Midterm

Question 1

Financial Statements

Answer 1

Reports of a company’s financial performance. The three basic types of statements included in an annual report are: the Income Statement, the Balance Sheet, and the Cash Flow Statement. These statements provide different financial perspectives on a company’s performance.

Question 2

Income Statement

Answer 2

A financial statement that shows a company’s Revenue, Expenses and Net Income. The layout is: Revenue - Expenses = Net Income (or Net Profit). It closes out to Retained Earnings after the end of the year.

Question 3

Balance Sheet

Answer 3

A means of summarizing a company’s financial position at a specific point in time. The Balance Sheet equation is: Assets = Liabilities + Owners’ Equity.

Question 4

Assets

Answer 4

Liabilities + Owners’ Equity. The economic resources of a company. Assets are listed on the Balance Sheet and commonly include cash, accounts receivable, notes receivable, inventories, land, buildings, machinery, equipment, and other investments.

Question 5

Cash Flow Statement

Answer 5

Shows a company’s sources and uses of cash as well as the net change in cash for a company in a given period. It’s categories are cash from (1) operating activities, (2) investing activities and (3) financing activities. It shows the flow of cash in, through, and out of the company.

Question 6

Revenue

Answer 6

The amount recognized on the sale of a product or service. (aka Sales)

Question 7

Cost of Goods Sold

Answer 7

Cost of Goods Sold or (COGS). Expenses that are tied to the sale of each unit, primarily direct labor and materials costs. See Variable Costs

Question 8

Variable Costs

Answer 8

Expenses that are tied to the sale of each unit, primarily direct labor and materials costs (aka Cost of Goods Sold)

Question 9

Net Earnings

Answer 9

Net Earnings (See Net Income)

Question 10

Net Income

Answer 10

Net income (or Loss).The income (or loss) of an organization after deducting the expenses, including interest and taxes, incurred in earning that income. It is usually the last amount on the Income Statement.

Question 11

Net Profit

Answer 11

Net Profit. (See Net Income or Net Earnings)

Question 12

Liabilities

Answer 12

Liabilities include Accounts Payable, Current Debt and Notes Payable (shown on the right side of the Balance Sheet). Represents how much of company assets were paid for by bankers, bond holders, or other creditors.

Question 13

Equity

Answer 13

Comprised mainly of Common Stock and Retained Earnings (shown on the right side of the Balance Sheet). Represents how much of company assets were paid for by owners or shareholders. On a balance sheet, equity is referred to as shareholders’ equity or owner’s equity.

Question 14

Owner’s Equity

Answer 14

Owner’s equity.See equity.

Question 15

Emergency Loan

Answer 15

A loan automatically given in the simulation when a company runs out of cash. In the real world, emergency loans do not exist. When you run out of cash, you have a “Liquidity Crisis,” “Chapter 11,” or “Bankruptcy” on your hands.

Question 16

Shareholder’s Equity

Answer 16

Shareholders’ equity.See equity.

Question 17

Retained Earnings

Answer 17

An accumulation of annual net income left after payments of dividends reported on a company’s balance sheet. Basis computation is: Previous year’s Retained Earnings + Net Profit – Dividends = Ending Retained Earnings.

Question 18

Placement

Answer 18

The process of making the product accessible in a way which is convenient for consumers. (driven by the Sales Budget in the simulation)

Question 19

Productivity

Answer 19

A measure of your workforce output

Question 20

Promotion

Answer 20

Promotion (aka Promo Budget) The process of creating product awareness before customers shop (driven by the Promo Budget in the simulation)

Question 21

Sales Budget

Answer 21

The sales budget drives accessibility, which governs everything during and after the sale.

Question 22

Sales

Answer 22

Sales. Dollar amount given in exchange for product (aka Revenue, Top Line)

Question 23

Accounts Payable

Answer 23

Accounts payable (A/P).Money owed by the company to suppliers, vendors or creditors.

Question 24

Accounts Receivable

Answer 24

Accounts receivable (A/R).Money owed to the company for goods or services sold. A sale has occurred, but the company has not received the cash yet.

Question 25

Accrual-basis Accounting

Answer 25

An accounting method whereby income and expenses are booked when they are incurred, regardless of when they are actually received or paid. Revenues are recognized during the period in which the sales activity occurred; expenses are recognized in the same period as their associated revenues.

Question 26

Cash-basis Accounting

Answer 26

An accounting process that records transactions when cash actually changes hands. This practice is less conservative than accrual accounting when it comes to expense recognition, but sometimes more conservative when it comes to revenue recognition.

Question 27

Contribution Margin

Answer 27

Sales less variable costs (aka Gross Profit)

Question 28

Contribution Margin Percentage

Answer 28

Contribution Margin divided by Sales (aka Gross Margin Percentage)

Question 29

Cumulative Profits

Answer 29

The sum of all company profits over multiple periods.

Question 30

Current Ratio

Answer 30

Current Assets ÷ Current Liabilities. This is a prime measure of how solvent a company is. It’s so popular with lenders that it’s sometimes called the banker’s ratio. Generally speaking, the higher the ratio, the better financial condition a company is in.

Question 31

Dividend

Answer 31

A payment (usually occurring quarterly) to the stockholders of a company, as a return on their investment. Dividends reduce retained earnings and are NOT an expense on the income statement.

Question 32

EBIT

Answer 32

Earnings Before Interest and Taxes (EBIT).See operating profit.

Question 33

EPS

Answer 33

Earnings per share (EPS).One of the most commonly watched indicators of a company’s financial performance, it equals net income divided by the number of shares outstanding. When EPS falls, it usually takes the stock’s price down with it.

Question 34

EBITDA

Answer 34

Earnings Before Interest, Taxes, Depreciation and Amortization

Question 35

Financial Structure

Answer 35

Your company’s relationship between Debt and Equity (or how your company pays for its assets). See Leverage.

Question 36

Fixed Assets

Answer 36

Tangible Assets that are difficult to convert to cash—for example, buildings, and equipment. Sometimes called plant assets or PP&E for property, plant and equipment..

Question 37

Forecasting

Answer 37

The art and science of predicting demand such that you supply adequate products to satisfy demand and yet not accumulate excess inventory.

Question 38

GAAP

Answer 38

Generally accepted accounting principles (GAAP).The rules and conventions that accountants follow in recording and summarizing transactions and preparing financial statements.

Question 39

Gross Margin

Answer 39

Gross Margin. Percentage See Contribution Margin Percentage

Question 40

Gross Profit

Answer 40

Gross profit.See Contribution Margin (revenue - costs of goods sold).

Question 41

Inventory

Answer 41

The supplies of the company that are or will become its product. Examples include raw materials, work-in-progress, the merchandise in a shop, and the finished goods in a warehouse.

Question 42

Leverage

Answer 42

Total Assets ÷ Total Equity. Leverage provides insights into a company’s Financial Structure. It is a measure of risk for investors and creditors. Investors tend to like high leverage, while creditors tend to like low leverage. For the simulation the ideal range for leverage is greater than 1.8 and less than 2.8.

Question 43

Net Margin

Answer 43

Contribution Margin (Revenue - COGS) less Period Costs (aka Fixed Costs). In other words: revenue - variable costs - fixed costs = Net Margin

Question 44

Period Costs

Answer 44

Costs that are not tied directly to the cost of producing a unit. Examples include administration, salespeople, managers, and depreciation. These costs are also known as fixed costs.

Question 45

ROA

Answer 45

Return on Assets: Net Income ÷ Total Assets.Expressed as a percentage, ROA is a quantitative description of how well a company has invested in its assets. To calculate it, divide the net income for a given time period by the total assets. The larger the ROA, the better a company is performing.

Question 46

ROE

Answer 46

Return on Equity: Net Income ÷ Total Equity. This measure shows the return on the portion of the company’s financing that is provided by owners. It answers the question, “How profitable have management’s efforts been?”. To calculate ROE, divide the total income by total owners’ equity.

Question 47

ROS

Answer 47

Return on sales: Net Income ÷ Total Sales.Also known as profit margin, ROS is a way to measure a company’s operational efficiency—how its sales translate into profit.

Question 48

Working Capital

Answer 48

Current Assets minus Current Liabilities

Question 49

Book Value & Book Value per Share

Answer 49

This term can be used in various ways. In the simulation, Book Value sometimes refers to Book Value per Share, which is Total Equity divided by number of shares outstanding. Sometimes Book Value is stated as Total Equity. Furthermore, the book value of an assets is the value at which an asset is carried on a balance sheet (historical cost less accumulated depreciation)

Question 50

Capital Expenditure

Answer 50

Capital expenditure or capital investment.The payment required to acquire or improve a capital asset (Fixed Asset).

Question 51

Cumulative Free Cash Flow

Answer 51

The sum of all the Free Cash Flows since you took over management of the company

Question 52

Days of Working Capital

Answer 52

Working Capital divided by daily sales: (Current Assets - Current Liabilities) ÷ (Sales / 365) or may be presented as (Current Assets - Current Liabilities) X 365 ÷ Sales.

Question 53

Depreciation Expense

Answer 53

The decrease in value of a Fixed or Tangible Assets over time or use. (CapSim uses 15 year straight-line depreciation with no salvage value.) It is calculated as: (Cost - Salvage Value) ÷ Life

Question 54

Dividend Yield

Answer 54

Dividend per share ÷ Stock Price

Question 55

Free Cash Flow

Answer 55

Cash Flow from Operations – Capital Expenditures

Question 56

Investment in PP&E

Answer 56

Investment in PP&E.Dollars spent on property, plant, and equipment. Sometimes called capital investment or capital expenditures.

Question 57

Market Capitalization

Answer 57

Current stock price × number of shares outstanding

Question 58

Price-Earnings Ratio

Answer 58

Price Earnings Ratio (P/E) Current stock price ÷ EPS

Question 59

PP&E

Answer 59

Property, plant, and equipment (PP&E).A line item on a balance sheet that lists the book value of a business’s land, buildings, machinery, equipment, and natural resources that are used for the purpose of producing products or providing services.

Question 60

Working Capital

Answer 60

A measure of a business’s ability to pay its financial obligations, working capital equals the difference between a company’s current assets (easily sellable goods, cash, and bank deposits) and its current liabilities (debt due in less than a year, interest payments, etc.). Shortages of working capital are often relieved by short-term loans. It is calculated as current assets - current liabilities.