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Sml Biz ACCT/FIN F21 > Exam 2 > Flashcards

Exam 2 Flashcards

1
Q

balance sheet (financial condition)

A

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

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2
Q

balance sheet date

A

the specified date of the balance sheet reporting assets and liabilities

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3
Q

asset

A

anything owned by the company

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4
Q

inventory

A

merchandise normally available for sale to customers

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5
Q

current asset

A

an asset expected to be converted to cash within one year

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6
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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7
Q

categories of non current assets

A

fixed and intangible

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8
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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9
Q

intangible asset

A

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

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10
Q

alternate names for fixed assets

A

PP&E property plant and equipment

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11
Q

accounts recieveable

A

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

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12
Q

accounts payable

A

amount due to suppliers/distributor for goods and service co has already received

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13
Q

current liability

A

a liability expected to be paid within one year

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14
Q

long term liability

A

a liability expected to be paid in greater than one year

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15
Q

OE

A

indicates the owners’ investment in the business

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16
Q

B2B

A

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

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17
Q

current + non current assets equal

A

total assets

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18
Q

current liabilities + long-term debt equals

A

total liabilities

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19
Q

alt name for balance sheet

A

statement of financial condition

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20
Q

3 examples of intellectual property

A

patent, copyright, trademark

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21
Q

alternate names for fixed assets

A

PP&E property plant and equipment

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22
Q

2 names for reinvested profits

A

owners equity and retained earnings

accumulated earnings and reinvested profits

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23
Q

who do the profits of the business belong to

A

the owners

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24
Q

alt name for profit

A

earnings/income

total after expenses

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25
Q

corporations name for owners equity

A

stockholder/shareholder equity

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26
Q

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

A

before

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27
Q

debt capital

A

borrowed funds to be repaid at a later date

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28
Q

loan agreement/promissory note

A

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

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29
Q

interest

A

cost of borrowing money

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30
Q

principal

A

the amount borrowed

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31
Q

maturity

A

when principal must be repaid

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32
Q

due date

A

alt name for maturity date

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33
Q

debt service requirement

A

interest + principal repayment

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

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34
Q

secured debt

A

has collateral

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35
Q

collateral

A

property the lender can take if the borrower defaults

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36
Q

default

A

failure of the borrower to pay int or principal

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37
Q

mortgage

A

debt secured with real estate

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38
Q

unsecured debt

A

debt without collateral

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39
Q

2 things loan agreements require borrower to pay

A

interest and principal

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40
Q

alt name for short term debt

A

current liability

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41
Q

secured debt example from class

A

mortgage

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42
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

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43
Q

whether bank loans offered to start-ups typically require the entrepreneur to personally guarantee the loan

A

most often yes

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44
Q

whether it is common for entrepreneurs to use personal credit cards to help finance their venture

A

yes, 1/3 - 1/2 of ventures use them

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45
Q

the primary factor banks consider when deciding whether to lend to a venture

A

ability to generate cash enough to cover the interest and principal

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46
Q

whether banks will typically lend a venture 100% of the value of property put up as collateral

A

no, always less

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47
Q

be able to explain the type of assets that are predominant in a start-up and whether they can serve as collateral

A

intangible, cannot provide as collateral

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48
Q

be able to explain what underwriting a loan refers to

A

lender verifies your income, assets, debt and property details in order to issue final approval for your loan

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49
Q

debt service requirement

A

the amount of interest and principal the borrower needs to pay

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50
Q

balloon payment

A

a lump sum payment of whatever interest and principal is left due

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51
Q

capitalized interest

A

unpaid interest added to the principal

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52
Q

amortizing loan payment structure

A

paying principal and interest down regularly

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53
Q

amortizing loan balance at maturity

A

$0 due

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54
Q

non-amortizing loan balance at maturity

A

principal only in a balloon note

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55
Q

non-amortizing loan payment structure

A

regular payments on a loan of interest only

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56
Q

negative amortizing loan payment structure

A

payments of partial interest regularly, remainder is added to principal

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57
Q

negative amortizing loan balance at maturity

A

greater than original with added interest paid in balloon note

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58
Q

order of payment sizes on loans

A

negative am
non-am
am

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59
Q

order of loan balances on loans at maturity

A

am
non-am
am

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60
Q

P&I

A

Principal and interest

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61
Q

stage of life cycle seed financing is used

A

development

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62
Q

is the SBA part of the government

A

yes

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63
Q

does the SBA make loan to small businesses

A

no, it guarantees loans from lenders

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64
Q

how does the SBA benefit small businesses

A

makes small business loans less risky
helps develop/educate ENTPs
provides resources and tools

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65
Q

guaranteeing a loan

A

government will cover the borrower’s debt obligation in the event that the borrower defaults.

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66
Q

which financial statement reports the venture’s equity capital

A

Balance sheet

statement of financial condition

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67
Q

equity capital

A

OE - owners investment in the business

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68
Q

which should be listed first on the balance sheet, Preferred Stock or Common Stock

A

preferred

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69
Q

what reinvested profits are called on the balance sheet

A

accumulate/retained earnings

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70
Q

what preferred equity + common equity equals

A

total equity (OE)

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71
Q

order of payment in a corporate liquidation

A

secured creditor
unsecured creditor
preferred stockholder
common stockholder

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72
Q

whether a ‘“stated dividend” applies to preferred stock, common stock, or both

A

preestablished and fixed dividend preferred only

73
Q

the risk-return trade-off

A

greater the risk greater the potential reward

74
Q

contributed capital

A

out of pocket investments made by owners in exchange for a portion of ownership

75
Q

alt names for contributed capital

A

invested capital

paid-in capital

76
Q

retained earnings

A

reinvested profits

77
Q

alt name for retained earnings

A

accumulated earnings

78
Q

senior claim to assets

A

higher up the chain for payments in a bankruptcy

79
Q

junior claim to assets

A

lower in the chain for payments in a bankruptcy

80
Q

dividend

A

a distribution of profits to the owners

81
Q

2 preferences of preferred equity

A

paid divs before common owners
get money back from liquidation before common
(liquidation and div preference)

82
Q

what preferred shareholders receive when a corporation is liquidated

A

price paid for the preferred shares + unpaid dividends

83
Q

do preferred stock dividends increase or remain constant

A

stay constant

84
Q

are preferred stock dividends guaranteed

A

no

85
Q

do preferred stockholders have voting rights

A

usually no

86
Q

is preferred stock more or less risky than common stock

A

less

87
Q

does preferred stock have greater growth potential than common

A

lower

88
Q

do common stockholders have vote rights

A

yes

89
Q

are common shareholders guaranteed dividends

A

no

90
Q

do common stock dividends increase over time or remain constant

A

can change over time up or down

91
Q

does preferred or common stock offer greater potential return

A

common

92
Q

cumulative preferred stock

A

unpaid dividends accumulate and must be paid before common holders receive dividends

93
Q

participating preferred stock

A

gets additional divs if common holders get divs and provides proceeds beyond preferred stock purchase price at liquidation

94
Q

convertible preferred stock

A

may be exchanged at the stockholders option for a specified number of common shares

95
Q

2 benefits of convertible preferred stock for the preferred stockholder

A

safety of preferred stock (div and liquid preference) and potential to benefit from an increase in the value of common stock

96
Q

2 rights that can differ between different classes of stock

A

sharing in profits(divs)

voting rights

97
Q

which stage is first round financing recieved

A

survival

98
Q

which stage is second round financing received

A

rapid growth

99
Q

sources of seed financing

A

ENTP personal assets
friends/family
credit cards

100
Q

whether sales during the start-up stage provide the venture with all the cash it needs

A

sales begin but not enough to cover expenses, so no

101
Q

2 items that grow rapidly when the venture experiences a rapid growth in revenues

A

sales

freecashflow

102
Q

whether ventures typically pay their suppliers for inventory before collecting cash from customers, or after collecting cash from customers

A

after

103
Q

5 stages of a business’s life-cycle

A 
development stage
start-up stage
survival
rapid growth
maturity
104
Q

stage(s) in which a venture is said to be “early-stage”

A

development/start-up

105
Q

stage at which angel investors typically become involved with a venture

A

startup

106
Q

3 characteristics of angel investors, as discussed in class

A

wealthy
sophisticated (successful)
significant exp. to share

107
Q

3 characteristics of venture capitalists, as discussed in class

A

pro investors
sophisticated
wealth of exp.

108
Q

whether VC firms typically have more capital to invest than angel investors, or less

A

VCs have more

109
Q

whether it is considered easy to get an angel or VC to invest in your venture, or not so easy

A

not at all

110
Q

2 issues facing existing owners (including the entrepreneur/venture founder) when considering accepting new investors as owners

A

dilution of ownership

loss in control/direction of business

111
Q

3 strategies existing owners (including the entrepreneur/venture founder) can use to maintain control when accepting new investors as owners

A
  • issue non-voting common stock(private companies)
  • issue preferred stock
  • try to get an investor to lend rather than invest/become owner
112
Q

2 common situations in which ventures issue non-voting common stock

A

to reward key employees with ownership

to pass ownership to family members before founder retires (succession planning)

113
Q

whether lenders to a venture typically have voting rights

A

lenders/creditors dont vote

114
Q

2 disadvantages of borrowing from new investors, rather than allowing them to invest as owners

A

interest expenses

debt service requirements and payments cut into revenue

115
Q

2 issues facing new owners in a private business, as discussed in class

A

high risk/potential to lose everything

potential for extremely high returns

116
Q

whether new owners seek a higher potential return, or lower potential return, the earlier the life-cycle stage the venture is in

A

higher the earlier
3x on public stocks
10x original investment

117
Q

2 common methods used by new investors/owners in a private business to limit their risk

A

provide debt capital with opportunity to profit like common stockholder
(convertible debt capital)
provide preferred equity

118
Q

3 protections when providing debt capital rather than equity capital

A

lenders have highest liquidation priority
interest is contractually obligated
loan may be secured with collateral

119
Q

2 ways that providing debt capital can allow the investor to potentially profit like a common stockholder

A

convertible debt

warrants

120
Q

2 protections when providing preferred equity rather than common equity

A

higher priority in liquidation

receive dividends before common holders

121
Q

2 ways that providing preferred equity can allow the investor to potentially profit like a common stockholder

A

receive convertible preferred stock

receive participating preferred stock

122
Q

2 ways that preferred shareholders can gain a voice in management of a private business (see examples on last page of concepts handout)

A

possible option to elect a member to the board

board is gievn x number of preferred stockholders

123
Q

disadvantage for the entrepreneur/venture founder when issuing warrants, if the warrants are exercised

A

ownership is diluted and VCs/Angels get voting rights on common stock

124
Q

dilution

A

reduction in ownership%

125
Q

minority interest

A

an ownership stake of less than 50% voting rights

126
Q

alt name for minority interest

A

non-controlling interest

127
Q

illiquid

A

not easy to sell/convert to cash

128
Q

convertible debt (notes)

A

may be converted to common stock in the venture at the investors option

129
Q

warrants

A

give the holder the right (not reqd) to purchase the corps shares at a specified price in a specified period

130
Q

strike price

A

current price of venture common stock when the warrants are issued

131
Q

does a warrant holder have ownership rights

A

no

132
Q

does a warrant holder receive dividends

A

no

133
Q

does a warrant holder have voting rights

A

not for angels or VCs

134
Q

which is higher when warrants are issued, the current value of the common stock or the warrants’ strike price

A

strike price is higher than common price when warrant issued

135
Q

which section of the balance sheet reports the venture’s equity capital

A

equity/retained earnings/contributed capital

136
Q

capital structure of a business

A

the % of debt and equity financing used to pay for the businesses assets

137
Q

recapitalization

A

a transaction that produces significant change in capital structure
(ex. issue stock and pay off debt with it)

138
Q

financing vs. operating

A

financing provides information to pay for day to day tasks

Operating executes day to day tasks

139
Q

debt financing + equity financing =

A

capital structure

140
Q

how to calculate capital structure

A

debt financing + equity financing

141
Q

debt-to-total assets ratio

A

total liabilities / total assets

142
Q

alt name for debt-to-total assets ratio

A

debt ratio

143
Q

debt-equity ratio

A

total liabilities / total equity

144
Q

alt name for debt-equity ratio

A

debt to equity ratio

145
Q

debt-to-total assets ratio (2 interpretations)

A

indicates % of assets financed by debt
indicates % of assets financed by equity
% above 50 means more debt than equity

146
Q

interpretation of debt-equity ratio

A

indicates debt capital as a multiple of equity capital

greater than 1 means more debt

147
Q

with debt to total asset how to calc if it is using more debt than equity

A

divide liabilities by total assets (L+OE), if percentage is more than 50, using more debt

148
Q

with debt to equity how to calc if it is using more debt than equity or equal amounts

A

divide debt by equity, comes out as a decimal, that is the multiple of debt - greater than 1 means more debt

149
Q

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

A

greater risk of default

150
Q

whether a higher debt-equity ratio indicates a greater risk of default, or a smaller risk of default, than a lower debt-equity ratio

A

greater risk of default

151
Q

2 advantages of an equity recapitalization (to the venture)

A

reduces ventures interest expense

reduces ventures debt service requirement

152
Q

disadvantage of an equity recapitalization to existing owners

A

dilution of ownership percentage

153
Q

purpose of accounting

A

measuring performance of the venture and report it to decision makers

154
Q

role of the SEC

A

to regulate US public financial markets with goal of protecting public investors

155
Q

2 characteristics of private markets

A

less regulated than private markets (most SEC regs do not apply)
illiquid - difficult to sell shares

156
Q

example of internal decision makers who use accounting reports

A

owners (you)

management

157
Q

example of external decision-makers who are interested in a venture’s accounting information

A

lenders
investors
govt - IRS/SEC

158
Q

financial accounting

A

the preparation of financial statements

159
Q

transaction

A

completed agreement between a buyer and a seller to exchange goods, services, or financial assets in return for money, affects financial statements

160
Q

historical cost

A

includes the cost to acquire the asset, put it in place, and make it operational

161
Q

how to calculate historical cost

A

add together all expenses between item purchased, shipping, ins, labor, etc.

162
Q

4 steps of the accounting cycle

A

transaction occurs
transaction entered into accounting
processing
financial statements (end product)

163
Q

end product of the accounting cycle

A

financial statements

164
Q

alt names for balance sheet

A

statement of financial position/condition

165
Q

consolidated financial statement

A

financial statements of a parent company and its subsidiaries

166
Q

parent company

A

a company that owns another

167
Q

subsidiary

A

a company owned by another company

168
Q

sister companies

A

companies that share a parent company

169
Q

alt names for allowance of doubtful account

A

estimated uncollectibles

170
Q

allowance of doubtful account

A

estimates the percentage of accounts receivable that are expected to be uncollectible

171
Q

A/R net Formula

A

gross A/R - estimate of uncollectibles

172
Q

which is the total amount owed by customers to the company, gross A/R or A/R net

A

Gross A/R

173
Q

which is the amount the company actually expects to collect, gross A/R or A/R net

A

A/R net

174
Q

which is included in the company’s total assets, gross A/R or A/R net

A

A/R net

175
Q

how are transactions recorded?

A

at historical cost

176
Q

gross A/R

A

total accounts receivable

177
Q

A/R net

A

amount of receivables your company expects to collect from customers

178
Q

equation for equity financing

A

total oe / total assets

179
Q

formula for debt financing

A

total liabilities / total assets

Sml Biz ACCT/FIN F21 (10 decks)

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