CH11- Finance Flashcards
What is finance>
The management, creation and study of money, credit, banking, investment that make up the financial system
(Create value for shareholders)
4 types of ways to evaluate performance
Liquidity ratios
Assets management ratios
Leverage ratios
Profitability ratios
Liquidity ratio
how quickly are you able to pay off debt, converting asset into cash/ how strong are ur asset in relationship of your debt
Type of liquidity ratio
Current ratio
Current ratio and it’s formula
within a year, the larger the ratio the better (most companies like a 2:1 ratio). However it depends of the industry
Current assets/current liability
Asset management ratios
how well a firm uses their assets to generate revenues, it focus on efficiency (you can tell how efficient a business is)
Types of management ratios
Inventory turnover ratio
Inventory turnover ratio
relates to inventory, needs a tangible good (not services). We look how quickly a product is sol and replaced in a year
Cost of good sold/average inventory
Leverage ratio
How much capital comes in form of debt
Types of financial leverage
Debt to equity ratio
Debt ratio
Debt to equity ratio and formula
smaller number less risk, more people will want to invest in it
Total debt/ shareholder equity
Debt ratio
Total debt/ total asset
Profitability ratios
rate of return on an investment
Types of profitability ratio
Return on equity
Return on equity and formula
how efficiently a company manage the shareholders money (mostly look at common shares)
Net income/ shareholder equity
Financial planning
establish goals for a business or an individual in a financial stand point
2types of budgeted financial statement + cash budget
Budgeted income statement
Budgeted balance sheet
Cash budget
Budget income statement
Forecasts net income using sales and cost information (anticipate what will happen)
Budgeted balance sheet
Forecasts assets a firm will need for future plans
Cash budget
Timing of cash flow (cash crunches)
Types of managing current assets
Cash
Accounts receivable
Managing inventory
Managing current assets: CASH
- cash equivalent (commercial paper, treasury bills, mutual funds)
Allows cash to grow, very liquid
Managing current assets : ACCOUNT RECEIVABLE
Settling credit terms, establishing credit standards, deciding on collection
Not everyone pays right away their goods purchased (monthly payments), money owed from credit sale
Managing current assets; MANAGING INVENTORY
Industry that produce goods that are ready to be sold.
Inventory=value
Need managing so there isn’t a surplus or shortage (cost money)
