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Business Management 1 > Business Functions: Finance > Flashcards

Business Functions: Finance Flashcards

1
Q

What are the 3 main areas of financial management?

A

Capital budgeting
Capital structure
Financing decision

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2
Q

What is capital budgeting?

A

The process of planning and managing a business’s long-term investments

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3
Q

What are the five steps in capital budgeting?

A

Review and analysis
Proposal generation
Decision-making
Implementation
Follow-up

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4
Q

What is capital structure?

A

The mixture and management of long-term debt and equity

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5
Q

What is working capital?

A

Short-term assets less short-term liabilities

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6
Q

What are the 3 key decisions of financial management?

A

Investment decision
Financing decision
Asset management decision

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7
Q

What is liquidity?

A

A measure of how well working capital is managed

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8
Q

What is solvency?

A

The ability to short and long term obligations as they become due

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9
Q

What is the long-term objective of a business?

A

Growing shareholder wealth

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10
Q

What is the time value of money principle?

A

An amount of money received today is more valuable than that amount received tomorrow

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11
Q

What is the risk-return trade-off?

A

The probability of higher return is associated with higher risk

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12
Q

What is the principle of cash flows are the source of value?

A

Businesses use cash, not profits, to reinvest their money

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13
Q

What is the CVP analysis?

A

The cost-volume-profit analysis determines how changes in costs and volume affect operating income

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14
Q

What is EBIT?

A

Earnings before interest and taxes is operating income

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15
Q

What is a business’s cost structure?

A

The relevant proportion of fixed, variable and mixed costs present in a business

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16
Q

What is the break-even analysis?

A

A measurement system used to determine the amount of sales revenue required to pay fixed and variable expenses

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17
Q

What is the contribution margin?

A

The business’s financial resources to cover fixed costs

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18
Q

How is the break-even point in sales value calculated?

A

Fixed cost ÷ contribution margin ratio

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19
Q

What is a balance sheet?

A

Summary of a business’s financial position at a given date

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20
Q

What is an income statement?

A

Business’s financial performance in terms of net profit or loss over a specific period

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21
Q

What is a cash flow statement?

A

A business’s flow of funds over a period

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22
Q

What is a statement of retained earnings?

A

Movement of owner’s equity over a period

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23
Q

What is vertical analysis?

A

Comparison of financial data within one financial year

24
Q

What is horizontal analysis?

A

Comparison of financial data from different financial years

25
Q

What is trend analysis?

A

Comparison of financial data for periods of 3-5 years

26
Q

What are the 5 financial ratio types?

A

Liquidity
Activity
Debt
Profitability
Market

27
Q

What are the liquidity ratios?

A

Current
Quick
Cash
Net working capital to total assets

28
Q

What is the function of the current ratio?

A

To help establish short-term financial position

29
Q

What is the function of the quick ratio?

A

To establish a business’s ability to settle short-term obligations

30
Q

What is the function of the cash ratio?

A

Establish ability to settle short-term debt if required to pay cash

31
Q

What is the function of the net working capital to total assets ratio?

A

Determine percentage of assets carried as net working capital

32
Q

What are the solvency ratios?

A

Debt
Long-term debt

33
Q

What is the function of the debt ratio?

A

Measure percentage of total assets finances by debt

34
Q

What is the function of the long-term debt ratio?

A

Provide more insight into debt management policy by excluding potentially irrelevant current liabilities

35
Q

What are the asset management ratios?

A

Accounts receivable turnover
Receivables collection period
Inventory turnover
Inventory processing period
Accounts payable turnover
Accounts payable payment period
Asset turnover

36
Q

What is the function of the accounts receivable turnover ratio?

A

Measure number of times accounts receivable are generated and also collected in a year

37
Q

What is the function of the receivables collection period?

A

Number of days it takes to convert accounts receivable into cash

38
Q

What is the function of the inventory turnover ratio?

A

Calculate how often a business’s inventory is replenished

39
Q

What is the function of the inventory processing period?

A

Determine the time frame that it takes to turn over the business’s entire inventory

40
Q

What is the function of the accounts payable turnover ratio?

A

Measures amount of times accounts payable are generated and paid during a year

41
Q

What is the function of the accounts payable payment period?

A

Measure how long it takes to settle accounts payable

42
Q

What is the function of the assets turnover ratio?

A

Measure the efficiency of utilising assets to generate sales

43
Q

What are the profitability ratios?

A

Gross profit margin
Operating profit margin
Net profit margin
Return on assets
Total return on assets
Return on total equity
DuPont analysis

44
Q

What is the function of the gross profit margin ratio?

A

Measure the relationship between gross profit and net sales

45
Q

What is the function of the operating profit margin ratio?

A

Indicate how well business operational efficiency is

46
Q

What is the function of the net profit margin ratio?

A

Measure overall operating efficiency

47
Q

What is the function of the return on assets ratio?

A

Measures how much net income is made for every R1 invested in total assets

48
Q

What is the function of the total return on assets ratio?

A

By deducting interest expense, businesses with large debt financing will have lower return on assets

49
Q

What is the function of the return on total equity ratio?

A

Measures return earned on capital from shareholders

50
Q

What is the function of the DuPont analysis ratio?

A

Measures money gained using capital investment from shareholders and determining whether changes are due to changes in the profit margin, sales or total assets

51
Q

What are the market value ratios?

A

Price/earnings
Market-to-book value
Dividend yield
Dividend pay

52
Q

What is the function of the P/E ratio?

A

Provide insight to how much investors are willing to pay for shares

53
Q

What is the function of the market-to-book value ratio?

A

Measures market value relative to book value

54
Q

What is the function of the dividend yield ratio?

A

Measures amount of cash dividends distributed to shareholders

55
Q

What is the function of the dividend payout ratio?

A

Measures percentage of net income returned annually as dividends

Business Management 1 (10 decks)

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