Accounting/Finance Flashcards
Areas of Finance
Corporate Finance
Investments
Financial Markets and Institutions
How does money flow into and out of a firm?
Sales of products or services
Investment returns
Financing
Key activities of finance
planning, investment, financing
Planning
A key activity of finance
Preparing financial plans, which project revenues, expenditures, and financing needs over a given period
Investment (spending money)
A key activity of finance
Investing the firm’s funds in projects and securities that provide high returns in relation to their risks.
Financing (raising money)
A key activity of finance
Obtaining funding for the firm’s operations and investments and seeking the best balance between debt and equity
Risk-return tradeoff
The higher the risk, the greater the return that is required
Liquidity and managing cash flows
More Liquid = better b/c easier to turn into cash for instant use
Short-term expenses
Outlays used to support current production and selling activities
Long-Term Expenses/Capital Expenditures
Major expenditure that requires a large up-front investment and is expected to generate substantial cash inflow in return
Capital budgeting
Determining which long-term or fixed assets to acquire in an effort to maximize shareholder value
Accounts receivable
Amounts owed to the firm by customers that paid w/ credit
Accounts Payable
Amounts the firm owes for credit purchases due within a year
Managing inventory
(Stock of goods being held for production or for sale to customers)
Production managers wants
lots of raw materials on hand to avoid production delays
Marketing managers wants
finished goods on hand so customer orders can be filled
Financial managers wants
work w/ production & marketing to balance conflicting goals
Debt Financing
Inability to influence management unless the borrower defaults
Payment of interest and principal is needed and are contractually obligated
Stated maturity and requires repayment of principal by a specified date
Interest is a tax deductible expense
Equity Financing
Common stockholders have voting rights
Equity owners have residual claim on income with no obligation to pay dividends
The company is not required to repay equity, which has no maturity date
Dividends are not tax deductible and are paid from after-tax income
Dividends
Payments to stockholders from a corporation’s profits
Retained Earnings
Amounts left over from profitable operations since the firm’s beginning
Equal to total profits – all dividends paid to stockholders
IPO
Offering shares of a private corporation to the public in a new stock for the 1st time.
Venture Capital
Money, technical, or managerial expertise provided by investors to startup firms with long-term growth potential.
Accounting vs. Finance
Those who work in finance typically focus on planning and directing the financial transactions for an organization, while those who work in accounting focus on recording and reporting on those transactions.
GAAP
Set of accounting rules, standards, and procedures issued and frequently revised by the Financial Accounting Standards Board (FASB).
International Financial Reporting System (IFRS)
A standard set of accounting rules, standards, and procedures usually used by other countries
SEC purpose
Enforces the law against market manipulation
SEC Things
Annual reports (10-K)
Public Company Reports (8-K)
Quarterly Reports (10-Q)
Bankruptcy
Change in public accountants
Sets disclosure requirements for topics in 10-Ks and 10-Qs and how it’s presented
Companies cant make false claims or leave out information
Does NOT vouch for the accuracy of a 10-K or 10-Q
- CEO and CFO must certify accuracy
Management Discussion and Analysis (MD&A)
Narrative explanation of a company’s financial performance/condition
Provides context for financial statements
Risks facing the company
Key Sections of the Annual Report
Management Discussion and Analysis (MD&A), External auditor’s report, Financial statements (Footnotes)
Financial statements (Footnotes)
Discloses the accounting policies that are most important to portraying the company’s financial condition and results
Case: Funko
Seeing lower returns this year compared to 2021 and 2022 (not profitable/in the red)
Has too much inventory -> destroying $30M worth of product
Gross margin dec. b/c pf inc. warehouse operations & freight/storage costs
Shows that Amount of Inventory and Cash Balance are inversely related
