FINAL EXAM Flashcards
_____ is a retrospective (look back) recording of actual business transactions
Accounting
_____ is a prospective (look forward) evaluation or model of different possible outcomes
Finance
In ______, you use assumptions and estimates to make the most informed decision possible
Finance
In _______, you use journal entries, accounts, ledgers & ultimately financial statements to record past activity
Accounting
Ticket sales, broadcast contracts, concession sales, sponsorship agreements are an example of
Revenue
Player salaries, equipment, travel, rent, insurance are an example of
Expenses
An alternate measure of profitability to net income
EBITDA
Attempts to represent cash profit generated by the company’s operations
EBITDA
What does EBITDA stand for?
Earnings before interest, taxes, depreciation and amortization
What is an asset?
Provides a future economic benefit to the organization
What is a liability?
A promise to provide a future good or service
What is equity?
The initial capital invested in the business // accumulation of profit & loss over time
Balance sheet equation
(A=L+E) - Assets = liabilities + equity
What is a statement that shows movement of cash by account driver?
Cash flow statement
Three different types of cash flow
Operating, investing, financing
Total of _____ ______ statement represents total change in cash
from year to year
Cash flow
Who uses financial statements?
Executives, ownership, investors, stockholders, rating agencies, league offices
What are the four formatting things a financial statement must have?
Company name, name of the financial statement, period in which it occurs, units of measure
What is the difference between a balance sheet and an income statement?
Balance sheet is a point in time (picture) and an income statement is a period of time (movie)
An income statement may also be called
Cash flow statement
Income equation
Revenue - expenses
___ provide a future economic benefit
Assets
____ is money owed to the organization for services already rendered or goods provided
Accounts Receivable (AR)
Merchandise or raw materials purchased to be produced / packaged and sold at a later date
Inventory
Prepaid expenses
Upfront payment made by an organization for a future good or service
Example of prepaid expense
Rent for future months, insurance premium for future coverage
Fixed Assets
Equipment, machinery, furniture or any asset purchased that is expected to be utilized for longer than one year
A promise to provide a future good or service
Liability
Money owed by the organization for services already received or goods delievered
Accounts Payable (AP)
Liability for amounts owed
Accrued liabilities
Money borrowed by an org from a creditor or lender
Debt
Payments made by a customer in advance of services provided
Deferred revenue
Current = _____-term
Short
Non-current = _____-term
Long
Expected to be received (asset) or paid (liability) within one year
Current or short-term
Expected to be received (asset) or paid (liability) beyond one year
Non-current or long-term
Assets = __ + ___
Liabilities + Equity
Where the ownership interest in the organization is recorded
Equity
Interest and required principal debt repayments together are considered ________
Debt service costs
How would you calculate the debt service cost of a $30M loan with a 3 year term and 5% annual interest rate?
$30m principal repayment + 3 years of 5% interest ($1.5M per year or $4.5M for 3 years = $34.5M
What reduces the liability on the company’s balance sheet?
Principal repayments
____ is for a period of time (movie)
P&L / income statement
__________ flows through to Retained Earnings/Accumulated Loss on the Equity section of the Balance Sheet
Net income
____ is a snapshot (picture) at a certain period
Balance sheet
_____ is the movements of each balance sheet account, showing all cash activity during the year and reconciling beginning and ending cash
Cash flow
__________ method where revenues and expenses are booked when a transaction occurs rather than when a payment is made
Accrual accounting
What method of accounting does the U.S. use?
GAAP - Generally Accepted Accounting Principles
What method of accounting is used internationally?
IFRS - International Financial Reporting Standards
Accrual accounting approach uses the ______________ where revenues and expenses should be recognized at the same time
Matching principle
______ method means for any given transaction a minimum of 2 entries must be made for book keeping
Double entry system
In the double entry system, for ever transaction _______
The amount of debits must equal the amount of credits
Entries on the right side of the t-system
Credits (equity / liabilities)
Entries on the left side of the t-system
Debits (assets)
Debits indicate an
increase in _____, increase in _______
decrease in _____, decrease in ______,
increase in an asset,
an increase in an expense
a decrease in a liability,
a decrease in shareholders’ equity,
Credits indicate an
decrease in _____,
increase in _____,
increase in _____,
increase in _______
decrease in an asset, increase in a liability,
increase in shareholders’ equity,
increase in revenue
Three steps in the process from a transaction to financial statements
- Create journal entries for every transaction
- At the end of the period reconcile your accounts
- Apply the ending balance to the corresponding financial statement
On January 31st, Sports Clothing Inc, (“SCI”) paid $250,000 in
cash for the monthly salaries of its employees - What are the debits and credits?
Debit - salary expense
Credit - cash
On January 1st SCI paid $42,000 cash to rent office space and
furnishings for the year ending December 31st-What are the debits and credits?
Debit - prepaid rent
Credit - cash
On March 15th, SCI purchased merchandise for $750 which will
be packaged and sold at a later date- What are the debits and credits?
Debit - inventory
Credit - cash
SCI sold merchandise at a selling price of $1,000 on April 1st; the
merchandise sold had cost to SCI $750. The customer paid SCI in
cash with no refunds- What are the debits and credits?
Debit - cash 1k
Credit - sales revenue 1k
Debit - COGS 750
Credit - inventory 750
SCI sold merchandise at a selling price of $60,000 on March 10th; the merchandise sold had cost to SCI of $45,000. The customer agreed to pay SCI in the third quarter - What are the debits and credits?
Debit - AR 60K
Credit - Sales rev 60K
Debit - COGS 45K
Credit - Inventory 45K
SCI receives $200,000 from a customer for merchandise on March 15th. SCI will deliver 3/4 of the merchandise on June 30th and 1/4 on December 31st - What are the debits and the credits?
Debit - Cash 200k
Credit - Deferred Revenue 200k
On 1/1/21, I buy $3,000 worth of t-shirts to sell (Q1 2021) - what are the debits and the credits
Debit - Inventory 3K
Credit - Cash 3K
A football manufacturer buys a new machine for $10M on 1/1/21. They estimate that the new equipment will have a useful life of 10 years. Show the entries and FS impact for 2021
1/1/21
DR: Equipment $10M
1/1/21
CR: Cash $10M
12/31/21
DR: Depreciation Expense $1M
12/31/21
CR: Accumulated Depreciation $1M
An MLS expansion club plans to borrow $250M from a bank to fund the cost of stadium construction. The bank loans the money to the team on 1/1/21 with an annual interest rate of 3.5%. The loan is due on 12/31/26 and the stadium is expected to last 25 years (assume the stadium is paid for and opens on 7/1/21)
What are the debits and credits?
1/1/21 DR: Cash $250M
1/1/21 CR: Long-Term Debt $250M
7/1/21 DR: Stadium Asset (PP&E) $250M
7/1/21 CR: Cash $250M
An MLS expansion club plans to borrow $250M from a bank to fund the cost of stadium construction. The bank loans the money to the team on 1/1/21 with an annual interest rate of 3.5%. The loan is due on 12/31/26 and the stadium is expected to last 25 years (assume the stadium is paid for opens on 7/1/21):
Interest per year - 8.75M
250M/25 years - 5M
12/31/21
DR: Interest Expense $8.75M
12/31/21
CR: Cash $8.75M
12/31/21
DR: Depreciation Expense $5M
12/31/21
CR: Accum Depr – Stadium $5M
A basketball team signs a contract with a new jersey patch sponsor. The sponsor pays $5M up front on 1/1/21 for a 2 year contract. Show the journal entries and
financial impact in 2021:
1/1/21
DR: Cash $5M
1/1/21
CR: Deferred Revenue $5M
12/31/21
DR: Deferred Revenue $2.5M
12/31/21
CR: Sponsorship Revenue $2.5M
On March 1, a baseball team purchases new travel bags for its players for a cost of $5,000. The team has agreed to pay for the travel bags by September 30. Show the
entries and FS impact for 2021:
3/1/21
DR: Equipment Expense $5,000
3/1/21
CR: Accounts Payable $5,000
9/30/21
DR: Accounts Payable $5,000
9/30/21
CR: Cash $5,000
On Jan 1, a football team leases extra office space near the stadium to add offices for staff. The office lease is a 4 year lease for $25,000/year. The team pays for the
entire lease term on Jan 1. Show the entries and FS impact for 2021:
1/1/21
DR: Prepaid Expense (Asset) $100,000
1/1/21
CR: Cash $100,000
12/31/21
DR: Office Lease Expense $25,000
12/31/21
CR: Prepaid Expense (Asset) $25,000
Debit or credit - Assets
Debit
Debit or credit - Liabilities
Credit
Debit or credit - Equity
Credit if net income, debit if net loss
Debit or credit - Revenue
Credit
Debit or credit - Expenses
Debit
Net income formula
Revenue - expenses = net income/loss
Examples of stadium investments
Clubs, restuarants, views experience
Examples of investing in ticketing technologies
CRM, pricing tools, mobile ticketing
Variable pricing
Ticket prices set in advance of on-sale // major variations are by seat and game tier
Dynamic pricing
Occurs between on-sale and event date // results from change of demand from variable pricing
2 fans could be sitting next to each other in identical seats, and depending on WHEN they purchased, the price could be drastically different. This is an example of?
Dynamic pricing
Primary ticket market
Tickets are sold by the artist/team/venue directly to the fans
Face value
Price at which tickets are initially sold
Secondary ticket market
Tickets are sold by fans (previously obtained on the primary market) to other fans
What are some impacts of the secondary ticket market?
Teams are no longer the single source for ticket sales, In theory, every ticket sold on the secondary market cannibalizes a
ticket that otherwise could have been sold on the primary market
What does ticketing look like for teams now?
Most leagues/teams have an authorized secondary market partner.
In return for _______, secondary market sites agreed to split a share of the fees generated with teams/leagues
Integration
Why is integration with teams/leagues and secondary market sites beneficial to each party?
What does StubHub gain?
* Tickets sold on their site are verified by the venue as a legitimate ticket
– What do the teams/leagues gain?
* A portion of the fees, but also customer data (key factor at play)
What are sponsorships?
A cash and/or in-kind fee paid to a property (typically in sports, arts, entertainment or causes) in return for access to the exploitable commercial potential associated with that property
Examples of sponsorship revenue
- Use of marks
- Activation
- Signage
- Media
- Hospitality
- Tickets
- Suites
RSNs - Regional Sports Networks
Cable stations created to primarily show only sports in a local market
Advantages of RSNs
High risk, high return
Disadvantages of RSNs
No guaranteed money, a lot of work and infrastructure to set up, assume all risk
Main revenue drivers for RSNs?
Subscriber fees (could be as much as 85% of revenue), advertising, shoulder programming
Revenue sharing
Measures taken to pool and redistribute certain revenues among competing teams in a league, in order to lessen economic inequalities among teams
Direct Revenue Sharing
Team-to-team sharing local revenues
Indirect/Inherent Revenue Sharing
League revenues shared equally amongst all member teams
- National TV contracts, league-wide licensing deals/sponsorships
Why does revenue sharing exist?
Main purpose is to help put all teams on an equal playing field (despite market size)
Does the NBA have revenue sharing?
Yes
Does the NFL have revenue sharing?
League wide - Yes
Local - Partial
Does the MLB have revenue sharing?
Yes
Does the NHL have revenue sharing?
Yes
What type of salary cap does the NBA have?
Soft
What type of salary cap does the NFL have?
Hard
What type of salary cap does the MLB have?
Soft
What type of salary cap does the NHL have?
Hard
Leagues with hard salary caps
NFL, NHL
Leagues with soft salary caps
NBA, MLB
No show rate
Difference between paid attendance and turnstile attendance
Is there sales tax on suite revenue for license?
No
Is there sales taxes on tickets?
Yes
NBA Revenue Sharing - how is league income and local income split?
League split evenly (including National TV)
Local revenue is split in complicated formula
NFL Revenue Sharing - how is league income split?
League rev split evenly
NFL Revenue Sharing - how is gate income split?
66% home
34% road
MLB Revenue Sharing - how is league income and local income split?
League split evenly
Local rev split in complicated formula
NBA has a ____ cap
Soft
NFL has a ____ cap
Hard
What is the NFL’s hard cap set as?
A % of league wide revenues
Leagues with guaranteed player contracts
NBA, MLB
What is the difference between a soft and hard cap?
Soft cap - go over and pay a tax
Hard cap - cannot go over
Leagues with non -guaranteed player contracts
NFL, NHL
Internal Audit
Completed by staff members within a business
Independent Audit
An external review of finances by people not directly involved with the documents
Involved in establishing internal controls and preparing an organization’s financial statements to ensure their accuracy
Internal audit
Involved in verifying the truthfulness of the documents being
reviewed, often by public accounting firms
Independent audit
A financial plan for a revenue, expense, P&L, cash flow or a balance sheet item
Budget
The owner wants what type of salary cap?
Hard
The players want what type of salary cap?
Soft
What does BRI stand for and what league is it used in?
Basketball related income - NBA
Guaranteed contracts happen in leagues that have ___________
Strong player’s unions
What does TR stand for and what league is it used in?
Total revenue - NFL
In what league do you have to be under the salary cap every day of the season?
NFL
What does NLR stand for and what league is it used in?
Net local revenue - MLB
What does HRR stand for and what league is it used in?
Hockey related revenue - NHL
Name a few typical expenses for professional sports orgs
Salaries
Stadium rent (if not owned)
Ops
Arena Ops
Sales/marketing
Front office
Name a few expense drivers
Headcount (not just salary - benefits, vacation, office supplies, etc)
Travel costs
Misc operating costs
Two types of budgeting?
Zero-based budgeting, historical growth budgeting
Zero based budgeting
All budget dollars are requested every year and then budgeted for if approved (i.e. Oscar/Michael - The Office example)
Historical growth budgeting
Budgets are set based upon prior years spend and historical trends
What does SALY stand for and what does it reference?
Same As Last Year
Historical growth budgeting
Updates to the budget that are more frequent than annually
Forecasts
SEC requires _____ reporting
Quarterly
Direct expenses + example
Directly related to a business operation
EX - producing footballs
Examples of indirect expenses
HR / IT / Finance / Legal
Insurance
Back office expenses - computers, supplies, software
Examples of direct expenses
Sponsorship (cost of putting up a new sign)
Ticket sales commissions paid to sales team
Indirect expenses + example
Overhead/indirect cost in achieving project completion
EX - Salaries
What type of expenses are a VARIABLE COST?
DIRECT - they are a function of revenue - i.e. sponsorships, ticket sales, media, etc.
What type of expenses are a FIXED COST?
INDIRECT - they stay the same - i.e. back office expenses, insurance, executives, non-revenue generating
_____ cap: more favorable to owners (generally)
Hard
Salary cap usually comes with a _____
Salary floor (a concession to players/union)
____ cap: more favorable to players (generally)
Soft
______ cap typically comes with some tax/penalty structure to ensure competitive balance
amongst the teams
Soft
__________ are set based on an agreed upon % of total league-wide
revenue (as defined by the CBA)
Salary Caps
Name the five (5) different cost arrangements with service providers?
Flat fee
Per hour fee
Per hour fee with min requirement
Per game fee
Fee per usage
Will indirect expenses change as revenues increase or decrease?
NO
Will direct expenses change as revenues increase or decrease?
YES
Types of non sporting events?
Concerts, weddings, tours, corporate meetings
Types of deals for non-sporting events?
Facility rental (low risk/minimal upside)
Stadium produces the event (high risk, high reward)
Combination
Types of revenue models for non-sporting events?
Rev share agreement
Fixed guarantee to the act
Combination of both
How to find Goal Seek
Data tab - what if analysis - goal seek
Examples of mixed use developments?
Battery - ATL
SoFi Stadium
What is depreciation?
It is the recognition of expense relating to the reduction in value for an asset
_____ depreciation – prefer expenses to extend as long as
possible
GAAP
____ debt – money loaned by bank
Bank
______ offering – investments made by private company
Bond
_______ placements – long term investments by companies
Private
Goals of capital budgeting
To select investment opportunities that are worth more than
they cost
To invest in those projects that are most profitable for the organization (greatest ROI)
Profitability of an investment
or a project
ROI
How is ROI profitability measured?
By looking at the cash flow that the project can produce and compare it to the cost of the project
Why is ROI important?
ROI provides a method to compare projects and drive the allocation of resources amongst them
ROI Formula
(Gain from investment - cost of investment) / cost of investment
SHOWN AS PERCENTAGE
Three (3) tools used to calculate Gain from Investment & Cost of
Investment:
- Net Present Value (NPV)
– Internal Rate of Return (IRR)
– Payback Period
What is present value?
Time value of money, a dollar today is better than a dollar tomorrow
How is time value of money calculated?
PV = CFt / (1+r)^t
PV = present value
CF = cash flow at the end of year t
r = interest rate
t = years
Goal of accounting/finance
Help allocate resources
Cost of debt =
Discount rate
An increase in discount rate ___________ net present value
Lowers
If NPV is positive….
Accept the project if there is no better alternative (i.e. another project with a higher NPV)
Net Present Value (NPV)
The difference between the present value of the future income and the required investment
The difference between the present value of the future income and the required investment
NPV
How is NPV calculated?
NPV = PV - RI
PV = present value
RI = required investment
Amount of capital needed
Required investment
The future income stream is discounted based on _______________
The cost of
capital needed for the project
Internal Rate of Return
An organization’s required return for a
project (a hurdle rate)
An organization’s required return for a
project (a hurdle rate)
Internal Rate of Return
The _____ method shows the rate of return where NPV is equal to _____
IRR, zero
If IRR is greater than the required return……..
Accept the project if there
is no better alternative
The payback period looks at …
How long it will take a company to get its money back after the investment
(purely measured on the amount of time it
takes to payback the company - time value of money is not factored in)
How long it will take a company to get its money back after the investment
Payback period
(purely measured on the amount of time it takes to payback the company - time value of money is not factored in)
PRACTICE NPV / IRR / PAYBACK PERIOD EXAMPLES (3.28 4.4)
PRACTICE NPV / IRR / PAYBACK PERIOD EXAMPLES
Monthly cash flows need a _____ discount rate
Monthly
6% annual discount rate = xxx% monthly rate
0.5%
0.25% monthly rate = xxx% annual rate
3%
Higher the discount rate = _______ NPV
Lower
Lower the discount rate = _____ NPV
Higher
How to calculate IRR in excel
Let NPV equal zero, solve for IRR (GOAL SEEK in Excel)
If IRR is greater than the required return, accept the project if there is no better alternative
Is time value of money factored into the payback period calculation?
NO
Which method of evaluating projects is best?
IT DEPENDS; can calculate all 3 and weigh each data point when comparing Project A vs Project B, C & D
_______ are the most commonly used primary investment criteria
NPV & IRR
_______ is a commonly used secondary investment criteria
Payback period
What does CAGR stand for?
Compound Annual Growth Rate (or Cumulative Annual Growth Rate)
How is CAGR used?
To determine the annual growth rate, when applied to value in Period 1, you would arrive at the value in Period T
CAGR Formula
((Vfinal/Vbegin)^(1/t))- 1
Vbegin - beginning value
Vfinal - final value
t - time in years
CAGR in Excel - counting the number of periods
The Beginning Period does not get counted in the total as you are starting with that period and applying an annual growth rate thereafter
Pro of CAGR
Provides a more meaningful growth rate that is annualized
Con of CAGR
Does not take into account ANY period values other than the
beginning and the end
What is PMT function used for?
Calculates the payment for a loan based on constant payments and a constant interest rate
Calculates a consistent annual value at a constant interest rate to arrive at an ending value (FV) or a desired starting amount (PV)
What is PMT useful for?
Useful for personal loans, personal investments or “smoothing” of
contractual escalators
Metric to calculate how long it will take to return your initial investment
Payback period
_____________ does not go into future cash flow assumptions
Sunk costs
Balloon Payment
Assumes the amount borrowed is paid
back at the end of the Term
Effective Interest Table
Common, how mortgages are calculated
Even annual principal repayments
______ measures the degree to which a change in pricing affects the unit sales of a product
Elasticity
If a change in price does not impact demand, then the demand is _________
Examples
Inelastic
Milk, eggs
An _______ demand changes significantly when prices change
Examples
Elastic
Entertainment, disposable goods with alternatives
How to calculate the right price?
The price where all inventory clears or where supply equals
demand
The place where marginal revenue is greater than marginal cost
The __________ is the level of revenue at which total
revenue exactly matches total costs
Break even point
Break even point formula
(Price x unit sales) - (COGS x unit sales) - fixed costs = 0
Break even sales equation / break even units =
Fixed costs / (price per unit - COGS per unit)
______________ is running multiple versions while varying some
of the assumptions
Sensitivity analysis
What drives value in franchise valuations?
Brand, cash flow, league economics, location, availbaility
Three ways an owner can monetize their franchise
Outright sale, public offering, minority interest
Net Income flows through to __________ on the Equity section of the Balance Sheet
Retained Earnings/Accumulated Loss
What is taxable / non-taxable?
Tickets / License
Price components: Ticket (taxable) vs License (non-taxable)
Two accounting issues with revenue sharing
Consistency with reporting
Accuracy with reporting
Two accounting issues with salary cap
Definitions of payments
Loop holes
Non sporting events - benefits for teams
More events = more revenue
Higher return on stadium investments
Not subject to revenue sharing
Before construction begins decisions must be made on:
Total seating
Premium v.s. non premium spaces
Clubs v.s. restaurants
Logistics - stairs, elevators, bathrooms
Before construction begins decisions must be made on:
Total seating
Premium v.s. non premium spaces
Clubs v.s. restaurants
Logistics - stairs, elevators, bathrooms
Potential errors using NPV/IRR/other calculations
- Measuring sunk costs
- Measuring opportunity costs
- Failing to analyze the impact of any funding decision
- Failing to appreciate the impact of a capital decision on net
working capital
A document that displays the financial condition of a business at a single point in time is called
A balance sheet
A legal or financial obligation owed (e.g., debt, taxes owed) is
called a/an
Liability
Assets on the balance sheet with the least liquidity (e.g., real
estate, equipment) are known as
Fixed assets
The value of an initial lump sum of money after it is invested over
one or more periods of time is called
Future value
The “today” value of an amount of money expected to be received
in the future is called:
Present value
The concept that monetary amounts to be received in the future
or invested in the present have differing values is called
Time value of money
The two major activities in the financial planning process are:
forecasting potential revenues and budgeting for future expenses
Bonds and loans are typically examples of:
Long term debt obligations
Which of the US pro sports leagues have a hard salary cap
NHL and NFL
Examples of revenue sharing in the sports industry:
each team participating equally in national TV contracts
a home team paying a visiting team a % of gate receipts
large-market teams funding a pool to be provided to small-
market team
A front office employee notices that inflation has increased
expenses over the past few quarters. Raw materials costs in 2017
were $200,000 and now in 2023 they have increased to
$425,000. What is the CAGR over that period
13.4%
2017 to 2023 = 7 year period, but only 6 years of growth
[(425,000 / 200,000) ^ (1 / 6 years)] – 1 = 13.4%
EXCEL:
A Team has to decide between two different sponsorship deals.
Which should they choose and why?
- Deal A – 3 year deal
– Year 1 - $100,000, Year 2 - $125,000, Year 3 - $150,000
– The Team will incur signage costs of $50,000 each year - Deal B – 3 year deal
– Year 1 - $75,000, Year 2 - $75,000, Year 3 - $75,000
– No out-of-pocket costs incurred - The Team has an internal borrowing rate of 0.25% per mont
NPV Option 2: $212,145.85
(not option 1, but NPV is $210,752.55)
EXCEL:
An NFL team is considering building a standing-room endzone
club for use during games. The team estimates that it will cost
$500,000 to build. The team expects an incremental $60,000 a
year for the next 10 years from this new endzone club. What is
the payback period of this investment? If the team can borrow
money at 3.0% annually, would it make the investment? If the
bank counter-offers a rate of 3.5%, would the team still make the investment?
Payback Period = $500,000 / $60,000 = 8.3 years
- PV = FV / (1+r)t (will be given in exam)
EXCEL:
A team plans to sell autographed hockey pucks from its star
player. The team must pay the player $85 for each autograph,
the cost of the pucks is $22/each and the team had to construct a new kiosk in the arena to sell the items (cost of $15,000).
– If they can obtain 500 autographed pucks, what price do they need to charge to break-even?
– If they charge $147 per unit, how many units would they need to sell to break-even
1) $137
2) 375
