Financial Management Flashcards
measures the ability to meet short term obligations
Current ratio
Measures immediate liquidity
Quick ratio
Measures the average number of days it takes to collect cash from credit sales
Average collection period
Measures the average number of days the company holds its inventory before selling it.
Days sale period or days inventory held
Measures the average number of days it takes a company to pay its suppliers
Days payable outstanding
Metric that shows the amount of time it takes a company to convert its investment in inventory and other resource inputs into cash
Cash conversion cycle
Measures the ability of the firm to pay its short term obligations
Liquidity ratios
Measures the firms ability to use its assets and manage its liabilities effectively. Measures the speed at which accounts are converted into cash or revenue
Efficiency ratios /activity ratios
Measures the ability of the business to generate profits
Profitability ratios
Measures the degree to which assets are finance by debt or suppliers credit; measures the effectiveness of the company’s financing decisions and risk taking
Leverage ratios
Used by investors to determine whether or not to purchase stock in the company
Market ratios
Measures how many times the firms accounts receivable had been turned into cash during the year
Accounts receivable turn over
Measures how many times a firms inventory has been sold during the year
Inventory turnover
Measures how many times payables are paid during the year
Accounts payable turnover
Measures the effectiveness of management in generating revenues from investments in plant, property and equipment
Fixed asset turnover
Measures management’s effectiveness in generating sales from all of the firms assets
Total assets turnover
Shows the percentage of sales revenue after it covers all direct costs
Gross profit margin
Performance ratio that reflects the percentage of profit from operations, prior to subtracting interest charges and taxes
Operating profit margin
Measures how much profit is generated as a percentage of revenue
Net profit margin
Shows the percentage of how profitable company’s assets are in generating revenue
Return on assets
A performance measure used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments
Return on investment
Measures the proportion of all assets that are financed with debt
Debt ratio
Indicates the relative proportion if shareholders equity and the funds supplied by creditors
Debt to equity ratio
Measures the amount of net income that is available for payment to the holders of its common stock
Earnings per share
The ratio of the company’s share price to the company’s earnings per share
Price-earnings ratio
Shows how much a company pays out in dividends each year relative its stock price
Dividend yield
Is the ratio of equity available to common shareholders dividend by the number of shares outstanding
Book value per share
The ratio of the total amount of dividends paid out to shareholders relative to the net income
Dividend payout ratio
Measures the average number of days that a patient stays in the hospital
Average length of stay
A measure of utilisation of the available bed capacity. Measures the percentage of beds occupied by patients for a given period of time (usually per year)
Bed occupancy rate
It is the number of times there is change in the occupant for a bed during a given time period
Bed turn over rate
Are written records that convey the business activities and the financial performance of a company
Financial statements
The three main financial statement reports are
Balance sheet
Income statement
Statement of cash flows
Shows the firms assets, liabilities and equity
Balance sheet
Are economic resources that are owned by Organizational and are expected to benefit future operations
Assets
Refers to cash and other assets that will be converted to cash or consumed once year from date of balance sheet
Current assets
Refers to assets that have anticipated useful life that is considerably longer that 1 year
Non-current assets
Are amounts due from customers for goods or services performed in normal course of business
Accounts receivable
Assets held for sale in ordinary course to business
Inventory
Tangible assets that are held for use by the firm for more that one period
Fixed assets
Examples of fixed assets are ?
Land
Building
Equipments vehicles
Furniture
Economic obligations that are owed by the firm and are expected to be paid in the future
Liabilities
Obligations that are due to be settled within months from balance sheet date
Current liabilities
Long term financial obligations that are after a year or more
Non current liabilities
Are amounts due to vendors or supplies for goods and services received that have not been paid for
Accounts payable
Principal on a bank loan that si due within the year
Current portion of long term debt
Income tax due to the government
Income tax payable
Unpaid expenses like payroll, utilities, government contributions, interest on bank loan, taxes and permits, etc
Accrued expenses
Debt that matures in more than one year. Can be secured or unsecured and generally have maturities of more that 5 years
Long term debt/ term loans
Generally issued to the general public and payable over the course of several years
Bonds
Debt instruments issues to individual investors. Payment terms may vary from note to note
Individual notes payable
Are bonds with feature that allows to redeem them for shares of common stock
Convertible bonds
Leases that extend beyond 12 months period
Lease obligations or contracts
Capital contributed by the owner
Equity or capital
Accumulated earnings or surplus, net of dividends paid to shareholders
Retained earnings
Summarises revenues, expenses and resulting net income for net loss for a given period
Income statement
The price of goods sold or services rendered
Revenue
Any cost of doing business resulting from revenue generating activities during a given period
Cost and expenses
Direct cost incurred in producing a product or delivering service
Cost of sales or cost of service
Expenses that the business incurs through its normal operations
Operating expenses (OPEX)
Excess of revenue over cost
Net income
Summarises the sources and uses of finds for a given period
Statement of cash flow
Cash inflow clues
Proceeds, receipts from customers, collection of
Clues for cash outflow
Payment, purchase of , building construction or renovation, cash paid , repurchase of, repayment of , dividends paid to shareholders
Refers to the efficient and effective management of finds in such a manner as to accomplish the objectives of the organisation
Financial management
Financial management concept that states that a peso today is worth more that a peso you will receive in the future
Time value of money
Five components of time value
Present value
Fitire value
Rate
Time period
Payments
Possibility that the investment will lose money
Risk
The profit expressed as a percentage of the initial investment
Return
Is an investment principle that indicates the higher the risk, the higher the potential reward
Risk-return tradeoff
Is any technique involving use of debt rather that fresh equity in purchase of an asset, with the expectation that the after tax profit to the shareholders from the transactions will exceed the cost of borrowed capital
Leverage
Refers to the sustained increase in price of goods and services which can ve translated as the decline in purchasing power over time
Inflation
The potential benefits an individual, investor or business missed out when choosing one alternative over the other
Opportunity cost
Perfers to profits earned by the company during a period of time which calculated as difference between revenue and expense
Profitability
The ability of an equity to pay its liabilities in a timely manner, as they fall due under the original payment terms
Liquidity
Involves significant commitment of funds to generate future returns or benefits
Capital investment
Refers to the mix of long term sources of fund used by firm. It usually is composed of long term debt, preferred stock and common stockholders equity
Capital structure
Refers to the best mix of debt, and equity financing to be used for operations and expansion
Optimal capital structure
Money invested by the shareholders
Equity capital
2 sources of equity capital
Money invested in business
Retained earnings or accumulated profits less dividends paid
Referrs to borrowed capital/money
Debt capital
It is the minimum rate of return or rate of earnings that the firm requires as a condition for undertaking an investment
Cost of capital/weighted cost of capital/ interest rate /hurdle rate
Calculation of the firms cost of capital in which each category of capital if proportionately weighed
Weighted average cost of capital (WACC)
The process by which management identifies, evaluates and make decisions on capital investment
Capital budgeting
It is the value future cash flows (inflow and outflows) over entire life of the investment discounted to the present
Net present value (positive NPV should be accepted)
Indicates whether an investment will create or destroy the company value
Profitability index or profitability investment ratio (>1 is acceptable )
Estimates the profitability of potential investments. It is a discount rate that makes NPV of all cash flows from a particular project equal to zero
Internal rate of return ( if IRR is < WACC, then accept the project )
Gives the number of years to recoup the funds invested in a project
Discounted payback period (shortest payback period is considered most profitable)
