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Definition
| is obtaining the highest possible return with the minimum use of resources |
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| is accomplishing a specific task or reaching a goal |
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| is an absolute number that is earned on an investment |
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| for a business, is typically shown at the bottom of the income statement as net income |
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| the amount that is earned above and beyond what the entrepreneur would have earned if he or she had chosen to invest time and money in some other enterprise |
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| can be measured in a business by using a ratio that is obtained by dividing net profit by total assets. Profitability, therefore, is our ROI (Return on Investment) |
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| can be defined as the product of two factors: (1) the company's ability to generate income on the amount of revenue it receives, which is also known as net profit margin; and (2) its ability to maximize sales revenue from proper asset employement, also known as total asset turnover. |
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| a process of determining how many units of production must be sold, or how much revenue must be obtained, before we begin to earn a profit |
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| How to calculate BEQ (Break-even quantity)? |
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Definition
| BEQ= FC/ P-VC where FC is fixed costs, P is price charged per unit, and VC is Variable cost per unit |
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| What two cost categories are on a monthly payment basis? |
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Definition
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| What two cost categories are on an annual payment basis? |
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| Employee Benefits and Propety Taxes |
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| What payment basis is the cost category, insurance, on? |
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Definition
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| Wood, Paint and finishing, labor, and packing and shipping are on what payment basis? |
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Definition
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| How do you calculate break-even dollars? |
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Definition
| BE$= FC/CMratio, where contribution margin ratio equals contribution margin divided by sales (either per unit or in total) |
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Term
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Definition
| the amount of profit that will be made by a company on each unit that is sold above and beyond the break even quantity, and also the amount the company will lose for each unit of production by which it falls short of the break-even point |
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| How do you calculate contribution margin? |
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Definition
| CM= sales - variable costs |
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Term
| how do you calculate the total quantity when the desired profit is with break even analysis? |
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Definition
| Total quantity= FC + Desired Profit/ P - VC |
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| How do you calculate the BE$ when desired profit is with break even analysis |
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Definition
| BE$= FC + Desired Profit/ CMratio |
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Definition
| uses those items that have a fixed cost to magnify the return to a company. Fixed costs can be related to company operations or related to the cost of financing. |
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| True or False: Interest expenses paid on the amount of debt incurred is the fixed cost of financing. |
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Definition
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| True or False: A firm is heavily financially leveraged if the fixed costs of financing are low. |
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Definition
| False, it is heavily financially leveraged if the fixed costs of financing are high |
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Term
| Degree of operating leverage (DOL) |
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Definition
| is the percentage change in operating income divided by the percentage change in sales. DOL= % change in operating income/ % change in sales |
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| Degree of financial leverage |
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Definition
| is the percentage change in earnings per share divided by the percentage change in operating income. DFL= % change in earnings per share/ % change in operating income |
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Term
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Definition
| for a business occurs when the liabilities of the firm exceed the assets and the business does not have sufficient cash flow to make payments to creditors |
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| There are essentially three types of bankruptcy? |
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Definition
1) Chapter 11 bankruptcy- occurs when a business seeks court protection while it develops a reorganization plan
2) Chapter 13 bankruptcy- reserved for individuals and sole proprietorships and is similar to, but much simpler than, Chapter 11
3) Chapter 7 bankruptcy requires liquidation of all assets of the business, and payment to creditors. |
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| Bankruptcy Abuse, Prevention, and Consumer Protection Act. |
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Definition
| Signed into law by President Bush on April 20, 2005. Took effect October 17, 2005. Makes it much more difficult for individuals and business to declare chapter 7 bankruptcy. Establishes a means test to determine if an individual filing Chapter 7 is abusing the system. Imposes federal guidelines for using the homestead exemption |
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Term
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Definition
| is a quantifiable estimate of future demand |
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Term
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Definition
| in business is the process of estimating the future demand for our products and services; for the financial manager also requires estimates of future interest rates. |
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Term
1) Determine the type of model to be used
2) Determine the forecast horizon
3) Select one or more forecasting models
4) evaluate the models
5) apply the chosen model
6) montior and control the model |
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Definition
| What is the Forecasting process? (6 steps) |
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Term
1) Judgemental Models- which use qualitative methods
2) Time series models- which use quantitative methods
3) Causal models- which use cause-and-effect methods |
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Definition
| 3 Types of Forecasting Models |
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Term
| pro forma financial statement |
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Definition
| is a projected statement based on the forecast |
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Term
1) Pro forma income statement
2) pro forma cash budget
3) pro forma balance sheet |
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Definition
| 3 basic pro forma statements are: |
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Term
| Percentage of Sales Method |
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Definition
| is based on the fact that assets and liabilities historically vary with sales. |
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Term
| The greater the amount of financial leverage, the more debt you have to service. If there is a business reversal, or operating profit decreases due to unforeseen operating expenses, the business may not have enough income to pay its creditors. The failure to pay creditors results in a condition of bankruptcy. |
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Definition
| How is financial leverage related to bankruptcy? |
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Term
| Fixed costs are the costs of running abusiness that do not relate to the volume of production or sales. These costs must be paid every time period, even if there is no production in sales. Contribution margin is sales income per unit minus variable cost per unit, and may be expressed as either a fixed dollar amount or as a percentage of the sales dollar. Break even is that dollar amount of sales, or number of units produced and sold, which is the point where total cost (fixed plus variable) equals total revenue |
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Definition
| What is the relationship among fixed costs, contribution margin, and the break-even point? |
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Term
| They are all of the costs associated with producing or procuring a product or service sold by a firm. Therefore any change in resource costs such as raw material, shipping, production labor, or energy may affect variable costs |
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Definition
| What are some factors that affect variable costs? |
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Term
1) Determine the value of the variables in the break-even formula
2) Determine the time period that must be used in break-even analysis
3) Convert all fixed costs to the break even time period.
4) Use the break-even formula to determine the number of units that must be produced during the time period. If you exceed break even you will be able to make a profit. |
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Definition
| What are the basic steps that you must take to determine if you are able to make a profit? |
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