Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

CPA Business > Financial Management > Flashcards

Financial Management Flashcards

1
Q

What is the primary focus of working capital management?

A

Managing inventory & receivables (current assets & liabilities)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

How is Net Working Capital calculated?

A

NWC : Current Assets - Current Liabilities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are the characteristics of effective Working Capital Management?

A

Shorten the cash conversion cycle

Don’t negatively impact operations

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is the Receivables Collection Period?

A

Average time needed to collect A/R

RCP : Average Receivables / Credit Sales Per Day

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What traits should Cash and Short-Term Investments have?

A

Liquid

Safe

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

For what are Letters of Credit used?

A

Used for importing goods.

Issued by importer’s bank.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is the advantage of using Trade Credit?

A

No interest cost if paid timely.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is Carrying Cost?

A

The cost of keeping inventory.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is Order Cost?

A

Cost of executing an order and starting product production.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

24
Q

What is the cost of forgoing a discount?

A

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

25
Q

What is the Prime Rate?

A

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
Q

What is the Nominal (Face- Coupon- Stated) Rate?

A

Interest rate stated on the face of a bond.

27
Q

How is Current Yield calculated?

A

CY : Interest Payment / Bond Price

28
Q

What is the Effective (YTM- Market) Rate?

A

PV of Principle + Interest : Bond Price

29
Q

What is a Zero Coupon Bond?

A

No interest payments made

Bond sold at a discount

Interest reflected when Bond matures

30
Q

What are the characteristics of a Junk Bond?

A

High interest rate

High default risk

31
Q

What are debenture bonds?

A

Bonds unsecured by collateral

32
Q

What are subordinated debentures?

A

Debenture Bonds that will be repaid if any assets are left after liquidation of a company

33
Q

What are Redeemable Bonds?

A

Provision in Bond contract allows demand of Bond payment under certain circumstances

34
Q

What is a Callable Bond?

A

Borrower can pay off debt early

35
Q

What is a Convertible Bond?

A

Lender can demand payment via company stock instead of money

36
Q

What is a Sinking Fund?

A

Borrower deposits regular sums into an account that will eventually pay off the debt

37
Q

What is the disadvantage of Common Stock in comparison to bonds?

A

Common Stock is more expensive to issue than debt.

Why? Investors demand a greater ROI than debtors (bondholders)

38
Q

What is the advantage of Preferred Stock?

A

Hold dividend priority over common stock

39
Q

What is Weighted Average Cost of Capital?

A

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
Q

What is CAPM?

A

A stock’s expected performance is based on its beta (systematic risk) compared to that of the stock market.

More risk : more expected return. Mkt premium=R(m)-R(f)

Formula = R(f) + B(R(m) - R(f)
R(f)=Risk Free Rate (currently paying %)
R(m)=Market Rate
B=measure the sys risk or volatility of the individual security compared to market(portfolio).

41
Q

How is Cost of Debt calculated?

A

(Interest Expense - Tax Benefit) / Carrying Value of Debt

42
Q

What is systematic risk?

A

aka market risk

is the risk faced by all firms, Hence called undiversifiable risk because it affects ALL investments.

43
Q

What is unsystematic risk?

A

aka unique risk or company risk

it is the risk inherent in a particular investment. Hence called diversifiable because companies can diversify the risk.

44
Q

What is included in the required rate of return?

A

it takes into account all investment risks that relate to a specific security.
+ Real Risk-free Rate
+ Inflation Premium
= Risk-free Rate
+ Liquidity Risk Premium (wont be able to sell)
+ Default Risk Premium (borrower will default)
+ Maturity Risk Premium (investment will fluctuate)

45
Q

What is the coefficient of variation?

A

Measures and compares each investment by:
standard deviation / rate of return

The investment with the lowest coefficient of variation has a better risk-return tradeoff.

46
Q

Measuring and selecting different investments?

A

Rate of Return % x Probability % for each investment and sum.

Select the investment with the highest weighted avg (expected rate of return)

47
Q

What does the coefficient of correlation (r) measure?

A

It measure the degree to which any two variables (prices of two stocks) are related.
It ranges from 1.0 to -1.0
The ideal portfolio is one consisting of securities with a wide enough variety of coefficients of correlation that only market risk remains. The normal range of two randomly selected stocks is .50 to .70.

48
Q

What does the perfect positive correlation (1.0) mean?

A

It means that the two variables always move together.

49
Q

What does the negative correlation (1.0) mean?

A

It means that the two variables always move in the opposite direction.

50
Q

What does the perfect positive correlation (1.0) mean?

A

It means that the two variables always move together.
If coefficient of correlation of 1.0, then the risk of the two together is the same as the risk of each security of itself.

51
Q

What does the negative correlation (1.0) mean?

A

It means that the two variables always move in the opposite direction. aka ALL specific unsystematic risk has been eliminated.

52
Q

Intrinsic value of a call option?

A

Currently trading price - exercise price. if negative = out of the money.

53
Q

Intrinsic value of a put option?

A

Exercise price - currently trading price. if negative = out of the money.

54
Q

What are states of nature?

A

are those uncontrollable future events that can affect the outcome of a decision

55
Q

What are the assumptions underlying the EOQ model?

A

1) demand for product is uniform
2) Order (setup) costs and carrying costs are constant
3) No quantity discount are allowed

56
Q

If demand or ordering cost rise, what happens?

If carrying costs rise, what happens?

A

If demand or ordering cost rise, each order must contain more units.
If carrying cost rise, each order will contain fewer units

CPA Business (10 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions