You should use a financial calculator and Excel to solve the problems.Discuss the differences between efficiency and effectiveness.Why is it important for small business owners to understand the difference between profit and profitability? What financial ratio is used to determine profitability?Sam quit a $30,000-a-year job with a local heating and air conditioning firm to go into business for himself. After his first year in business, his accountant showed him an income statement that indicated Sam’s firm had a profit of $40,000. During this year Sam had drawn a salary of $20,000.What was Sam’s accounting profit, his entrepreneurial profit, and his opportunity cost?Explain the difference between accounting and entrepreneurial profit.Discuss the differences between operating and financial leverage.You are going to open a business making custom cabinets. You can sell each cabinet for $80. It takes a cabinet-maker approximately 45 minutes to make one cabinet. Each cabinet-maker works an eight-hour day, earning $18 per hour. Each cabinet will use $25 in raw materials. You usually produce cabinets 20 days a month and can employ two cabinet-makers. You estimate that your fixed costs are $5,000 per month.What is your contribution margin?How many cabinets must you make each month to break even?What is your total monthly revenue if you want to earn a $2,000 profit?Distinguish between gross working capital and net working capital.Discuss the role that marketable securities play in current asset management.Explain the problems that a firm may encounter when it does not provide for accrued liabilities.Jane James owns an appliance store. She normally receives $50,000 worth of appliances per month. She does not like to owe people money and always pays her bills on the day she receives the invoice. Someone told her that if she delayed payment, she could actually increase her profit because the money would be earning interest in her account. She went through her bills and found that she actually had an additional ten days, on average to pay her invoices. She also found that she was earning 5 percent interest on the money she had in her money market savings account.If she delayed payment by ten days, how much additional interest would she earn for the year?Explain how this problem represents a disbursement float.Larry’s Lawn Equipment Company gives terms of 2/10, n/30. Larry has annual credit sales of $500,000 and average accounts receivable of $60,000.What is Larry’s accounts receivable turnover?What is Larry’s average daily collection?What is the relationship between the terms that Larry is giving and his average daily collection?If Larry has accounts receivable of $100,000 rather than $60,000:What is Larry’s accounts receivable turnover?What is Larry’s average collection period?What should Larry do, if anything?

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FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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You should use a financial calculator and Excel to solve the problems.

Discuss the differences between efficiency and effectiveness.
Why is it important for small business owners to understand the difference between profit and profitability? What financial ratio is used to determine profitability?
Sam quit a $30,000-a-year job with a local heating and air conditioning firm to go into business for himself. After his first year in business, his accountant showed him an income statement that indicated Sam’s firm had a profit of $40,000. During this year Sam had drawn a salary of $20,000.
1. What was Sam’s accounting profit, his entrepreneurial profit, and his opportunity cost?
2. Explain the difference between accounting and entrepreneurial profit.
Discuss the differences between operating and financial leverage.
You are going to open a business making custom cabinets. You can sell each cabinet for $80. It takes a cabinet-maker approximately 45 minutes to make one cabinet. Each cabinet-maker works an eight-hour day, earning $18 per hour. Each cabinet will use $25 in raw materials. You usually produce cabinets 20 days a month and can employ two cabinet-makers. You estimate that your fixed costs are $5,000 per month.
1. What is your contribution margin?
2. How many cabinets must you make each month to break even?
3. What is your total monthly revenue if you want to earn a $2,000 profit?
Distinguish between gross working capital and net working capital.
Discuss the role that marketable securities play in current asset management.
Explain the problems that a firm may encounter when it does not provide for accrued liabilities.
Jane James owns an appliance store. She normally receives $50,000 worth of appliances per month. She does not like to owe people money and always pays her bills on the day she receives the invoice. Someone told her that if she delayed payment, she could actually increase her profit because the money would be earning interest in her account. She went through her bills and found that she actually had an additional ten days, on average to pay her invoices. She also found that she was earning 5 percent interest on the money she had in her money market savings account.
1. If she delayed payment by ten days, how much additional interest would she earn for the year?
2. Explain how this problem represents a disbursement float.
Larry’s Lawn Equipment Company gives terms of 2/10, n/30. Larry has annual credit sales of $500,000 and average accounts receivable of $60,000.
1. What is Larry’s accounts receivable turnover?
2. What is Larry’s average daily collection?
3. What is the relationship between the terms that Larry is giving and his average daily collection?

If Larry has accounts receivable of $100,000 rather than $60,000:

- - What is Larry’s accounts receivable turnover?
  - What is Larry’s average collection period?
  - What should Larry do, if anything?

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