MB Midterm Flashcards
What is the connection between finances and operations?
A company’s financial health is directly linked to its operational efficiency.
What does the Operating/Working Capital Cycle entail?
The movement of cash through inventory purchases, sales (accounts receivable), and back into cash.
What is depreciation?
The systematic reduction of an asset’s value over time, reflecting its usage and wear.
What is the ultimate goal of investment and growth in a company?
Ensure cash returned from the working capital cycle and investment cycle exceeds the initial investment.
What does a balance sheet represent?
A financial snapshot of a company’s assets, liabilities, and equity at a specific point in time.
What is the accounting equation?
Assets = Liabilities + Shareholders’ Equity.
What does an income statement show?
Revenues, expenses, and net income over a period of time.
What is accrual accounting?
Includes non-cash expenses like depreciation and recognizes revenue when earned.
What are the three sections of a cash flow statement?
- Operating Activities
- Investing Activities
- Financing Activities
What is straight-line depreciation?
Formula: (Asset Cost - Salvage Value) / Useful Life.
What is accelerated depreciation?
Charges more depreciation in early years of an asset’s life.
What are sources of cash?
- Selling assets
- Reducing accounts receivable
- Increasing liabilities
What are uses of cash?
- Purchasing inventory or new fixed assets
- Repaying loans
- Operating losses or dividends paid to shareholders
What is the formula for Free Cash Flow?
Operating Cash Flow - Capital Expenditures.
What is the Current Ratio formula?
Current Assets / Current Liabilities.
What does Return on Equity (ROE) measure?
ROE = Profit Margin × Asset Turnover × Financial Leverage.
What is a common pitfall with ROE?
High ROE can be misleading if achieved through excessive leverage.
What does Net Present Value (NPV) indicate?
The difference between present values of inflows and outflows.
What is the Internal Rate of Return (IRR)?
The discount rate that makes NPV = 0.
What are Pro Forma Statements used for?
Predicting what financial statements will look like at the end of a forecast period.
What is the Percent-of-Sales Approach?
Ties income statement and balance sheet figures to projected sales growth.
What does the Price-to-Earnings (P/E) Ratio evaluate?
Investor expectations and earnings potential.
What does the Times Interest Earned ratio indicate?
A company’s ability to meet debt obligations.
True or False: Cash flow is distinct from profit.
True
