Exam 2 Flashcards
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
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
accounts recieveable
amounts due from customers for goods and services the co. has already provided
accounts payable
amount due to suppliers/distributor for goods and service co has already received
current liability
a liability expected to be paid within one year
long term liability
a liability expected to be paid in greater than one year
OE
indicates the owners’ investment in the business
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
alt name for balance sheet
statement of financial condition
3 examples of intellectual property
patent, copyright, trademark
alternate names for fixed assets
PP&E property plant and equipment
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
alt name for profit
earnings/income
total after expenses
corporations name for owners equity
stockholder/shareholder equity
is preferred stock listed before or after common on the balance sheet
before
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
2 things loan agreements require borrower to pay
interest and principal
alt name for short term debt
current liability
secured debt example from class
mortgage
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
whether bank loans offered to start-ups typically require the entrepreneur to personally guarantee the loan
most often yes
whether it is common for entrepreneurs to use personal credit cards to help finance their venture
yes, 1/3 - 1/2 of ventures use them
the primary factor banks consider when deciding whether to lend to a venture
ability to generate cash enough to cover the interest and principal
whether banks will typically lend a venture 100% of the value of property put up as collateral
no, always less
be able to explain the type of assets that are predominant in a start-up and whether they can serve as collateral
intangible, cannot provide as collateral
be able to explain what underwriting a loan refers to
lender verifies your income, assets, debt and property details in order to issue final approval for your loan
debt service requirement
the amount of interest and principal the borrower needs to pay
balloon payment
a lump sum payment of whatever interest and principal is left due
capitalized interest
unpaid interest added to the principal
amortizing loan payment structure
paying principal and interest down regularly
amortizing loan balance at maturity
$0 due
non-amortizing loan balance at maturity
principal only in a balloon note
non-amortizing loan payment structure
regular payments on a loan of interest only
negative amortizing loan payment structure
payments of partial interest regularly, remainder is added to principal
negative amortizing loan balance at maturity
greater than original with added interest paid in balloon note
order of payment sizes on loans
negative am
non-am
am
order of loan balances on loans at maturity
am
non-am
am
P&I
Principal and interest
stage of life cycle seed financing is used
development
is the SBA part of the government
yes
does the SBA make loan to small businesses
no, it guarantees loans from lenders
how does the SBA benefit small businesses
makes small business loans less risky
helps develop/educate ENTPs
provides resources and tools
guaranteeing a loan
government will cover the borrower’s debt obligation in the event that the borrower defaults.
which financial statement reports the venture’s equity capital
Balance sheet
statement of financial condition
equity capital
OE - owners investment in the business
which should be listed first on the balance sheet, Preferred Stock or Common Stock
preferred
what reinvested profits are called on the balance sheet
accumulate/retained earnings
what preferred equity + common equity equals
total equity (OE)
order of payment in a corporate liquidation
secured creditor
unsecured creditor
preferred stockholder
common stockholder
whether a ‘“stated dividend” applies to preferred stock, common stock, or both
preestablished and fixed dividend preferred only
the risk-return trade-off
greater the risk greater the potential reward
contributed capital
out of pocket investments made by owners in exchange for a portion of ownership
alt names for contributed capital
invested capital
paid-in capital
retained earnings
reinvested profits
alt name for retained earnings
accumulated earnings
senior claim to assets
higher up the chain for payments in a bankruptcy
junior claim to assets
lower in the chain for payments in a bankruptcy
dividend
a distribution of profits to the owners
2 preferences of preferred equity
paid divs before common owners
get money back from liquidation before common
(liquidation and div preference)
what preferred shareholders receive when a corporation is liquidated
price paid for the preferred shares + unpaid dividends
do preferred stock dividends increase or remain constant
stay constant
are preferred stock dividends guaranteed
no
do preferred stockholders have voting rights
usually no
is preferred stock more or less risky than common stock
less
does preferred stock have greater growth potential than common
lower
do common stockholders have vote rights
yes
are common shareholders guaranteed dividends
no
do common stock dividends increase over time or remain constant
can change over time up or down
does preferred or common stock offer greater potential return
common
cumulative preferred stock
unpaid dividends accumulate and must be paid before common holders receive dividends
participating preferred stock
gets additional divs if common holders get divs and provides proceeds beyond preferred stock purchase price at liquidation
convertible preferred stock
may be exchanged at the stockholders option for a specified number of common shares
2 benefits of convertible preferred stock for the preferred stockholder
safety of preferred stock (div and liquid preference) and potential to benefit from an increase in the value of common stock
2 rights that can differ between different classes of stock
sharing in profits(divs)
voting rights
which stage is first round financing recieved
survival
which stage is second round financing received
rapid growth
sources of seed financing
ENTP personal assets
friends/family
credit cards
whether sales during the start-up stage provide the venture with all the cash it needs
sales begin but not enough to cover expenses, so no
2 items that grow rapidly when the venture experiences a rapid growth in revenues
sales
freecashflow
whether ventures typically pay their suppliers for inventory before collecting cash from customers, or after collecting cash from customers
after
5 stages of a business’s life-cycle
development stage start-up stage survival rapid growth maturity
stage(s) in which a venture is said to be “early-stage”
development/start-up
stage at which angel investors typically become involved with a venture
startup
3 characteristics of angel investors, as discussed in class
wealthy
sophisticated (successful)
significant exp. to share
3 characteristics of venture capitalists, as discussed in class
pro investors
sophisticated
wealth of exp.
whether VC firms typically have more capital to invest than angel investors, or less
VCs have more
whether it is considered easy to get an angel or VC to invest in your venture, or not so easy
not at all
2 issues facing existing owners (including the entrepreneur/venture founder) when considering accepting new investors as owners
dilution of ownership
loss in control/direction of business
3 strategies existing owners (including the entrepreneur/venture founder) can use to maintain control when accepting new investors as owners
- issue non-voting common stock(private companies)
- issue preferred stock
- try to get an investor to lend rather than invest/become owner
2 common situations in which ventures issue non-voting common stock
to reward key employees with ownership
to pass ownership to family members before founder retires (succession planning)
whether lenders to a venture typically have voting rights
lenders/creditors dont vote
2 disadvantages of borrowing from new investors, rather than allowing them to invest as owners
interest expenses
debt service requirements and payments cut into revenue
2 issues facing new owners in a private business, as discussed in class
high risk/potential to lose everything
potential for extremely high returns
whether new owners seek a higher potential return, or lower potential return, the earlier the life-cycle stage the venture is in
higher the earlier
3x on public stocks
10x original investment
2 common methods used by new investors/owners in a private business to limit their risk
provide debt capital with opportunity to profit like common stockholder
(convertible debt capital)
provide preferred equity
3 protections when providing debt capital rather than equity capital
lenders have highest liquidation priority
interest is contractually obligated
loan may be secured with collateral
2 ways that providing debt capital can allow the investor to potentially profit like a common stockholder
convertible debt
warrants
2 protections when providing preferred equity rather than common equity
higher priority in liquidation
receive dividends before common holders
2 ways that providing preferred equity can allow the investor to potentially profit like a common stockholder
receive convertible preferred stock
receive participating preferred stock
2 ways that preferred shareholders can gain a voice in management of a private business (see examples on last page of concepts handout)
possible option to elect a member to the board
board is gievn x number of preferred stockholders
disadvantage for the entrepreneur/venture founder when issuing warrants, if the warrants are exercised
ownership is diluted and VCs/Angels get voting rights on common stock
dilution
reduction in ownership%
minority interest
an ownership stake of less than 50% voting rights
alt name for minority interest
non-controlling interest
illiquid
not easy to sell/convert to cash
convertible debt (notes)
may be converted to common stock in the venture at the investors option
warrants
give the holder the right (not reqd) to purchase the corps shares at a specified price in a specified period
strike price
current price of venture common stock when the warrants are issued
does a warrant holder have ownership rights
no
does a warrant holder receive dividends
no
does a warrant holder have voting rights
not for angels or VCs
which is higher when warrants are issued, the current value of the common stock or the warrants’ strike price
strike price is higher than common price when warrant issued
which section of the balance sheet reports the venture’s equity capital
equity/retained earnings/contributed capital
capital structure of a business
the % of debt and equity financing used to pay for the businesses assets
recapitalization
a transaction that produces significant change in capital structure
(ex. issue stock and pay off debt with it)
financing vs. operating
financing provides information to pay for day to day tasks
Operating executes day to day tasks
debt financing + equity financing =
capital structure
how to calculate capital structure
debt financing + equity financing
debt-to-total assets ratio
total liabilities / total assets
alt name for debt-to-total assets ratio
debt ratio
debt-equity ratio
total liabilities / total equity
alt name for debt-equity ratio
debt to equity ratio
debt-to-total assets ratio (2 interpretations)
indicates % of assets financed by debt
indicates % of assets financed by equity
% above 50 means more debt than equity
interpretation of debt-equity ratio
indicates debt capital as a multiple of equity capital
greater than 1 means more debt
with debt to total asset how to calc if it is using more debt than equity
divide liabilities by total assets (L+OE), if percentage is more than 50, using more debt
with debt to equity how to calc if it is using more debt than equity or equal amounts
divide debt by equity, comes out as a decimal, that is the multiple of debt - greater than 1 means more debt
whether a higher debt-to-total assets ratio indicates a greater risk of default, or a smaller risk of default, than a lower debt-to-total assets ratio
greater risk of default
whether a higher debt-equity ratio indicates a greater risk of default, or a smaller risk of default, than a lower debt-equity ratio
greater risk of default
2 advantages of an equity recapitalization (to the venture)
reduces ventures interest expense
reduces ventures debt service requirement
disadvantage of an equity recapitalization to existing owners
dilution of ownership percentage
purpose of accounting
measuring performance of the venture and report it to decision makers
role of the SEC
to regulate US public financial markets with goal of protecting public investors
2 characteristics of private markets
less regulated than private markets (most SEC regs do not apply)
illiquid - difficult to sell shares
example of internal decision makers who use accounting reports
owners (you)
management
example of external decision-makers who are interested in a venture’s accounting information
lenders
investors
govt - IRS/SEC
financial accounting
the preparation of financial statements
transaction
completed agreement between a buyer and a seller to exchange goods, services, or financial assets in return for money, affects financial statements
historical cost
includes the cost to acquire the asset, put it in place, and make it operational
how to calculate historical cost
add together all expenses between item purchased, shipping, ins, labor, etc.
4 steps of the accounting cycle
transaction occurs
transaction entered into accounting
processing
financial statements (end product)
end product of the accounting cycle
financial statements
alt names for balance sheet
statement of financial position/condition
consolidated financial statement
financial statements of a parent company and its subsidiaries
parent company
a company that owns another
subsidiary
a company owned by another company
sister companies
companies that share a parent company
alt names for allowance of doubtful account
estimated uncollectibles
allowance of doubtful account
estimates the percentage of accounts receivable that are expected to be uncollectible
A/R net Formula
gross A/R - estimate of uncollectibles
which is the total amount owed by customers to the company, gross A/R or A/R net
Gross A/R
which is the amount the company actually expects to collect, gross A/R or A/R net
A/R net
which is included in the company’s total assets, gross A/R or A/R net
A/R net
how are transactions recorded?
at historical cost
gross A/R
total accounts receivable
A/R net
amount of receivables your company expects to collect from customers
equation for equity financing
total oe / total assets
formula for debt financing
total liabilities / total assets
