Exam 1 Flashcards
1
Q
Different types of businesses
A
Corporation
Partnership
Sole Proprietorship
LLC
2
Q
Partnership
A
owners are called partners
3
Q
Sole Proprietorship
A
owner is called proprietor
4
Q
LLC
A
Limited Liability Company early 90s/late 70s
owners called members
5
Q
What are public companies typically
A
corporations
6
Q
2 types of stock
A
common / preferred
7
Q
Which stock must be issued, which is optional
A
common is require preferred is optional
8
Q
minimum # of owners in a partnership
A
2
9
Q
minimum # of owners in a LLC
A
1
10
Q
differences between Co, Corp, Inc
A
corp, inc indicate it is a corporation
co = any type of business
11
Q
balance sheet (financial condition)
A
reports the company’s assets, liabilities and owners’ equity as of a specified date
12
Q
balance sheet date
A
the specified date of the balance sheet reporting assets and liabilities
13
Q
asset
A
anything owned by the company
14
Q
accounts receivable
A
amounts due from customers for goods and services the co. has already provided
15
Q
inventory
A
merchandise normally available for sale to customers
16
Q
current asset
A
an asset expected to be converted to cash within one year
17
Q
non current asset
A
an asset expected to be converted to cash in greater than one year - has 2 sub categories
18
Q
categories of non current assets
A
fixed and intangible
19
Q
fixed asset
A
land, buildings, equipment and other long-term (more than 1 year) assets, are also known as plant assets
20
Q
intangible asset
A
sub category of long term assets - include patents, trademarks, copyrights and goodwill
21
Q
alternate names for fixed assets
A
PP&E property plant and equipment
22
Q
owners equity
A
indicates the owners’ investment in the business
23
Q
what is B2B
A
Business-to-business is a situation where one business makes a commercial transaction with another.
24
Q
current + non current assets equal
A
total assets
25
current liabilities + long-term debt equals
total liabilities
26
alternate name for balance sheet
statement of financial condition
27
3 examples of intellectual property
patent, copyright, trademark
28
2 names for reinvested profits
owners equity and retained earnings
| accumulated earnings and reinvested profits
29
who do the profits of the business belong to
the owners
30
alternate name for profits
earnings
31
corporations name for owners equity
stockholder/shareholder equity
32
is preferred stock listed before or after common on the balance sheet
before
33
what is top line
sales
34
income statement
reports the business’s revenues, expenses, and net income for a specified period of time
35
revenues / top line
total sales
36
2 alternate names for income statement
P&L/statement of operations
37
shorthand version of income statement
P&L
38
alternate terms for income
profit, earnings
39
dividend
a distribution (payment) of a corporation's net income to its shareholders
40
what happens to profits not paid as dividends
reinvested and show up as retained earnings on the balance sheet
41
term for reinvested profits on the balance sheet
retained earnings
42
what is the financial goal of a business
maximize the wealth of the owners
43
what is assumed when the owner provides services or invests in the business
they must be compensated
44
risk-return payoff
the greater the risk the higher potential return
45
3 financial purposes businesses serve for the owner
salary replacement
lifestyle venture
entrepreneurial venture
46
which 2 of 3 financial purposes do small businesses serve most commonly
salary replacement
| lifestyle venture
47
2 differences between small business and corporate finance
small business is
- focused on the owners interests
- making an exit strategy for the owner
48
3 definitions of risk
uncertainty
possibility of financial loss
possibility of an undesired outcome
49
Commercial activity
selling goods or services for-profit.
50
who provides debt capital
banks, lenders, creditor
51
who provides equity capital
owners, investors
52
accounting term for debt capital
liability
53
accounting term for equity capital
owners equity
54
liability
anything that the company owes/borrowed/debts
55
equity capital
owners investment into the business; capital contributions and reinvested profits
56
total operating capital
capital needed to run the business on a day to day basis
57
free cashflow
cashflow generated by the business beyond what is needed for operation (total operating capital)
58
free cashflow to equity uses
the cashflow available to shareholders
| used to pay divs and buy back shares
59
start-up costs
the costs incurred when starting a business or acquiring a business
60
seed financing
early investment, meant to support the business until it can generate cash of its own
61
3 common sources of seed financing
ENTP savings
owners credit cards or personal loan
family/friends/fools
grants
62
3 uses for free cashflow
pay interest and re-pay principal on debt
pay dividends to shareholders
buy back shares from stockholders
63
what does the IRS do
administer and enforce the US federal tax law
64
is IRS part of the govt
yes
65
relationship between free cashflow to equity and value creation
greater the free cashflow the greater the value created
66
the goal of an entrepreneur
to maximize free cashflow equity (value created)
67
5 stages of a business’s life-cycle
```
development stage
start-up stage
survival
rapid growth
maturity
```
68
development stage
making prototypes/trials
no sales
no profits
seed financing
considered early stage
69
Start Up Stage
organizing business and entering the market
choose legal form for business
begin sales
no profit and losses incurred R
need to bring in new capital and owners
70
survival stage
building the business
growing sales
still incurring losses
need more new capital - may be able to get a loan now or bring in more new owners
71
rapid growth stage
sales grow faster than expenses
free cashflow to equity generated now
self sufficient financing no longer needed
72
early maturity stage
stable/viable
| slow sales growth
73
risk management
process of identifying risks and implementing techniques to handle them
74
risk transfer
risk mgmt technique that passes risk to another party
75
carrier
company the sells insurance/holds the risk
76
premium
the cost of insurance
77
indemnification
restoring the insured to prior financial position prior to the loss
78
objective of risk mgmt
ensuring losses do not prevent the business from operating effectively or maximizing wealth of owners
79
source of revenue for insurance company
premiums
80
purpose of insurance
to indemnify
81
what is insurance not to do
allow the insured to profit after incurring a loss
82
Business income (interruption) insurance
protects against loss of income due to suspension of ops by physical damage only
83
direct loss
loss resulting from physical damage to property
84
indirect loss (consequential)
loss as a result of direct loss (consequential)
85
restoration period
starts when damage suspends business until reasonable completion of repairs for normal operations to begin
86
continuing operating expenses examples
```
lease
rent
PP&E costs
payroll
debt payments
```
87
extended business income insurance
provides further protection against loss of income for a period of time after the restoration is complete and ops resumed
88
continuing operating expense
expense that continues despite operation suspension
89
extra expense coverage
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
business income formula
profit before tax+ normal continuing operating expenses
91
life insurance face amount (death benefit)
the amount paid when the insured dies
92
insured
the person whos death triggers the benefits
93
benficiary
parties named to receive death benefit
94
deduction
an expense
95
expense
the cost of carrying on a trade or business or generate sales
96
collateral
property a lender can take upon failure to pay principal and interest
97
collateral assignment purpose
ensures the lender receives funds to cover loan balances if key person dies
98
assignee
the person assigned collateral
99
common uses of the death benefit of a key person policy
replace loss revenues
pays expenses until person is replaced
pays debts
recruiting and training replacement's
100
who pays the premium on a key person policy
the business
101
whether the premium on a key person policy is deductible for tax purposes
no, its an expense
102
whether the death benefit received from a key person policy is taxable
tax free
103
who is the insured on a key person policy
the business that pays the premiums
104
how does key person ins affect business taxable income
goes up
105
how does key person ins affect business taxable income
if it pushes into a higher tax bracket so be it, goes up
106
4 common mistakes business owners make
- overestimating sales
- understimate expenses
- undercapitalization (not enough money or investment in new or existing tech/facilities)
- borrowing too much (overleveraged)
107
which mistake is a result of expanding too rapidly
undercapitalization
108
financial leverage
using borrowed capital to increase returns on investment rather than fresh funds
109
3 financial challenges of a business
not running out of money
generating positive cashflows
obtaining capital
110
alt name for cash inflows
cash receipts
sources of cash
positive
111
alt name for cash outflows
disbursements
uses of cash
expenditures
negative
112
expenditure
expenses incurred for operating a particular business.
| NOT an expense
113
basic accounting equation
A=L+OE
114
what is financing
provide information necessary for the continued operations of a business
paying for the business
115
operating
overseeing the execution of day-to-day tasks
116
2 types of equity capital
preferred and common
117
preferred equity + common equity =
total equity
118
2 types of capital
debt and equity
119
current liabilities + long term debt =
total liabilities
120
debt capital
borrowed funds to be repaid at a later date
121
loan agreement/promissory note
contract between borrower and lender that regulates promises made by each regarding financing
122
interest
cost of borrowing money
123
principal
the amount borrowed
124
maturity
when principal must be repaid
125
due date
alt name for maturity date
126
debt service requirement
interest + principal repayment
| cash needed to pay interest plus principal in the specified period of time
127
secured debt
has collateral
128
collateral
property the lender can take if the borrower defaults
129
default
failure of the borrower to pay int or principal
130
mortgage
debt secured with real estate
131
unsecured debt
debt without collateral
132
what can be in a contract
anything that legal
133
2 things loan agreements require borrower to pay
interest and principal
134
short term debt alt name
current debt
135
secured debt example from class
mortgage
136
unsecured debt example from class
credit card
137
is secured or unsecured riskier for the borrower
secured
138
is secured or unsecured riskier for the lender
unsecured
139
calculate interest with actual/360 or actual/365
int = principal x int rate x frac of year (y/#days specified)
140
another term for the actual/360 method of calculating interest
business loans
141
another term for the actual/365 method of calculating interest
savings account
142
which 360 or 365 method produces higher interest
/360
143
which 360 or 365 method produces higher payment for borrower
/360
144
which 360 or 365 method produces higher interest rate
/360
145
loan covenant
reqs and restrictions on the borrower imposed by the lender
146
4 common loan covenants
maintain specified financial ratios
periodic delivery of financial statements to the lender
restrictions on additional borrowing
restrictions on distributions to owners as pay
147
debt capital is borrowed pursuant to a
contract
148
loan agreements require borrower to pay
interest
149
formula for interest
principal x interest rate x fraction of a year
150
owners of a corp are called
shareholders
151
when do you need permission to buy shares or invest in a company
only when it is private, usually need invitation
