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AFM 182 Final exam > Chapter 8: (things idk) > Flashcards

Chapter 8: (things idk) Flashcards

1
Q

why is cash important to external stakeholders

A

A business cannot meet the expectations of external stakeholders without sufficient cash to operate + grow the business

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2
Q

Why does internal stakehodlers monitor cash

A

to see if they need to raise more cash

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3
Q

Why does external stakehodlers monitor cash

A

To see if company is investing moneey to pay dividends + fund future growth

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4
Q

What is the ‘cash flow’ statement?

A

To understand how cash is generated + used during a period

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5
Q

What is the equation for the cash flow statement?

A

Cash flow from/for operating activities

+

Net cash flow from/for investing activities

+

Net cash flow from/for financing activities

=

Net increase (or decrease) in cash for the period

+

Cash balance at beginning of period

=

Cash balance at end of period

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6
Q

What are operating activities

A

Activities relating to core activities in the business

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7
Q

what are examples of ‘operating actitvities’?

A

+ cash recieved from goods and services sold

+ cash used to pay suppliers

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8
Q

What are investing activities?

A
  1. Activities related to purchasing or disposing of PP&E
  2. Investments that are not cash equivalents or held for trading
  3. Acitivites relating to cash advance to other areas
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9
Q

what are examples of ‘ investing actitvities’?

A
  1. Cash used to purchase a manufacturing facility
  2. Dispose of equipment
  3. Lend money to others
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10
Q

What is the financial acitivites

A

Business activities related to raising capital

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11
Q

What are examples of finance activities?

A

Borrowed cash received from a bank.

Cash is used to repay a bank loan.

Cash received from an investor in exchange for company shares.

Cash is used to pay dividends to shareholders.

Cash is used to buy back shares.

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12
Q

What is the accounting policy choice under IFRS for how to present interest and dividends?

A

Dividends and interest received - operating and investing

Dividends and interest paid - Operating and financing

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13
Q

Explain the equation from/for operating activities

A

Net income
+/-
Non-cash items
+/-
Changes in current assets
+/-
Changes in current liabilities

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14
Q

What are noncash items

A
  1. Depreciation (add to net income)
  2. Gain or loss on asset disposal (remove gain, add loss)
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15
Q

What are the changes in current assets?

A

a. Remove increases in current assets from net income
b. Add decreases in current assets to net income

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16
Q

What are the changes in current liabilities?

A

Add increases in current liabilities to net income
b. Remove decreases in current liabilities from net income

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17
Q

Major sources of cash

A

Look at inflow

18
Q

Major uses of cash

A

Look at outflow

19
Q

What are the two ratios a company looks at for ‘liquidity’

A

Current ratio
Quick Ratio (acid)

20
Q

What is current ratio?

current ratio = current assets / current liabilities

A

It measures a companies ability to pay ‘current obligations’

21
Q

What is a rule of thumb for ‘current ratio’?

A

A ratio greater than 1 indicates company has enough assets to cover all its current obligations in short term

22
Q

What is a quick acid test ratio? (current asset less invetory/ current liabilities)

A

Measures a companies ability to pay current obligations without selling their inventory.

23
Q

What is a rule of thumb for the quick acid test ratio? (current asset less invetory/ current liabilities)

A

ratio exceedign 1 implies company can pay its current liabilities wihout selling inventory

24
Q

What is the ‘cash conversion cycle’?

A

Its the number of days it takes for a company to convert inventory + sales into cash

25
Q

Cash conversion cycle?

A

Days in inventory + days in accounts recievable less days in accounts payable

26
Q

What is the equation for the cash conversion cycle?

A

Day in invetory + Days in A/r - Days in a/p

27
Q

What is the inventory turnover ratio?
(inventory turnover = COGS / Average inventory)

A

Measures a companies effectiveness to sell its inventory throughout the period

28
Q

Is this ratio higher better?

A

yes if compared to its compeitiors

29
Q

What is the DIO (365/Inventory turnover)?

A

Its how much on average inventory we can sell in days.

30
Q

Whay if we were calculating inventory turnover for a month

A

Divide by 31 or 30 days in a month to calculate DIO

31
Q

What is Accounts recievable turnover ratio? (a/r turnover = net credit sales (total revenue) / average a/r)

A

Measures a companies effectivenes in sollecting its a/r.

32
Q

Is a/r turnover ratio better higher?

A

Higher = better

33
Q

A/P turnover ratio (COGS/average ap)

A

measures a companies effectiveness in paying its creditors for a specificed period

34
Q

Can we convert this into days

A

YES

35
Q

Should this be lower or higher

A

They prefer this to be lower as companies prefer to collect recievables quickly but make payments slowly

36
Q

What are solvecy ratios

A

This shows a companies ability to tae on addtioal debt in the future

37
Q

What are the two solvency ratios

A

Debt ratio
TIE ratio

38
Q

What is debt ratio? (tota liabiliites / total assets)

A

Measures how much compnies assets are financed by debt

39
Q

What is a rule of thumb for debt ratio

A

1 = implies all assets are financed by debt

0.5 - half assets are financed by debt

40
Q

What are TIE ratio?

A

Measures the number of time a company can pay its intrest expense with the operating income it generates

41
Q

Is higher = better for TIE ratio

A

yes it shows were able to pay our intrest obligations through normal operations

AFM 182 Final exam (11 decks)

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