Chapter 1. Overview of Corporate Finance Flashcards
Who is the primary Internal Financial statement user
Management
What are the two main External Users of financial statements (and list some others as well)
1) Shareholders
2) Creditors
Regulators Tax Authorities Other Corporations Stock analysts credit rating agencies labour unions journalists
What is interesting about Shareholders being external financial statement users
Shareholders includes the owners and board of directors.
-This is interesting because even though these are the owners, they are considered an external user. they will not have access to day to day information and will only get information quarterly.
A company is owned by its ______
Shareholders
There may be a single shareholder in the case of a ________ or many thousands of shareholders in the case of a _______
private company
public company.
In situations where there are numerous shareholders, they elect a ______ to represent their interests.
board of directors
The board of directors is given the responsibility of overseeing whom?
the management team that has been hired to operate the company
What are the two major categories of Creditors
( a creditor is described as “those who lend money or otherwise extend credit to a company rather than invest in it directly as investors do.”)
- Financial institutions (i.e. banks, credit unions)
- Suppliers, employees, and the various levels of government ( These groups often sell goods or provide services prior to receiving payment – for example providing services and not requiring payment for 30 days)
There are two main types of corporations: public and private companies. What is the difference between the two?
- the shares of public companies trade on public stock exchanges (shares often held by a large number of individuals/entities)
- the shares of private companies trade privately and are not available through public exchanges (usually narrowly held
What are the distinguishing features of a Corporation in regard to the questions below? (as compared with Proprietorship and Partnership). {EXHIBIT 1.4}
A) Number of owners B) Separate legal entity? C) Owner(s) responsible for debts of the business? D) Taxed? E) Costs to establish F) Cost to maintain
A) Can be a single owner or multiple owners
B) Yes, personal assets of shareholders are not at risk in the event of legal action against company
C) Only to extent of investment
D) Yes, taxed separately
E) Most expensive
F) Most expensive
What are the distinguishing features of a Proprietorship in regard to the questions below? (as compared with Corporation and Partnership). {EXHIBIT 1.4}
A) Number of owners B) Separate legal entity? C) Owner(s) responsible for debts of the business? D) Taxed? E) Costs to establish F) Cost to maintain
A) Single owner B) No, personal assets of owner are at risk in the event of legal action C) Yes D) No, profits taxed in hands of owner E) Least expensive F) Least expensive
What are the distinguishing features of a Partnership in regard to the questions below? (as compared with Proprietorship and Corporation). {EXHIBIT 1.4}
A) Number of owners B) Separate legal entity? C) Owner(s) responsible for debts of the business? D) Taxed? E) Costs to establish F) Cost to maintain
A) Multiple owners B) No, partners' personal assets are at risk in the event of legal action c) Yes D) No, profits taxed in hands of owners E) Moderately expensive F) Moderately expensive
What Are the Three Categories of Business Activities?
(1) financing activities
(2) investing activities, and
(3) operating activities
Each of these involves inflows and outflows of cash into and out of the company.
What is considered the first financing activity
The first activities of all companies involve obtaining the funding needed to purchase what they need to start operations
What are the two primary sources that companies receive their funding from?
- investors, through the issuance of shares
* creditors, through taking out loans or making purchases on credit
What are the two ways shareholders can get a return on their investments
1) Dividends
2) capital appreciation
What are dividends
a portion of a companies profits that is distributed to shareholders.
What is capital appreciation
When a shareholder sells their shares to other investors for more than they paid for the shares.
If a company is operating profitably, it has an internal source of new funding because generally not all of those profits are being paid out to shareholders as dividends. Any profits that are kept or retained by the company are known as what?
retained earnings.
What are the typical financing activities?
Inflows:
Borrowing money
Issuing shares
Outflows:
Repaying loan principal
Paying dividends
What are the typical investing activities?
Inflows:
Proceeds from the sale of property, plant, and equipment
Proceeds from the sale of shares of other companies
Outflows:
Purchase of property, plant, and equipment
Purchase of shares of other companies
What are the typical Operating activities?
Inflows:
Sales to customers
Collections of amounts owed by customers
Outflows: Purchases of inventory Payments of amounts owed to suppliers Payments of expenses such as wages, rent, and interest Payments of taxes owed to the government
What are the Components of the Financial Statements
Statement of income Statement of changes in equity Statement of financial position Statement of cash flows Notes to the financial statements
the objective of the statement of income is to measure the company’s what?
performance by the results of its operating activities for a month, a quarter, or a year
At the bottom of the statement of income is an earnings per share disclosure. Define
Basic earnings per share?
the company’s net income divided by the average number of common shares that are outstanding during the year.
(Shareholders find this calculation useful since it puts the performance of their investment into perspective.)
Common Statement of Income Items: Sales revenue
The total amount of sales of goods and/or services for the period.
Common Statement of Income Items: Other Income
Various types of revenues or income to the company other than sales, including interest or rental income
Common Statement of Income Items: Costs of Goods sold
The cost of the inventory that was sold during the period.
Common Statement of Income Items: Selling, general and administrative expense
The total amount of other expenses (such as wages and rent) during the period that do not fit into any other category.
Common Statement of Income Items: Depreciation expense
The allocation of part of the cost of long-lived items such as equipment or a patent.
Common Statement of Income Items: Interest expense
The amount of interest incurred on the company’s debt during the period.
Common Statement of Income Items: Interest tax expense
The taxes levied on the company’s profits during the period.
A statement of income will always have _____ in order to put it into context for the users
comparative results
Common Statement of income items (FULL REVIEW)
Sales revenues:
The total amount of sales of goods and/or services for the period.
Other income:
Various types of revenues or income to the company other than sales, including interest or rental income.
Cost of goods sold:
The cost of the inventory that was sold during the period.
Selling, general, and administrative expense:
The total amount of other expenses (such as wages and rent) during the period that do not fit into any other category.
Depreciation expense (amortization expense): The allocation of part of the cost of long-lived items such as equipment or a patent.
Interest expense:
The amount of interest incurred on the company’s debt during the period.
Income tax expense (provision for taxes):
The taxes levied on the company’s profits during the period.
