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Chapter Eight: Financial Analysis
Critical Thinking Exercise 8.1 Evaluating Sensitivity Analysis - Notes
The answers in this lesson might vary depending upon the student research.
1. Discuss the steps required to perform a sensitivity analysis can be
performed on historical data. Why is this analysis important to a business
owner?
2. What does a rapid increase in sales indicate about the business? Be
specific.
3. What does a rapid decrease in sales indicate about the business? Be
specific.
4. How does a business owner know if they need to acquire additional
funding for the business?
Critical Thinking Exercise 8.2: Survey Questions to Assess Competitors
(LO 8-7)
The small business owner initiates surveys to evaluate the performance of the business.
Recall that if there are many customers served by the organization the small business
owner may want to complete a random sample of customers. In the text, the authors
discussed what questions on the survey should be designed to answer questions
directly related to the mission and strategy of the business (text page 155).
For the purpose of this exercise, you are the owner of a restaurant that serves upper
class Italian food in the community. You have approximately 1,500 customers on your
mailing list.
IM 8-1
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Eight: Financial Analysis
a. Create five survey questions for your customers to complete in your survey.
b. Will you send your survey out to all of your customers? Why or why not?
c. How will you evaluate the completed data compiled from the survey?
d. What is the expected outcome of the survey data that reveals a decline in
customer service? Will you hire a new staff?
Critical Thinking Exercise 8.2: Survey Questions to Assess Competitor - Notes
For the purpose of this exercise, you are the owner of a restaurant that serves the upper
class Italian food in the community. You have approximately 1,500 customers on your
mailing list.
a. Create five survey questions for your customers to complete in your
survey.
b. Will you send your survey out to all of your customers? Why or why not?
c. How will you evaluate the completed survey data?
d. What is the expected outcome of the survey data that reveals a decline in
customer service? Will you hire a new staff?
Critical Thinking Exercise 8.3: How to Measure the Firm
(LO 8-3, 8-4, 8-5, 8-6, 8-7)
IM 8-2
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Eight: Financial Analysis
In the text, the authors revealed four classic techniques used to measure the firm.
Discuss the four techniques and provide an example when each is an effective method
to measure the firm. Be specific and provide examples.
1.
2.
3.
4.
Critical Thinking Exercise 8.3: How to Measure the Firm - Notes
In the text, the authors revealed four classic techniques used to measure the firm.
Discuss the four techniques and provide an example when each is an effective method
to measure the firm. Be specific and provide examples.
1. Ratio analysis
2. Deviation analysis
3. Sensitivity analysis
4. Short surveys
The examples that the students provide are expected to be based on their
perception of the analysis.
Bonus Cases
Bonus Case 8.1: Deviation Analysis and the Entrepreneurial Business
(LO 8-5)
A small business owner establishes the business and manages the operations of the
new business. The owner examines the firm, its activities and its performance using a
deviation analysis. Consider the deviation analysis and answer the following questions:
1. Describe how to prepare a deviation chart for the business.
2. What does each of the columns represent? What changes are revealed in the
chart?
3. Why do the results of a deviation analysis vary based on the perception of the
business owner? What does this reveal?
4. How often should a small business owner perform a deviation analysis? Why?
IM 8-3
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Eight: Financial Analysis
Bonus Case 8.1: Deviation Analysis and the Entrepreneurial Business
(LO 8-4) - Notes
1. Describe how to prepare a deviation chart for the business. A deviation chart
2. What does each of the columns represent? What changes are revealed in
3. Why do the results of a deviation analysis vary based on the perception of
the business owner? What does this reveal? The business owner must
4. How often should a small business owner perform a deviation analysis?
Bonus Case 8.2: Liquidity Considerations and Solvency Issues
(LO 8-4)
The results of liquidity ratios measure the short term ability of the firm to pay its debt. In
the text, the authors revealed that lending institutions require liquidity ratios be kept
within certain ranges. Typically, a bank will monitor the ratios of the business when the
business has a loan or a line of credit that is being financed by the bank. In addition, a
bank will analyze these ratios of a business that seeks to acquire a loan.
A business should use extreme caution and do everything in its power to keep the firm
liquid. The bank could view the business as a high risk if these ratios fall below the
standard industry ratio. A business owner strives to remain solvent and “the more
self-sufficiency a company demonstrates, the less risky it appears (Pattison, 2009)i” A
business does not want to project itself as a business risk to the lending institution.
Discussion Questions:
IM 8-4
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Eight: Financial Analysis
1. Do you believe that a company that has poor liquidity can obtain a loan from a
bank or other lending institution? Why or why not?
2. What percentage should a current ratio be in order to reveal that the company
has enough money to meet its short-term obligations? What if the ratio falls
below that requirement?
3. What can a business owner do to assure that the business maintains adequate
liquidity and that there is a positive cash flow?
Bonus Case 8.2: Liquidity Ratios and Solvency Issues - Notes
1. Do you believe that a company that has poor liquidity can obtain a loan
from a bank or other lending institution? Why or why not?
2. What percentage should a current ratio be in order to reveal that the
company has enough money to meet its short-term obligations? What if it
falls below this requirement?
3. What can a business owner do to assure that the business maintains
adequate liquidity and a positive cash flow
Bonus Case 8.3: FBI Reports Financial Crimes
The accurate reporting of the accounting and finance functions of the new business is
an important consideration to the new small business owner. The reports compiled for
the business are used for an industry comparative analysis, calculate financial ratios,
and to project the future earnings of a business. What happens if there is an error or
incorrect reporting in those statements?
Obviously, the business owner should investigate the issue to discover if there was an
error, transposition, or another form of human oversight. In certain cases, innocent
IM 8-5
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Eight: Financial Analysis
errors are made in the reporting process and the responsible employee apologizes to
the boss for the oversight that resulted in the error. However, in other cases, there are
dishonest individuals working for the business who cause the firm to report incorrect
data as a result of embezzlement, employee theft, or an additional dishonest
circumstance.
The “FBI investigates cases resulting in indictments and convictions of corporate
criminals (Federal bureau of investigation) related to workplace crimes. The results
found indicate that there are many dishonest employees who steal from their
employers. The business owner needs to create a keen sense of awareness in
reference to employee theft and other dishonest practices associated with the financial
reporting process.
Discussion Questions
1. What would you do if you were a small business owner and you discovered that
your accountant was embezzling funds from the business as shown by your
analysis of liquidity ratios?
2. As a business owner, what are some of the precautions that you could take to
assure accurate reporting in your financial records?
3. Would you report such theft to the authorities? Why of why not?
IM 8-6
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
i Pattison, K. (October 8, 2009). The new rules of angel investing. NewYorkTimes.com.
http://www.nytimes.com/2009/10/29/business/smallbusiness/29angels.html?
scp=15&sq=human%20resources%20and%20the%20new%20small
%20business&st=cse. Retrieved on October 31, 2009.
