Entrepreneurship The Art Science and Process For Success 2nd Edition Bamford Solutions Manual Full Chapter PDF

Entrepreneurship The Art Science and
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Bamford Solutions Manual
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Chapter Eight: Financial Analysis
Table of Contents
Brief Chapter Outline ............................................................................................................................ 2
Chapter Outline and Lecture notes ..................................................................................................... 4
Key Terms ............................................................................................................................................. 14
Suggested Text Responses…………………………………………………………………………..15
Class Activities and Sample Assignments........................................................................................ 21

Discussion Questions for Online/Hybrid classes ........................................................................... 22
Lecture Links ........................................................................................................................................ 25
Lecture Link 8-1: Entrepreneurs Create Surveys at the New Small Business ................................... 25
Lecture Link 8-2: Financial Ratios for American Express ................ Error! Bookmark not defined.
Lecture Link 8-3: Auditing Standards at the New Entrepreneurial Business ................................... 27
Bonus Internet Exercises ..................................................................................................................... 29
Bonus Internet Exercise 8-1: Factors Impact Sales ............................................................................ 29
Bonus Internet Exercise 8-2: Industry Ratio Analysis Sources ......................................................... 30
Bonus Internet Exercise 8-3: Industry Profit Analysis ...................................................................... 31
Critical Thinking Exercises ................................................................................................................. 33
Critical Thinking Exercise 8-1: Evaluating Sensitivity Analysis ...................................................... 33
Critical Thinking Exercise 8-2: Survey Questions to Assess Competitors ........................................ 35
Critical Thinking Exercise 8-3: How to Measure the Firm ................................................................ 37
Bonus Cases .......................................................................................................................................... 39
Bonus Case 8-1: Deviation Analysis and the Entrepreneurial Business............................................ 39
Bonus Case 8-2: Liquidity Considerations and Solvency Issues ........................................................ 41
Bonus Case 8-3: FBI Reports Financial Crimes ................................................................................. 43
Endnotes ................................................................................................................................................ 44
IM 8-1
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Brief Chapter Outline
I. Learning Objectives (text page 137)
.
 Describe the importance of solid financial foundation in entrepreneurial
business.
 Discuss techniques for measuring performance.
 Explain ratio analysis.
 Explain deviation analysis.
 Explain sensitivity analysis.
 Describe the use of short surveys in business.
 Analyze the importance of having a measurement focus.
II. Importance of a Solid Financial Foundation in an Entrepreneurial Business (text

page 138)
 Learning Objective 8-1: Describe the importance of solid financial foundation in
small business.
III. Techniques for Measuring Performance (text pages 138-141)

 Learning Objective 8-2: Discuss techniques for measuring performance.
IV. Ratio Analysis (text pages 141-148)

 Learning Objective 8-3: Explain ratio analysis.
V. Deviation Analysis (text pages 148-149)

 Learning Objective 8-4: Explain deviation analysis.
VI. Sensitivity Analysis (text pages 149-150)

 Learning Objective 8-5: Explain sensitivity analysis
VII. Use of Short Surveys in Business (text pages 150-153)

 Learning Objective 8- 6: Describe the use of short surveys in business
VIII. Importance of Having a Measurement Focus (text pages 153-154)

 Learning Objective 8-7: Analyze the importance of having a measurement focus
IM 8-2
IX. For Review (text page 154)
IM 8-3
Chapter Outline and Lecture notes
1. Learning Objectives (text page 137)
 Describe the importance of solid financial foundation in an entrepreneurial

business.
 Discuss techniques for measuring performance.
 Explain ratio analysis.
 Explain deviation analysis.
 Explain sensitivity analysis.
 Describe the use of short surveys in business.
 Analyze the importance of having a measurement focus.
2. Financial Foundation
 Learning Objective 8-1: Describe the importance of solid financial foundation in

small business
i. Recap evaluation of a firm (text page 138)

1. Starts with the mission of the organization
2. Mission is related to a specific industry where the firm
competes
3. Firms develop competitive advantages
ii. Measure the outcomes of a firm at intervals relevant to the
business
iii. Evaluate cost savings frequently
iv. Next, examine the metrics that should be used to evaluate the
business
3. Techniques for Measuring Performance (text pages 138 through 141)
 Learning Objective 8-2: Discuss techniques for measuring performance
i. Company analysis moves from the general to the specific

ii. Four techniques or analytical methods to design and monitor the
core metrics of the firm
1. Ratio analysis
2. Deviation analysis
IM 8-4
3. Sensitivity analysis
4. Surveys
iii. Recall the study of the balance sheet and income statements to
prepare for section 8.3, the Ratio Analysis
4. Ratio Analysis (text pages 141 through 148)
 Learning objective 8-3: Explain ratio analysis
a. Ratio analysis
i. Ratio analysis is a series of ratios along four areas of company
performance (liquidity, activity, leverage, profitability) that provides
a picture of the health of the company
ii. Tool to examine the overall health of the organization
iii. Small business owners use a combination of the ratios to evaluate
the firm
iv. Compare ratios
1. Similar organizations
2. Industry averages
3. Previous performance of the firm
a. Annual
b. Monthly
v. Four categories of ratios
1. Liquidity
2. Activity
3. Leverage
4. Profitability
b. Liquidity ratios
i. Ratios that measure the short-term ability of the firm to meet its
obligations
1. Obligations include debt or accounts payable due in the near
term
2. Financial industry standards require that ratios be within
certain ratios to be considered healthy
3. If ratio falls below the lower bounds of its liquidity level the
bank may limit the line of credit to the firm or require a higher
interest rate on the debt
IM 8-5
a. Indicates the firm is operating at a risk, or the bank

considers the ratio to be at a risk level not
appropriate to meet the obligations of the note
4. Two ratios used to evaluate if the business can meet their
short-term obligations:
a. Current Ratio
i. Current assets divided by current liabilities.
ii. Measures assets than can be quickly turned
into cash to pay immediate liabilities or
accounts payable
iii. The cash balance of the firm plus inventory
divided by all short-term liabilities
b. Quick (Acid) Ratio
i. Current assets minus inventory divided by
current liabilities
ii. Removes the ability to sell inventory and
examines the pure cash position relative to the
current liabilities.
iii. Quick ratio is also known as the acid test
5. Calculating liquidity ratios
a. For this illustration, use the example in figure 8.1
provided on page 140 of the text or provide an
example for the class
c. Activity Ratios
i. Ratios that measure the efficiency with which the entrepreneur is
handling the resources of the business
ii. A helpful resource to use as the firm develops
iii. Used to evaluate the firm on a monthly basis
1. Inventory turnover
a. Cost of goods sold divided by inventory
b. Cost of goods sold is the direct costs involved with the
product
c. As the inventory turnover rises, the firm is closer to a
just-in-time system
d. Inventory turnover ratio is better than industry average
e. An improvement in this ratio on a monthly basis
indicates that the firm is operating at a higher level of
efficiency
IM 8-6
2. Accounts receivable turnover

a. Credit sales divided by accounts receivable
b. Measures how fast the company turns credit sales
into cash
c. Faster turnover indicates the business turns credit
sales into cash
i. Indicates a good cash flow
d. Credit sales are evaluated and aged into categories
based on how long it has been since the sale
e. The older the debt is the less likely payment will be
received
f. Debt less than 30 days will likely be paid to the firm
g. Debt that is 90 days past due may not be recovered
3. Total/Fixed Asset Turnover
a. Net sales divided by fixed assets or net sales divided
by total assets
b. Popular evaluation tool
c. Difference depends on whether or not the business has
large amounts of fixed assets.
d. Examine the ability to generate sales from the assets
employed by the organization
e. As the number increases, the firm is being more efficient
f. New business owners try to minimize the amount of both
fixed and total assets in order to conserve cash
4. Calculating activity ratios
a. Calculation requires data from the balance sheet and
the income statement
b. From the income statement, use the cost of goods
sold number, or the numerator in the calculation
c. From the balance sheet, use the inventory figure, or
the denominator in the calculation
d. To demonstrate this calculation, use the numbers and
criteria provided in Figure 8.1 and 8.2 in the text.
i. Focus on the change in the numbers
ii. An increase in the inventory turnover rate
indicates that the firm is operating at a greater
rate of efficiency
IM 8-7
iii. If the firm is new, an increase in this calculation

might reveal that the new firm is gaining
experience
iv. The firm may have gained a competitive
advantage
v. Identify the competitive advantage
vi. Obtain industry data relative to the industry
turnover rates
d. Leverage ratios
i. Ratios that are used to examine the relative level of indebtedness
of the entrepreneurial business
ii. Three ratios evaluate the level of indebtedness of a business
1. Debt-to-Equity
a. Ratio provides data about the portion of the business
owned by lenders versus the portion of business
owned by the owner or founder of the business
i. Total liabilities divided by total assets minus
total liabilities
2. Debt-to-Assets
a. Measures the percentage of the assets of the firm that
are actually owned by creditors
b. Total liabilities divided by total assets
3. Times Interest Earned
a. Figure estimates the number of times that the firm
could repay the current interest owed on its debts.
b. Higher number indicates the firm is more capable of
servicing its debt load
c. Operating income divided by the interest
iii. Calculating leverage ratios
1. Refer to the balance sheet illustrated in Figure 8.1 on page
140 of the text to provide example about how to calculate the
leverage ratios
2. Refer to the income statement illustrated in Figure 8.2 on
page 141 of the text to provide example about how to
calculate the times interest earned ratio
IM 8-8
3. Significant changes in the debt-to-equity ratio and the times

interest earned ratio are of particular interest to the business
owner
a. Owners compare this data with industry averages to
reveal if there are changes in the particular industry
e. Profitability ratios
i. Ratios that examine the performance of the firm and its ability to
make economic rents over and above its costs
1. Gross profit margin
a. Gross profit divided by net sales
b. Used to determine the overall profit obtained from
sales during a specific period of time
c. Calculated by taking the total net sales of the firm and
subtracting the returned merchandise as well as the
direct cost of the goods sold
2. Operating profit margin
a. Operating income divided by net sales
b. Gross profit minus all operating expenses
c. Also known as earning before interest and taxes
(EBIT)
i. Represents the operating efficiency of the
organization
3. Net profit margin
a. Net profit divided by net sales
i. Bottom line calculation from the income
statement
ii. Figure represents a view of the relative margin
earned after all obligations and expenses are
considered
4. Return on assets (ROA)
a. Net profit divided by total assets
i. Industry standard calculation
ii. Examine the ability of the firm to return to an
overall profit compared to the amount of assets
that the firm has invested
5. Return on equity (ROE)
a. Net profit divided by equity
IM 8-9
i. Provides investors with evaluation of how

much each dollar of their investment generates
a profit
ii. Calculating profitability ratios
1. Review the income statement on page 140 of the text, figure
8.2
f. Summary of Ratios
i. Ratios are valuable assets to a firm
ii. Statements are standard with a variety of accounting packages
iii. Accounting packages may calculate ratios
iv. Small business owners understand the ratios and they only use a
few ratios in each category to assure conciseness
1. Liquidity
2. Activity
3. Leverage
4. Performance
5. Profitability
v. Small business owners compare the ratios with other firms in their
industry over a specific time period to interpret the outcome of the
ratio analysis
5. Deviation Analysis (text page 148)
 Learning Objective 8-4: Explain Deviation Analysis.
a. Deviation analysis
i. Analysis of the differences between the predicted and the actual
performance.
ii. Deviation is the second method used to evaluate the firm, activities,
and performance
iii. The time period associated with deviation analysis is typically
month to month or year to year
iv. Deviation chart has two additional columns that ensure all important
metrics are maintained
1. Column to show the actual change
2. Colum to show a percentage of change
v. Ratios reveal data based on perception analysis
IM 8-10
1. A drop in the current ratio from one year to the next can be a
negative indicator
2. At the same time, a drop in the amount of complaints can be
a positive indicator
vi. Entrepreneurs can easily evaluate the performance of the
organization based on perception of success at the business
vii. Consider the frequency of ratio analysis when interpreting results
1. The frequency at shorter intervals can produce positive or
negative insight on the outcome of the analysis
2. Shorter intervals in evaluating a firm have a tendency to
reveal trends in the industry in regards to performance
3. Develop charts using shorter intervals so patterns and
deviations can be observed
4. Maintain the chart to complete the analysis on a monthly
basis
a. Reveal seasonal trends
i. Results of analysis enhance ordering, staffing,
and advertising at the business
b. Annual updating of the chart permits the analysis over
years as the firm reaches maturity
viii. Measuring the performance of a business goes beyond the
financial considerations of the business
ix. Maintain an analysis of how well the firm pursues its strategy over a
stated period of time
6. Sensitivity Analysis (text page 149)
 Learning Objective 8-5: Explain sensitivity analysis
i. Sensitivity analysis (text page 149)

1. A chart utilizing current cash flow statement, income
statement, or balance sheet in order to create a pro forma
projection based upon a dramatic increase in sales, a
dramatic decrease in sales, or the complication of a major
change in the business
ii. The data required to complete a sensitivity analysis
1. Current cash flow statement
2. Income statement or balance sheet
iii. The projections are based on a variety of circumstances
IM 8-11
1. Dramatic increase in sales

2. Dramatic decrease in sales
3. A dramatic change in the business
iv. The advantage is a visualization of how sensitive the business is to
various factors
v. Cash flow statement is used to evaluate the impact of a dramatic
increase or decrease in sales
1. For instance, what is the impact on the organization as a
whole if the firm experiences a sudden 50 percent increase
or decrease in sales
a. If the result is an increase the outcome to consider is
how much staff is needed to accommodate the sales
b. Another consideration is the impact on travel or
insurance
vi. Steps used in evaluation
1. List the cash flow statement of the firm
2. Provide another cash flow statement that indicates a 50
percent increase
3. Provide another cash flow statement that indicates a 50
percent decrease in sales
vii. A firm that experiences a rapid increase in sales could be hurt
during the first two years of operation
1. The business could experience a recovery period in the third
year
a. Result of analysis indicates a need for additional
funding
b. It is very important for a business owner to gain
experience in order to diversify plans to
accommodate and handle a variety of changes in the
business
2. A business that misses its projections by a significant
amount is not good for the future of the business
viii. Sensitivity analysis provides advantages to the business
1. Sensitivity analysis provides the businessperson the
opportunity to test assumptions
2. The businessperson views the potential impact of those
assumptions prior to committing to additional resources
IM 8-12
7. Use of Short Surveys in Business
 Learning objective 8–6:Describe the use of short surveys in business
a. Surveys are the fourth method used by a businessperson to analyze the

business
i. Surveys are a nonfinancial method of analysis
1. Ratio analysis, deviation analysis, and sensitivity analysis
focus on the financial data associated with the business
ii. Surveys are used to evaluate the contextual information that is not
easily categorized or interpreted by the business owner
1. Customers
2. Suppliers
3. Employees
iii. Surveys are used to gather data to enhance the financial success
of a business
iv. Random sampling is an effective measure of a large customer base
1. Survey every third customer
a. The subset of total customers reflect all customers
taking into consideration a small margin of error
v. Data obtained in a survey contains bias
1. Use judgment to interpret the results of survey
vi. Survey questions are designed to answer direct questions related
to the organization’s mission and strategy
vii. Questions in the survey are designed to provide specific data about
an organizations goals or objectives
viii. Results of survey data and interpretation
1. Data in the survey is tabulated and examined with statistical
techniques, such as percentages
2. Increase the level of sophistication of data contained in a
survey in order to achieve specific results which are based
on organizational needs or owner curiosity
3. Strategic implementation of key competitive advantage to
reveal trouble in goals or objectives of the business
4. Cross tabulation of related items and simple regressions
form a visualization of the organization versus its
competitors
IM 8-13
a. Cross tabulations and simple regressions are

available in most spreadsheet or software packages
b. Cross tabulation displays the distribution of two or
more variables in columns
i. For example, how the drinks match entrees in
a restaurant
c. Regression analysis is more complex
i. Reveals the difference in the measurement of
profits
8. Importance of Having a Measurement Focus
 Learning Objective 8-7: Analyze the importance of having a measurement focus
i. Use a simplistic approach to measure the standard components of

the business
ii. Assure that the performance of the firm is equivalent to other firms
in the industry
iii. Do not analyze areas that do not create value to the business
iv. Focus efforts on areas of the firm that enhance organizational
efficiency
v. Focus efforts on areas that provide a competitive advantage to the
firm
vi. Concentrate analysis efforts on the areas that are extraordinary
efforts to create differentiation in the business
9. For Review (text page 154)
IM 8-14
Key Terms
Activity ratios: Ratios that measure the efficiency with which the entrepreneur is
handling the resources of the business. (LO 8.3)
Deviation analysis: An analysis of the differences between the predicted and the
actual performance. (LO 8.4)
Leverage ratios: Ratios that are used to examine the relative level of indebtedness of
the entrepreneurial business. (LO 8.3)
Liquidity ratios: Ratios that measure the short-term ability of the firm to meet its
obligations. (LO 8.3)
IM 8-15
Profitability ratios: Ratios that examine the performance of the firm and its ability to
make economic rents over and above its costs. (LO 8.3)
Ratio analysis: A series of ratios along four areas of company performance (liquidity,
activity, leverage, profitability) that provides a picture of the health of the company. (LO
8.3)
Sensitivity analysis: A chart utilizing current cash flow statement, income statement,
or balance sheet to create a pro forma projection based upon a dramatic increase in
sales, a dramatic decrease in sales or the complication of a major change in the
business. (LO 8.5)
IM 8-16
Suggested Text Responses

Questions – p. 137
1. There are several reasons that women are likely to become entrepreneurs.
Sometimes women in large corporations reach the “glass ceiling” and are unable to
advance further in the corporate structure. Women may also see opportunities to
provide services or products to other women. In the opening vignette
“Vavavroomonline.com”, the founder states that there was little motorcycle gear
available in women’s sizes. This provided a niche that she entered.
2. Yes.
3. Students responses may vary.
Questions – p. 139
1. Students response may vary.
2. Students responses may vary.
Exercise 1 – p. 142
Answers are found on pages 143, 144, 145 and 147 in the text.
Students’ responses will vary.
Students’ responses will vary.
IM 8-17
1. These ratios seem to show that Chris is controlling expenses better in month 2.
2. Actual numbers would be useful.
3. Students’ responses will vary.
4. Chris’s business may be impacted by the seasons or sales may be increasing during
the second month because the business has been opened longer.
Ethical Challenge – p. 154
Student’s answers will vary.
IM 8-18
Review Questions – Responses

1. What are the four means to evaluate the firm, its activities, and its
performance? The four techniques are ratio analysis, deviation analysis, sensitivity
analysis and short surveys.
2. What do liquidity ratios seek to measure? What are the major types of liquidity
ratios? Liquidity ratios measure the short term ability of the company to meet its
obligations. The most common liquidity ratios are the current ratio and quick ratio.
3. Why are industry averages important to the interpretation of ratios? Each type
business will have different industry averages.
4. What do activity ratios seem to measure? What are the major types of activity
ratios? Activity ratios measure the efficiency in which the resources of the business are
handled. Major activity ratios are inventory turnover, accounts receivable turnover, and
total/fixed asset turnover.
5. What do leverage ratios seek to measure? What are the major types of liquidity
ratios? Leverage ratios are used to examine the relative level of indebtedness of the
business. The major liquidity ratios are debt-to-equity ratio, debt-to-asset ratio, and
times interest earned ratio.
6. What do performance ratios seek to measure? What are the major types of
performance ratios? Profitability ratios examine the performance of the firm and its
ability to make economic returns over and above its costs. The major types of
performance ratios are gross profit margin, operating profit margin, net profit margin,
return on assets and return on equity.
7. List two performance measures and explain their significance. The three most
common used are gross profit margin which is gross profit divided by net sales,
operating profit margin which is operating income divided by net sales, and net profit
margin which is net profit divided by net sales. These ratios are compared annually to
help assess the improvements in the profits of the business.
IM 8-19
8. How is deviation analysis used by a business? The deviation analysis shows the
difference in performance by comparing different periods of time. Differences in each
ratio need to be analyzed to determine whether they are positive or negative events.
9. How is sensitivity analysis used to protect a business? A sensitivity analysis

helps the business predict the effect of possible events on the business.
IM 8-20
Class Activities and Sample Assignments
1. Ask the students to discuss ratio analysis. Why are the ratios for the firm evaluated
and compared to other firms in the industry? List the four basic categories of
performance ratios. (LO 8.1, 8.2, 8.3)
2. Ask students to discuss deviation analysis. Then discuss why it is important and how
often a deviation analysis is performed. (LO 8.4)
3. Divide the students into groups. Assign each group one of the commonly used
ratios. Next, ask each group to prepare a presentation and describe how to calculate
the ratio, why it is important to calculate the ratio, and why that ratio is beneficial to a
business owner. The presentation can be presented as a power point presentation
or a presentation in front of the class. (LO 8.3)
4. Ask students to discuss sensitivity analysis. Then discuss why it is important to a

business owner. What data is revealed in this analysis? (LO 8.6)
5. Ask students to describe the use of nonfinancial analysis in a business. Next,

discuss the various data that is gathered as a result of the survey. Finally, ask the
students why random sampling is an effective method to survey a large pool of
customers. (LO 8.6)
6. In groups, ask the students to discuss the measurement techniques used to analyze
a business. How can they use those techniques to achieve a competitive advantage
in a particular industry? Next, ask the students to discuss how a firm gains a
competitive advantage by using the ratios for that industry. Discuss as a group or
present to the class on a flip chart or blackboard. (LO 8.7)
7. In groups, ask students to choose an industry and prepare sample questions to

complete a survey for their customers. Next, ask the students to discuss how the
outcome of those questions can benefit a business owner. Finally discuss how the
outcome of the survey can reveal whether or not the firm has a competitive
advantage. (LO 8.6)
IM 8-21
Discussion Questions for Online/Hybrid classes
1. Which of the four classic techniques used to measure a firm is the most important
to a business owner? Discuss why. (LO 8.1, 8.2, 8.3, 8.4, 8.5, 8.6)
2. What is ratio analysis? How does this analysis benefit a business? (LO 8.3)
3. What does a survey reveal about competitors? What does it reveal about a
competitive advantage? (LO 8.6)
4. What are the three activity ratios? How are they calculated? What do they
measure? (LO 8.3)
5. What is deviation analysis? What does it reveal? (LO 8.4)
6. Why do small business owners compare their ratios to other firms in the same
industry? (LO 8.3)
7. What are the four classic techniques used to measure a business? Explain how
each method is an effective tool to measure the business. (LO 8.1, 8.2, 8.3, 8.4,
8.5, 8.6, 8.7)
8. How does sensitivity analysis benefit a business owner? What do the results of
sensitivity analysis reveal? (LO 8.5)
9. What are the differences associated with leverage ratios and profitability ratios?
Explain how they benefit a business owner. What do they reveal? (LO 8.3)
10. What are the two liquidity ratios? How are they calculated? What do they reveal?
(LO 8.3)
IM 8-22
Discussion Questions for Online/Hybrid classes-Responses
1. Which of the four classic techniques used to measure a firm is the most
important to a business owner? Discuss why. (LO 8.1, 8.2, 8.3, 8.4, 8.5, 8.6)
Liquidity ratios are probably the most important since financing institutions require
them to be within certain ranges.
2. What is ratio analysis? How does this analysis benefit a business? (LO 8.3)
Ratio analysis is a tool for the entrepreneur to use to examine the overall health of
an organization.
3. What does a survey reveal about competitors? What does it reveal about a
competitive advantage? (LO 8.6) A survey should show how the entrepreneurial
business compares to the competitors and which aspect of the business is most
appreciated by the customers.
4. What are the three activity ratios? How are they calculated? What do they
measure? (LO 8.3) The three activity ratios are inventory turnover (which
measures the efficiency of handling inventory), accounts receivable turnover
(which measures how fast the company turns credit sales into cash), and the
total/fixed asset turnover (which measures how efficiently the fixed assets are
being used in the business).
5. What is deviation analysis? What does it reveal? (LO 8.4) A deviation

analysis is an analysis of the differences either between the predicted and the
actual performance of a business or between two different time periods of the
business.
6. Why do small business owners compare their ratios to other firms in the
same industry? (LO 8.3) Different industries have variances in expected
margins and fixed assets requirements. To try to use one standard ratio would be
like comparing apples to oranges and would not be useful to the business.
7. What are the four classic techniques used to measure a business? Explain
how each method is an effective tool to measure the business. (LO 8.1, 8.2,
8.3, 8.4, 8.5, 8.6, 8.7) The four classic techniques are ratio analysis, deviation
analysis, sensitivity analysis and short surveys.
IM 8-23
8. How does sensitivity analysis benefit a business owner? What do the

results of sensitivity analysis reveal? (LO 8.5) A sensitivity analysis helps the
business predict the possible effects of changes in the business, such as a large
increase in sales.
9. What are the differences associated with leverage ratios and profitability
ratios? Explain how they benefit a business owner. What do they reveal?
(LO 8.3) Leverage ratios are concerned with debt and its relationship to equity,
assets and interest. Profitability ratios measure the performance of the firm by
calculating the revenues less all expenses.
10. What are the two liquidity ratios? How are they calculated? What do they
reveal? (LO 8.3) The two liquidity ratios are current ratio which is current assets
divided by current liabilities and the quick ratio which is current assets less
inventory divided by current liabilities. Both ratios are indicators of the company’s
ability to pay its current debts.
IM 8-24
Lecture Links
Lecture Link 8-1: Entrepreneurs Create Surveys at the New Small Business
(LO 8.6)
The authors revealed that a survey is a nonfinancial method which is used to analyze a
business. The results of survey reveal pertinent data that is beneficial to a business
owner. SurveyMonkey.com is an online resource that a new small business owner can
utilize to conduct a survey. Visit the website at http://www.surveymonkey.com/i (Survey
Monkey) and consider the process required to implement a survey for the target
customers in the industry where you will compete in your new small business.
IM 8-25
Lecture Link 8-2: Financial Ratios of American Express

(LO 8.1, 8.2, 8.3, 8.4, 8.5, 8.6, 8.7)
The authors in the text revealed that an entrepreneurial business owner analyze the
business to reveal data about the firm. Do you keep good financial records? Visit the
website at http://wwwbloomberg.com/research/stocks/financials/ratios.asp?ticker=AXP.
This is the website for American Express. Which ratios does Bloomberg feature for this
company?
IM 8-26
Lecture Link 8-3: Auditing Standards at the New Entrepreneurial Business
Can management complete this type of transaction? What would an auditor say about
this transaction? These are only some of the questions a new small business owner
might have about a transaction or process as it relates to the finances of the small
business. The Accounting and Auditing Policy Committee (AAPC) works in conjunction
with the Federal government to implement processes and resolve ongoing accounting
issues (FASB Accounting and Auditing Policy Committee)ii. Visit the Accounting and
Auditing Policy Committee website at http://www.fasab.gov/about/aapc and discuss
how this agency could assist a new small business owner with any accounting and
finance questions.
IM 8-27
Lecture Link 8-3: Auditing Standards at the New Entrepreneurial Business-Notes
This committee helps the government improve financial reporting through discussions
and recommendation of solutions to accounting problems. The project tab lists the
current projects that are being discussed.
IM 8-28
Bonus Internet Exercises

Bonus Internet Exercise 8-1: Factors Impact Sales
(LO 8.1)
It is interesting to note that there are various factors during a year that impact the sales
made by a business. Visit the website
http://www.fastlinksolutions.co.uk/calculat.htm#howto (Fast Link Solutions)iii and scroll
down to the factors that the influence sales section. Next, choose three items and
discuss how they might impact the sales at your new small business.
1. Which three factors did you choose that impact the sales made by a business?
2. How do these factors impact the sales made by the new small business? Be
specific.
3. What strategies can a business owner create to enhance the sales made by the
business? Be specific.
IM 8-29
Bonus Internet Exercise 8-2: Industry Ratio Analysis Sources

(LO 8.2, 8.3, 8.4, 8.5)
When a business owner evaluates the ratios for the business the owner must evaluate
those ratios compared to the industry standards in a particular industry. Visit the website
at http://smbtn.com/bizrations/ and scroll down to the “Sources for Industry Operating
Ratios (Small Business Ratios)iv” and discuss the following questions.
What resources did you utilize to obtain the industry data for your new small business?
How will these industry standards assist you with a ratio analysis at your new small
business?
What other data did you discover that might assist a new small business owner?
IM 8-30
Bonus Internet Exercise 8-3: Industry Profit Analysis
Business owners utilize all of the available resources to assist them with their goals and
objectives. A business owner can analyze the profit ratios of other firms in the same
industry. Visit the website http://www.bankrate.com/brm/news/biz/green/19990712i.asp
(Financial planning: Profit industry comparisons, 2009)v and review the resources that
are available to assist a business owner.
1. What were the seven resources provided to obtain the published profit ratios?
2. What were the three electronic resources provided to obtain statistical data about
the other businesses?
3. What were the other resources that you found beneficial to assist the business
owner? How would you intend to use those resources?
IM 8-31
Bonus Internet Exercise 8-3: Industry Profit Analysis - Notes
1. What were the seven resources provided to obtain published profit ratios?
“Industry Norms and Key Business Ratios”, “Analyst’s Handbook”, “Almanac of
Business and Industrial Ratios”, “Annual Statement Studies”, “Dunn’s Business
Rankings”, Standard and Poor’s Industry Surveys” and “US Industry and Trade
Outlook”.
2. What were the three electronic resources provided to obtain statistical data
about other businesses? The electronic resources are. “Savvy.com”, “Bureau
of Labor Statistics” and “US Census Bureau”.
3. What were the other resources that you found beneficial to assist the
business owner? How do you intend to use those resources? Answers will
vary.
IM 8-32
Critical Thinking Exercises

Critical Thinking Exercise 8-1: Evaluating Sensitivity Analysis
(LO 8.5)
Sales fluctuate in a new small business. They affect the financial performance and the
cash flow of the business. The authors in the text revealed that sensitivity analysis
involves taking the current cash flow statement, the income statement, or the balance
sheet and making projections based upon a dramatic increase in sales, a dramatic
decrease in sales, or the businesses efforts to make a major change in the business
(text page 253). Sensitivity analysis can measure the cash flow impact of changes on
historical statements and existing statements.
1. Discuss the steps required to perform a sensitivity analysis 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 additional funding is needed for the
business?
IM 8-33
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?
The new business owner can utilize a cash flow statement to observe an
increase or decrease in sales.
2. What does a rapid increase in sales indicate about the business? Be

specific.
A business that experiences a rapid increase in sales will experience a downfall
during the first couple of years; however, by the third year the business will show
a significant recovery.
3. What does a rapid decrease in sales indicate about the business? Be

specific.
A rapid decrease in sales indicates that the business is not meeting or exceeding
their sales expectations. As a result, there is a negative cash flow in the
business. This is a red flag for a business owner. The business owner will
investigate to determine the cause of the negative cash flow.
4. How does a business owner know if they need to acquire additional

funding for the business?
The negative cash flow indicator is the signal to a business owner that additional
cash flow and funding is required to accommodate the cash inflows and cash
outflows in the small business.
IM 8-34
Critical Thinking Exercise 8-2: Survey Questions to Assess Competitors

(LO 8.6)
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 256).
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.
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?
IM 8-35
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.
The answers will vary based on the student perception. However, the questions
should be oriented to the service, price, and atmosphere found in the small
business.
b. Will you send your survey out to all of your customers? Why or why not?
The answers to these questions will vary based on the student perception. A
complete survey could be sent to all consumers or the student might elect to
send out a random selection of questions to survey a portion of their customers.
c. How will you evaluate the completed survey data?

The point to this question is how the students will tabulate the survey responses
that they receive back from their customers. The survey results could be
tabulated in percentage categories and cross tabulations so that simple
regressions could be compiled to analyze the data.
d. What is the expected outcome of the survey data that reveals a decline in
customer service? Will you hire a new staff?
The student answers here will vary based on the student perception of the
questions.
IM 8-36
Critical Thinking Exercise 8-3: How to Measure the Firm

(LO 8.1, 8.2, 8.3, 8.4)
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.
IM 8-37
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.
IM 8-38
Bonus Cases
Bonus Case 8-1: Deviation Analysis and the Entrepreneurial Business
(LO 8.4)
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 8-39
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
should include a column identifying the item being compared, a column for the
result from one year, another column for the result from another year, a column
showing the difference between the two, and a final column showing the
percentage of difference.
2. What does each of the columns represent? What changes are revealed in
the chart? See above for the columns. The percentage difference column is the
one that should be analyzed. This should disclose both the successes and
problems in the business.
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
determine what caused the changes and if a reaction is necessary. For example,
seasonal changes may help the owner purchase less inventory or have fewer
employees during the “low” season while increasing both during the “high”
season. This type analysis helps control cash flow.
4. How often should a small business owner perform a deviation analysis?

Why? A deviation analysis should be performed month to month for a new
business and then annually.
IM 8-40
Bonus Case 8-2: Liquidity Considerations and Solvency Issues

(LO 8.3)
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)vi” A
business does not want to project itself as a business risk to the lending institution.
Discussion Questions:
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?
IM 8-41
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?
A company is expected to have a difficult time to get a loan approved because
the company is unable to show the bank that it has adequate cash to repay a
loan or line of credit.
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?
The current ratio should be over 1.0 in order to show that the company can pay
its short-term obligations in a timely manner.
3. What can a business owner do to assure that the business maintains

adequate liquidity and a positive cash flow
A business owner can monitor the liquidity of the business periodically by
calculating the current ratio and the quick (acid) ratios.
IM 8-42
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
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.
In “2009,” the “FBI investigated 490 fraud cases resulting in 171 indictments and 124
convictions of corporate criminals (Federal bureau of investigation - 2006 financial crime
report)vii” related to workplace crimes. The results found in this report 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 8-43
Endnotes
iSurvey Monkey. http://www.surveymonkey.com . Retrieved on October 30, 2009.

iiFASB Accounting and Auditing Policy Committee. Federal Accounting Standards Board
(FASB). http://www.fasab.gov/aapc/aapc.html . Federal Accounting Standards Advisory
Board. Retrieved on October 30, 2009.
iiiFast Link Solutions. http://www.fastlinksolutions.co.uk/calculat.htm#howto. Retrieved on
October 31, 2009.

ivSmall Business Ratios. Bizratios.com. http://smbtn.com/bizratios/. Retrieved on October 31,
2009.
v Financial planning: Profit industry comparisons. (2009). Bankrate.com.
http://www.bankrate.com/brm/news/biz/green/19990712i.asp . Retrieved on October 31,

2009.
vi 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=hu
man%20resources%20and%20the%20new%20small%20business&st=cse. Retrieved on October
31, 2009.
viiFederal Bureau of Investigation – 2006 Financial Crime Report. Federal Bureau of Investigations.
http://www.fbi.gov/publications/financial/fcs_report2006/financial_crime_2006.htm. Retrieved on
October 31, 2009.
IM 8-44
Another random document with
no related content on Scribd:
decentration of the eye as if a prism were prescribed, nature
supplying its own decentration.
Treatment for Correcting Esophoria

in Children
In case of esophoria, regardless of amount, slightly increased
spherical power is frequently prescribed for children. This will
naturally blur or fog the patient’s vision, but in their effort to
overcome the blur, accommodation is relaxed, usually tending to
correct the muscular defect.
In such cases, as a rule, a quarter diopter increased spherical
strength may frequently be added for each degree of esophoria as
determined before the optical correction was made. In a case of 6
degrees of esophoria, the refractionist may prescribe +1.50 diopter
spherical added to the optical correction, which, let us assume, is
+1.00 sph. = -1.00 cyl. ax. 180°, so that the treatment glasses would
be +2.50 sph. = -1.00 ax. 180° (See Procedure on Page 74).
At the end of each three months’ period, the patient should be
requested to return, when the binocular and the duction test should
again be made, comparing results with the work previously
accomplished. An improvement tending to build up the left weak
externus will possibly permit of a decrease of the excessive spherical
power, so that excessive spherical power is reduced until completely
removed, in all probability overcoming the muscular defect.
Esophoria is almost invariably a false condition and frequently is
outgrown under this treatment as the child advances in years. On the
other hand, esophoria uncared for in the child may tend to produce
exophoria in the adult.
How Optical Correction Tends to

Decrease 6° Esophoria in a Child
Assume binocular muscle test made
before optical correction shows
6° Esophoria.
+1. Sph. = -1. Cyl. Ax. 180.
Next, locate faulty muscle by making a duction

test, which shows how abduction of left eye is
made to equal that of right eye, change being
made quarterly with treatment lenses in
accordance with following rule. Note as
abduction is increased, esophoria is reduced.
Rule—prescribe a quarter diopter increased
sphere for each degree of imbalance or 0.25
× 6 equals:
+1.50 added to optical correction.
1/1/19 (assumed date) prescribed treatment
lenses equal:
+2.50 = -1. × 180°.
4/1/19 (3 months later) assuming abduction has

increased from 2° to 3° showing difference of
5 Es. or 0.25 × 5. equals +1.25 added to
optical correction, prescribed treatment lenses
equal:
+2.25 = -1. × 180.
7/1/19 (3 months later), assuming abduction has

increased from 3° to 4° showing difference of
4° Es. or 0.25 × 4 equals +1.00 which added
to optical correction would make prescribed
treatment lenses equal:
+2.00 = -1. × 180.
And so on, every three months treatment lenses

are prescribed until both right and left eye
show 8° of abduction. In this way the
treatment lenses are reduced to original
correction of +1.00 = -100 × 180. This would
have required six changes of lenses, three
months apart—thus consuming 18 months
time.
Chapter X
SECOND METHOD OF TREATMENT—
MUSCULAR EXERCISE
Made With Two Rotary Prisms

and Red Maddox Rod
Exophoria
I f a case is one of exophoria of six degrees, where the second

method of treatment or muscular exercise is in line of routine, it is
essential to first determine through a duction test and the
preparation of the diagram exactly which one of the four muscles are
faulty (Fig. 24).
Having determined, with the aid of the diagram, first, the
existence of 6 degrees of exophoria; second, 18 degrees of
adduction; third, a weak left internus—the next procedure is to
determine what degree of prism will enable the patient to obtain
single binocular vision, with both eyes looking “straight.”
To determine this, place both of the Ski-optometer’s rotary prisms
in position with the handle of each pointing outward horizontally. The
red line or indicator of each prism should then be placed at 30° of the
outer scale (Fig. 26).
The red Maddox rod should be horizontally positioned before the
eye, the white line on indicator pointing to 180° of the scale (Fig. 27).
The strength of the rotary prism before the right eye should
thereupon be reduced by rotating the prism indicator or red line
toward the upper zero (0) to a point where the patient first sees the
red streak—assuming that the red line appears at 42 degrees, that is
30 degrees before the left eye and 12 degrees before the right.
Fig. 26 (A and B)—First position of rotary

prisms to determine amount of prism
exercise to be employed for building up
the weak muscle.
The prism should then be still further reduced until the vertical
streak produced by the Maddox rod directly bisects the muscle
testing spot of light. Assuming that this point be thirty-eight degrees,
which is four degrees less, single binocular vision is produced.
Fig. 27—Position of red Maddox rod used
in conjunction with Fig. 26 for prism
exercising.
For example, sixty degrees of prism power (the combined power
of the two rotary prisms) will usually cause complete distortion.
Therefore, as outlined in Figure 28, the patient, seeing only out of
the right eye, will detect nothing but a white light. By gradually
reducing the strength of the prism before the right, which is the good
eye, the patient will eventually see a red streak off to the left. A
continued and gradual reduction to a point where the red streak
bisects the white light, will determine how much prism power is
required for the patient to obtain single binocular vision, thus
establishing the same image at the same time on each fovea or
retina (Fig. 20).
This has taught the patient to do that which he has never before
accomplished. Therefore, after having been taught how to make the
two eyes work in relation to each other, the natural tendency
thereafter will be to strive for the same relationship of vision with
both eyes. The refractionist should then aim to reduce the excessive
amount of prism required to give binocular vision, which can be
accomplished by muscular exercise.
It must always be remembered before the refractionist is ready to
employ the muscular exercise or second method, that the degree of
prism required to give the patient single binocular vision must be
determined with the optical correction in place. The exercise must be
practised daily in routine, a daily record being essential.
An Assumed Case
We will assume a case where 42 degrees is required to enable
the patient to first see the red streak as produced by the Maddox rod
to the extreme left. Through a continued gradual reduction of 4
degrees (or to 38 degrees), we next learn that the streak was carried
over until it bisected the white spot of light, giving single binocular
vision and producing a position of rest.
Fig. 28—Simplified chart showing the
prism action employed in developing a
weak ocular muscle through alternating
prism exercise. Either side of 38° in
excess of 4° causing diplopia.
The patient has now established the limitation of the exercise,
which is four degrees, this limitation being determined by the
difference between the point where the streak was first seen to the
extreme side and where it bisected the spot. The same amount of
four degrees should then be used for the opposite side, thus
reducing the prism strength to 34 degrees.
This again produces diplopia, because of the lesser amount of
prism power employed to give single binocular vision. The
refractionist should then return to 38 degrees, where single binocular
vision had originally been determined (Fig. 28), alternating back to
42, returning to 38, over to 34, back to 38, and so on. This procedure
should be employed once a day just after meals for about five
minutes, and repeated ten times, constantly striving for a slight
reduction of prism power from day to day.
Effect of Muscular Exercise

This muscular treatment, or constructive exercising, should
enable the patient to overcome his amount of four degrees in either
direction in about a week. Hence in the case showing 38 degrees for
single binocular vision, results may be looked for in about nine
weeks—four degrees divided into 38 degrees. While the patient is
undergoing the treatment, which is nothing more than the
strengthening of the interni muscles or developing adduction, it is
natural to believe that the amount of imbalance is likewise being
conquered. This, however, is readily determined from time to time by
making the binocular muscle test with the phorometer and Maddox
rod, as well as the duction chart test (Fig. 24), as previously outlined.
To fully appreciate the effect of this muscular treatment, the
reader need only hold his head in a stationary position, casting his
eyes several times from the extreme right to the extreme left, not
failing to note the apparent muscular strain. On the other hand, with
the aid of the Ski-optometer’s rotating prisms, the refractionist not
only has complete control of the patient’s muscles at all times, but
scientifically accomplishes muscular exercise without any tiresome
strain, overcoming all possible exertion.
After the case in question has been reduced to 30 degrees,
having no further use for the rotary prism, it may be removed from
before the right eye and the same exercising procedure continued as
before with the remaining left side rotary prism by reducing its power,
until it is likewise down to zero.
Having reduced both prisms to zero, each prism should again be
placed in position with zero graduations vertical and the prism
indicator on upper zero. Both prisms should then be turned
simultaneously about four degrees toward the nasal side of the
patient, thus tending to jointly force corresponding muscles of both
eyes.
Home Treatment for Muscular Exercise—

Square Prism Set Used in Conjunction
With the Ski-Optometer
Where a patient is unable to call each day for this muscular
treatment or exercise, the work will be greatly facilitated by
employing a specially designed set of square prisms ranging in
strength from ½ to 20 degrees for home treatment. As in the case
previously cited, it is necessary to carefully instruct the patient that
the interni muscles must be developed, hence prism base out with
apex in must be employed. Attention should then be directed to a
candle light, serving as a muscle testing spot of light and stationed in
a semi-dark room at an approximate distance of twenty feet.
Having determined through the Ski-optometer the strength of the
prism required after each office treatment, its equivalent should then
be placed in a special square prism trial-frame which permits rotation
of the prism, although the patient is frequently taught to twirl the lens
before the eye. This exercise may be continued for about five
minutes each day.
The patient should also be instructed to call at the end of each
week, when the work may be checked by means of the Ski-
optometer’s rotary prisms, making the duction test as previously
explained and outlined in Fig. 24. It is then possible to determine
whether or not satisfactory results are being obtained. Otherwise the
exercise should be abandoned.
Should the second method employed in the work of muscular
imbalance not prove effective, the third method requiring the use of
prisms would be next in routine.
Chapter XI
THIRD METHOD OF TREATMENT—PRISM
LENSES
When and How Employed
A s stated in the preceding chapter, on ascertaining the failure of

the second muscular treatment or method, prisms are employed
for constant wear. When prism lenses are used, whether the
case is exophoria or esophoria, or right or left hyperphoria, it is
always safe to prescribe one-quarter degree prism for each degree
of prism imbalance for each eye. For example, in a case of 6
degrees of esophoria, a prism of 1½ degree base out should be
prescribed for each eye; or in 6 degrees of exophoria, employ the
same amount of prism, but base in. In right hyperphoria, place the
prism base down before the right eye and up before the left, and vice
versa for left hyperphoria.
It is not always advisable, however, to allow the patient to wear
the same degree of prism for any length of time. Many authorities
suggest a constant change with the idea that a prism is nothing more
than a crutch. Should the same degree be constantly worn, even
though it afforded temporary relief, the eye would become
accustomed to it and the purpose of the prism entirely lost. Prisms
should be prescribed with extreme care, their use being identical
with that of dumb-bells, where weight is first increased to maximum
and subsequently reduced, viz.:
Prism Reduction Method

Where prisms are prescribed, it is considered good practice to
make a binocular muscle test and the duction test (Fig. 24) at the
end of each three months’ period, employing the phorometer,
Maddox rod, and rotary prisms, as already explained.
If the condition shows any decrease, the prism degree should be
proportionately decreased. For example, in the case originally
showing 6 degrees of exophoria, one-quarter degree prism for each
degree of imbalance was prescribed, or 1½ degree for each eye. If
the same case subsequently indicated 4 degrees, only one degree
for each eye should be prescribed—and so on, a gradual reduction
of prism value being constantly sought.
Except in rare cases, prisms should not be prescribed with the
base or apex at oblique angles, as the eye is rarely at rest with such
a correction. An imbalance may be caused by a false condition in
one rectus and a true imbalance in the other, giving one the
impression that cyclophoria exists, as explained in a following
chapter.
Having now employed the three methods, the refractionist can
readily understand that a marked percentage of muscular imbalance
cases may be directly benefited through the aid of the Ski-optometer.
If these three methods of procedure fail, there is nothing left but the
fourth and last method—that of operative procedure.
Chapter XII
A CONDENSATION OF PREVIOUS CHAPTERS
ON THE PROCEDURE FOR MUSCLE TESTING
WITH THE SKI-OPTOMETER
T he present chapter, intended for those desiring a synopsis or

condensed summary of muscular imbalance work, should prove
of the utmost assistance to the busy refractionist. Muscular
imbalance work can be successfully conducted if the following
routine is studied and memorized, with the Ski-optometer constantly
before the reader. The chapters containing the corresponding figures
and diagrams or illustrations will then be readily comprehended. It is
also important to carefully note the captions under each diagram.
1. Without any testing lenses before patient’s eyes, direct
attention to a 20-foot distant muscle testing spot of light (Fig. 9).
2. Place phorometer handle vertically (Fig. 16).
Place red Maddox rod vertically (Fig. 15). Patient should see a
white spot of light, and a red horizontal streak (Fig. 17).
Simply turn phorometer handle until horizontal streak bisects
white spot of light. Pointer then indicates amount of deviation on red
scale. Ignore cases less than 1° hyperphoria, whether right or left
designated by (R. H.—L. H.).
3. Place phorometer handle horizontally (Fig. 19).
Place red Maddox rod horizontally (Fig. 18). Patient should see a
white spot of light and a vertical red streak (Fig. 20).
Simply turn phorometer handle until red streak bisects spot of
light. Pointer indicates amount of deviation on white scale, whether
esophoria or exophoria designated by (Es—Ex).
4. Ignore all exophoria cases, less than 3°.
Ignore all esophoria cases, less than 5°—except in children,
ignore less than 3° of esophoria.
5. Always make the above or binocular muscle test—with
phorometer and red Maddox before optical correction or (test for
spheres and cylinders) and again after optical correction where case
shows more than 1-3-5 rule, to determine whether muscles are
aggravated or benefited.
6. In cases showing more than the 1-3-5 rule, shown in above
No. 4, make monocular duction test first with rotary prism before
patient’s right eye,—then with rotary prism before left eye to find
faulty muscle and determine which eye is affected.
7. To test adduction, prism base out is required. Rotary prism’s
red line or indicator should be rotated from zero outwardly. To test
abduction, base in is required. Indicator should be rotated inwardly
from zero (Fig. 22). Power of adduction as compared with abduction,
is normally 3 to 1—usually rated 24 to 8.
8. To test superduction, base down is required. Rotary prism’s
line or indicator should be rotated downward from zero. To test
subduction, base up is required. Indicator should be rotated upward
from zero. Power of superduction as compared with subduction, is
normally equal—usually rated 2 for each (Fig. 23).
9. Direct patient’s attention to largest letter on distant chart,
usually letter “E,” rotating red line indicator of rotary prism outlined in
above No. 7 and No. 8, until diplopia is first procured.
10. The use of a duction chart on a record card, quickly
designates pull for each of four muscles (Fig. 24), illustrating an
assumed case of—
1st—6D of Exophoria.
2nd—18° adduction (which must be developed to 24°).
3rd—Patient has a left weak internus.
11. Employ First Method—Optical Correction—to effect
treatment.
12. Assuming a case of a child with 6° of esophoria—8° of right
abduction and 2° left abduction indicating a left weak externus,
prescribe a quarter diopter increased plus spherical power for each
degree of imbalance, thus adding +1.50D spherical to optical
correction. This is the first method of treatment. This requires a
thorough reading of Chapter IX on Treatment for Correcting
Esophoria in Children and a careful study of the formula. For
synopsis see Page 74.
Four Methods of Treating an Imbalance Case

When the Preceding One Fails
1st—Optical correction;
2nd—Muscular exercise or treatment;
75% are Curable with First and Second Methods.
3rd—Prisms;
5% are Curable with Third Method.
4th—Operation;
20% are Curable with Fourth Method.
13. When first method of treatment fails, Employ Second
Method—Muscular Exercise—to effect treatment.
1st—Find degree of prism patient will accept to produce single
binocular vision with optical correction on, placing both rotary prisms
in position, handles horizontal, red line on 30° of temporal scale of
each, giving total value to 60° (Fig. 26a and b).
2nd—Also place red Maddox rod before patient’s eye (rods
horizontal) (Fig. 18), calling patient’s attention to usual muscle
testing spot of light.
3rd—Reduce prism before good eye until red streak appears,
noting degree (which we assume shows 42° the combined total
value of both prisms) slowly continue to decrease prism until streak
bisects spot. Assume this shows total of 38°. Either side of 38° in
excess of 4° (38 to 42) produces diplopia. Prisms must only be
rotated from 38° to 42° back to 38° over to 34°—back to 38° over to
42°—back again to 38° and so on—exercise to be continued daily
ten times for five minutes (Fig. 28).
4th—At end of each week, duction test should again be made.
Duction chart should show a tendency to reduce exophoria by a
gradual building up of adduction, approximately one week is usually
sufficient to teach patient to hold streak within the spot (between 38°
and 42°). Exercise to be continued until both prisms are worked
down to zero. Exercise tends to teach patient how to establish same
image on each fovea or retina at same time.
5th—If patient is unable to call daily for treatment, employ home
treatment. (Read “Home Treatment for Muscular Exercising,” Page
82).
Employ Third Method—Use of Prisms for Constant Wear to
effect treatment.
Prisms
1st. Where a case cannot be reduced through use of first two
methods, as for example in a case of 6° of exophoria, prescribe ¼ of
amount of imbalance (¼ × 6 = 1½°) for each eye—base in—or
esophoria base out, hyperphoria base up on eye affected.
2nd. Advise patient to call every three months and make duction
test (Fig. 24). If no improvement in condition, after wearing prisms
six months, operative means is suggested.
Assume a case is benefited, reduce prism power according to
rule; ¼D prism for each degree of imbalance.
Cyclophoria
This work being of a technical nature, it is deemed best for the
reader to study Chapter XIII and XIV.
Chapter XIII
CYCLOPHORIA
Made with Maddox Rods

and Rotary Prisms
C yclophoria, a condition affecting the oblique muscles of the

eye, is caused by its rotation. It is detected in the following
manner by the combined use of the red and white Maddox rods
and the rotary prism.
Fig. 29—Position of rotary prism for
producing diplopia in testing cyclophoria
with prism placed at 8° base up.
Darken the room and direct the patient’s attention to the usual
muscle-testing spot of light, located approximately twenty feet away
and on a direct plane with the patient’s eye. The optical correction, if
one is required, should always be left in place—just as in making
other previously described muscle tests.
The rotary prism should then be brought before the patient’s right
eye with the handle-pointing upward and with zero graduations
horizontal. The indicator or red line should then be rotated upward
from zero to eight upon the prism scale, creating the equivalent of a
prism of 8 diopters with base up (Fig. 29). This normally caused

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Class Activities and Sample Assignments........................................................................................ 21

Brief Chapter Outline

I. Learning Objectives (text page 137)

II. Importance of a Solid Financial Foundation in an Entrepreneurial Business (text

III. Techniques for Measuring Performance (text pages 138-141)

IV. Ratio Analysis (text pages 141-148)

V. Deviation Analysis (text pages 148-149)

VI. Sensitivity Analysis (text pages 149-150)

VII. Use of Short Surveys in Business (text pages 150-153)

VIII. Importance of Having a Measurement Focus (text pages 153-154)

IX. For Review (text page 154)

Chapter Outline and Lecture notes

1. Learning Objectives (text page 137)

 Describe the importance of solid financial foundation in an entrepreneurial

 Learning Objective 8-1: Describe the importance of solid financial foundation in

i. Recap evaluation of a firm (text page 138)

3. Techniques for Measuring Performance (text pages 138 through 141)

 Learning Objective 8-2: Discuss techniques for measuring performance

i. Company analysis moves from the general to the specific

4. Ratio Analysis (text pages 141 through 148)

 Learning objective 8-3: Explain ratio analysis

a. Indicates the firm is operating at a risk, or the bank

2. Accounts receivable turnover

iii. If the firm is new, an increase in this calculation

3. Significant changes in the debt-to-equity ratio and the times

i. Provides investors with evaluation of how

5. Deviation Analysis (text page 148)

 Learning Objective 8-4: Explain Deviation Analysis.

6. Sensitivity Analysis (text page 149)

 Learning Objective 8-5: Explain sensitivity analysis

i. Sensitivity analysis (text page 149)

1. Dramatic increase in sales

7. Use of Short Surveys in Business

 Learning objective 8–6:Describe the use of short surveys in business

a. Surveys are the fourth method used by a businessperson to analyze the

a. Cross tabulations and simple regressions are

8. Importance of Having a Measurement Focus

 Learning Objective 8-7: Analyze the importance of having a measurement focus

i. Use a simplistic approach to measure the standard components of

9. For Review (text page 154)

Suggested Text Responses

3. Students responses may vary.

1. Students response may vary.

2. Students responses may vary.

Students’ responses will vary.

Students’ responses will vary.

2. Actual numbers would be useful.

3. Students’ responses will vary.

Ethical Challenge – p. 154

Student’s answers will vary.

Review Questions – Responses

9. How is sensitivity analysis used to protect a business? A sensitivity analysis

Class Activities and Sample Assignments

4. Ask students to discuss sensitivity analysis. Then discuss why it is important to a

5. Ask students to describe the use of nonfinancial analysis in a business. Next,

7. In groups, ask students to choose an industry and prepare sample questions to

Discussion Questions for Online/Hybrid classes

5. What is deviation analysis? What does it reveal? (LO 8.4)

Discussion Questions for Online/Hybrid classes-Responses

5. What is deviation analysis? What does it reveal? (LO 8.4) A deviation

8. How does sensitivity analysis benefit a business owner? What do the