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TMGT 3030 - Financial Management for Tourism > Financial Management Fundamentals > Flashcards

Financial Management Fundamentals Flashcards

1
Q

Financial Statements

A
  1. Balance sheet - a snapshot of the value of a business at a point in time
  2. Statement of Income - profit/wealth creation during given period
  3. Changes in Equity - Accumulated wealth retained
  4. Cash flow - Sources/uses of funds during given period

last three - a record of performance over time

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2
Q

The Annual Report

A

a document that public corporations must provide annually to shareholders that describes their operations and financial conditions.

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3
Q

Financial Analysis

A
  • Horizontal Analysis
  • Vertical Analysis
  • Financial Statements
  • Ratio Analysis
  • Operational Analysis
  • Break-Even Analysis
  • Statement of cash flows
  • Income statement – percentage of gross sales or revenue
    Balance Sheet – percentage of total assets or liabilities
    Cash flow statement – each cash inflow or outflow as a percentage of the total cash inflows.
    Ratio Analysis – Measures liquidity, profitability, debt, operating performance and investment valuation.
    Break-even Analysis – Determines the point at which revenue received equals the costs associated with receiving the revenue.
    Operational Analysis – Studies operational systems with the aim of identifying opportunities for improving operations of a company.
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3
Q

Financial Analysis

A
  • Statement of cash flows
  • Horizontal Analysis
  • Vertical Analysis
  • Ratio Analysis
  • Break-even Analysis
  • Operational Analysis
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4
Q

Statement of cash flows

A

Focused on cash accounting.

Financial statement that provides aggregate data regarding all cash inflows a company receives from its ongoing operations and external investment sources, as well as all cash outflows that pay for business activities and investments during a given period.

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5
Q

Horizontal Analysis

A

Technique for Financial Statement Analysis.

Compares historical data, such as ratios or line items, over a number of accounting periods. Can be in dollars or percentages.

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6
Q

Vertical Analysis

A

Technique for Financial Statement Analysis. Line item is listed as a percentage of a base figure within the statement.

Used for all financial statements:

  • Income statement – percentage of gross sales or revenue
  • Balance Sheet – percentage of total assets or liabilities
  • Cash flow statement – each cash inflow or outflow as a percentage of the total cash inflows.
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7
Q

Ratio Analysis

A

Measures liquidity, profitability, debt, operating performance and investment valuation.

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8
Q

Break-even Analysis

A

Determines the point at which revenue received equals the costs associated with receiving the revenue.

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9
Q

Operational Analysis

A

Studies operational systems with the aim of identifying opportunities for improving operations of a company.

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10
Q

Decision-Making

A
  • Financial decisions
  • Working capital decisions
  • Capital budgeting decisions
  • Growth decisions
  • Capital Structure decisions
  • Lease or buy decisions
  • Pricing decisions
  • Operating budgeting decisions
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11
Q

Financial decisions

A

Firms’ progress through four stages of a developmental life cycle, each with their own funding needs.

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12
Q

Working capital decisions

A

Management of working capital requires evaluating factors affecting cash flows — including the evaluation of appropriate interest rates.

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13
Q

Capital budgeting decisions

A

Planning process to determine which of an organization’s long-term investments are worth pursuing.

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14
Q

Growth decisions

A

When to scale and how to finance movement through the company’s development life cycle.

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15
Q

Capital Structure decisions

A

The optimal capital structure is the mix of debt and equity that maximizes a firm’s return on capital, thereby maximizing its value.

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16
Q

Lease or buy decisions

A

Lease or buy decision involves applying capital budgeting principles to determine if leasing as asset is a better option than buying it.

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17
Q

Pricing decisions

A

Decisions that are impacted by your cost, revenue requirements and consumer’s willingness to pay for your good or service.

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18
Q

Operating budgeting decisions

A

Decisions related to a firm’s operations and operational costs

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19
Q

Cash Flow Statement

A
  • provides a summary for cash flow for a period of time
  • to reconcile the difference between start and end cash balance
  • tells how cash was made and used
  • difference between Accrual and Cash Basis
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20
Q

Accrual Basis Accounting

A

Method of recording accounting transactions for revenue when earned and expenses when incurred.

21
Q

Cash Basis Accounting

A

Refers to a majoraccounting methodthat recognizes revenues and expenses at the time cashis exchanged - received or paid out.

22
Q

Cash inflows and outflows

A

how cash is coming in and how it is going out

Identifying

  • Asset account = cash inflow down – cash outflow up
  • Equity account = cash inflow up – cash outflow down
  • Liability account = cash inflow up – cash outflow down
23
Q

Cashflow activity by category

A

Operating - related to net-income
Investing - related to non-current assets
Financing - related to non-current liabilities and owners equity

24
Q

Preparing cash flow

A

need:

  • Balance sheet
  • Income Statement - needed asa starting point - converting accrual to cash
  • Other info - dividends paid, original cost of long-term investment sold
25
Q

Why Analyze Financial Statements

A
  • Ensure Liquidity
  • Maintain Solvency
  • Improve Productivity of Assets
  • Maximize return
  • Secure Long-term Prosperity
26
Q

Liquidity

A

refers to an enterprise’s ability to pay short-term obligations; the term also refers to a company’s capability to sell assets quickly to raise cash

also refers to financial health - a company with adequate liquidity may have enough cash available to pay its bills, but it may be heading for financial disaster down the road.

27
Q

Solvency

A

refers to an enterprise’s capacity to meet its long-term financial commitments. I.e. it’s long term debt commitments and returns to shareholders or owners of the company.

also refer to an enterprise’s state of financial health - one that owns more than it owes; in other words, it has a positive net worth and a manageable debt load.

28
Q

Productivity of Assets

A

This means how much revenue you can generate from the assets you have.

Analyzing financial statements allows us to see if our assets are productive and possibly offer us a clue as to how we can make them more productive or which assets we need to make more productive. An example could be a new hotel or restaurant that is opened up and is struggling to get sales or exposure. This would result it lower sales, but possibly greater marketing efforts or specific promotional efforts could improve sales at these locations.

29
Q

Maximize return

A

how can we maximize profits that go back to the shareholders or owners of the company as a return for their risk in investing in the company. Improving both revenue and expenses has the effect of maximizing profit and therefore return for shareholders.

30
Q

Secure Long-term Prosperity

A

The main objective of any company is to remain relevant.

Relevance allows a business to continue operations and generate a return for the owners of the business. Securing long-term prosperity is about analyzing not only revenue and expense levels, but also monitoring cash flow and debt levels.

31
Q

Vertical Analysis

A
  • Form of Financial Statement Analysis.

Line item is listed as a percentage of a base figure within the statement. Used for all financial statements:

  • Income statement – percentage of gross sales or revenue
  • Balance Sheet – percentage of total assets or liabilities
  • Cash flow statement – each cash inflow or outflow as a percentage of the total cash inflows
32
Q

Horizontal (Trend) Analysis

A
  • Financial Statement Analysis.

Compares historical data, such as ratios or line items, over a number of accounting periods. Can be in dollars or percentages. Looking at changes from one year to the next.

A very easy formula to remember this calculation:

(New balance – Old Balance)/Old Balance = % change from one year to the next

33
Q

Commonly used financial ratios

A
  • Liquidity Ratios
  • Debt/coverage ratios
  • Asset-management ratios
  • Profitability ratios
  • Market-value ratios
34
Q

Liquidity Ratios

A

These ratios measure how well a company can use its short-term assets to fund its short-term liabilities.

Liquidity refers to how quickly assets can be turned to cash, so the liquidity ratios shows how well a company can use its current assets to fund possibly short-term loans or short-term payables.

35
Q

Debt/coverage ratios

A

These ratios look at solvency.

They indicate how much and how effective a company is at utilizing debt to grow the business and generate revenue.

It is important to note that debt is not inherently bad, but quite often it is misused. These ratios look at the proportion of assets or the company that are financed by debt vs. equity (investment by owners) and how well the company is able to pay off interest, which is the cost of taking on debt.

36
Q

Asset-management ratios

A

These ratios are also called Activity Ratios or Efficiency ratios.

They look at how well assets are converted to sales or revenues, particularly inventory and accounts receivables.

These ratios indicate how efficient and well managed day to day operations are for a company.

37
Q

Profitability ratios

A

reflect how well the company turns sales and assets into profit.

It measures not only how strong revenues are but more importantly how well costs / expenses are controlled. These are very important ratios for shareholders or owners and is a way a company can demonstrate how well they are creating shareholder value and maximizing their return on shareholders’ investment.

38
Q

Market-value ratios

A

These have more to do with publicly traded companies and are an indication as to how overvalued/undervalued a company is in the stock market.

39
Q

The Current Ratio

A
  • a significant liquidity ratio that measures the company’s ability to pay back its current or short-term liabilities with its assets

CR > 1 = Liabilities > Assest == unable to pay obligations
CR = 1 = Assets = Liability == they can pay - goal to be at least above this
CR that is too high (3) = CA may not be used effectively or are not being leveraged well by the company.

40
Q

The quick ratio (Acid Test)

A

also Liquidity – is similar to the current ratio but it takes out inventory.

The reason for this is that a company may have a good-looking current ratio (over 1) but it may be due to the fact that inventory is high. That could be due to a whole host of issues, quite possibly stagnating sales and the inability to move inventory. So a high current ratio could actually signal current asset issues. That is why the quick ratio is a better measure of liquidity because it only looks at the assets that are most liquid.

A quick ratio lower than 1 could mean company is relying on inventory or other assets to pay short-term liabilities. For the quick ratio, the rule of thumb is the higher the better. However, much like the current ratio, too high of a quick ratio could suggest too much cash (not used effectively) or potential issues collecting on accounts receivables.

41
Q

debt-to-total assets

A

measure the proportion of assets that are financed by debt, rather than equity.

Assets = Liabilities (debt) + Shareholders’ equity

A ratio > 100% = more debt that finance assets than equity.
A ratio < 100% = more equity than debt.
a ratio = 100% = same proportion of debt and equity that finance the assets.

42
Q

fixed-charges coverage ratio

A

measures the ability of a company to meet fixed charges

adds to the times-interest earned to show the stability of a company in ensuring that it can pay its fixed charges and essentially keep the business running.

The higher the ratio the better. A ratio below 1 signals big issues for the company in that finance and lease payments outpace profit growth.

PBT is profit before taxes.

43
Q

Asset Management: Average Collection Period

A

shows how well a company converts AR to cash.

The rule of thumb is usually 30 days as companies normally give 30 days for payment. Anytime over that, then the company is ineffective at collection. The goal is to be as low as possible (or as few days as possible).

44
Q

Asset Management: Inventory Turnover

A

measures how well a company turns their inventory into sales.

  • basically how fast are they selling
45
Q

Asset Management: Capital Assets Turnover

A

shows how well a company can turn non-current assets into sales

Generally, the higher the better because it shows that the company can leverage their commonly larger assets into revenue effectively. A low ratio, or at one extreme, a ratio below one, shows that a company is struggling to turn their major assets into sales or the company has yet to generate significant sales.

46
Q

Profitability: Profit Margin on Revenue

A

These ratios show the proportion of costs to revenue.

The higher the operating profit margin and the profit margin (3.2% in the example above) the better because it shows greater cost control.

47
Q

Profitability: Return on Equity

A

This ratio also measures our efficiency objective.

The ratio measures how well a company utilizes investment funds to generate profit.

48
Q

Market-Value Ratios

A

Earnings per Share (EPS) - indicator of company profitability

net profit after tax/# of shares outstanding

Price/Earnings Ratio (P/E) - Amount investor can expect to invest in order to get one dollar company earns

price/per common share/EPS

49
Q

Limitations of financial ratios

A
  • only gives signals - don’t answer why, what or how
  • ensure numbers used are similar - diffrent accounting methods/ratio calculations
  • business size many may make difference
  • Nature of operation may also be different
50
Q

Depreciation, Amortization, and Capital Cost Allowance (CCA)

A

Depreciation - Acct purposes
Amortization - Acct purposes
Capital Cost Allowance (CCA) - tax purposes

= temp diff in net proft

TMGT 3030 - Financial Management for Tourism (9 decks)

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