ACCOUNTING/FINANCE Flashcards
Key activities of finance
- planning
- investment (spending money)
- financing (rasing money + seeking balance between debt [borrowed funds] and equity [sale of ownership in business])
Definition of Risk and Return
Return = opportunity for profit
Risk = potential for loss
Liquidity and managing cash flows
Financial managers plan and monitor cash flow
- long term: manage capital expenditures through capital budgeting (project costs and future returns) - consider time value of money
Short term expenses
operating expenses ( used to support current production and selling activities + result in current assets[asset that can be converted quickly into cash])
Long term expenses
for fixed assets (ex: land, building)
capital budgeting
a method of estimating the financial viability of a investment
capital expenditure
money spent by a business on acquiring fixed assets
Accounts receivable
money owed to the company
Accounts Payable
money that business owes
Stock out
=> not enough stock for demand -> may lose customers
Excess inventory
high sunk costs and possibly cash shortages
Equity financing pros and cons
Pros: few resictions (no dividends or no repaying the investment)
Cons: more costly than debt, gives common stockholders voting rights
Firm obtains equity financing by selling new ownership shares (external financing), by retaining earnings (internal financing) and venture capital (external financing)
Debt financing
pros and cons and defo
used for long term expenses
Pros: deductibility of interest expense for income tax purposes, no loss of ownership
Cons: financial risk
Dividends/retained earnings
Dividend = payments to stockholders from a corporation’s profits
Retained earnings = profits that have been reinvested in the firm
Securities markets primary and secondary
primary market = new securities sold to the public
secondary market = old securities bought and sold among investors
What are securities and why are they issued?
short-term investments that are easily converted into cash (ex: treasury bills, certificates of deposit, commercial paper)
Mutual funds and ETFs
mutual fund = Purchased at end of trading day based on calculated price
exchange traded funds = Funds that trade on exchanges. Trade like a stock (can be purchased anytime during trading hours).
NYSE and NASDAQ
NYSE = broker market, buyer purchases directly security from seller through broker (physical)
NASDAQ = dealer market, buyer purchases security from other dealer (telecommunications)
What is the SEC, when did it come about, what is its role related to securities markets?
Securities Exchange Commission = protects investors by requiring full disclosure of inofrmation about new securities issues.
- annual reports must be audited
What is GAAP and what does the SEC require of public companies?
US public companies must report information using General Accepted Accounting Principles
Key sections of the annual report
- management discussion and analysis
- external auditor’s report
- financial statements
Class example: Funko (annual report exercise)
had to trash products as demand decreased
Marketable securities
Temporary investments of excess cash that can readily be converted to cash.
Accounts receivable:
Amounts owed to the firm by customers who bought goods or services on credit.
Notes receivable:
Amounts owed to the firm by customers or others to whom it lent money.
Inventory:
Stock of goods being held for production or for sale to customers.
