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MODULE 1 Flashcards

1
Q

Finances, like most other resources, are, however, _____. Wants,
on the other hand, are often _____-.

A

FINITE; LIMITLESS

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2
Q

It is important for any company to invest the funds it receives in such a way that the investment yields a
higher return than the ______.

A

COST OF CAPITAL

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3
Q

Financial management, in a nutshell –

A
  • Endeavours to reduce the cost of finance
  • Ensures sufficient availability of funds
  • Deals with the planning, organizing, and controlling of financial activities like the procurement and
    utilization of funds
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4
Q

WHO STATES THAT “Financial management is the activity concerned with planning, raising, controlling and administering of
funds used in the business.”

A

Guthman and Dougal

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5
Q

WHO STATES THAT “Financial management is that area of business management devoted to a judicious use of capital and a
careful selection of the source of capital in order to enable a spending unit to move in the direction of
reaching the goals.”

A

– J.F. Brandley

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6
Q

WHO STATES THAT “Financial management is the operational activity of a business that is responsible for obtaining and
effectively utilizing the funds necessary for efficient operations.”-

A

Massie

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7
Q

financial accounting theories:

A
  1. Some experts believe that financial management is all about getting a company the money it needs
    on the most attractive terms possible while keeping its goals in mind.
  2. Another group of experts believes that money is all in finance.
  3. The third and most commonly held viewpoint is that financial management encompasses both the
    acquisition and effective use of funds.
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8
Q

T/F: Many companies can easily raise capital in a developed market. The real issue, however, is minimizing
capital use through successful financial planning and control.

A

FALSE; MAXIMIZING CAPITAL

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9
Q

ACTIVITIES THAT A COMPANY MUST ENSURE TO HANDLE

A

allocating funds, handling them,
investing them, controlling expenses, predicting financial needs, preparing income and calculating returns
on investment, evaluating working capital, and so on.

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10
Q

It is not important that financial decisions consider the needs of shareholders.

A

FALSE; IT IS IMPORTANT

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11
Q

The Scope of Financial Management

A
  1. investment decision
  2. financing decision
  3. dividend decisions.
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12
Q

Managers of companies make the following decisions in order to reduce the costs of obtaining finance and
to use it in the most efficient way possible:

A

the nature of financial management by studying the nature of investment,

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13
Q

Managers must determine the amount of investment available from existing funds,
both long- and short-term. There are two kinds of them:

A

Investment Decisions:

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14
Q

2 kinds of investment decisions

A
  1. Capital Budgeting, also known as Long-term investment decisions,
  2. Working capital management, also known as short-term investment decisions,
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15
Q

refers to committing
funds for a short period of time, such as current assets. These decisions include cash, bank deposits,
and other short-term investments, as well as inventory investment. They have a direct impact on a
company’s liquidity and profitability.

A

Working capital management, also known as short-term investment decisions,

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16
Q

imply committing funds for a
long time, similar to fixed assets. These decisions are normally irreversible and involve those
involving the purchase of a building and/or property, the acquisition of new plants/machinery or
the replacement of old ones, and so on. These choices influence a company’s financial goals and
results.

A

Capital Budgeting, also known as Long-term investment decisions,

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17
Q

Managers must also make decisions on raising funds from long-term (Capital
Structure) and short-term sources (called Working Capital).

A

Financing Decisions:

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18
Q

These are decisions over how much of a company’s earnings will be paid as dividends.
Shareholders often seek a higher dividend, while management prefers to keep income for operational
purposes. As a result, this is a difficult managerial decision.

A

Dividend Decisions:

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19
Q

2 kinds of financing decision

A
  1. Financial Planning Decisions
  2. Capital Structure Decisions
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20
Q

include estimating the origins and applications of funds. It entails
anticipating a company’s financial needs in order to ensure that sufficient funds are available. The
primary goal of financial planning is to prepare ahead of time to ensure that funds are available
when needed.

A

Financial Planning Decisions

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21
Q

that include locating funding sources. They also include decisions on
whether to raise funds from external sources such as selling shares, bonds, or borrowing from
banks, or from internal sources such as retained earnings.

A

Capital Structure Decisions

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22
Q

Company’s form will affect:

A

● How you are taxed
● Your legal liability
● Costs of formation
● Operational costs

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23
Q

the simplest and most common type of business ownership. It is a business that is
owned and operated solely for the benefit of the owner. Since the company’s survival is solely dependent
on the owner’s decisions, when the owner dies, the business dies with him.

A

Sole Proprietorship

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24
Q

2 types of partnership

A
  1. General
  2. Exclusive
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25
Q

both partners invest their capital, land, labor,
and other resources in the company and are equally liable for its debts. In other words, even though you
just put a small amount of money into a general partnership, you might be held liable for the entire debt.

A

partnership

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26
Q

do not need a formal agreement; between the two company owners, partnerships may
be implicit or even verbal.

A

general partnership

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27
Q

needed for limited partnerships. They must also file a
relationship certificate with the department. Limited partnerships allow partners to restrict their personal
responsibility for business debts based on their ownership or investment percentage.

A

formal agreement

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28
Q

considered legal persons and are considered distinct entities for tax purposes. This
assumes, among other items, that a corporation’s earnings are taxed as the corporation’s “personal gain.”
The money paid to shareholders as dividends or gains is then taxed as the owners’ personal income.

A

corporation

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29
Q

disadvantages of sole proprietorship:

A

● Owner is 100% liable for business debts
● Equity is limited to the owner’s personal
resources
● Ownership of proprietorship is difficult to
transfer
● No distinction between personal and
business income

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30
Q

disadvantages of corporation:

A

● Corporate operations are costly
● Establishing a corporation is costly
● Start a corporate business requires
complex paper work
● With some exemptions corporate income
tax is higher

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31
Q

disadvantages of partnership:

A

● Each partner is 100% responsible for debts
and losses
● Selling the business is difficult – requires
finding new partner
● Partnership ends when any partner decides
to end it

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32
Q

advantages of sole proprietorship:

A

● All profits are subject to the owner
● There is very little regulation for
proprietorships
● Owners have total flexibility when running
the business
● Very few requirements for starting—often
only a business license

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33
Q

advantages of partnership:

A

● Shared resources provide more capital for
the business
● Each partner shares the total profits of the
company
● Similar flexibility and simple design of a
proprietorship
● Inexpensive to establish a business
partnership, formal or informal

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34
Q

advantages of corporation:

A

● Limits the liability of owners to debt or
losses
● Profit and losses belong to the corporation
● Can be transferred to new owners fairly
easily
● Personal assets cannot be seized to pay for
business debts

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35
Q

the art and science of handling a company’s resources in order to achieve its
objectives, is not solely the domain of the finance department.

A

financial management

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36
Q

____of the company’s goods should be the primary source of funding.

A

sales

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37
Q

The financial manager’s main responsibilities include:

A
  1. Financial planning:
  2. Investment
  3. Financing
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38
Q

(spending money): Investing the firm’s funds in projects and securities that provide
high returns in relation to their risks.

A

investment

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39
Q

(raising money): Obtaining funding for the firm’s operations and investments and
seeking the best balance between debt (borrowed funds) and equity (funds raised through the sale
of ownership in the business).

A

financing

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40
Q

Preparing the financial plan, which projects revenues, expenditures, and
financing needs over a given period.

A

financial planning

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41
Q

T/F: In a worse economy, capital flows efficiently from those who
supply capital to those who demand it.

A

FALSE; well-functioning economy

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42
Q

individuals and institutions who need to raise funds to
finance their investment opportunities. These groups are willing to pay a
rate of return on the capital they borrow.

A

Users of Capital

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43
Q

individuals and institutions with “excess funds”.
These groups are saving money and looking for a rate of return on their
investment.

A

Suppliers of Capital

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44
Q

How is capital transferred between savers and borrowers? ( explain)

A
  1. Direct transfers
  2. Indirect transfers through investment bankers
  3. Indirect transfers through financial intermediary
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45
Q

where
individuals and organizations
wanting to borrow funds are
brought together with those
having a surplus of funds

A

Financial Market

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46
Q

venue where goods
and services are exchanged

A

Market

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47
Q

Types of Financial Markets

A

Physical Assets vs Financial Assets
Money vs Capital
Primary vs Secondary
Spot vs Futures
Public vs Private

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48
Q

(also called “tangible” or “real” asset
markets) are for products such as wheat, autos, real estate,
computers, and machinery.

A

Physical asset markets

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49
Q

on the
other hand, deal with stocks, bonds, notes, and mortgages.

A

Financial asset markets,

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50
Q

are markets in which participants agree
today to buy or sell an asset at some future date.

A

Futures markets

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51
Q

are markets in which assets are bought or
sold for “on-the-spot” delivery (literally, within a few days).

A

Spot markets

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52
Q

are the markets for intermediate- or long-term
debt and corporate stocks.

A

Capital
markets

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53
Q

are the markets for short-term, highly
liquid debt securities. The New York, London, and Tokyo
money markets are among the world’s largest.

A

Money markets

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54
Q

are markets in which
existing, already outstanding securities are traded among
investors.

A

Secondary markets

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55
Q

are the markets in which corporations
raise new capital. If GE were to sell a new issue of common
stock to raise capital, a primary market transaction would
take place. The corporation selling the newly created stock,
GE, receives the proceeds from the sale in a primary market
transaction.

A

Primary markets

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56
Q

where standardized contracts are traded on
organized exchanges.

A

public
markets,

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57
Q

where transactions are negotiated directly
between two parties,

A

Private markets,

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58
Q

Importance of financial markets

A
  1. Financial Markets facilitate flow of capital from investors to the
    users of capital.
  2. Well-functioning markets promote economic growth.
  3. Economies with well-developed markets perform better than
    economies with poorly-functioning markets.
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59
Q

t/f: Markets provide spenders with returns on their money saved/invested, which provides them
money in the future.

A

FALSE; MARKET PROVIDE savers

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60
Q

Markets provide __________ with the necessary funds to finance their investment
projects.

A

USERS OF CAPITAL

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61
Q

Types of financial institutions

A

Commercial banks
Investment banks
Mutual savings banks
Credit unions
Pension funds
Life insurance companies
Mutual funds
Hedge funds

62
Q

first time to the public

A

IPO –

63
Q

(IPO) MEANS

A

Initial Public Offering

64
Q

(EMH)?

A

Efficient Market Hypothesis

65
Q

Levels of market efficiency

A

Weak-form efficiency
Semistrong-form efficiency
Strong-form efficiency

65
Q

Levels of market efficiency

A

Weak-form efficiency
Semistrong-form efficiency
Strong-form efficiency

66
Q

All past and present public information is in price

A

Semistrong-form efficiency

67
Q

All past information is in the price

A

Weak-form efficiency

68
Q

All information, public or private

A

Strong-form efficiency

69
Q

This type of analysis studies the changes in the items on the financial
statement, in both dollar amount and as percentages, for successive accounting periods. The
earliest year is known as the “base year”. The base year amounts are what is used to get your
percentages.

A

Horizontal Analysis

70
Q

Steps in performing a Horizontal Analysis:

A

Step 1: Compute the dollar amount of change from the base year to the next year
by subtracting the base year amount.
Step 2: Compute the percent of change from the base year,

71
Q

can also be done for a series of years using trend percentages. The trend
percentages are computed by selecting a year to serve as the base year, usually the earliest year.
Then the amounts for every other year are divided by the base year amounts to get a percentage.

A

HORIZONTAL ANALYSIS

72
Q

The percentages for the base year will always be ___

A

100%

73
Q

This type of analysis reveals the relationship of each financial statement item
to the base amount. For the Income Statement, the Net Sales is used as the base amount and all
other items on the Income Statement are expressed as a percentage of Net Sales. For the
Balance Sheet, the Total Assets is used as the base amount.

A

Vertical Analysis:

74
Q

Financial Ratios

A

1) Working Capital
2) Current Ratio
3) Acid-Test (Quick) Ratio
4) Inventory Turnover
5) Accounts Receivable Turnover
6) Days Sales in Receivables
7) Debt Ratio
8) Times Interest Earned Ratio
9) Rate of Return on Net Sales
10) Rate of Return on Assets
11) Rate of Return on Common Stockholders Equity
12) Earnings per Share of Common Stock
13) Price/Earnings Ratio
14) Dividend Yield

75
Q

Measuring a company’s ability to pay its current liabilities

A

1) Working Capital
2) Current Ratio
3) Acid-Test (Quick) Ratio

76
Q

Measuring a company’s ability to sell inventory and collect receivables:

A

4) Inventory Turnover
5) Accounts Receivable Turnover
6) Days Sales in Receivables

77
Q

Measuring a company’s ability to pay Short and Long Term Debt:

A

7) Debt Ratio
8) Times Interest Earned Ratio

78
Q

Measuring a company’s profitability:

A

9) Rate of Return on Net Sales
10) Rate of Return on Assets
11) Rate of Return on Common Stockholders Equity
12) Earnings per Share of Common Stock

79
Q

Measuring a company’s stock as an investment:

A

1) Price/Earnings Ratio
2) Dividend Yield

80
Q

Shows the percentage of the market price returned to the stockholder as a dividend

A

Dividend Yield

81
Q

This ratio gives you the market price of $1 of earnings

A

Price/Earnings Ratio

82
Q

The net income per one share of common stock.

A

Earnings per Share of Common Stock

83
Q

Shows how much income was earned with the common stockholder’s investment.

A

Rate of Return on Common Stockholders Equity

84
Q

Shows how profitably a company has used its assets.

A

Rate of Return on Assets

85
Q

Shows the percentage of each Sales dollar that is earned as Net Income.

A

Rate of Return on Net Sales

86
Q

Shows the number of times Operating Income can cover the Interest Expense. A ratio of
2.0 to 3.0 is average.

A

Times Interest Earned Ratio

87
Q

Shows the percentage of assets financed by debt.

A

Debt Ratio

88
Q

The number of days in which Sales remain in Accounts Receivable. The lower the
number, the better off a company’s cash flows will be.

A

Days Sales in Receivables

89
Q

Shows a company’s ability to collect cash from its credit customers. Average Accounts
Receivable is calculated the same way as the average inventory above. Generally the
higher the turnover the better.

A

Accounts Receivable Turnover

90
Q

Shows the number of times a company sells its average inventory during the year. To
calculate the average inventory add the beginning and ending inventory balances together
and then divide by two. The _____ is dependent on the type of business.
Businesses that sell perishable goods should have a much higher turnover than businesses
that sell non-perishable goods

A

Inventory Turnover

91
Q

The company’s ability to pay is current liabilities if they were to become due
immediately. A ratio of .9 to 1.0 is average.

A

Acid-Test (Quick) Ratio

92
Q

ToF: If the stock market is inefficient, it is a waste of time
for most people to seek bargains by analyzing
published data on stocks. That follows because if
stock prices already reflect all publicly available
information, they will be fairly priced; and a person
can beat the market only with luck or inside
information. So rather than spending time and
money trying to find undervalued stocks, it would
be better to buy an index fund designed to match
the overall market as reflected in an index such as
the S&P 500 stocks.

A

FALSE; STOCK MARKET IS EFFICIENT

93
Q

Important things when looking at the financial statements:

A

• Dates
• Comparing results among companies.
• Economic conditions are certainly different,

94
Q

ToF: comparison give you an accurate view of how well the companies
competed in similar economic conditions.

A

FALSE; COMPARISON DOESN’T GIVE YOU

95
Q

TYPES OF FINANCIAL STATEMENT:

A

(1) Balance Sheet
(2) Income Statement
(3) Statement of Cash Flows
(4) Statement of Retained Earnings

96
Q

represent the resources that the business owns or controls at a given
point in time. This includes items such as cash, inventory, machinery and
buildings.

A

Assets

97
Q

represent obligations, which must be paid back.

A

Liabilities

98
Q

represents the value of money that the owners have contributed to the
business - including retained earnings, which is the profit made in previous years.

A

Equity

99
Q

The balance sheet tells investors a lot about a company’s
fundamentals:

A

• How much debt the company has,
• How much it needs to collect from customers (and how fast it does so),
• How much cash and its equivalents it possesses and what kinds of funds the
company has generated over time.

100
Q

are resources likely to be used up or converted
into cash within one business cycle - usually treated as twelve
months. Three important current asset items found on the
balance sheet are:

A

Current Assets

101
Q

Any item of economic value owned by an individual or
corporation, especially that which could be converted to cash. Examples
are cash, securities, accounts receivable, inventory, office equipment, real
estate, a car, and other property.

A

Cash

102
Q

The raw materials, work-in-process goods and completely
finished goods that are considered to be the portion of a business’s assets
those are ready or will be ready for sale

A

Inventories

103
Q

Money owed by customers (individuals or corporations) to
another entity in exchange for goods or services that have been delivered or used, but
not yet paid for

A

Accounts receivables

104
Q

are defined as resources that not classified
as current asset. This includes items that are fixed assets, such as property,
plant and equipment (PP&E).

A

Long-term or Non-Current Assets

105
Q

are obligations the firm must pay within a
year, such as payments to suppliers. Current liabilities
appear on the company’s balance sheet and include shortterm debts, accounts payable, accrued liabilities and other
debts.

A

Current Liabilities

106
Q

are those obligations of the business
that are not expected to be paid for at least one year from
the date on the balance sheet. Typically, non-current
liabilities represent bank and bondholder debts.

A

Non-current liabilities

107
Q

represents what shareholders own, so it is often called
shareholder’s _____

A

Equity

108
Q

is the amount of money shareholders paid for their
shares when the stock was first offered to the public. It basically
represents how much money the firm received when it sold its
shares

A

Paid-in Capital

109
Q

are the money the company has chosen to
reinvest in the business rather than pay to shareholders (in terms of
dividend). Investors should look closely at how a company puts
retained capital to use and how a company generates a re

A

Retained Earnings

110
Q

Companies will often use _____ financing to keep their debt
to equity (D/E) and leverage ratios low,

A

Off-balance-sheet

111
Q

Examples of off-balance-sheet financing:

A
  • joint ventures,
    -research and development partnerships, and
  • operating leases (rather than
    purchases of capital equipment).
112
Q

_____ are one of the most common forms of off-balancesheet financing. In these cases, the asset itself is kept on the lessor’s
balance sheet, and the lessee reports only the required rental expense
for use of the asse

A

Operating Leases

113
Q

___ and ____ have set numerous
rules for companies to follow in determining whether a lease should be
capitalized (included on the balance sheet) or expensed.

A

Generally Accepted Accounting Principles and IRB

114
Q

measures a company’s performance over a specific
time frame

A

Income Statement

115
Q

The income statement presents information about

A

• Revenues
• Expenses
• Profit

116
Q

Income statement shows:

A

• how much money the company generated (revenue)
• how much it spent (expenses)
• the difference between the company’s return (profit) over a certain time period

117
Q

Income Statement also contains the numbers most often discussed
when a company announces its results - numbers such
as and

A

• earnings per share,
• dividend per share

118
Q

Known as sales - represents all the money a company brought in during a specific time
period, although big companies sometimes break down revenue by business segment or
geography.

A

Revenue/ revenue as a signal

119
Q

ToF: The best way for a company to improve profitability is by increasing assets. Consistent
inventory growth has been a strong driver of company’s profitability

A

FALSE; INCREASING SALES, CONSISTENT SALES GROWTH

120
Q

ToF: The best revenues are those that continue year in and year out. Temporary increases,
such as those that might result from a short-term promotion, are less valuable and
should garner a lower price-to-earnings multiple for a company.

A

True

121
Q

Two most common expenses:

A

Cost of goods sold (COGS)
Selling, general and administrative expenses (SG&A)

122
Q

the expense most directly involved in
creating revenue. It represents the costs of producing or purchasing the
goods or services sold by the company

A

Cost of Goods Sold (COGS)

123
Q

marketing, salaries, utility bills, technology expenses, other general costs
associated with running a business, depreciation and amortization( a
cost of replacing worn out assets), costs of taxes and interest payments.

A

Selling, general and administrative expenses (SG&A)

124
Q

calculated as revenue minus cost of sales.

A

Gross profit

125
Q

Several commonly used profit subcategories that tell investors
how the company is performing.

A

Profit

126
Q

the profit a company made from its actual operations,
and excludes certain expenses and revenues that may not be related to
its central operations.

A

Operating profit

127
Q

The company’s profit after all expenses, including financial expenses, have
been paid.
•
• Often called the “bottom line” and is generally the figure people refer to
when they use the word “profit” or “earnings”.

A

Net income

128
Q

ToF: When a company has a high profit margin, means that it has more
disadvantages over its competitors. Companies with high net profit margins
have a smaller cushion to protect themselves during the hard times.

A

FALSE; MORE ADVANTAGES, HAVE BIGGER CUSHION

129
Q

ToF: Companies with high profit margins can get wiped out in a downturn

A

FALSE; LOW PROFIT MARGINS

130
Q

ToF: Companies with profit margins reflecting a competitive advantage is able to
improve their market share during the hard times - leaving them even better
positioned when things improve again.

A

True

131
Q

• Three core activities of cash flow

A

cash flow from financing, (CFF)
cash flow from investing (CFI)
cash flow from operations (CFO)

132
Q

Cash is raised from the capital suppliers :

A

cash flow from financing, (CFF)

133
Q

• Cash is used to buy assets

A

cash flow from investing (CFI)

134
Q

• Cash is used to create a profit

A

cash flow from operations (CFO)

135
Q

includes cash received (inflow) for
the issuance of debt and equity. As expected, ___ is reduced by
dividends paid (outflow).

A

CFF

136
Q

usually negative because the
biggest portion is the expenditure (outflow) for the purchase of
long-term assets such as plants or machinery.

A

CFI

137
Q

naturally includes cash collected
for sales and cash spent to generate sales. This includes operating
expenses such as salaries, rent and taxes. But notice two
additional items that reduce __: cash paid for inventory and
interest paid on debt.

A

CFO

138
Q

CFF + CFI + CFO = ___

A

Net cash flow

139
Q

Cash generated from day-to-day business operations

A

CFO

140
Q

Cash used for investing in assets, as well as the proceeds from the
sale of other businesses, equipment or long-term assets

A

CFI

141
Q

Cash paid or received from the issuing and borrowing of funds

A

CFF

142
Q

refers to a financial institution that accepts deposits, offers checking account services, makes various loans, and offers basic financial products like certificates of deposit (CDs) and savings accounts to individuals and small businesses.

A

Commercial banks

143
Q

is a financial services company that acts as an intermediary in large and complex financial transactions. An investment bank is usually involved when a startup company prepares for its launch of an initial public offering (IPO) and when a corporation merges with a competitor.

A

Investment banks

144
Q

a type of thrift institution originally designed to serve low-income individuals.

A

Mutual savings banks

145
Q

type of financial institution similar to a commercial bank, is a member-owned nonprofit financial cooperative

A

Credit unions

146
Q

provides retirement income.

A

Pension fund

147
Q

can be defined as a contract between an insurance policy holder and an insurance company, where the insurer promises to pay a sum of money in exchange for a premium, upon the death of an insured person or after a set period.

A

Life Insurance companies

148
Q

a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio

A

Mutual funds

149
Q

pool money from investors and invest in securities or other types of investments with the goal of getting positive returns.

A

Hedge funds

FM (2 decks)

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