Exam 2 Flashcards
1
Q
balance sheet (financial condition)
A
reports the company’s assets, liabilities and owners’ equity as of a specified date
2
Q
balance sheet date
A
the specified date of the balance sheet reporting assets and liabilities
3
Q
asset
A
anything owned by the company
4
Q
inventory
A
merchandise normally available for sale to customers
5
Q
current asset
A
an asset expected to be converted to cash within one year
6
Q
non current asset
A
an asset expected to be converted to cash in greater than one year - has 2 sub categories
7
Q
categories of non current assets
A
fixed and intangible
8
Q
fixed asset
A
land, buildings, equipment and other long-term (more than 1 year) assets, are also known as plant assets
9
Q
intangible asset
A
sub category of long term assets - include patents, trademarks, copyrights and goodwill
10
Q
alternate names for fixed assets
A
PP&E property plant and equipment
11
Q
accounts recieveable
A
amounts due from customers for goods and services the co. has already provided
12
Q
accounts payable
A
amount due to suppliers/distributor for goods and service co has already received
13
Q
current liability
A
a liability expected to be paid within one year
14
Q
long term liability
A
a liability expected to be paid in greater than one year
15
Q
OE
A
indicates the owners’ investment in the business
16
Q
B2B
A
Business-to-business is a situation where one business makes a commercial transaction with another.
17
Q
current + non current assets equal
A
total assets
18
Q
current liabilities + long-term debt equals
A
total liabilities
19
Q
alt name for balance sheet
A
statement of financial condition
20
Q
3 examples of intellectual property
A
patent, copyright, trademark
21
Q
alternate names for fixed assets
A
PP&E property plant and equipment
22
Q
2 names for reinvested profits
A
owners equity and retained earnings
accumulated earnings and reinvested profits
23
Q
who do the profits of the business belong to
A
the owners
24
Q
alt name for profit
A
earnings/income
total after expenses
25
corporations name for owners equity
stockholder/shareholder equity
26
is preferred stock listed before or after common on the balance sheet
before
27
debt capital
borrowed funds to be repaid at a later date
28
loan agreement/promissory note
contract between borrower and lender that regulates promises made by each regarding financing
29
interest
cost of borrowing money
30
principal
the amount borrowed
31
maturity
when principal must be repaid
32
due date
alt name for maturity date
33
debt service requirement
interest + principal repayment
| cash needed to pay interest plus principal in the specified period of time
34
secured debt
has collateral
35
collateral
property the lender can take if the borrower defaults
36
default
failure of the borrower to pay int or principal
37
mortgage
debt secured with real estate
38
unsecured debt
debt without collateral
39
2 things loan agreements require borrower to pay
interest and principal
40
alt name for short term debt
current liability
41
secured debt example from class
mortgage
42
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
43
whether bank loans offered to start-ups typically require the entrepreneur to personally guarantee the loan
most often yes
44
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
45
the primary factor banks consider when deciding whether to lend to a venture
ability to generate cash enough to cover the interest and principal
46
whether banks will typically lend a venture 100% of the value of property put up as collateral
no, always less
47
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
48
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
49
debt service requirement
the amount of interest and principal the borrower needs to pay
50
balloon payment
a lump sum payment of whatever interest and principal is left due
51
capitalized interest
unpaid interest added to the principal
52
amortizing loan payment structure
paying principal and interest down regularly
53
amortizing loan balance at maturity
$0 due
54
non-amortizing loan balance at maturity
principal only in a balloon note
55
non-amortizing loan payment structure
regular payments on a loan of interest only
56
negative amortizing loan payment structure
payments of partial interest regularly, remainder is added to principal
57
negative amortizing loan balance at maturity
greater than original with added interest paid in balloon note
58
order of payment sizes on loans
negative am
non-am
am
59
order of loan balances on loans at maturity
am
non-am
am
60
P&I
Principal and interest
61
stage of life cycle seed financing is used
development
62
is the SBA part of the government
yes
63
does the SBA make loan to small businesses
no, it guarantees loans from lenders
64
how does the SBA benefit small businesses
makes small business loans less risky
helps develop/educate ENTPs
provides resources and tools
65
guaranteeing a loan
government will cover the borrower's debt obligation in the event that the borrower defaults.
66
which financial statement reports the venture's equity capital
Balance sheet
| statement of financial condition
67
equity capital
OE - owners investment in the business
68
which should be listed first on the balance sheet, Preferred Stock or Common Stock
preferred
69
what reinvested profits are called on the balance sheet
accumulate/retained earnings
70
what preferred equity + common equity equals
total equity (OE)
71
order of payment in a corporate liquidation
secured creditor
unsecured creditor
preferred stockholder
common stockholder
72
whether a '"stated dividend" applies to preferred stock, common stock, or both
preestablished and fixed dividend preferred only
73
the risk-return trade-off
greater the risk greater the potential reward
74
contributed capital
out of pocket investments made by owners in exchange for a portion of ownership
75
alt names for contributed capital
invested capital
| paid-in capital
76
retained earnings
reinvested profits
77
alt name for retained earnings
accumulated earnings
78
senior claim to assets
higher up the chain for payments in a bankruptcy
79
junior claim to assets
lower in the chain for payments in a bankruptcy
80
dividend
a distribution of profits to the owners
81
2 preferences of preferred equity
paid divs before common owners
get money back from liquidation before common
(liquidation and div preference)
82
what preferred shareholders receive when a corporation is liquidated
price paid for the preferred shares + unpaid dividends
83
do preferred stock dividends increase or remain constant
stay constant
84
are preferred stock dividends guaranteed
no
85
do preferred stockholders have voting rights
usually no
86
is preferred stock more or less risky than common stock
less
87
does preferred stock have greater growth potential than common
lower
88
do common stockholders have vote rights
yes
89
are common shareholders guaranteed dividends
no
90
do common stock dividends increase over time or remain constant
can change over time up or down
91
does preferred or common stock offer greater potential return
common
92
cumulative preferred stock
unpaid dividends accumulate and must be paid before common holders receive dividends
93
participating preferred stock
gets additional divs if common holders get divs and provides proceeds beyond preferred stock purchase price at liquidation
94
convertible preferred stock
may be exchanged at the stockholders option for a specified number of common shares
95
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
96
2 rights that can differ between different classes of stock
sharing in profits(divs)
| voting rights
97
which stage is first round financing recieved
survival
98
which stage is second round financing received
rapid growth
99
sources of seed financing
ENTP personal assets
friends/family
credit cards
100
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
101
2 items that grow rapidly when the venture experiences a rapid growth in revenues
sales
| freecashflow
102
whether ventures typically pay their suppliers for inventory before collecting cash from customers, or after collecting cash from customers
after
103
5 stages of a business’s life-cycle
```
development stage
start-up stage
survival
rapid growth
maturity
```
104
stage(s) in which a venture is said to be "early-stage"
development/start-up
105
stage at which angel investors typically become involved with a venture
startup
106
3 characteristics of angel investors, as discussed in class
wealthy
sophisticated (successful)
significant exp. to share
107
3 characteristics of venture capitalists, as discussed in class
pro investors
sophisticated
wealth of exp.
108
whether VC firms typically have more capital to invest than angel investors, or less
VCs have more
109
whether it is considered easy to get an angel or VC to invest in your venture, or not so easy
not at all
110
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
111
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
112
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)
113
whether lenders to a venture typically have voting rights
lenders/creditors dont vote
114
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
115
2 issues facing new owners in a private business, as discussed in class
high risk/potential to lose everything
| potential for extremely high returns
116
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
117
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
118
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
119
2 ways that providing debt capital can allow the investor to potentially profit like a common stockholder
convertible debt
| warrants
120
2 protections when providing preferred equity rather than common equity
higher priority in liquidation
| receive dividends before common holders
121
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
122
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
123
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
124
dilution
reduction in ownership%
125
minority interest
an ownership stake of less than 50% voting rights
126
alt name for minority interest
non-controlling interest
127
illiquid
not easy to sell/convert to cash
128
convertible debt (notes)
may be converted to common stock in the venture at the investors option
129
warrants
give the holder the right (not reqd) to purchase the corps shares at a specified price in a specified period
130
strike price
current price of venture common stock when the warrants are issued
131
does a warrant holder have ownership rights
no
132
does a warrant holder receive dividends
no
133
does a warrant holder have voting rights
not for angels or VCs
134
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
135
which section of the balance sheet reports the venture's equity capital
equity/retained earnings/contributed capital
136
capital structure of a business
the % of debt and equity financing used to pay for the businesses assets
137
recapitalization
a transaction that produces significant change in capital structure
(ex. issue stock and pay off debt with it)
138
financing vs. operating
financing provides information to pay for day to day tasks
| Operating executes day to day tasks
139
debt financing + equity financing =
capital structure
140
how to calculate capital structure
debt financing + equity financing
141
debt-to-total assets ratio
total liabilities / total assets
142
alt name for debt-to-total assets ratio
debt ratio
143
debt-equity ratio
total liabilities / total equity
144
alt name for debt-equity ratio
debt to equity ratio
145
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
146
interpretation of debt-equity ratio
indicates debt capital as a multiple of equity capital
| greater than 1 means more debt
147
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
148
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
149
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
150
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
151
2 advantages of an equity recapitalization (to the venture)
reduces ventures interest expense
| reduces ventures debt service requirement
152
disadvantage of an equity recapitalization to existing owners
dilution of ownership percentage
153
purpose of accounting
measuring performance of the venture and report it to decision makers
154
role of the SEC
to regulate US public financial markets with goal of protecting public investors
155
2 characteristics of private markets
less regulated than private markets (most SEC regs do not apply)
illiquid - difficult to sell shares
156
example of internal decision makers who use accounting reports
owners (you)
| management
157
example of external decision-makers who are interested in a venture's accounting information
lenders
investors
govt - IRS/SEC
158
financial accounting
the preparation of financial statements
159
transaction
completed agreement between a buyer and a seller to exchange goods, services, or financial assets in return for money, affects financial statements
160
historical cost
includes the cost to acquire the asset, put it in place, and make it operational
161
how to calculate historical cost
add together all expenses between item purchased, shipping, ins, labor, etc.
162
4 steps of the accounting cycle
transaction occurs
transaction entered into accounting
processing
financial statements (end product)
163
end product of the accounting cycle
financial statements
164
alt names for balance sheet
statement of financial position/condition
165
consolidated financial statement
financial statements of a parent company and its subsidiaries
166
parent company
a company that owns another
167
subsidiary
a company owned by another company
168
sister companies
companies that share a parent company
169
alt names for allowance of doubtful account
estimated uncollectibles
170
allowance of doubtful account
estimates the percentage of accounts receivable that are expected to be uncollectible
171
A/R net Formula
gross A/R - estimate of uncollectibles
172
which is the total amount owed by customers to the company, gross A/R or A/R net
Gross A/R
173
which is the amount the company actually expects to collect, gross A/R or A/R net
A/R net
174
which is included in the company's total assets, gross A/R or A/R net
A/R net
175
how are transactions recorded?
at historical cost
176
gross A/R
total accounts receivable
177
A/R net
amount of receivables your company expects to collect from customers
178
equation for equity financing
total oe / total assets
179
formula for debt financing
total liabilities / total assets
