FINANCIAL CONTROLLERSHIP Flashcards
The discounting rate at which all of a companies investment must exhibit a positive cashflow.
HURDLE RATE
It is the standard criterion for investment.
HURDLE RATE
It is how much an investment worth throughout its lifetime, discounted to today’s value.
NET PRESENT VALUE
It is the method calculates the expected net monetary gain or loss from a project by bringing all expected future cash inflows and outflows to the present time.
NET PRESENT VALUE
is the acquisition of physical assets by a company for use in furthering its long-term business goals and objectives.
CAPITAL INVESTMENTS
It is similar to a breakeven analysis but instead of the number of units to cover fixed costs, it looks at the amount of time required to return the investment.
PAYBACK PERIOD
It is the length of time it takes to recoup the initial investment in a project or investment, typically measured in years
PAYBACK PERIOD
It gives you the average annual rate of return of a project throughout its lifetime.
INTERNAL RATE OF RETURN
Are chiefly responsible for approving new capital expenditures and also responsible for generating an adequate return on investment from the company’s existing capital base
SENIOR LEVEL MANAGERS
It represents the annualized rate of growth a project is expected to generate, such that the net present value (NPV) of the project’s cash flows equals zero.
INTERNAL RATE OF RETURN
If there is production equipment involved, then there will be periodic maintenance needed to ensure that it runs properly.
CASH OUTFLOW FOR MAINTENANCE
T or F
Real estate, manufacturing plants, equipment, buildings, land, and machinery are among the assets that are purchased as capital market.
False
T or F
The formula of net present value is : present value= past cash flow/(1+discount rate) squared by the number of periods if discounting.
False
T or F
Hurdle rate serves as a benchmark to evaluate the attractiveness of potential investments.
True
The net present value (NPV) method calculates the expected net monetary gain or loss from a project by bringing all expected future cash inflows and outflows to the past time
False
The net present value (NPV) method calculates the expected net monetary gain or loss from a project by bringing all expected future cash inflows and outflows to the past time
False
Internal Rate of Return represents the duration needed to generate enough cash inflows to recover the initial cost of the investment.
False/Payback Period
The Hurdle Rate is derived from the cost of capital, which is uncovered by depth.
False/Covered by Depth
The Internal Rate of Return (IRR) in capital investment is a financial metric used to evaluate the profitability of an investment.
True
The use of a discount rate is extremely important, for it reduces the value of cash inflows and outflows scheduled for some time in the future, so that they are comparable to the value of cash flows in the present.
True
Most common cash flow line items that include in net present value analysis
- CASH INFLOWS FROM SALES
- CASH INFLOWS AND OUTFLOWS FOR EQUIPMENT PURCHASES AND SALES
- CASH INFLOWS AND OUTFLOWS FOR WORKING CAPITAL
- CASH OUTFLOWS FOR MAINTENANCE
- CASH OUTFLOWS FOR TAXES
- CASH INFLOWS FOR THE TAX EFFECT OF DEPRECIATION
- CASH OUTFLOWS FOR MAINTENANCE
It is called a hurdle rate because the summary of all cash flows must exceed, or hurdle, this rate, or else the underlying investments will not be approved
True
The best way to resolve the problem is to set aside a small amount of cash to be handed out by a lower-level group of employees.
False/Large amount of cash
Types of capital investment
- FINANCIAL CAPITAL INVESTMENT
- PHYSICAL CAPITAL INVESTMENT
What is the formula for NVP or Net Present Value?
Also known as common shares or ordinary shares, represent ownership in a corporation and provide investors with a proportional claim on the company’s asset, earnings and voting rights.
A. Leasing
B. Preferred Stock
C. Common Stock
Common Stock
Is a bond that can be converted into common stock.
A. Convertible Securities
B. Common Stock
C. Stock Rights
Convertible Securities
Also known as subscription rights or right issues.
A. Loan
B. Warrants
C. Stock Rights
Stock Rights
Can reduce bond interest rates.
A. Leasing
B. Warrants
C. Preferred Stock
Warrants
Lenders sometimes have the operation to force the acceleration of payments on debt owed to them.
A. Risk of experiencing a loan acceleration
B. Risk of tighter loans covenants
C. Risk of shareholder revolt
Risk of experiencing a loan acceleration
Typically used by cash-poor companies with real estate holdings
SALE AND LEASEBACK
The funding is not contingent on any specified interest payment, but the holder of the underlying common stock expects either a periodic dividend payment, an appreciation in the share price on the open market, or a combination of the two.
Equity
It tends to be rather expensive for the lessee, because it is paying for the interest cost, profit, taxes, maintenance, and decline in value of the asset
LEASING ARRANGEMENT
- Generally the least expensive form of financing
LOANS
An authorization to purchase additional shares of common stock at a set price
STOCK RIGHTS
Funding is contingent on some obligation to pay interest in exchange for the use of the invested funds.
DEBT
The funding is not contingent on any specified interest payment
Equity
T or f
Loans is typically used by cash-poor companies with real estate holdings.
FALSE/SALE AND LEASEBACK
A _____ is also useful when a company can acquire more expensive equipment than it could otherwise afford.
LEASING
The cost of a ______ is based on the interest rate.
LOAN
A ______ is a right to purchase common stock at a fixed price and usually has a distant termination date, if any.
WARRANT
DEBT OR EQUITY
An interest payment must be paid to the lender on specified dates
The interest rate can be quite a few percentage points higher than the prime rate charged
Interest rate charged will vary greatly, depending on the willingness of the borrowing organization to put up its assets
DEBT
DEBT OR EQUITY
The investments of shareholders are not secured by any form of collateral
There is the surface appearance of free money
EQUITY
T or F
Convertible security is sometimes used when selling bonds, so that buyers can later switch their bonds over to debt if a specific stock price point is reached at which the conversation is an attractive one.
TRUE
T or F
Interest payments on debt are tax deductible, whereas dividend payments are not, thereby making payments to shareholders more expensive than payments to creditors.
TRUE
T or F
Stock rights give the holder the right to buy common stock at a specific price.
FALSE/WARRANT
T or F
An interest payment must be paid to the borrower on specified dates.
FALSE/LENDER
T or F
Interest rate charged will vary greatly, depending on the willingness of the borrowing organization to put up its assets as collateral.
TRUE
Two types of Funding Options.
- Debt
- Equity
Five types of Risk associated with Funding Options.
- Risk of not paying interest on debt
- Risk of not paying principal on debt
- Risk of experiencing a loan acceleration
- Risk of tighter loan covenants
- Risk of shareholder revolt.
specific control problems associated with Funding Options.
- Equity Financing Control Problems
- Debt Financing Control Problems
- Venture Capital and Private Equity Control Problems
- Control Problems in Hybrid Financing
It is the movement of money in and out?
CASH FLOW
Formula on how to Evaluate working capital
CURRENT ASSETS-CURRENT LIABILITIES
T or F
When a company declines payment for its preferred stock, its only obligation is to pay a prespecified interest rate on that investment in perpetuity, or until the shares of preferred stock are bought back by the company.
FALSE/ACCEPTS
It is a critical aspects of financial aspects of financial management for business and individuals alike.
VARIATION IN THE FLOW OF CASH
T or F
A leasing arrangement tends to be rather expensive for the lessor, because it is paying for the interest cost, profit and taxes.
FALSE/LESSEE
T or F
Common stock is the type of funding that carries with it no immediate payment obligation.
TRUE
T or F
Company can either obtain a loan either by borrowing funds from a lending institution or by issuing its own bonds to investors.
TRUE
A financial evaluation method used to assess the financial impact of particular decision or project
INCREMENTAL CASH FLOW ANALYSIS
Respresents cash generated or used by a company’s core operating activities.
OPERATING
Represents the value of goods or materials a company holds for production or resale
INVENTORY
It is a source of money.
ACCOUNTS PAYABLE
Represents the money owed to a company by its customers for goods and services.
ACCOUNTS RECEIVABLE
Represents the capital available for a company’s day to day operations.
WORKING CAPITAL
It records cash flow from raising or repaying capital.
FINANCING
Relates to cash flows from buying and selling assets
INVESTING
T or F
Incremental cash flow is crucial when constructing or reviewing transactions.
FALSE
T or F
Working capital is equal to accounts receivable plus inventory subtracted by accounts payable.
TRUE
T or F
Working capital changes in accounts payable are attributed to billing problems and sales growth.
FALSE
T or F
Working capital is a crucial factor in assessing a company’s cash flow position.
TRUE
T or F
To get the present value factor, you need to divide 1 to (2+ r) to the nth power.
FALSE
T or F
Working capital comprises three main components: accounts receivable, inventory, and accounts payable.
TRUE
T or F
Production obsolescence problems and sales growth are included in inventory.
TRUE
T or F
To calculate the present value of line item, multiply the cash inflows/outflows by the present value factors.
TRUE
T or F
Incremental cash flows should include only future cash flows and not only past cash flows.
FALSE
Three components of working capital
Accounts Receivable
Inventory
Accounts Payable
Three sections of cash forecast
Assumptions
Cash Inflows
Cash Outflows
TYPES OF CASH FLOW
Operating
Investing
Financial
Steps in analyzing and calculating the incremental cashflow
Initial investment
Expected cash
Operating expenses
It is also known as the cost volume-profit relationship.
A. Financial Analysis
B. Breakeven Analysis
C. Risk Analysis
Breakeven Analysis
A costs that remain the same regardless of how many units are sold .
A. Fixed-cost
B. Variable-cost
C. Unit-cost
Fixed-cost
costs that change as the quantity of the good or service that a business produces changes.
A. Fixed-cost
B. Variable-cost
C. Unit-cost
Variable-cost
if a business lowers its prices, it will likely sell more units but it also incur lower profit per unit. Similarly, if production levels are increased, fixed costs will spread out over more units, lowering the break-even point.
A. Demand change
B. Stock change
C. Price change
Price change
Two variables that needs to be equal to have a breakeven point.
a. Expenses and sales
b. Revenue and cost
C. Profit and price
Revenue and cost
It is how many unit s of a produc t mus t be sold to cover the fIxed and variable costs of production.
BREAK EVEN ANALYSIS
What formula is being used in break -even analysis?
= FIXED COST/(SELLING PRICE-VARIABLE COST) -
It is also called the costs of goods sold.
VARIABLE COSTS
It is the amount your customer pays for a product or service.
SELLING PRICE
It is a cost/expense that does not change
FIXED COST
T or F
Cumulative net present value is included in the cash forecast.
FALSE
FIXED COST or VARIABLE COST
Rent
FIXED COST
FIXED COST or VARIABLE COST
Raw materials
VARIABLE COST
FIXED COST or VARIABLE COST
Commissions
VARIABLE COST
FIXED COST or VARIABLE COST
Machineries and equipment
FIXED COST
FIXED COST or VARIABLE COST
Production supplies
VARIABLE COST
FIXED COST or VARIABLE COST
Advertising and taxes
FIXED COST
FIXED COST or VARIABLE COST
Insurance and salaries of employees
FIXED COST
T or F
F i x e d C o s t i s a c o s t / e x p e n s e t h a t c h a n g e s w h e n s a l e s o r p r o d u c t i o n v o l u m e s i n c r e a s e o r d e c r e a s e .
FALSE
T or F
Va ri a b l e C o s t s a r e t h e c o s t s t h a t d o n o t c h a n g e a s t h e v o l u m e c h a n g e s .
FALSE
T or F
T o d e t e r m i n e a b r e a k - e v e n p o i n t , a d d u p a l l t h e f i x e d c o s t s f o r t h e c o m p a n y o r p ro d u c t b e i n g a n a l y z e d , a n d d i v i d e i t b y t h e a s s o c i a t e d g r o s s m a r g i n p e r c e n t a g e .
TRUE
T or F
T h e b r e a k e v e n p o i n t i s a l s o k n o w n a s t h e c o s t - v o l u m e - p r o f i t r e l a t i o n s h i p .
FALSE
T or F
I n s o m e a c c o u n t i n g s t a t e m e n t s , t h e Va ri a b l e c o s t o f p r o d u c t i o n i s c a l l e d t h e “ C o s t o f Go o d s So l d “.
TRUE
3 components of break-even
- volume
- fixed cost
- variable cost
GIVE THE BREAK- EVEN ANALYSIS FORMULA
- Break even sales= Total foxed cost/ Gross margin percentage
It is a recurring series of expansions and contractions, involving and driven by a vast number of economic variables, that manifests itself as changes in the level of income, production, and employment
BUSINESS CYCLE
A variable that affects the economic system, though it is not an integral component of the system.
EXOGENOUS
Also known as “Act of God”
EXOGENOUS
A variable that impacts an economic system from within.
ENDOGENOUS
A theory states that a rise in consumer demand causes a demand for more production equipment so that manufacturers can meet the demand.
CONSUMER DEMAND
A theory is that companies gradually burden themselves with more and more debt, which they need to build more capacity to fuel additional growth.
DEBT ACCUMULATION
These are surveys of key people in the business community.
ANTICIPATION SURVEYS
These are the leading and lagging indicators that foretell changes in the economy.
CYCLICAL INDICATORS
These are highly complex and iterative models that simulate the real economy and are frequently composed of hundreds of variables that interact with each other.
ECONOMIC MODEL
A forecast published by nearly every major business magazine for the economy at large, which can be easily extracted, reformatted into an internal report, and presented to management, perhaps as part of the monthly financial statements.
REPORT ON PUBLISHED FORECAST
These are trend lines that are based on historical information.
TIME SERIES MODELS
Tends to be long-term and very difficult to predict interms of length or intensity?
NATURE OF BUSINESS CYCLE
What year did business cycle on companies in the united states historical impact happen?
1920 TO 2005
What percent most significant contraction was the Great Depression when the GNP dropped?
33%
Who is the responsible to decide on balancing the time needed for forecasting against the perceived value of the information?
CONTROLLER
MONEY SUPPLY - It is the fundamental concept in business cycle forecasting.
MONEY SUPPLY
It Provide insight into how economics grow over extended periods.
LONG-TERM GROWTH
T or F
FALSE - Consumer demand is a theory that states that inventory is at the core of business cycles. Producers build inventories in the expectation of creating new sales volume.
FALSE
T or F
Econometric models are highly complex and iterative models that simulate the real economy and are frequently composed of hundreds of variables that interact with each other.
TRUE
T or F
Cyclical indicators are the lending and lagging indicators that foretell changes in the economy.
FALSE
T or F
Cost of capacity utilization is theory holds that, as a company enters the late stages of a business expansion, the costs of operating at very high levels of capacity utilization will reduce profits, because the costs of overtime, machine maintenance, and high-demand supplies will rise.
TRUE
T or F
Innovative decision is a theory states that economic growth is founded on bursts of innovation, which tends to be sector specific, and has a trickle-down effect on other parts of the economy.
FALSE
ELEMENTS OF BUSINESS CYCLE FORECASTING
- Economic Indicators
- Data Analysis Techniques
- Economic model
THEORIES OF BUSINESS CYCLE FORECASTING
- Consumer Demand
- Inventory Expectations
- Cost of Capacity Utilization
- Debt Accumulation
- Money Supply
- Innovation Basis
- Long Term Growth
TWO CYCLICAL INDICATORS
- Leading
- Lagging
possible action to obtain, analyze and report on business cycle.
- REPORT ON PUBLISHED FORECAST
- SUBSCRIBE TO A FORECASTING SERVICE
- DEVELOP AN IN-HOUSE FORECASTING MODEL.
What are the two types of variables?
- EXOGENOUS VARIABLE
- ENDOGENOUS VARIABLE
What are the four primary method used to arrive the forecast?
- ANTICIPATION SURVEY
- TIME SERIES MODEL
- ECONOMIC MODEL
- CYCLICAL INDICATOR
