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Adv Corp Finance > Midterm 1 Review > Flashcards

Midterm 1 Review Flashcards

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1
Q

FASB

A

Financial Accounting Standards Board

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2
Q

GAAP

A

General Accepted Accounting Principle

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3
Q

Use Financial Statements to make inferences about…

A

Profitability, Leverage, Liquidity, Efficiency

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4
Q

Credit =

Debit =

A

Credit is a source of funds

Debit is a use of funds

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5
Q

If debt goes down that is a debit (use of funds) or credit (source of funds)?

A

Debit - Use of funds (you used cash to pay down debt)

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6
Q

Is an Asset going up a debit (use of funds) or credit (source of funds)?

A

Debit - Use of funds (If Asset increases, you are spending money to pay for those Assets)

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7
Q

Is Inventory going down a debit (use of funds) or credit (source of funds)?

A

Credit - Source of funds (You are gaining money by selling inventory)

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8
Q

What is the most volatile item on the Balance Sheet?

A

Perishable inventory. This is the most volatile because you know the value of it will eventually go down to 0

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9
Q

What is the most important assumption you will make in a financial model?

A

Revenue growth - it drives terminal value

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10
Q

What is the most important financial statement?

A

The statement of cash flows. It tells you where the money is coming in from and where it is going. We only care about where we are getting it from

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11
Q

What is fair market value?

A

FMV is the value of the Asset under normal market conditions

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12
Q

What is liquidation value?

A

It is the value you will get if you sell the Asset immediately, regardless of market conditions

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13
Q

What is the difference and similarities for FMV and Liquidation value?

A

For cash, FMV = LV

For a car, FMV will be very different from LV

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14
Q

What is cash basis accounting?

A

Revenues are recorded when the cash is actually recieved

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15
Q

What is accrual basis accounting?

A

Revenues are recognized in the accounting period when they are earned, does not matter if you haven’t received cash yet (this is A/R)

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16
Q

What is the most important item on the Balance Sheet?

A

The date

17
Q

In what order is the Balance Sheet organized?

A

It is organized in decreasing liquidity

18
Q

What is liquidity? What is important with the liquidity of something?

A

Your ability to monetize stuff (turn to cash)
Depends on:
1) Speed - how quickly you can monetize
2) Transaction cost - how much is the cost to liquidate the asset

Market value - Liquidity = Liquidity Premium

19
Q

What is cash specifically?

A

It is a financial asset

20
Q

What is the difference between required cash and excess cash?

A

Required cash = Not available to be spent

Excess cash - Do whatever you want with this

21
Q

What are marketable securities?

A

A place/places to park your cash

Little risk + Highly liquid

i.e. US Treasury bills, bonds

22
Q

What is driven by what? A/R, Inv, Prepaid expense, Quantity, COGS, PP&E, CapEx

A 
A/R = Driven by sales (1:1)
A/P = Driven by purchases
Accrued Expenses = Driven by COGS
Inventory = Driven by COGS
COGS = Drive by Quantity
Prepaid expense = Driven by quantity (things sold)
Quantity = Driven by COGS
PP&E = Driven by CapEx
CapEx = Driven by Maintenance and Expansionary CapEx
Maintenance Capex = Driven by COGS
Expansionary CapEx = Driven by lack of capacity
Patents = Driven by R&D
23
Q

What is obsolescense?

A

Value of inventory that goes down over time

i.e. Fashion companies that have to decrease cost of clothes that aren’t selling

24
Q

What is idiosyncratic inventory?

A

Asset that is very specific to one customer

25
Q

Does land depreciate?

A

No, but it can be impaired

26
Q

What are some identifiable intangibles?

A

Patents, trademarks, copyrights, franchises

These are reported on Balance Sheet

27
Q

What are some unidentifiable intangibles?

A

Brand name, human capital

28
Q

What are trademarks, copyrights, and franchises driven by?

A

Marketing expenditures.

29
Q

What is the most difficult Asset to attain and retain?

A

Human capital

30
Q

What is a seasonal line of credit?

A

Type of flexible credit arrangement (debt) that allows a business to pay its expenses even with an extreme fluctuation in revenue (i.e. seasonal businesses).

Cheaper, lower interest rate

31
Q

What is the most important Liability?

A

Payroll

32
Q

What is a committment?

A

Non-cancellable obligation to do something or pay something in the future

33
Q

What is a contingency?

A

There will be a liability if this event happens

34
Q

What are four ways to increase profit

A

Raise price, cut variable costs, cut fixed costs, cut taxes

35
Q

What does it mean if something is capitalized?

A

Cost is subtracted over time.

Things that provide future benefits over time are capitalized

36
Q

What is Gross Profit?

A

Sales - COGS

A measure of the power of the brand

37
Q

What do we use Porter’s Five Forces for?

A

Industry analysis and to think about the volatility of Gross Margin

1) Threat of new entry
2) Intensity of existing competition
3) Threat of substitute products
4) Bargaining power of buyers
5) Bargaining power of suppliers

38
Q

Explain R&D

A

Research is the expense you have to pay to get proof of concept (much riskier)

Development is manufacturing the formula

39
Q

What is the formula for Retained earnings?

A

Net income - dividend - share re-purchases = Retained earnings

Adv Corp Finance (3 decks)

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