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Finance 305 > Chapters 1-3 > Flashcards

Chapters 1-3 Flashcards

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1
Q

Cash Ratio

A

(Cash + Marketable Securities) / Current Liabilities

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2
Q

Most conservative of the liquidity ratios

A

Cash Ratio

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3
Q

Inventory Ratio

A

Cost of Goods Sold / Ave Inventory

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4
Q

Average Collection Period

A

(Ave AR x 365) / Credit Sales

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5
Q

Measures the number of times per period a business sells and replaces its entire inventory

A

Inventory Ratio

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6
Q

Measures the average number of days a company takes to collect its receivables after the sale

A

Average Collection Period

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7
Q

Return on Equity

A

NI Available to Common Stockholders / Common Stockholders Equity

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8
Q

Measures the net income earned per dollar of common stockholders investment in the company

A

Return on Equity

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9
Q

Market-to-book

A

Market Price Per Share / Book Value Per Share

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10
Q

Measures how much investors will pay for the company’s stock per dollar of equity

A

Market-to-book

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11
Q

Caution Using Ratios

A

Historical data may not reflect future performance

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12
Q

Accounting principles and practices

A

Caution Using Ratios

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13
Q

Sales and expenses can fluctuate- seasonality

A

Caution Using Ratios

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14
Q

Different fiscal year-ends

A

Caution Using Ratios

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15
Q

One-time events can distort

A

Caution Using Ratios

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16
Q

Large firms often have multiple divisions, may impact the comparability with other companies

A

Caution Using Ratios

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17
Q

Company’s often “window dress” their financial statements

A

Caution Using Ratios

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18
Q

Ratios may not be calculated consistently

A

Caution Using Ratios

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19
Q

Money and ideas

A

fuel the economy’s financial engine

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20
Q

Flow of capital

A
  1. Investors to 2. Businesses to 3. Ideas to 4. Returns back to Investors. Retained Earnings in the middle
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21
Q

Type 1 Players

A

No money, no ideas

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22
Q

Type 2 Players

A

Money, but no ideas- lend money to type 3 people, capital provided in the form of equity or debt

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23
Q

Type 3 Players

A

No money, but ideas- idea generators, rely on type 2 for capital, RD, profits from ideas are returned to investors in the form of dividends

24
Q

Type 4 Players

A

Money and ideas

25
Q

Sole Proprietorship

A

most common type of business, owned by single or sole individual, easy to start, owner has complete control, all profits (personal income), UNLIMITED LIABILITY

26
Q

Partnership

A

multiple owners or partners, control is determined by partners’ ownership percentages, UNLIMITED LIABILITY

27
Q

Corporation

A

Legally independent separate from its owner, owners- shareholders, run by professional managers, limited liability, subject to double-taxation

28
Q

Hybrid

A

S corporations- limited liability sole proprietorships, LLPs- limited liability partnerships, LLCs- limited liability companies, avoid double-taxation, limited liability

29
Q

Agency problem

A

CEOs put their personal interests before the interests of the shareholders, conflict of interest

30
Q

How to fix agency problem

A

align CEO and shareholder interests, make them the owners, link compensation to shareholder value, Board of Directors manages problem through corporate governance role

31
Q

Accounting

A

focuses on the past, what happened and why?

32
Q

Finance

A

focuses on the present and future, what’s next?

33
Q

Financial Crisis of 2008

A

greed, dishonesty, subprime mortgages, traded fix rate for variable rate

34
Q

Cash-basis accounting

A

sales are recorded when cash is received, expenses are recorded when cash is paid

35
Q

Accrual-basis

A

sales are recorded when goods/services are delivered/performed, expenses are recorded when goods/services are received

36
Q

Balance sheet

A

assets, liabilities, and equity

37
Q

Assets

A

items of ownership having economic

38
Q

Liabilities

A

represent sacrifices of future economic benefits that an entity is obliged to make other entities as a result of past transactions or events

39
Q

Equity

A

difference between the values of assets and liabilities

40
Q

Balance sheet equation

A

Assets = Liabilities + Equity

41
Q

Net Working Capital

A

Current Assets - Current Liabilities

A measure of a company’s ability to pay its obligations; net working capital should be positive

42
Q

Financial management involves decisions about which of the following?

A

Which projects to fund, How to minimize taxation, What type of capital should be raised

43
Q

This type of business organization is entirely legally independent from its owners

A

Public corporations

44
Q

The practice generally known as double taxation is due to:

A

corporate incomes being taxed at the corporate level, then again at the shareholder level when corporate profits are paid out as dividends.

45
Q

For corporations, maximizing the value of owner’s equity can also be stated as:

A

maximizing the stock price.

46
Q

These individuals help firms access capital markets and advise managers about how to interact with those capital markets.

A

Investment bankers

47
Q

Which of the following can create ethical dilemmas between corporate managers and stockholders?

A

Agency relationship

48
Q

The biggest disadvantage of the sole proprietorship is:

A

unlimited liability

49
Q

Which of the following statements is correct?

A

Accountants are focused on what happened in the past.

50
Q

Which type of ratio measures the dollars of current assets available to pay each dollar of current liabilities?

A

Current

51
Q

Which of these statements is true?

A

A high inventory turnover ratio or a low days’ sales in inventory is a sign of good inventory management.

52
Q

Which of the following measures the number of days accounts receivable are held before the firm collects cash from the sale?

A

Average collection period

53
Q

Which of the following refers to the amount of debt versus equity a firm has on its balance sheet?

A

Capital structure

54
Q

How is inventory turnover related to days’ sales in inventory?

A

The lower the turnover rate, the more days’ sales that are held in inventory. The shorter the inventory period, the higher the turnover rate.

55
Q

Which of these factors are key to finding a firm to use for comparative purposes in cross sectional analysis?

A

key factors are similar markets, operations, and asset sizes

56
Q

Which of these contributed to a worsening of the financial crisis?

A

lowered business outlooks, double digit unemployment, weakened financial institutions

Finance 305 (1 decks)

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