Credit Analysis and Finance Flashcards
What are EDO financing goals and programs?
EDOs can
lower the cost of borrowing
lower the credit risk of a company
increase access through different investment products by packaging loans, providing direct loans, guaranteeing loans, or providing technical assistance
Economically targeted investments
direct funds to opportunities that earn competitive financial returns while producing economic development benefits
working capital is synonymous with what on the balance sheet
current assets and current liabilities
working capital
focuses on the most liquid assets used in the normal operation of an entity. Also used to meet current debt obligations and to cover other unexpected expenses.
fixed assets
longer-lived assets such as plant, property, and equipment
as a firm grows what does it need more of?
working capital and fixed assets to accommodate the higher volume of demand.
four main types of loans
recourse: loans in which the debt holder has recourse to the personal assets of the borrower to satisfy payment
nonrecourse: does not ^
secured: backed by collateral
unsecured: not backed by collateral. similar to promissory notes
short-term secured loans
typically less than a year, used for working capital
medium and long-term secured loans
3-7 years (medium) used to fund assets such as permanent increases in receivables and inventory and fixed assets
what are the three types of trade credit
an arrangement between a goods or services supplier and its customer, whereby the supplier does not demand advance payment for its sales
open account
notes payable
trade acceptances
bonds can be secured or unsecured; also known as
collateral bonds or debenture bonds
new issues of bonds can be sold in what 3 ways
competitive sale; issuer sells bonds to underwriters through bidding process
negotiated sale; underwriter is selected prior to the bond sale and is given a right to purchase at an agreed upon price
private placement; bonds sold directly from the business to an investors (mainly insurance companies)
equity finance
capital investment in exchange for partial ownership in the venture
what are the three financial statements that are used by creditors, equity investors and others to evaluate the strength of a business
the balance sheet
the income statement
the statement of cash flows
The Balance Sheet
Made up of assets, liabilities and equity. shows the financial position of a company at a specific point in time; typically monthly
Assets= Liabilities + Equity
Assets = current assets (cash and cash equivalents, accounts receivable, inventory, pre-paid expenses) non-current assets (plant, equipment, machinery, leasehold improvements.
Liabilities = current liabilities (current portion of long-term debt, accounts payable, accrued expenses) long-term liabilities (long-term debt)
equity = common stock, retained earnings at beginning of year, net profit, retained earnings
The Income Statement
also called a profit and loss statement. Summarizes the income and expenses and profitability of a business over a specific period of time.
Net Sales
- cost of goods sold
= gross profit
- operating and admin expenses (general and admin + selling expenses)
= Net operating income
- other expense interest expense (income before income taxes)
- income taxes expense
=Net income
cost of goods sold
direct costs associated with the generation of revenue. includes raw materials, labor, shipping, for merchandising it involves the price of goods purchased for their inventory
The Statement of Cash Flows
provides info on a company’s cash receipts and cash payments; shows use of cash.
operating activities: cash receipts (collected from customers) and cash payments (paid to suppliers)
investing activities: payments to acquire equipment and to purchase securities
financing activities: proceeds from borrowing, repayment of amount borrowed, dividends paid to stockholders
what general criteria do banks use to evaluate borrowers?
management ability
repayment ability
collateral
equity in business
accounts receivables
amount of money owed to the company by its customers who have purchased the company’s goods or services.
accounts receivables turnover
net sales divided by accounts receivables
days receivable
measures the average number of days it takes for a firm to collect its accounts receivable.
(accounts receivable divided by sales) x 360
inventory turnover ratio
measures the average number of times inventory was sold over the period.
COGS for period divided by inventory for period
average days inventory
measures average number of days it takes to sell inventory.
(inventory / COGS) x 360
notes payable
money borrowed from a bank or other investor on a short-term basis, such as a line of credit.
