Business Functions: Finance Flashcards
What are the 3 main areas of financial management?
Capital budgeting
Capital structure
Financing decision
What is capital budgeting?
The process of planning and managing a business’s long-term investments
What are the five steps in capital budgeting?
Review and analysis
Proposal generation
Decision-making
Implementation
Follow-up
What is capital structure?
The mixture and management of long-term debt and equity
What is working capital?
Short-term assets less short-term liabilities
What are the 3 key decisions of financial management?
Investment decision
Financing decision
Asset management decision
What is liquidity?
A measure of how well working capital is managed
What is solvency?
The ability to short and long term obligations as they become due
What is the long-term objective of a business?
Growing shareholder wealth
What is the time value of money principle?
An amount of money received today is more valuable than that amount received tomorrow
What is the risk-return trade-off?
The probability of higher return is associated with higher risk
What is the principle of cash flows are the source of value?
Businesses use cash, not profits, to reinvest their money
What is the CVP analysis?
The cost-volume-profit analysis determines how changes in costs and volume affect operating income
What is EBIT?
Earnings before interest and taxes is operating income
What is a business’s cost structure?
The relevant proportion of fixed, variable and mixed costs present in a business
What is the break-even analysis?
A measurement system used to determine the amount of sales revenue required to pay fixed and variable expenses
What is the contribution margin?
The business’s financial resources to cover fixed costs
How is the break-even point in sales value calculated?
Fixed cost ÷ contribution margin ratio
What is a balance sheet?
Summary of a business’s financial position at a given date
What is an income statement?
Business’s financial performance in terms of net profit or loss over a specific period
What is a cash flow statement?
A business’s flow of funds over a period
What is a statement of retained earnings?
Movement of owner’s equity over a period
What is vertical analysis?
Comparison of financial data within one financial year
What is horizontal analysis?
Comparison of financial data from different financial years
What is trend analysis?
Comparison of financial data for periods of 3-5 years
What are the 5 financial ratio types?
Liquidity
Activity
Debt
Profitability
Market
What are the liquidity ratios?
Current
Quick
Cash
Net working capital to total assets
What is the function of the current ratio?
To help establish short-term financial position
What is the function of the quick ratio?
To establish a business’s ability to settle short-term obligations
What is the function of the cash ratio?
Establish ability to settle short-term debt if required to pay cash
What is the function of the net working capital to total assets ratio?
Determine percentage of assets carried as net working capital
What are the solvency ratios?
Debt
Long-term debt
What is the function of the debt ratio?
Measure percentage of total assets finances by debt
What is the function of the long-term debt ratio?
Provide more insight into debt management policy by excluding potentially irrelevant current liabilities
What are the asset management ratios?
Accounts receivable turnover
Receivables collection period
Inventory turnover
Inventory processing period
Accounts payable turnover
Accounts payable payment period
Asset turnover
What is the function of the accounts receivable turnover ratio?
Measure number of times accounts receivable are generated and also collected in a year
What is the function of the receivables collection period?
Number of days it takes to convert accounts receivable into cash
What is the function of the inventory turnover ratio?
Calculate how often a business’s inventory is replenished
What is the function of the inventory processing period?
Determine the time frame that it takes to turn over the business’s entire inventory
What is the function of the accounts payable turnover ratio?
Measures amount of times accounts payable are generated and paid during a year
What is the function of the accounts payable payment period?
Measure how long it takes to settle accounts payable
What is the function of the assets turnover ratio?
Measure the efficiency of utilising assets to generate sales
What are the profitability ratios?
Gross profit margin
Operating profit margin
Net profit margin
Return on assets
Total return on assets
Return on total equity
DuPont analysis
What is the function of the gross profit margin ratio?
Measure the relationship between gross profit and net sales
What is the function of the operating profit margin ratio?
Indicate how well business operational efficiency is
What is the function of the net profit margin ratio?
Measure overall operating efficiency
What is the function of the return on assets ratio?
Measures how much net income is made for every R1 invested in total assets
What is the function of the total return on assets ratio?
By deducting interest expense, businesses with large debt financing will have lower return on assets
What is the function of the return on total equity ratio?
Measures return earned on capital from shareholders
What is the function of the DuPont analysis ratio?
Measures money gained using capital investment from shareholders and determining whether changes are due to changes in the profit margin, sales or total assets
What are the market value ratios?
Price/earnings
Market-to-book value
Dividend yield
Dividend pay
What is the function of the P/E ratio?
Provide insight to how much investors are willing to pay for shares
What is the function of the market-to-book value ratio?
Measures market value relative to book value
What is the function of the dividend yield ratio?
Measures amount of cash dividends distributed to shareholders
What is the function of the dividend payout ratio?
Measures percentage of net income returned annually as dividends
