Chapter 6 Discussion Questions

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 (TVM) is an important concept to investors because a

dollar on hand today is worth more than a dollar promised in the future. The
dollar on hand today can be used to invest and earn interest or capital gains.

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)

In accounting, fixed costs are expenses that remain constant for a period of time
irrespective of the level of outputs. Variable costs are expenses that change
directly and proportionally to the changes in business activity level or volume.
Even if the output is nil, fixed costs are incurred.

3. Discuss the differences between cash flow and profit. When does a firm
obtain a profit? (LO 6-1)

Cash flow refers to the money that flows in and out of your business. It's income
and expenses. What you're bringing in and spending. Profit, however, is the
money you have after deducting your business expenses from overall revenue.

4. Discuss the purpose of a cash flow statement. What are the key issues
associated with developing a cash flow statement? (LO 6-2)

A cash flow statement is a financial statement that summarizes the amount of

cash and cash equivalents entering and leaving a company. The cash flow
statement measures how well a company manages its cash position, meaning
how well the company generates cash to pay its debt obligations and fund its
operating expenses.

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 financial statement that reports a company's assets,
liabilities and shareholders' equity at a specific point in time, and provides
a basis for computing rates of return and evaluating its capital structure. It
is a financial statement that provides a snapshot of what a company owns
and owes, as well as the amount invested by shareholders.

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

business owner. Be specific. (LO 6-1)

the value of the shares issued by a company. Advantages - less burden, credit issues
gone, lean and gain from partners. Disadvantages - share profit, loss of control, potential
conflict

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

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

an estimate of income and expenditure for a set period of time Since budgeting
allows you to create a spending plan for your money, it ensures that you will
always have enough money for the things you need and the things that are
important to you. Following a budget or spending plan will also keep you out of
debt or help you work your way out of debt if you are currently in debt.

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

small business owner. (LO 6-1)

a series of ratios along four areas of company performance (liquidity, activity,

leverage, and profitability) that provides a picture of the health of the company.

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

specific examples. (LO 6-2)

The three categories of cash flows are operating activities, investing activities,
and financing activities. Operating activities include cash activities related to net
income. Investing activities include cash activities related to noncurrent assets.
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)

Begin with net income from the income statement. Add back noncash
expenses, such as depreciation, amortization, and depletion. Remove the
effect of gains and/or losses from disposal of long-term assets, as cash from
the disposal of long-term assets is shown under investing cash flows. Adjust
for changes in current assets and liabilities to remove accruals from operating
activities.