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Sml Biz ACCT/FIN F21 > Exam 1 > Flashcards

Exam 1 Flashcards

1
Q

Different types of businesses

A

Corporation
Partnership
Sole Proprietorship
LLC

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2
Q

Partnership

A

owners are called partners

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3
Q

Sole Proprietorship

A

owner is called proprietor

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4
Q

LLC

A

Limited Liability Company early 90s/late 70s

owners called members

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5
Q

What are public companies typically

A

corporations

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6
Q

2 types of stock

A

common / preferred

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7
Q

Which stock must be issued, which is optional

A

common is require preferred is optional

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8
Q

minimum # of owners in a partnership

A

2

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9
Q

minimum # of owners in a LLC

A

1

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10
Q

differences between Co, Corp, Inc

A

corp, inc indicate it is a corporation

co = any type of business

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11
Q

balance sheet (financial condition)

A

reports the company’s assets, liabilities and owners’ equity as of a specified date

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12
Q

balance sheet date

A

the specified date of the balance sheet reporting assets and liabilities

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13
Q

asset

A

anything owned by the company

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14
Q

accounts receivable

A

amounts due from customers for goods and services the co. has already provided

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15
Q

inventory

A

merchandise normally available for sale to customers

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16
Q

current asset

A

an asset expected to be converted to cash within one year

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17
Q

non current asset

A

an asset expected to be converted to cash in greater than one year - has 2 sub categories

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18
Q

categories of non current assets

A

fixed and intangible

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19
Q

fixed asset

A

land, buildings, equipment and other long-term (more than 1 year) assets, are also known as plant assets

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20
Q

intangible asset

A

sub category of long term assets - include patents, trademarks, copyrights and goodwill

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21
Q

alternate names for fixed assets

A

PP&E property plant and equipment

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22
Q

owners equity

A

indicates the owners’ investment in the business

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23
Q

what is B2B

A

Business-to-business is a situation where one business makes a commercial transaction with another.

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24
Q

current + non current assets equal

A

total assets

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25
Q

current liabilities + long-term debt equals

A

total liabilities

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26
Q

alternate name for balance sheet

A

statement of financial condition

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27
Q

3 examples of intellectual property

A

patent, copyright, trademark

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28
Q

2 names for reinvested profits

A

owners equity and retained earnings

accumulated earnings and reinvested profits

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29
Q

who do the profits of the business belong to

A

the owners

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30
Q

alternate name for profits

A

earnings

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31
Q

corporations name for owners equity

A

stockholder/shareholder equity

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32
Q

is preferred stock listed before or after common on the balance sheet

A

before

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33
Q

what is top line

A

sales

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34
Q

income statement

A

reports the business’s revenues, expenses, and net income for a specified period of time

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35
Q

revenues / top line

A

total sales

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36
Q

2 alternate names for income statement

A

P&L/statement of operations

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37
Q

shorthand version of income statement

A

P&L

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38
Q

alternate terms for income

A

profit, earnings

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39
Q

dividend

A

a distribution (payment) of a corporation’s net income to its shareholders

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40
Q

what happens to profits not paid as dividends

A

reinvested and show up as retained earnings on the balance sheet

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41
Q

term for reinvested profits on the balance sheet

A

retained earnings

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42
Q

what is the financial goal of a business

A

maximize the wealth of the owners

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43
Q

what is assumed when the owner provides services or invests in the business

A

they must be compensated

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44
Q

risk-return payoff

A

the greater the risk the higher potential return

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45
Q

3 financial purposes businesses serve for the owner

A

salary replacement
lifestyle venture
entrepreneurial venture

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46
Q

which 2 of 3 financial purposes do small businesses serve most commonly

A

salary replacement

lifestyle venture

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47
Q

2 differences between small business and corporate finance

A

small business is

  • focused on the owners interests
  • making an exit strategy for the owner
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48
Q

3 definitions of risk

A

uncertainty
possibility of financial loss
possibility of an undesired outcome

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49
Q

Commercial activity

A

selling goods or services for-profit.

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50
Q

who provides debt capital

A

banks, lenders, creditor

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51
Q

who provides equity capital

A

owners, investors

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52
Q

accounting term for debt capital

A

liability

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53
Q

accounting term for equity capital

A

owners equity

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54
Q

liability

A

anything that the company owes/borrowed/debts

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55
Q

equity capital

A

owners investment into the business; capital contributions and reinvested profits

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56
Q

total operating capital

A

capital needed to run the business on a day to day basis

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57
Q

free cashflow

A

cashflow generated by the business beyond what is needed for operation (total operating capital)

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58
Q

free cashflow to equity uses

A

the cashflow available to shareholders

used to pay divs and buy back shares

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59
Q

start-up costs

A

the costs incurred when starting a business or acquiring a business

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60
Q

seed financing

A

early investment, meant to support the business until it can generate cash of its own

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61
Q

3 common sources of seed financing

A

ENTP savings
owners credit cards or personal loan
family/friends/fools
grants

62
Q

3 uses for free cashflow

A

pay interest and re-pay principal on debt
pay dividends to shareholders
buy back shares from stockholders

63
Q

what does the IRS do

A

administer and enforce the US federal tax law

64
Q

is IRS part of the govt

A

yes

65
Q

relationship between free cashflow to equity and value creation

A

greater the free cashflow the greater the value created

66
Q

the goal of an entrepreneur

A

to maximize free cashflow equity (value created)

67
Q

5 stages of a business’s life-cycle

A 
development stage
start-up stage
survival
rapid growth
maturity
68
Q

development stage

making prototypes/trials

A

no sales
no profits
seed financing
considered early stage

69
Q

Start Up Stage

organizing business and entering the market
choose legal form for business

A

begin sales
no profit and losses incurred R
need to bring in new capital and owners

70
Q

survival stage

building the business

A

growing sales
still incurring losses
need more new capital - may be able to get a loan now or bring in more new owners

71
Q

rapid growth stage

A

sales grow faster than expenses
free cashflow to equity generated now
self sufficient financing no longer needed

72
Q

early maturity stage

A

stable/viable

slow sales growth

73
Q

risk management

A

process of identifying risks and implementing techniques to handle them

74
Q

risk transfer

A

risk mgmt technique that passes risk to another party

75
Q

carrier

A

company the sells insurance/holds the risk

76
Q

premium

A

the cost of insurance

77
Q

indemnification

A

restoring the insured to prior financial position prior to the loss

78
Q

objective of risk mgmt

A

ensuring losses do not prevent the business from operating effectively or maximizing wealth of owners

79
Q

source of revenue for insurance company

A

premiums

80
Q

purpose of insurance

A

to indemnify

81
Q

what is insurance not to do

A

allow the insured to profit after incurring a loss

82
Q

Business income (interruption) insurance

A

protects against loss of income due to suspension of ops by physical damage only

83
Q

direct loss

A

loss resulting from physical damage to property

84
Q

indirect loss (consequential)

A

loss as a result of direct loss (consequential)

85
Q

restoration period

A

starts when damage suspends business until reasonable completion of repairs for normal operations to begin

86
Q

continuing operating expenses examples

A 
lease
rent
PP&E costs
payroll
debt payments
87
Q

extended business income insurance

A

provides further protection against loss of income for a period of time after the restoration is complete and ops resumed

88
Q

continuing operating expense

A

expense that continues despite operation suspension

89
Q

extra expense coverage

A

coverage for expenses that would not have occurred without the direct loss event and are incurred to reduce loss of income due to direct event

90
Q

business income formula

A

profit before tax+ normal continuing operating expenses

91
Q

life insurance face amount (death benefit)

A

the amount paid when the insured dies

92
Q

insured

A

the person whos death triggers the benefits

93
Q

benficiary

A

parties named to receive death benefit

94
Q

deduction

A

an expense

95
Q

expense

A

the cost of carrying on a trade or business or generate sales

96
Q

collateral

A

property a lender can take upon failure to pay principal and interest

97
Q

collateral assignment purpose

A

ensures the lender receives funds to cover loan balances if key person dies

98
Q

assignee

A

the person assigned collateral

99
Q

common uses of the death benefit of a key person policy

A

replace loss revenues
pays expenses until person is replaced
pays debts
recruiting and training replacement’s

100
Q

who pays the premium on a key person policy

A

the business

101
Q

whether the premium on a key person policy is deductible for tax purposes

A

no, its an expense

102
Q

whether the death benefit received from a key person policy is taxable

A

tax free

103
Q

who is the insured on a key person policy

A

the business that pays the premiums

104
Q

how does key person ins affect business taxable income

A

goes up

105
Q

how does key person ins affect business taxable income

A

if it pushes into a higher tax bracket so be it, goes up

106
Q

4 common mistakes business owners make

A
  • overestimating sales
  • understimate expenses
  • undercapitalization (not enough money or investment in new or existing tech/facilities)
  • borrowing too much (overleveraged)
107
Q

which mistake is a result of expanding too rapidly

A

undercapitalization

108
Q

financial leverage

A

using borrowed capital to increase returns on investment rather than fresh funds

109
Q

3 financial challenges of a business

A

not running out of money
generating positive cashflows
obtaining capital

110
Q

alt name for cash inflows

A

cash receipts
sources of cash
positive

111
Q

alt name for cash outflows

A

disbursements
uses of cash
expenditures
negative

112
Q

expenditure

A

expenses incurred for operating a particular business.

NOT an expense

113
Q

basic accounting equation

A

A=L+OE

114
Q

what is financing

A

provide information necessary for the continued operations of a business
paying for the business

115
Q

operating

A

overseeing the execution of day-to-day tasks

116
Q

2 types of equity capital

A

preferred and common

117
Q

preferred equity + common equity =

A

total equity

118
Q

2 types of capital

A

debt and equity

119
Q

current liabilities + long term debt =

A

total liabilities

120
Q

debt capital

A

borrowed funds to be repaid at a later date

121
Q

loan agreement/promissory note

A

contract between borrower and lender that regulates promises made by each regarding financing

122
Q

interest

A

cost of borrowing money

123
Q

principal

A

the amount borrowed

124
Q

maturity

A

when principal must be repaid

125
Q

due date

A

alt name for maturity date

126
Q

debt service requirement

A

interest + principal repayment

cash needed to pay interest plus principal in the specified period of time

127
Q

secured debt

A

has collateral

128
Q

collateral

A

property the lender can take if the borrower defaults

129
Q

default

A

failure of the borrower to pay int or principal

130
Q

mortgage

A

debt secured with real estate

131
Q

unsecured debt

A

debt without collateral

132
Q

what can be in a contract

A

anything that legal

133
Q

2 things loan agreements require borrower to pay

A

interest and principal

134
Q

short term debt alt name

A

current debt

135
Q

secured debt example from class

A

mortgage

136
Q

unsecured debt example from class

A

credit card

137
Q

is secured or unsecured riskier for the borrower

A

secured

138
Q

is secured or unsecured riskier for the lender

A

unsecured

139
Q

calculate interest with actual/360 or actual/365

A

int = principal x int rate x frac of year (y/#days specified)

140
Q

another term for the actual/360 method of calculating interest

A

business loans

141
Q

another term for the actual/365 method of calculating interest

A

savings account

142
Q

which 360 or 365 method produces higher interest

A

/360

143
Q

which 360 or 365 method produces higher payment for borrower

A

/360

144
Q

which 360 or 365 method produces higher interest rate

A

/360

145
Q

loan covenant

A

reqs and restrictions on the borrower imposed by the lender

146
Q

4 common loan covenants

A

maintain specified financial ratios
periodic delivery of financial statements to the lender
restrictions on additional borrowing
restrictions on distributions to owners as pay

147
Q

debt capital is borrowed pursuant to a

A

contract

148
Q

loan agreements require borrower to pay

A

interest

149
Q

formula for interest

A

principal x interest rate x fraction of a year

150
Q

owners of a corp are called

A

shareholders

151
Q

when do you need permission to buy shares or invest in a company

A

only when it is private, usually need invitation

Sml Biz ACCT/FIN F21 (10 decks)

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