Financial Equations and Calculations Flashcards
Inventory turnover =
inventory turnover = sale or cost of doing goods/inventory
sale or cost of doing goods
——-(divided by)—————
inventory
= inventory turnover
days’ sales in inventory =
days sales in inventory =
(ending inventory x 365 days)
——–(divided by)—————
sales or cost of goods sold
(ending inventory x 365 days)
——–(divided by)—————–
sales or cost of goods sold
= days’ sales in inventory
accounts receivable turnover =
credit sales
–divided by–
accounts receivable
credit sales
—divided by—
accounts receivable
accounts receivable =
ACP
Average Collection Period
average collection period (ACP) =
(accounts receivable x 365)
—divided by—-
credit sales
(accounts receivable x 365 days)
—divided by—
credit sales
= average collection period (ACP)
accounts payable turnover =
cost of goods sold
—divided by—
accounts payable
definition: accounts payable
Accounts payable (AP) is a short-term debt and a liability on a balance sheet where a business owes money to its vendors/suppliers that have provided the business with goods or services on credit.
definition: accounts receivable
Accounts receivable (AR) are the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers. Accounts receivable are listed on the balance sheet as a current asset. Any amount of money owed by customers for purchases made on credit is AR.
fixed asset turnover =
sales
—divided by—
net fixed assets
sales to working capital =
sales
—divided by
working capital
sales
—divided by—
net fixed assets
fixed asset turnover
sales
—divided by—
working capital
sales to working capital
total asset turnover =
sales
—divided by—
total assets
sales
—divided by—
total assets
total asset turnover
current ratio =
current assets
—divided by—
current liabilities
current assets
—divided by—
current liabilities
= current ratio
why is finance important?
because value is important
examples of value in financing
products/services, common stock, value of the firm itself
what should all managers strive to do , in terms of financing within their firm
all managers should maximize the intrinsic value of their firm.
finance has an impact on every important decision made by business managers
hx of New Coke
Coke II aka “New Coke” was introduced in 1985 to compete w/Pepsi
-Loyal coke believed: product did not need changing & mad the original product went off the shelves
-3 months after introduction: original product “Coke Classic” reintroduced. 7 years later, Coke II d/c.
***this is often used as a business case study for developing/introducing products
How do businesses choose their suppliers?
quality of product/service, prices changed, customer service offered during/after purchase
***some companies dedicate assets/manpower to specific customers in order to address their needs promptly
reason Obama choose to bail out GM
many reasons. one was the impact it had on the local community/local businesses who made virtually all of hteir revenue from supplying the local GM plant
CEO of Amazon
Jeff Bezos
Amazon in 2017
CEO Jeff Bezos became the richest man in the world the same year +10% of his 6K employees in Ohio were receiving food stamps
2018 STOP BEZOS act
- introduced by Bernie Sanders
- would have required large employers Amazon/Walmart to pay the government for public assistance received by their employees like food stamps/public housing/Medicaid
- bill had a 0% chance to pass but did begin a national conversation about corporate subsidies paid for with taxpayer funds
- Walmart claims its strategy is low prices but it is low wages so many Walmart employees are on public assistence
Walton family in 2016
6 members of the Walton family (Walmart) had a combined wealth of $90B in 2012 which is more than the bottom 30% of earners in the US
where do funds in a business come from
funds come from different sources and have different costs/risks
what is the role of finance within a business
determine how much money to raise, spend, & invest
what type of discipline is finance
finance is a strategic discipline
short-sighted view of the role of finance within a firm
short-sighted to say it is the responsibility of hte firm to maximize shareholder wealth. b/c short sighted-stock prices can be manipulated and do not add long-term value to a firm
intrinsic stock price
true value of stock based on all available issue
true value of stock based on all available issue
intrinsic stock price
role of finance within a business
**determines how much money to raise, spend, invest
ability to raise money quickly at a reasonable cost directly impacts decisions the firm will make, what markets to endter, who to hire, what products to make and how, determined the costs associated with production process, and the cash flows realized from these products, where to invest leftover cash
Right to Work Laws
gives the workers a choice of whether or not to join a union
law prohibits contracts that require workers to join a labor union to get/keep a job
states without a right to work law
requires employees to pay union dues/fees as a term for employment
proponents of right to work laws
say workers shouldn’t be obligated to join a union,
the law weakens union power and benefits corporations
push to bust unions
push by state government -with the courts- to bust unions with right to work laws
research regarding right to work laws
see higher employment, lower wages for workers, higher executive pay, lower unionization rates
community offerings to local firms
- ongoing source of labor
- restaurants for meals/outings
- local businesses as customers/suppliers
- retail stores for employee convenience
- efforts made/money spent on supporting local communities often pays dividends for hte firm in terms of good public relations and support from the local government
organization social and green initiatives
socially responsible investing
green funds
mutual funds that limit investment to firms that limit their carbon footprint & contribute to environmental protection, develop alternative energy sources, practice ethical corporate governance
what does socially responsible investing tell corporate executives
socially responsible investing is a way for the market to tell corporate execs how they choose to operate their business matters to investors
shareholders all managers of businesses are obligated to make decisions for the firm
all managers of businesses are obligated to make decisions for hte firm that will maximize the intrinsic value of hte firm. taking into account ALL stakeholders, not nust the common ones
founding of ENRON
energy firm founded in 1985 as a merger between two Texas energy firms
ENRON in the 1990s
used fradulent accounting practices to transfer liabilities off of its balance sheet to make the firm appear less risky thus keeping its stock prices artifically elevated which made the firm seem far more profitable than it was
ENRON in 2001
market analysis began to question their bookkeeping of Enron and the common stock prices droped from $90 per share to $1
stance on corporations buying back their own stock
it is illegal for corporations to buy back their own stock b/c that is a form of stock price manipulation
theory of corporate sustainability
corporations have an ethical obligation to run their business in a way that is sustainable for all parties involved (e.g., growth, profitability, societal goals like economic/social justice/environmental protection)
what is the benefit of a company’s focus on economic, social just, and environmental protection?
helps sustain relationships with stakeholders
4 concepts of corporate sustainability
corporate social responsibility,
ethical obligation to address the needs of society as a whole
what is sustainable development
meet the needs of the present generation and create conditions so the future generation can as well
what is stakeholder theory
stronger the firm’s relationships with other external partie, the eaasier it will be to meet the firm’s business objectives while the worse relationships will be harder
what is corporate accountability
legal/ethical responsibility to providfe an accurate account/justification of hte actions for which the firm is accuntable
how easy is it to measure the market price of stock
easy. it is published all day long and changes constantly with trades based on new information
how can businesses use the fundamental principles of finance
firms can use the fundamental principles to increase the present value of a firm’s expected future cash flow
