978-1259912191 Chapter 8 Solutions Manual Part 2

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.

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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)

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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?

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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:

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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

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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?

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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.