Business Finance Flashcards
It is a branch of economics concerned with resource allocation as well as resource acquisition, management, and investment
FINANCE
It is the business discipline concerned with managing money efficiently
FINANCE
It is the study of fund management and asset allocation over time
FINANCE
deals with the acquisition, management, and investment of financial resources to enable a business company to attain its predetermined objectives toward growth, stability, profitability, and liquidity
Finance
identifies the financing requirements of the firm at its estimated time and value. It determines if such financing requirements are needed short-term or long term.
Finance
Three Areas of Finance
Financial Institutions and markets
Investments
Financial Management
are where the providers and users of funds interact with the help of the financial intermediary. Here, the providers of funds are willing to lend their money for the purpose of generating interest or profits, while the users of funds are willing to use the funds either electronically or manually and the providers and users do not necessarily meet face to face to execute the transactions.
Financial Institutions and markets
is more concerned with raising, allocating, and controlling the firm’s funds. In times of financial trouble, the finance manager must find ways for the firms to meet
Financial Management
involve the buying and selling of financial securities, the analysis on making an investment, and risk management. The parties here are investors and users of funds, both individuals and institutions.
Investments
covers applications of finance other than public finance.
Private finance
is concerned with the government revenues and spending and their general effect on the economy.
Public finance
Categories of Finance
Public finance
Private finance
finance manager should answer are the following:
- What are the project proposals to accept to maintain or improve the firm’s stock price?
- In financing the acceptable project, should the firm borrow money or issue equity?
- If not from the borrowing, did the firm generate enough funds to finance its activities? Should they issue additional shares of stocks, preferred or common?
- In case there are no investment prospects and the firm has enough cash to declare as dividends, how much dividends should be declared?
Private finance is divided as:
a. Personal finance
b. Nonprofit organization
c. Business finance
Just like firms, individuals must consider the types, benefits, and risks of investments that they intend to make such as banking products, insurances, retirement plans, stock market, and mutual funds to name a few.
Personal finance
deals primarily with the management of the finances of individuals and households. It involves budgeting, saving, investing, and spending the finances to maintain, sustain, or enhance the unit’s well-being.
Personal finance
Fields of NPOs
- Arts, culture, and humanities
- Education
- Environment and animals
- Health
- Human services
- International and foreign affairs
- Public and societal benefit
- Religion related
- Mutual/membership benefit
- Unknown, unclassified
provides goods and services to the public without necessarily gaining profit for its owners or investors.
Non Profit Organization
Its uses whatever profit it gains to support its operations.
Non Profit Organization
It is basically funded by donations from individuals, corporations, foundations, and the government.
Non Profit Organization
Diff of Accounting and Finance:
Accounting
It deals with assets, liabilities, income, and expenses. It involves recording the past transactions, analyzing the past performance, and preparing and interpreting the financial statements of the business of the past year.
is the management of funds and other valuable assets to be used in the conduct of business. It is concerned with the acquisition, allocation, and accumulation of funds. Finance is commonly interchanged with accounting, but they have distinct differences. Both are concerned with managing the money of the business but in different ways.
BUSINESS FINANCE
Diff of Accounting and Finance:
Finance
Covers accounting, economics, taxation, and business laws. It involves using the accounting data and information in running the business and ensuring the sufficiency of its funds for future operations. The results of finance decisions make up the accounting data. This makes accounting and finance closely interrelated.
Reasons for Studying Finance
- come up with financial plans as to how their funds can be acquired, managed, and allocated;
- become better investors; and
- make informed financial and economic decisions.
questions that finance manager must answer in dealing with financing.
- Should the firm borrow money?
- Is it short-term or long-term?
- If they will not borrow, how will they generate enough funds?
- Should they issue additional shares of stocks, preferred or common?
Role of Finance Manager
Financing Decision
Investment Decision
Operating
Dividend Policy Decision
Definition of Finance by Mejorada
Acquisition, management, and investment of financial resources to enable a business company to attain its predetermined objectives toward growth, stability, profitability, and liquidity
Definition of Finance by AttractCapital
Study of the money and assets coupled with the management and use of those assets to build wealth
Definition of Finance by WebFinance, Inc
Branch of economics concerned with the resource allocation as well as resource acquisition, management, and investment
Definition of Finance by Kolakowski
Business discipline concerned with managing money efficiently
Definition of Finance by Lumen Learning
Study of fund management and asset allocation over time
It consists of the diversified financial activities being performed by the different economic units whose activities are so closely related to each other, considering the use of money, credit and different instruments associated with money.
THE FINANCIAL SYSTEM
A mathematical relationship between two numbers
Financial Ratio
Commonly expressed in percentages and decimals
Financial Ratio
basic functions of the financial system
a) Promote savings
b) Payment
c) Protection against risk
d) Means wealth
e) Provide liquidity
f) Credit facility
Categories of Bank Institutions
- Universal Bank
- Thrift Bank
- Cooperative Bank
- Islamic Bank
- Government Bank
- Investment Bank
- Investment Company
- Securities Dealers/brokers
- Insurance Company
- Credit Union
- Pawnshop
is part of the financial market where lending and borrowing takes place for the medium-term and long term.
Capital Market
refers to an institution that acts as a middleman between two parties in order to facilitate a financial transaction.
FINANCIAL INTERMEDIARY
It is the part of financial market where lending and borrowing takes place for short-term up to one year
Money Market
How are financial ratios commonly expressed?
In percentages and decimals
Financial data is in such a way that it can be compared and trends identified and thus questions for analysis can be raised
Financial Ratio
TYPES OF CAPITAL MARKET
Primary market
Secondary market
- Issuers
- Financial instruments
- Financial intermediaries
- Investors
Primary market
It is also called aftermarket. The securities are sold by the investor to another investor for the purpose of profit or cutting loss in the.
Secondary market
Definition of Financial Ratio by Jones and Ernest
Financial data is in such a way that it can be compared and trends identified and thus questions for analysis can be raised
What are the three areas of financial ratios?
- Liquidity Ratios
- Solvency Ratios
- Profitability Ratios
Ability to convert assets into spendable form
Liquidity
It dtermines a company’s ability to cover short-term obligations and cash flows.
Liquidity Ratios
Types of liquidity ratios
- Current Ratio
- Quick Ratio
- Receivable Turnover
- Inventory Turnover
The overall liquidity of a company by comparing current assets to current liabilities
Current Ratio
Another term for current ratio
Working Capital Ratio
Another term for working capital ratio
Current Ratio
More conservative in the sense that it does not include all current assets in the computation
Quick Ratio
Another term for quick ratio
Acid Test Ratio
Another term for acid test ratio
Quick Ratio
Measures how efficiently a company collects its outstanding credit sales
Accounts Receivable Turnover
It indicates how many times a company converts its accounts receivable into cash during a specific period
Accounts Receivable Turnover
The process of listing the unpaid invoices and other receivables by their due dates
Average Receivables
The number of times that inventory is sold during the accounting
Inventory Turnover
Where you can see how long the goods have been stored in the stockroom
Age of Inventory
The key metric used to measure an enterprise’s ability to meet its debt obligations and its use often by prospective business lenders
Solvency Ratios
It indicates whether a company’s cash flow is sufficient to meet its short- and long-term liabilities.
Solvency Ratios
Types of solvency ratios
- Time-Interest earned
- Debt Ratio
- Equity Ratio
- Debt to Equity Ratio
- Equity to Debt Ratio
It evaluates the ability of a company to pay the interest on its debt
Time-Interest Earned
Measures the percentage of assets funded by creditors
Debt Ratio
Indicates the percentage of assets funded by the owners
Equity Ratio
Refers to the financial ratio indicating the relative proportion of shareholders’ equity and debt use in the finance of a company’s asset
Debt to Equity Ratio
Refers to the proportion of owner’s equity to debt
Equity to Debt Ratio
Show how efficiently a company generates profits and value for shareholders
Profitability Ratios
Types of Profitability Ratios
- Gross Profit Margin
- Operating Profit Margin
- Net Profit Margin
Measures the company’s profitability, calculated as the gross profit as a percentage of revenue
Gross Profit Margin
The amount remaining deducting the cost of goods sold (COGS) or direct cost of earning revenue from revenue
Gross
Measures the average markup on every peso sale of each product
Gross Profit
Computed by deducting operating expenses from the gross profit
Operating Profit Margin
Overall measure of profitability
Net Profit Margin
The capacity of goods and services to satisfy wants
Utility or Expected Satisfaction
The final product of the whole accounting process
Financial Statement Analysis
Users of financial statements
- External
- Internal
Process preparing financial statements
- Analyzing business transactions
- Recording in the journals
- Posting to ledger accounts
- Preparing the unadjusted
- Making the adjusting entries
- Preparing the adjusted trial balance
- Preparing the financial statements
- Making the closing entries
- Post-closing trial balance
Types of financial statements
- Statement of Financial Position
- Statement of Comprehensive Income
- Statement of Changes in Owner’s Equity
- Statement of Cash Flow
A snapshot of a company’s financial position at a specific point in time, showing assets, liabilities, and equity
Statement of Financial Position
Another term for statement of financial position
Balance Sheet
Another term for balance sheet
Statement of Financial Position
It shows a company’s financial position at a specific point in time
Statement of Financial Position
What is the purpose of statements of financial position?
It shows a company’s financial position at a specific point in time
What are the components of a statement of financial position?
**Assets*, liabilities, and equity
What the company owns
Assets
What the company owes
Liabilities
The owner’s claim after liabilities are subtracted from assets
Equity
A report that shows a company’s financial performance over a specific period, detailing revenues, expenses, and net income or loss
Statement of Comprehensive Income
Another term for statement of comprehensive income
Income Statement
Another term for income statements
Statement of Comprehensive Income
It reports a company’s financial performance over a specific period
Statement of Comprehensive Income
What is the purpose of statements of comprehensive income?
It reports a company’s financial
performance over a specific period
What are the components of statements of comprehensive income?
Revenue, expenses, and net income
A financial statement that details the changes in the equity section of the balance sheet over a specific period
Statement of Changes in Owner’s Equity
Another term for statement of changes in owner’s equity
Statement of Changes in Equity
Another term for statement of changes in equity
Statement of Changes in Owner’s Equity
Shows the movement in the owner’s equity during the accounting period
Statement of Changes in Owner’s Equity
Provides transparency about how equity has changed due to various factors
Statement of Changes in Owner’s Equity
What are the purposes of Statement of Changes in Owner’s Equity?
- To show the movement in the owner’s equity during the accounting period
- To provide transparency about how equity has changed due to various factors
What are the components of Statement of Changes in Owner’s Equity?
Opening balance, owner contributions, net income/loss, dividends or withdrawals, other comprehensive income, and closing balance
The equity balance at the beginning of the period
Opening Balance
Additional investments made by the owner
Owner Contributions
Profit or loss from the income statement
Net Income or Loss
Amounts paid out to the owner or shareholders
Dividends or Withdrawals
Gains or losses not included in net income (e.g. revaluation surplus)
Other Comprehensive Income
Equity balance at the end of the period
Closing Balance
A statement that tracks the inflows and outflows of cash over a period, categorized into operating, investing, and financing activities
Statement of Cash Flow
Shows the inflows and outflows of cash over a period
Statement of Cash Flow
What is the purpose of Statements of Cash Flows?
Shows the inflows and outflows of cash over a period
What are the components of Statements of Cash Flows?
Operating activities, investing activities, and financial activities
It is the process of selecting related data from financial statements to evaluate the entity’s past financial position and operating performance and predict the outcome of future operations
Financial Statement Analysis
What are the methods of analyzing the financial statements?
- Horizontal or Comparative approach
- Vertical or Common-Size approach
An analytical tool that evaluates the present performance of an entity compared to last year’s
Horizontal or Comparative Analysis Approach
The analysis reflects the differences in absolute amount and in percentage between two periods only, namely the present year and previous year
Horizontal or Comparative Analysis Approach
The ability of the company to pay for the obligation in relation to the assets it has
Horizontal or Comparative Approach
Allocation of resources and management priorities
Vertical or Common-Size Approach
An analytical tool that determines the size or proportion of an item in the financial statements in relation to the total
Vertical or Common-Size Approach
Setting the goals of an organization and identifying ways to meet its goals
Planning
Planning may be broken down into _____ and ____?
Long-term plans and short-term plans
Involves strategies that focus on the results within a short period of time, say a year
Short-term plan
Mission
Short-term plan
Vision
Long-term plan
Plans are reflected in a company’s business strategy
Long-term plan
Includes monitoring and comparing actual performance with plans
Controlling
What are the steps in planning?
- Set goals or objectives
- Identify the resources
- Identify the goal related tasks
- Establish responsibility centers for accountability and timeline
- Establish an evaluation system for monitoring and controlling
- Determine the plans
An important financial statement account in forecasting because almost all other accounts in the financial statement are affected by this
Sales Budget
It analyzes the statement of profit or loss, such as cost of sales, gross profit, and variable operating expenses based on the sales figure
Sales Budget
Provides information regarding the number of units to be produced over a given accounting period based on expected sales and target level of ending inventories
Production Budget
