or she can use. For example, let’s say a single female, aged 23

is hired for a job. She doesn’t have kids, so doesn’t care about day-care or life

insurance, but would like more time off. With cafeteria benefits, she would be able to

take that time, while her 35 year old co-worker with 2 kids could enjoy daycare on-site.

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Chapter Six: Analyzing Cash Flow and Other Financial Information

Likewise, a 62 year old man whose kids are grown might be most interested in good

healthcare coverage and retirement plans. Remember that as part of the Health Care

Act, all persons must have health insurance.

Some companies are even going to the extreme and for employees to opt not to take

any benefits, they receive an amount back in cash on each paycheck.

1. In your current situation, which three benefits would you choose?

2. Do you see your situation changing in the next 10 years? Which benefits might

be important to you then?

3. How do you think cafeteria style benefits might help employee motivation? How

can they help maintain a diverse workforce?

Bonus Case 6.2: Ethics and Financial Planning

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

Entrepreneurs provide products and services to enhance their community; and to

implement positive social change in the communities they serve. Most business people

in society today trust the individuals and groups they choose to conduct their business.

Unfortunately, there are individuals who do not incorporate ethics in their business

decisions.

To illustrate this concept, consider the recent case of Bernie Madoff. According to recent

court documents from the US Department of Justice, Bernard L. Madoff had extensive

charges filed against him in Manhattan Federal Court. These charges consisted of

“eleven felony charges including securities fraud, investment adviser fraud, mail fraud,

wire fraud, three counts of money laundering, false statements, perjury, false filings with

the United States Securities and Exchange Commission (“SEC”), and theft from an

employee benefit plan (Justice)ii” (page 1). Recall that case and answer the following

questions.

Discussion Questions:

1. What is your reaction to this case?

2. If you were Bernie Madoff’s client, how would you react to these charges? Why?

3. Explain why a new entrepreneur should incorporate viable business planning

practices into the financial planning strategies for the new small business?

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Chapter Six: Analyzing Cash Flow and Other Financial Information

4. What can a new small business owner do to assure honest reporting in the

business’s cash flow statement, the balance sheet, and other financial

documents affiliated with the new small business? Why?

5. Why should an entrepreneur incorporate good ethical decisions into the financial

planning for the new small business?

Bonus Case 6.2: Ethics and Financial Planning – Notes

The purpose of this lesson is to illustrate how new small business owners can

incorporate ethics into their financial planning process. This is a classic example that

illustrates why the new small business owner should ensure that viable business

decisions are made as they relate to the financial functions of the new small business.

Investors were outraged when they discovered Bernie Madoff’s unethical business

practices.

New small business owners plan the financial tools they will use in their new small

businesses. As a result, they need to learn how to make viable business decisions that

project a practical approach to honesty, integrity, and the concepts of right and wrong

behaviors as they relate to ethics.

Bonus Case 6.3: Sensitivity Analysis

(LO 6-2)

Sensitivity analysis is essential to the new entrepreneur because it provides an

examination of positive and negative scenarios. It also provides a strong sense of

judgment to reveal how sensitive the firm would be to fluctuations in cash flow.

Discussion Questions:

1. A company notices that the gross profit (sales minus cost of goods sold) has

been decreasing. What should the company review to find the problem?

2. What factors should a company review if the company is considering a price

increase?

3. What factors should a company review if the company is considering an

expansion?

4. What factors should a company review if the company is considering moving to a

different location?

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Chapter Six: Analyzing Cash Flow and Other Financial Information

Bonus Case 6.3: Sensitivity Analysis (LO 6-2) – Notes

Developing new cash flow projections is part of each of the scenarios discussed.

Discussion Questions:

1. The company needs to look at its cost per product – has this cost increased if the

product is being purchased. If the product is being manufactured, the company

should its review labor costs and material costs. Even increases in utility costs

can adversely affect the cost of the goods sold.

2. Will the company lose customers? If they do, will an increase in price make up

for any lost customers? Will the new pricing affect the company’s competitive

advantage?

3. What would be all the costs of the expansion? Will personnel be tied up in the

expansion and be unable to perform their usual tasks? What is the expected

increase in sales or reduction in costs resulting from the expansion?

4. What would be the costs of the move to the new location? Will the customer

base follow the company to the new location? Will the new location add

substantial customers? Will the company lose sales during the transition?

Bonus Case 6.4: UPC Codes

(LO 6-3)

In this chapter, we discussed ways in which the government could help businesses be

successful. Among many ways, the government implements standards such as the

UPC code for retail products (this is the bar code required on products for sale in retail

stores). There are UPC codes on everything that you buy

1. Go to the web and find out how UPC codes are assigned.

2. Who keeps track of the codes?

3. What criteria are needed to get a code

Bonus Case 6.4: UPC Codes (LO 6-3) – Notes

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Chapter Six: Analyzing Cash Flow and Other Financial Information

1. Go to the web and find out how UPC codes are assigned. UPC codes have

four groups of numbers. The first group (2 numbers) is the country code.

Numbers 00 through 13 indicate those companies based in the US or Canada.

The next group (5 numbers) is the company code. The next group (5 numbers) is

the article code that is recorded in a centralized database. The last group (1

number) is a check digit. This is used to verify that the bar code has been

scanned correctly.

2. Who keeps track of the codes? GS1 is a not-for-profit group based in

Brussels, Belgium that administers the standards.

3. What criteria is needed to get one? To get a code, a business contacts GS1 US

and pays a fee. Then the company is issued a member kit and follows its

directions to obtain the code.

Endnotes

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i International Business Ethics Institute (IBEI). (2009). International Business Ethics Institute (IBEI). http://www.business-ethics.org/,

Retrieved on October 17, 2009.

ii United States v. Bernard L. Madoff and Related Cases. (2009). The United States Department of Justice. Southern District of New York.

http://www.justice.gov/usao/nys/madoff.html, Retrieved on October 18, 2009.