MODULE 1 Flashcards
1
Q
Finances, like most other resources, are, however, _____. Wants,
on the other hand, are often _____-.
A
FINITE; LIMITLESS
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
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
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
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
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
7
Q
financial accounting theories:
A
- 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. - Another group of experts believes that money is all in finance.
- The third and most commonly held viewpoint is that financial management encompasses both the
acquisition and effective use of funds.
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
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.
10
Q
It is not important that financial decisions consider the needs of shareholders.
A
FALSE; IT IS IMPORTANT
11
Q
The Scope of Financial Management
A
- investment decision
- financing decision
- dividend decisions.
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,
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:
14
Q
2 kinds of investment decisions
A
- Capital Budgeting, also known as Long-term investment decisions,
- Working capital management, also known as short-term investment decisions,
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,
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,
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:
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:
19
Q
2 kinds of financing decision
A
- Financial Planning Decisions
- Capital Structure Decisions
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
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
22
Q
Company’s form will affect:
A
● How you are taxed
● Your legal liability
● Costs of formation
● Operational costs
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
24
Q
2 types of partnership
A
- General
- Exclusive
25
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.
partnership
26
do not need a formal agreement; between the two company owners, partnerships may
be implicit or even verbal.
general partnership
27
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.
formal agreement
28
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.
corporation
29
disadvantages of sole proprietorship:
● 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
30
disadvantages of corporation:
● 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
31
disadvantages of partnership:
● 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
32
advantages of sole proprietorship:
● 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
33
advantages of partnership:
● 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
34
advantages of corporation:
● 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
35
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.
financial management
36
____of the company's goods should be the primary source of funding.
sales
37
The financial manager's main responsibilities include:
1. Financial planning:
2. Investment
3. Financing
38
(spending money): Investing the firm’s funds in projects and securities that provide
high returns in relation to their risks.
investment
39
(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).
financing
40
Preparing the financial plan, which projects revenues, expenditures, and
financing needs over a given period.
financial planning
41
T/F: In a worse economy, capital flows efficiently from those who
supply capital to those who demand it.
FALSE; well-functioning economy
42
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.
Users of Capital
43
individuals and institutions with “excess funds”.
These groups are saving money and looking for a rate of return on their
investment.
Suppliers of Capital
44
How is capital transferred between savers and borrowers? ( explain)
1. Direct transfers
2. Indirect transfers through investment bankers
3. Indirect transfers through financial intermediary
45
where
individuals and organizations
wanting to borrow funds are
brought together with those
having a surplus of funds
Financial Market
46
venue where goods
and services are exchanged
Market
47
Types of Financial Markets
Physical Assets vs Financial Assets
Money vs Capital
Primary vs Secondary
Spot vs Futures
Public vs Private
48
(also called “tangible” or “real” asset
markets) are for products such as wheat, autos, real estate,
computers, and machinery.
Physical asset markets
49
on the
other hand, deal with stocks, bonds, notes, and mortgages.
Financial asset markets,
50
are markets in which participants agree
today to buy or sell an asset at some future date.
Futures markets
51
are markets in which assets are bought or
sold for “on-the-spot” delivery (literally, within a few days).
Spot markets
52
are the markets for intermediate- or long-term
debt and corporate stocks.
Capital
markets
53
are the markets for short-term, highly
liquid debt securities. The New York, London, and Tokyo
money markets are among the world’s largest.
Money markets
54
are markets in which
existing, already outstanding securities are traded among
investors.
Secondary markets
55
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.
Primary markets
56
where standardized contracts are traded on
organized exchanges.
public
markets,
57
where transactions are negotiated directly
between two parties,
Private markets,
58
Importance of financial markets
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.
59
t/f: Markets provide spenders with returns on their money saved/invested, which provides them
money in the future.
FALSE; MARKET PROVIDE savers
60
Markets provide __________ with the necessary funds to finance their investment
projects.
USERS OF CAPITAL
61
Types of financial institutions
Commercial banks
Investment banks
Mutual savings banks
Credit unions
Pension funds
Life insurance companies
Mutual funds
Hedge funds
62
first time to the public
IPO –
63
(IPO) MEANS
Initial Public Offering
64
(EMH)?
Efficient Market Hypothesis
65
Levels of market efficiency
Weak-form efficiency
Semistrong-form efficiency
Strong-form efficiency
65
Levels of market efficiency
Weak-form efficiency
Semistrong-form efficiency
Strong-form efficiency
66
All past and present public information is in price
Semistrong-form efficiency
67
All past information is in the price
Weak-form efficiency
68
All information, public or private
Strong-form efficiency
69
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.
Horizontal Analysis
70
Steps in performing a Horizontal Analysis:
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
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.
HORIZONTAL ANALYSIS
72
The percentages for the base year will always be ___
100%
73
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.
Vertical Analysis:
74
Financial Ratios
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
Measuring a company’s ability to pay its current liabilities
1) Working Capital
2) Current Ratio
3) Acid-Test (Quick) Ratio
76
Measuring a company’s ability to sell inventory and collect receivables:
4) Inventory Turnover
5) Accounts Receivable Turnover
6) Days Sales in Receivables
77
Measuring a company’s ability to pay Short and Long Term Debt:
7) Debt Ratio
8) Times Interest Earned Ratio
78
Measuring a company’s profitability:
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
Measuring a company’s stock as an investment:
1) Price/Earnings Ratio
2) Dividend Yield
80
Shows the percentage of the market price returned to the stockholder as a dividend
Dividend Yield
81
This ratio gives you the market price of $1 of earnings
Price/Earnings Ratio
82
The net income per one share of common stock.
Earnings per Share of Common Stock
83
Shows how much income was earned with the common stockholder’s investment.
Rate of Return on Common Stockholders Equity
84
Shows how profitably a company has used its assets.
Rate of Return on Assets
85
Shows the percentage of each Sales dollar that is earned as Net Income.
Rate of Return on Net Sales
86
Shows the number of times Operating Income can cover the Interest Expense. A ratio of
2.0 to 3.0 is average.
Times Interest Earned Ratio
87
Shows the percentage of assets financed by debt.
Debt Ratio
88
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.
Days Sales in Receivables
89
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.
Accounts Receivable Turnover
90
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
Inventory Turnover
91
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.
Acid-Test (Quick) Ratio
92
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.
FALSE; STOCK MARKET IS EFFICIENT
93
Important things when looking at the financial statements:
• Dates
• Comparing results among companies.
• Economic conditions are certainly different,
94
ToF: comparison give you an accurate view of how well the companies
competed in similar economic conditions.
FALSE; COMPARISON DOESN'T GIVE YOU
95
TYPES OF FINANCIAL STATEMENT:
(1) Balance Sheet
(2) Income Statement
(3) Statement of Cash Flows
(4) Statement of Retained Earnings
96
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.
Assets
97
represent obligations, which must be paid back.
Liabilities
98
represents the value of money that the owners have contributed to the
business - including retained earnings, which is the profit made in previous years.
Equity
99
The balance sheet tells investors a lot about a company's
fundamentals:
• 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
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:
Current Assets
101
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.
Cash
102
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
Inventories
103
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
Accounts receivables
104
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).
Long-term or Non-Current Assets
105
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.
Current Liabilities
106
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.
Non-current liabilities
107
represents what shareholders own, so it is often called
shareholder's _____
Equity
108
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
Paid-in Capital
109
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
Retained Earnings
110
Companies will often use _____ financing to keep their debt
to equity (D/E) and leverage ratios low,
Off-balance-sheet
111
Examples of off-balance-sheet financing:
- joint ventures,
-research and development partnerships, and
- operating leases (rather than
purchases of capital equipment).
112
_____ 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
Operating Leases
113
___ and ____ have set numerous
rules for companies to follow in determining whether a lease should be
capitalized (included on the balance sheet) or expensed.
Generally Accepted Accounting Principles and IRB
114
measures a company's performance over a specific
time frame
Income Statement
115
The income statement presents information about
• Revenues
• Expenses
• Profit
116
Income statement shows:
• 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
Income Statement also contains the numbers most often discussed
when a company announces its results - numbers such
as and
• earnings per share,
• dividend per share
118
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.
Revenue/ revenue as a signal
119
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
FALSE; INCREASING SALES, CONSISTENT SALES GROWTH
120
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.
True
121
Two most common expenses:
Cost of goods sold (COGS)
Selling, general and administrative expenses (SG&A)
122
the expense most directly involved in
creating revenue. It represents the costs of producing or purchasing the
goods or services sold by the company
Cost of Goods Sold (COGS)
123
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.
Selling, general and administrative expenses (SG&A)
124
calculated as revenue minus cost of sales.
Gross profit
125
Several commonly used profit subcategories that tell investors
how the company is performing.
Profit
126
the profit a company made from its actual operations,
and excludes certain expenses and revenues that may not be related to
its central operations.
Operating profit
127
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".
Net income
128
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.
FALSE; MORE ADVANTAGES, HAVE BIGGER CUSHION
129
ToF: Companies with high profit margins can get wiped out in a downturn
FALSE; LOW PROFIT MARGINS
130
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.
True
131
• Three core activities of cash flow
cash flow from financing, (CFF)
cash flow from investing (CFI)
cash flow from operations (CFO)
132
Cash is raised from the capital suppliers :
cash flow from financing, (CFF)
133
• Cash is used to buy assets
cash flow from investing (CFI)
134
• Cash is used to create a profit
cash flow from operations (CFO)
135
includes cash received (inflow) for
the issuance of debt and equity. As expected, ___ is reduced by
dividends paid (outflow).
CFF
136
usually negative because the
biggest portion is the expenditure (outflow) for the purchase of
long-term assets such as plants or machinery.
CFI
137
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.
CFO
138
CFF + CFI + CFO = ___
Net cash flow
139
Cash generated from day-to-day business operations
CFO
140
Cash used for investing in assets, as well as the proceeds from the
sale of other businesses, equipment or long-term assets
CFI
141
Cash paid or received from the issuing and borrowing of funds
CFF
142
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.
Commercial banks
143
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.
Investment banks
144
a type of thrift institution originally designed to serve low-income individuals.
Mutual savings banks
145
type of financial institution similar to a commercial bank, is a member-owned nonprofit financial cooperative
Credit unions
146
provides retirement income.
Pension fund
147
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.
Life Insurance companies
148
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
Mutual funds
149
pool money from investors and invest in securities or other types of investments with the goal of getting positive returns.
Hedge funds
