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Accounting > Accounting 2 > Flashcards

Accounting 2 Flashcards

1
Q

What are annual net cash flows?

A

Excess of cash receipts over cash disbursements

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2
Q

What are the 3 capital budgeting techniques?

A
  1. Payback Period
  2. Net Present Value
  3. IRR
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3
Q

How do you calculate payback period?

A

Estimated Annual Net Cash Flows

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4
Q

What is the Present Value of a future cash flow?

A

Amount that a knowledgeable investor would pay today for the right to receive that future amount

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5
Q

What do you need for present value?

A
  1. The amount of the future cash flow.
  2. The length of time that the investor must wait to receive the cash flow.
  3. The rate of return required by the investor.
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6
Q

What is the discount rate?

A

An investor’s required rate of return.

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7
Q

What is Net Present Value?

A

Difference between the total present value of the net cash flows and the cost of the investment

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8
Q

What does a positive net present value mean?

A

The investment is expected to provide a rate of return greater than the discount rate

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9
Q

What does a negative present value mean?

A

The investment is likely to yield a return less than the discount rate.

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10
Q

What is an unequal cash flow?

A

A single investment followed by a series of unequal annual net cash flows.

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11
Q

What are the characteristics of Net Present Value?

A
  • Gives explicit consideration to the investment size.

- Assumes all net cash inflows are reinvested at the discount rate.

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12
Q

What are the characteristics of the Internal Rate of Return?

A
  • Gives no consideration to investment size

- Assumes all net cash inflows are reinvested at the project’s internal rate of return.

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13
Q

What is the profitability index?

A

Initial investment

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14
Q

What does it mean if the profitability index is greater than 1?

A

The project creates value. It generates a return greater than our required return

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15
Q

What does depreciation do to income taxes?

A

It reduces them. But it does not cause cash outflows.

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16
Q

What are the two assumptions in dealing with taxes in capital budgeting decisions?

A
  1. Revenues and operating cash receipts are the same each year
  2. Depreciation is the only noncash expense of an organization.
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17
Q

How do you calculate the value of a firm?

A

Value of debt + value of stock

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18
Q

What does market value of a company reflect?

A
  • Earning power of invested assets
  • Present value of current operations
  • Present value of expected improvement in operating performance.
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19
Q

What is the cost of capital?

A

Minimum required rate of return

Average return the company must pay to its long-term creditors and stockholders

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20
Q

What does the NPV method automatically provide?

A

Return of the original investment

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21
Q

What is the Internal Rate of Return?

A

Discount rate that will cause the net present value of a project to be zero.
The rate of return promised by an investment project over its life

22
Q

What is the hurdle rate?

A

Using the IRR, the capital acts that must clear for acceptance

23
Q

How do you calculate the PV Factor for the IRR?

A

Annual Net Cash Flows

24
Q

Which is simpler/preferred, NPV or IRR?

A

NPV

25
Q

What is Value Additivity?

A

Adding up all the capital projects gives you the company value.

26
Q

How do you calculate the payback period for unequal cash flow?

A

You keep a running tab and then divide the difference between the remainder and the final year.
i.e. $5,500 is leftover and $29,000 is the final year, using 5,500/29,000 = 0.19
Unrecovered Investment
————————————
Cash Flow

27
Q

What does compounding deal with?

A

Future Amounts

28
Q

What is discounting?

A

Bringing a future amount into today’s dollar?

29
Q

What is an annuity?

A

Same amount of money over the same time space

30
Q

What does compounding deal with

A

Future amounts

31
Q

What are the 2 ways of looking at the Cost of Capital?

A
  1. How much does it take me to run my business?

2. Market driven, what investors/creditors demand from the company

32
Q

As rates are increasing…

A

Factors are decreasing

33
Q

As years are increasing…

A

Factors are decreasing

34
Q

What is Net Present Value?

A

Sum of the Net Present Value of the Inflows Less the Investment
If NPV = + –> accept
If NPV = - –> reject

35
Q

What is I.R.R.?

A

NPV = 0

36
Q

What is the Profitability Index?

A

Common Size, Biggest bang for your buck
Present Value of Future Cash Flows / Initial Investment
Anything greater than 1 is a good project

37
Q

Why would you use the Profitability Index?

A

It compares things to a common size

38
Q

What are two assumptions in dealing with taxes in capital budgeting?

A
  1. Revenues and operating cash receipts are the same each year
  2. Depreciation is the only noncash expense of an organization
39
Q

What is a tax shield?

A

The difference between annual taxes without and with depreciation.

40
Q

What is EAA?

A

Equivalent annual annuity

Choose between projects with unequal useful lives

41
Q

What is the Decision Rule?

A

The project with higher equivalent annual annuity is preferred (High EAA)

42
Q

What is EVA?

A

Economic Value Added

Only get into projects that add value to your company

43
Q

What is MVA?

A

Market Value Added
Present value of all future EVA
Sum of all the NPVs

44
Q

What is the capital charge?

A

firm’s weighted average cost of capital % x invested capital

45
Q

What does degree of operating leverage refer to?

A

How much fixed cost do you have?

46
Q

What is the aggressive approach to cost?

A

High fixed cost
Low variable cost
(higher profit margin)

47
Q

What is the conservative approach to cost?

A

High variable cost

Low fixed cost

48
Q

What is another word for CVP?

A

Break-even

49
Q

What type of income does CVP work with?

A

Operating Income

50
Q

How do you calculate Contribution Margin Ratio?

A

Contribution Margin Per unit / Sales price

51
Q

What is the Margin of Safety?

A

Actual Sales - Break-Even Point in Sales

Accounting (3 decks)

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