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Financial Management Flashcards

1
Q

What is the primary focus of working capital management?

A

Managing inventory & receivables (current assets & liabilities)

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2
Q

How is Net Working Capital calculated?

A

NWC : Current Assets - Current Liabilities

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3
Q

What are the characteristics of effective Working Capital Management?

A

Shorten the cash conversion cycle

Don’t negatively impact operations

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4
Q

What is the Inventory Conversion Period?

A

Average time needed to convert materials into finished goods and sell them

Average Inventory : (BI + E) / 2

Inventory Conversion Period : Average Inventory / Sales Per Day

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5
Q

What is the Receivables Collection Period?

A

Average time needed to collect A/R

RCP : Average Receivables / Credit Sales Per Day

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6
Q

What is the Payables Deferral Period?

A

Average time between materials and labor purchase and their A/P payment

Average Payables : (BP + EP) / 2

Payables Deferral Period : Average Payables / (COGS/365)

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7
Q

What is the Cash Conversion Cycle?

A

Amount of time it takes to receive a cash inflow (Customers) after making a cash outflow (Vendors)

Inventory Conversion Period+ Receivables Collection Period- Payables Deferral Period
: Cash Conversion Cycle

(Inventory Really (-Pays) Cash)

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8
Q

What traits should Cash and Short-Term Investments have?

A

Liquid

Safe

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9
Q

For what are Letters of Credit used?

A

Used for importing goods.

Issued by importer’s bank.

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10
Q

What is the advantage of using Trade Credit?

A

No interest cost if paid timely.

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11
Q

What is a Lockbox System? What are the advantages?

A

Customer Payments are sent to a bank-managed PO box.

Employees don’t have access to cash.
Deposits are more timely.
Interest income from deposits should pay for the Lockbox fees (if they don’t- lockbox is not beneficial)

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12
Q

What is float?

A

Time it takes to mail a payment and have it clear your bank account

Maximize float on cash payments

Minimize float on cash receipts

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13
Q

What are Zero Balance Accounts?

A

Regional bank sends enough cash to cover daily checks

Advantages:
Checks take longer to clear -more float
Low amounts of cash tied up for compensating (minimum) balances

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14
Q

What is the difference between Treasury Bills- Notes and Bonds?

A

Treasury Bills: Short term (less than one year) Think: $1 Bill

Treasury Notes: Medium term (less than 10 years- more than 1)

Treasury Bonds: Long term (greater than 10 years) Think: government is in long-term bondage to you; they owe you money

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15
Q

What is commercial paper?

A

Similar to T-Bill- but issued by corporations instead of Government

Greater than 9 Months Maturity

Unsecured

Issued by large firms

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16
Q

What are the advantages and disadvantages of Commercial Paper?

A

Advantages: Financing at less than Prime. No compensating balances required.

Disadvantages: Unpredictability of markets. Credit crisis emerges and large insurance/investment companies aren’t lending.

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17
Q

What is Economic Order Quantity?

A

The order quantity that minimizes inventory costs.

EOQ : Square Root of (2DO/C)

D : Unit Demand (Annual)
O : Order Cost
C : Cost of Inventory

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18
Q

What is Carrying Cost?

A

The cost of keeping inventory.

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19
Q

What is Order Cost?

A

Cost of executing an order and starting product production.

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20
Q

What is inventory reorder point?

A

How low inventory should get before it should be re-ordered.

IOP : Average Daily Demand x Average Lead Time

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21
Q

What is a Just In Time (JIT) system?

A

Orders inventory so that you get it just in time for when it’s needed

JIT is valuable when Order Cost is low and Cost of Carrying Inventory is high

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22
Q

What is Factoring of receivables?

A

Receivables are sold to a financing company where they pay less than the value of the receivables due to a discount related to risk of non-collection

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23
Q

What is a Trade Discount?

A

Buyer saves if paid early

Example: 1/10 Net 30

1% Discount if paid within 10 days

If not- bill is still due in 30 days

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24
Q

What is the cost of forgoing a discount?

A

(Discount % x 365) / ((100% - Discount) x (Pay Period - Discount Period))

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25
What is the Prime Rate?
A benchmark used for lending only to the best customers Most customers will be charged Prime + 3%- for example If the lending institution and the customer are not in the same country- the LIBOR rate is often used
26
What is the Nominal (Face- Coupon- Stated) Rate?
Interest rate stated on the face of a bond.
27
How is Current Yield calculated?
CY : Interest Payment / Bond Price
28
What is the Effective (YTM- Market) Rate?
PV of Principle + Interest : Bond Price
29
What is a Zero Coupon Bond?
No interest payments made Bond sold at a discount Interest reflected when Bond matures
30
What are the characteristics of a Junk Bond?
High interest rate High default risk
31
What are debenture bonds?
Bonds unsecured by collateral
32
What are subordinated debentures?
Debenture Bonds that will be repaid if any assets are left after liquidation of a company
33
What are Redeemable Bonds?
Provision in Bond contract allows demand of Bond payment under certain circumstances
34
What is a Callable Bond?
Borrower can pay off debt early
35
What is a Convertible Bond?
Lender can demand payment via company stock instead of money
36
What is a Sinking Fund?
Borrower deposits regular sums into an account that will eventually pay off the debt
37
What is the disadvantage of Common Stock in comparison to bonds?
Common Stock is more expensive to issue than debt. Why? Investors demand a greater ROI than debtors (bondholders)
38
What is the advantage of Preferred Stock?
Hold dividend priority over common stock
39
What is Weighted Average Cost of Capital?
A company uses this to determine the true cost of their capital Example: Debt costs 5%; 40% of Cap. Equity costs 12%; 60% of Cap. (5% x 40%) + (12% x 60%) WACC : 9.2%
40
What is CAPM?
A stock's expected performance is based on its beta (risk) compared to that of the stock market. More risk : more expected return.
41
How is Cost of Debt calculated?
(Interest Expense - Tax Benefit) / Carrying Value of Debt
42
What is Capital Budgeting? How is it used?
Managerial Accounting technique used to evaluate different investment options Helps management make decisions Uses both accounting and non-accounting information Internal focus GAAP is not mandatory
43
What values are used in Capital Budgeting?
Capital Budgeting ONLY uses Present Value tables. Capital Budgeting NEVER uses Fair Value.
44
When is the Present Value of $1 table used?
For ONE payment- ONE time.
45
When is the Present Value of an Annuity Due used?
Multiple payments made over time- where the payments are made at the START of the period.
46
When is the Present Value of an Ordinary Annuity of $1 (PVOA) used?
Multiple payments over time- where payments are made at the END of the period. Think A for Arrears.
47
What is the calculation for the Present Value of $1?
1 / (( 1+i )^n) i : interest rate n : number of periods
48
What is Net Present Value (NPV)?
A preferred method of evaluating profitability. One of two methods that use the Time Value of Money : PV of Future Cash Flows - Investment
49
How is NPV used to calculate future benefit?
NPV : PV Future Cash Flows - Investment If NPV is Negative- Cost is greater than benefits (bad investment) If NPV is Positive- Cost is less than benefit (good investment) If NPV : 0- Cost : Benefit (Management is indifferent)
50
What is the rate of return on an investment called?
The Discount Rate.
51
What does the Discount Rate represent?
The rate of return on an investment used. It represents the minimum rate of return required.
52
What are the strengths of the Net Present Value system?
Uses the Time Value of Money Uses all cash flows- not just the cash flows to arrive at Payback Takes risks into consideration
53
What are the weaknesses of the Net Present Value system?
Not as simple as the Accounting Rate of Return.
54
How do Salvage Value and Depreciation affect Net Present Value?
NPV includes Salvage Value because it is a future cash inflow. NPV does NOT include depreciation because it is non-cash. Exception - If a CPA Exam question says to include tax considerations- then you have to include depreciation because of income tax savings generated by depreciation.
55
If multiple potential rates of return are available- which is used to calculate Net Present Value?
The minimum rate of return is used.
56
What is the Internal Rate of Return (IRR)?
It calculates a project's actual rate of return through the project's expected cash flows. IRR is the rate of return required for PV of future cash flows to EQUAL the investment. Investment / After Tax Annual Cash Inflow : PV Factor
57
Which rate of return is used to re-invest cash flows for Internal Rate of Return?
Cash flows are re-invested at the rate of return earned by the original investment.
58
How does the rate used for Internal Rate of Return (IRR) compare to that used for Net Present Value (NPV)?
Rate of return for IRR is the rate earned by the investment. Rate of return for NPV is the minimum rate.
59
What are the strengths and weaknesses of the Internal Rate of Return system?
Strengths: Uses Time Value of Money- Cash Flow emphasis Weakness: Uneven cash flows lead to varied IRR
60
When is NPV on an Investment positive?
When the benefits are greater than the costs. IRR is greater than the Discount Rate
61
When is NPV on an Investment Negative?
When Costs are greater than Benefits IRR is less than the Discount Rate
62
When is NPV Zero?
When benefits equal the Costs IRR : Discount Rate
63
What is the Payback Method? How is it calculated?
It measures an investment in terms of how long it takes to recoup the initial investment via Annual Cash Inflow Investment / Annual Cash Inflow : Payback Method Compare to a targeted timeframe; if payback is shorter than target- it's a good investment. If payback is longer than target- it's a bad investment.
64
What are the strengths of the Payback Method?
Takes risk into consideration 2 year payback is less risky than a 5 year payback
65
What are the weaknesses of the payback method?
Ignores the Time Value of Money Exception: Discount payback method Ignores cash flow after the initial investment is paid back
66
What is the Accounting Rate of Return?
An approximate rate of return on assets ARR : Net Income / Average Investment Compare to a targeted return rate; if ARR greater than target- good investment. If ARR less than target- bad investment.
67
What are the strengths of the Accounting Rate of Return (ARR)?
Simple to use People understand easily
68
What are the weaknesses of the Accounting Rate of Return (ARR)?
Can be skewed based on Depreciation method that is used. Ignores the Time Value of Money.
69
What is an Expected Return?
An approximate rate of return on assets.
70
What is a Static Budget?
Budget targeted for a specific segment of a company.
71
What is a Maser Budget?
Budget targeted for the company as a whole Includes budgets for Operations and Cash Flows Includes set of budgeted Financial Statements
72
How do Fixed Costs affect budgeting?
Costs independent of the level activity within the relevant range Property Tax is the same whether you produce 100-000 units or zero units However - Fixed Costs per unit vary given the amount of activity If you produce fewer units- fixed costs per unit will be greater than if you produce more units - i.e. less units to spread the cost over
73
How do Variable Costs affect budgeting?
The more Direct Materials or Direct Labor used- the more Variable Costs per unit However - Variable Costs per unit don't change with the level of activity like Fixed Costs per unit
74
How are Material Variances calculated?
SAM: Standard Material Costs - Actual Material Costs = Material Variance
75
How are Labor Variances calculated?
SAL Standard Labor Costs - Actual Labor Costs = Labor Variance
76
How are Overhead Variances calculated?
OAT Overhead Applied - Actual Overhead Cost = Total Overhead Variance
77
How does Absorption Costing compare to Variable Costing?
Absorption Costing - External Use- Cost of Sales- Gross Profit- SG&A Variable Costing - Internal Use- Variable Costs- Contribution Margin- Fixed Costs
78
How is Contribution Margin calculated?
Sales Price (per unit) - Variable Cost (per unit) = Contribution Margin (per unit)
79
How is Break-even Point (per unit) calculated?
Total Fixed Costs / Contribution Margin (per unit) = Break-even Point Per Unit Assumption: Total Costs & Total Revenues are LINEAR
80
What is the focus in a Cost Center?
Management is concerned only with costs
81
What is the focus in a Profit Center?
Management is concerned with both costs and profits
82
What is the focus in an Investment Center?
Management is concerned with costs- profits- and assets
83
What is the Delphi technique?
Forecasting technique where Data is collected and analyzed Requires judgement/consensus
84
What is Regression Analysis?
A forecasting technique where Sales is the dependent variable. Simple Regression - One independent variable Multiple Regression - Multiple independent variables
85
What are Econometric Models?
Forecast sales using Economic Data
86
What are Naive Forecasting Models?
Very Simplistic - Eyeball past trends and make an estimate
87
How does a Moving Average compare to Exponential Smoothing?
Both project estimates using average trends from recent periods Difference: Exponential Smoothing weighs recent data more heavily
88
What are the characteristics of Short-term Cost Analysis?
Uses Relevant Costs Only Ignore Sunk Costs Opportunity Cost is a Must

BEC Flashcards (6 decks)

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