Exam 1 Flashcards
Different types of businesses
Corporation
Partnership
Sole Proprietorship
LLC
Partnership
owners are called partners
Sole Proprietorship
owner is called proprietor
LLC
Limited Liability Company early 90s/late 70s
owners called members
What are public companies typically
corporations
2 types of stock
common / preferred
Which stock must be issued, which is optional
common is require preferred is optional
minimum # of owners in a partnership
2
minimum # of owners in a LLC
1
differences between Co, Corp, Inc
corp, inc indicate it is a corporation
co = any type of business
balance sheet (financial condition)
reports the company’s assets, liabilities and owners’ equity as of a specified date
balance sheet date
the specified date of the balance sheet reporting assets and liabilities
asset
anything owned by the company
accounts receivable
amounts due from customers for goods and services the co. has already provided
inventory
merchandise normally available for sale to customers
current asset
an asset expected to be converted to cash within one year
non current asset
an asset expected to be converted to cash in greater than one year - has 2 sub categories
categories of non current assets
fixed and intangible
fixed asset
land, buildings, equipment and other long-term (more than 1 year) assets, are also known as plant assets
intangible asset
sub category of long term assets - include patents, trademarks, copyrights and goodwill
alternate names for fixed assets
PP&E property plant and equipment
owners equity
indicates the owners’ investment in the business
what is B2B
Business-to-business is a situation where one business makes a commercial transaction with another.
current + non current assets equal
total assets
current liabilities + long-term debt equals
total liabilities
alternate name for balance sheet
statement of financial condition
3 examples of intellectual property
patent, copyright, trademark
2 names for reinvested profits
owners equity and retained earnings
accumulated earnings and reinvested profits
who do the profits of the business belong to
the owners
alternate name for profits
earnings
corporations name for owners equity
stockholder/shareholder equity
is preferred stock listed before or after common on the balance sheet
before
what is top line
sales
income statement
reports the business’s revenues, expenses, and net income for a specified period of time
revenues / top line
total sales
2 alternate names for income statement
P&L/statement of operations
shorthand version of income statement
P&L
alternate terms for income
profit, earnings
dividend
a distribution (payment) of a corporation’s net income to its shareholders
what happens to profits not paid as dividends
reinvested and show up as retained earnings on the balance sheet
term for reinvested profits on the balance sheet
retained earnings
what is the financial goal of a business
maximize the wealth of the owners
what is assumed when the owner provides services or invests in the business
they must be compensated
risk-return payoff
the greater the risk the higher potential return
3 financial purposes businesses serve for the owner
salary replacement
lifestyle venture
entrepreneurial venture
which 2 of 3 financial purposes do small businesses serve most commonly
salary replacement
lifestyle venture
2 differences between small business and corporate finance
small business is
- focused on the owners interests
- making an exit strategy for the owner
3 definitions of risk
uncertainty
possibility of financial loss
possibility of an undesired outcome
Commercial activity
selling goods or services for-profit.
who provides debt capital
banks, lenders, creditor
who provides equity capital
owners, investors
accounting term for debt capital
liability
accounting term for equity capital
owners equity
liability
anything that the company owes/borrowed/debts
equity capital
owners investment into the business; capital contributions and reinvested profits
total operating capital
capital needed to run the business on a day to day basis
free cashflow
cashflow generated by the business beyond what is needed for operation (total operating capital)
free cashflow to equity uses
the cashflow available to shareholders
used to pay divs and buy back shares
start-up costs
the costs incurred when starting a business or acquiring a business
seed financing
early investment, meant to support the business until it can generate cash of its own
3 common sources of seed financing
ENTP savings
owners credit cards or personal loan
family/friends/fools
grants
3 uses for free cashflow
pay interest and re-pay principal on debt
pay dividends to shareholders
buy back shares from stockholders
what does the IRS do
administer and enforce the US federal tax law
is IRS part of the govt
yes
relationship between free cashflow to equity and value creation
greater the free cashflow the greater the value created
the goal of an entrepreneur
to maximize free cashflow equity (value created)
5 stages of a business’s life-cycle
development stage start-up stage survival rapid growth maturity
development stage
making prototypes/trials
no sales
no profits
seed financing
considered early stage
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
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
rapid growth stage
sales grow faster than expenses
free cashflow to equity generated now
self sufficient financing no longer needed
early maturity stage
stable/viable
slow sales growth
risk management
process of identifying risks and implementing techniques to handle them
risk transfer
risk mgmt technique that passes risk to another party
carrier
company the sells insurance/holds the risk
premium
the cost of insurance
indemnification
restoring the insured to prior financial position prior to the loss
objective of risk mgmt
ensuring losses do not prevent the business from operating effectively or maximizing wealth of owners
source of revenue for insurance company
premiums
purpose of insurance
to indemnify
what is insurance not to do
allow the insured to profit after incurring a loss
Business income (interruption) insurance
protects against loss of income due to suspension of ops by physical damage only
direct loss
loss resulting from physical damage to property
indirect loss (consequential)
loss as a result of direct loss (consequential)
restoration period
starts when damage suspends business until reasonable completion of repairs for normal operations to begin
continuing operating expenses examples
lease rent PP&E costs payroll debt payments
extended business income insurance
provides further protection against loss of income for a period of time after the restoration is complete and ops resumed
continuing operating expense
expense that continues despite operation suspension
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
business income formula
profit before tax+ normal continuing operating expenses
life insurance face amount (death benefit)
the amount paid when the insured dies
insured
the person whos death triggers the benefits
benficiary
parties named to receive death benefit
deduction
an expense
expense
the cost of carrying on a trade or business or generate sales
collateral
property a lender can take upon failure to pay principal and interest
collateral assignment purpose
ensures the lender receives funds to cover loan balances if key person dies
assignee
the person assigned collateral
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
who pays the premium on a key person policy
the business
whether the premium on a key person policy is deductible for tax purposes
no, its an expense
whether the death benefit received from a key person policy is taxable
tax free
who is the insured on a key person policy
the business that pays the premiums
how does key person ins affect business taxable income
goes up
how does key person ins affect business taxable income
if it pushes into a higher tax bracket so be it, goes up
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)
which mistake is a result of expanding too rapidly
undercapitalization
financial leverage
using borrowed capital to increase returns on investment rather than fresh funds
3 financial challenges of a business
not running out of money
generating positive cashflows
obtaining capital
alt name for cash inflows
cash receipts
sources of cash
positive
alt name for cash outflows
disbursements
uses of cash
expenditures
negative
expenditure
expenses incurred for operating a particular business.
NOT an expense
basic accounting equation
A=L+OE
what is financing
provide information necessary for the continued operations of a business
paying for the business
operating
overseeing the execution of day-to-day tasks
2 types of equity capital
preferred and common
preferred equity + common equity =
total equity
2 types of capital
debt and equity
current liabilities + long term debt =
total liabilities
debt capital
borrowed funds to be repaid at a later date
loan agreement/promissory note
contract between borrower and lender that regulates promises made by each regarding financing
interest
cost of borrowing money
principal
the amount borrowed
maturity
when principal must be repaid
due date
alt name for maturity date
debt service requirement
interest + principal repayment
cash needed to pay interest plus principal in the specified period of time
secured debt
has collateral
collateral
property the lender can take if the borrower defaults
default
failure of the borrower to pay int or principal
mortgage
debt secured with real estate
unsecured debt
debt without collateral
what can be in a contract
anything that legal
2 things loan agreements require borrower to pay
interest and principal
short term debt alt name
current debt
secured debt example from class
mortgage
unsecured debt example from class
credit card
is secured or unsecured riskier for the borrower
secured
is secured or unsecured riskier for the lender
unsecured
calculate interest with actual/360 or actual/365
int = principal x int rate x frac of year (y/#days specified)
another term for the actual/360 method of calculating interest
business loans
another term for the actual/365 method of calculating interest
savings account
which 360 or 365 method produces higher interest
/360
which 360 or 365 method produces higher payment for borrower
/360
which 360 or 365 method produces higher interest rate
/360
loan covenant
reqs and restrictions on the borrower imposed by the lender
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
debt capital is borrowed pursuant to a
contract
loan agreements require borrower to pay
interest
formula for interest
principal x interest rate x fraction of a year
owners of a corp are called
shareholders
when do you need permission to buy shares or invest in a company
only when it is private, usually need invitation
