EFim04Ed3 (2) - Chapter 4 MEASURING FINANCIAL PERFORMANCE...

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Chapter 4 MEASURING FINANCIAL PERFORMANCE FOCUS In this chapter, we introduce basic accounting and financial statements designed to help ventures monitor their progress. We stress the need to understand how cash is built and burned both in terms of financial statements and through operating breakeven analyses. LEARNING OBJECTIVES 1. Describe the process for obtaining and recording resources needed for an early-stage venture 2. Describe and prepare a basic balance sheet 3. Describe and prepare a basic income statement 4. Explain the use of internal statements as they relate to formal financial statements 5. Briefly describe two important internal operating schedules: the cost of production schedule and the inventories schedule 6. Prepare a cash flow statement and explain how it helps monitor a venture’s cash position 7. Describe operating breakeven analysis in terms of EBDAT breakeven (survival) revenues 8. Describe operating breakeven analysis in terms of NOPAT breakeven revenues CHAPTER OUTLINE 4.1 OBTAINING AND RECORDING THE RESOURCES NECESSARY TO START AND BUILD A NEW VENTURE 4.2 BUSINESS ASSETS, LIABILITIES, AND OWNERS’ EQUITY A. Balance Sheet Assets B. Liabilities and Owners’ Equity 4.3 SALES, EXPENSES, AND PROFITS 4.4 INTERNAL OPERATING SCHEDULES 4.5 STATEMENT OF CASH FLOWS 4.6 OPERATING BREAKEVEN ANALYSES A. Survival Breakeven B. NOPAT Breakeven C. Identifying Breakeven Drivers in Revenue Projections SUMMARY DISCUSSION QUESTIONS AND ANSWERS 1. Describe the types of resources (assets) needed for a new product venture during its development and startup stages. Comment on the likely revenues and expenses during these early life cycle stages. Refer to Figure 4.1. Development Stage in Life Cycle: Assets: acquire initial assets (e.g., initial cash, office furniture, computer, etc.) Revenues: no sales (consequently no money is coming in) 56
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Chapter 4: Measuring Financial Performance Expenses: e.g., rent, utilities, subsistence salary for entrepreneur Startup Stage in Life Cycle: Assets: acquire production assets (e.g., inventories and equipment to produce products and give credit to customers) Revenues: making sales (money begins flowing in) Expenses: additional expenses to produce and market products and to record business transactions 2. What is meant by the statement that a balance sheet provides a “snapshot” of a venture’s financial position as of a point in time? Why must a balance sheet be in “balance?” A balance sheet is known as a “snapshot” because it the value of all the accounts at a certain point in time. A balance sheet must be in balance because the amount of total assets must be equivalent to the sum of the firm’s total liabilities and the owner’s equity. 3.
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EFim04Ed3 (2) - Chapter 4 MEASURING FINANCIAL PERFORMANCE...

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