Financial Concepts Test for Micro-Entrepreneurs

1. Break-Even Analysis

1.1 John runs a small bakery called "John's Breads" in his town. His monthly fixed costs are
$400 for rent on his storefront and $200 for utilities. He pays $1.50 per pound for flour, the
main ingredient in each loaf of bread he bakes. Each loaf weighs 1 pound and he sells each
loaf for $3. His other variable costs per loaf are $0.50.

Calculate John's break-even point in terms of the number of loaves of bread he needs to sell
each month to cover his total fixed and variable costs.

1.2 John is considering increasing the price of each loaf from $3 to $3.25. He anticipates that
higher prices may cause his monthly sales to decrease by 10%. However, his costs will remain
the same. Determine the new break-even point if John increases prices.

2. Cash Flow Analysis

2.1 Lisa runs a tailoring shop called "Lisa's Tailor" in her town. 6 months ago, she took a 1-
year, 12% interest loan for $1000 from the local microfinance institution to buy an industrial
sewing machine. The loan terms require $100 monthly payments over 12 months.

For the next month, Lisa projects:

- Monthly sales revenue from jobs: $800
- Cost of fabric: $300
- Utilities: $100
- Rent: $100
- Lisa's monthly salary: $200

Calculate Lisa's projected cash flow for the next month. Also, calculate the loan balance after
making the payment.

2.2 The following month, Lisa's projected sales decreased to $600 while her costs remained
the same. She has $50 cash on hand from the previous month. Will Lisa have a positive cash
flow for this month? Show your work.

3. Balance Sheet Analysis

3.1 Peter owns a small grocery store called "Pete's Pantry". According to his most recent
balance sheet:
- Current assets: Inventory $15,000, Accounts Receivable $5,000, Cash $5,000
- Non-current assets: Fixtures $25,000
- Current liabilities: Accounts Payable $8,000
- Long-term notes payable $10,000

Calculate Pete's total assets, total liabilities, and owners' equity as reported on his balance
sheet.

3.2 The following month, Pete pays $3,000 to settle his Accounts Payable. Describe in words
how this payment affects each item (total assets, total liabilities, owners' equity on Pete's
balance sheet.
4. Income Statement Analysis

4.1 Sarah runs a cafe called "Sarah's Cafe" that had the following income statement for the
most recent month:
- Sales: $4,500
- Cost of goods sold: $1,800
- Wages: $600
- Rent: $500
- Utilities: $200
- Other operating expenses: $300
- Interest expense on 6-month loan: $100

Calculate Sarah's net income (or loss for the month.

4.2 Sarah is considering taking out a new 6-month loan of $1,000 at 12% interest to purchase
a new commercial oven for her expanding cafe business. How will this loan affect her net
income next month, assuming all other income statement items remain the same? Show your
work.

5. Relationship between Balance Sheet and Income Statement

5.1 Suppose Sarah took the $1,000 loan from question 4.2. Her beginning owner's equity was
$8,000. Using the net income calculated in 4.1, calculate Sarah's ending owner's equity for the
month.

5.2 After one month of using her new oven, Sarah's sales increased to $5,000 while her cost of
goods sold increased to $2,000. All other income statement items stayed the same. How does
this affect Sarah's ending owner's equity? Explain your answer.