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Fund To Business > CH11- Finance > Flashcards

CH11- Finance Flashcards

1
Q

What is finance>

A

The management, creation and study of money, credit, banking, investment that make up the financial system

(Create value for shareholders)

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2
Q

4 types of ways to evaluate performance

A

Liquidity ratios
Assets management ratios
Leverage ratios
Profitability ratios

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3
Q

Liquidity ratio

A

how quickly are you able to pay off debt, converting asset into cash/ how strong are ur asset in relationship of your debt

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4
Q

Type of liquidity ratio

A

Current ratio

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5
Q

Current ratio and it’s formula

A

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

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6
Q

Asset management ratios

A

how well a firm uses their assets to generate revenues, it focus on efficiency (you can tell how efficient a business is)

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7
Q

Types of management ratios

A

Inventory turnover ratio

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8
Q

Inventory turnover ratio

A

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

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9
Q

Leverage ratio

A

How much capital comes in form of debt

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10
Q

Types of financial leverage

A

Debt to equity ratio

Debt ratio

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11
Q

Debt to equity ratio and formula

A

smaller number less risk, more people will want to invest in it

Total debt/ shareholder equity

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12
Q

Debt ratio

A

Total debt/ total asset

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13
Q

Profitability ratios

A

rate of return on an investment

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14
Q

Types of profitability ratio

A

Return on equity

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15
Q

Return on equity and formula

A

how efficiently a company manage the shareholders money (mostly look at common shares)

Net income/ shareholder equity

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16
Q

Financial planning

A

establish goals for a business or an individual in a financial stand point

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17
Q

2types of budgeted financial statement + cash budget

A

Budgeted income statement
Budgeted balance sheet
Cash budget

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18
Q

Budget income statement

A

Forecasts net income using sales and cost information (anticipate what will happen)

19
Q

Budgeted balance sheet

A

Forecasts assets a firm will need for future plans

20
Q

Cash budget

A

Timing of cash flow (cash crunches)

21
Q

Types of managing current assets

A

Cash
Accounts receivable
Managing inventory

22
Q

Managing current assets: CASH

A
  • cash equivalent (commercial paper, treasury bills, mutual funds)

Allows cash to grow, very liquid

23
Q

Managing current assets : ACCOUNT RECEIVABLE

A

Settling credit terms, establishing credit standards, deciding on collection

Not everyone pays right away their goods purchased (monthly payments), money owed from credit sale

24
Q

Managing current assets; MANAGING INVENTORY

A

Industry that produce goods that are ready to be sold.
Inventory=value
Need managing so there isn’t a surplus or shortage (cost money)

25
Q

Commercial paper

A

small loans (IOU) or a treasure bill from the gouvernment (IOU)

26
Q

Mutual funds

A

lower risk investments, pull funds from people to make money grow.

27
Q

Crédit terms

A

how long is your credit for? Should there be cash discounts (10% off if you pay in 30 days and not 60 —> less risky for business and allows them to invest faster)

28
Q

Crédit standard

A

who are you going to issue your credit to. What credit does a business have to be eligible to your credit plan.

29
Q

Types of short term financing

A

Spontaneous financing
Shot term bank loans
Factoring
Commercial paper

30
Q

Short term financing

A

Funds that can be used to fund a business

31
Q

Spontaneous financing (+ what does it include)

A

funds from business activity (from operating for day to day business).

+ trade credit

32
Q

Trade credit

A

(important when credit is used). Supply product are delivered when you dont need to pay right away.

33
Q

Shot term bank loans (what is included)

A

Line of credit

Revolving credit agreement

34
Q

Line of credit

A

bank issues a pre approved amount of money that is accessible for you very quickly.

35
Q

Revolving credit agreement

A

bank makes a formal legal binding agreement for a set amount of money

36
Q

Factoring

A

we don’t want to have too many sales with credit because we want to have cash in hand. Business sales off their account receivable to a factoring business to obtain cash. The factoring business pays less than the amount of money in the account.

37
Q

Commercial paper

A

you can issue out commercial papers.

38
Q

Capital budgeting (long term)

A

Way of evaluating long term investment proposals and its liability

Why it matters: poor choices lead to long term consequences

Types: present value of cash flows
Time value of money
Net present value

39
Q

Présent value of cash flows

A

comparing cash flow at different points in time

40
Q

Time value of money

A

outlines that money received today is more valuable than any money received in the future

41
Q

Net present values (NPV )

A

present value of all expected future cash flow. Looks at investment cost vs what we will be going from that investment

42
Q

What are the sources of long-term capital

A

Debt and equity

43
Q

LT capital: debt

A
  • repayment takes priority over owner’s earnings
  • fixed payements
  • collateral requirement
  • Tax deductible interest
  • does not require addition shareholder investment
  • covenants: restrictions on loans to protect lenders
44
Q

LT capital: equity

A

Two sources: retained earnings and new stocks
Less risky and flexible
Fewer tax benefits
Financial leverage

Fund To Business (12 decks)

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