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ULL MBA 512 > Module 1 > Flashcards

Module 1 Flashcards

Intro & Financial Statements, Taxes, and Cash Flow

1
Q

Usually associated with a top officer of the firm, such as VP of Finance or CFO

A

Financial Management

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2
Q

Coordinates the activities of the treasurer and controller

A

VP of Finance

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3
Q

The office that handles cost & financial accounting, tax payments, and management information systems

A

Controller’s Office

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4
Q

The office that is responsible for managing the firm’s cash and credit, its financial planning, and its capital expenditures

A

Treasurer’s Office

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5
Q

The process of planning and managing a firm’s long-term investments

A

Capital Budgeting

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6
Q

A Firm’s short term assets and its short term liabilities; Current Assets - (minus) Current Liabilities

A

Working Capital

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7
Q

Cash, Accounts Receivable, Inventory, Prepaid Assets

A

Current Assets

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8
Q

Accounts Payable, Notes Payable, Wages Payable, Interest Payable, Taxes Payable

A

Current Liabilities

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9
Q

What are the three different legal forms of business organizations?

A

Sole Proprietorship, Partnership, & Corporation

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10
Q

A business owned by one person who keeps all the profits and has unlimited liability for business debts

A

Sole Proprietorship

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11
Q

Describe the length of a Sole Proprietorship

A

It is limited to the owner’s life span

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12
Q

Describe the limits to the amount of equity that can be raised in a Sole Proprietorship

A

The amount of equity that can be raised is limited to the amount of the proprietor’s personal wealth

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13
Q

Describe the transfer of a Sole Proprietorship

A

May be difficult to transfer because it requires the sale of the entire business to a new owner

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14
Q

A business organization that has two or more owners

A

Partnership

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15
Q

What are the two types of partnerships?

A

General Partnership & Limited Partnership

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16
Q

A partnership where all the partners share in gains and losses, and all have unlimited liability for all partnership debts

A

General Partnership

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17
Q

How are the gains and losses divided in a general partnership

A

They are described in the Partnership Agreement

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18
Q

A partnership where one or more general partners will run the business and have unlimited liability, but there will be one or more limited partners who will not actively participate in the business and have limited liability up to the amount contributed to the partnership

A

Limited Partnership

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19
Q

Describe the length of a partnership

A

The partnership terminates when a general partner wishes to sell out or dies

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20
Q

Describe the limits to the amount of equity that can be raised in a partnership

A

It is limited to the partners’ combined wealth

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21
Q

Describe the transfer of a partnership

A

It is not easy because it requires that a new partnership be formed; a limited partner’s interest can be sold without dissolving the partnership, but finding a buyer may be difficult

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22
Q

The most important business organization in the US that can borrow money and own property, can sue and be sued, can even be a general partner or a limited partner in a partnership, and can own stock in another business organization like it

A

Corporation

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23
Q

How is a corporation formed?

A

It involves preparing articles of incorporation or charter and a set of bylaws

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24
Q

It must contain the corporation’s name, its intended life, its business purpose, and the number of shares that can be issued

A

Articles of Incorporation

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25
Q

Where must the articles of incorporation be filed?

A

The state in which the firm will be incorporated

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26
Q

The rules describing how the corporation regulates its existence. They may be simple or quite extensive. They may be amended or extended from time to time by shareholders

A

Bylaws

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27
Q

Who elects the board of directors of a corporation?

A

The Stockholders

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28
Q

Who selects the managers of a corporation?

A

The Board of Directors

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29
Q

Who is charged with running the corporation’s affairs in the stockholders’ interests?

A

The Managers

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30
Q

How is the ownership of a corporation represented?

A

Shares of Stock

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31
Q

Describe the transfer and lifespan of a corporation

A

It can be readily transferred, and life is therefore not limited

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32
Q

What is the significant disadvantage of a corporation?

A

Double Taxation

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33
Q

What is double taxation?

A

Corporate profits are taxed twice; at the corporate level when they are earned and then again at the personal level when they are paid out

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34
Q

What business organization operates and is taxed like a partnership, but retains limited liability for owners?

A

Limited Liability Company

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35
Q

What is the goal of financial management?

A

To maximize the market value of the existing owner’s equity

36
Q

What is the intended goal of the Sarbanes-Oxley Act of 2002?

A

To protect investors for corporate abuses in response to corporate scandals

37
Q

What are the requirements of Sarbanes-Oxley?

A

Officers of the corporation must review and explicitly declare that the annual report does not contain any false statements or material omissions, that the financial statements fairly represent the financial results, and that they are responsible for all internal controls

38
Q

What are the unintended effects of Sarbanes-Oxley?

A

Because of the extensive reporting requirements, compliance can be very costly; since its implementation hundreds of public firms have chosen to no longer trade on major stock exchanges

39
Q

What is the relationship between stockholders and management?

A

Agency Relationship

40
Q

What is the possibility of conflict of interest between principal and agent?

A

Agency Problem

41
Q

Who is the principal?

A

The stockholders

42
Q

Who is the agent?

A

Someone hired to represent the the interest of the stockholders

43
Q

What are the costs of conflict of interest between stockholders and management?

A

Agency Costs

44
Q

What is an indirect agency cost?

A

Lost opportunity

45
Q

What are direct agency costs?

A

Corporate expenditures (benefit management) and expenses that arise from the need to monitor management actions

46
Q

What are the two factors that determine whether managers will act in the best interest of stockholders?

A

How closely management goals are aligned with stockholder goals & Whether or not managers can be replaced if they do not pursue stockholder goals

47
Q

What is the authority to vote someone else’s stock?

A

Proxy

48
Q

What is a proxy fight?

A

When a group solicits proxies in order to replace the existing board and thereby replace the existing management

49
Q

Why would a takeover give management incentive to act in shareholders’ interests?

A

Firms that are poorly managed are more attractive as acquisitions because a greater profit potential exists; thus avoiding a takeover would allow them to keep their jobs

50
Q

Who are stakeholders of a firm?

A

Someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm; i.e. employees, customers, suppliers, etc.

51
Q

Describe Cash Flows to and from the Firm

A
  1. Firm issues securities to raise cash
  2. Firm invests in assets
  3. Firm’s operations generate cash flow
  4. Cash is paid to gov. as taxes/Other stakeholders may receive cash
  5. Reinvested cash flows are plowed back into firm
  6. Cash is paid out to investors in the form of interest or dividends
52
Q

What is a primary market?

A

The original sale of securities by governments and corporations

53
Q

What is a secondary market?

A

Those markets in which securities are bought and sold after the original sale

54
Q

Describe the Balance Sheet

A

A convenient means of organizing and summarizing what a firm owns (assets), what a firm owes (liabilities), and the difference between the two (firm’s equity) at a given point in time

55
Q

Current Assets

A

Assets that will convert to cash within 12 months

56
Q

Fixed Assets

A

A tangible or intangible ass that has a relatively long life

57
Q

Current Liabilities

A

Liabilities that must be paid within the year

58
Q

Long-term Liabilities

A

A debt that is not due in the coming year

59
Q

Shareholders’ Equity

A

The difference between the total value of the assets and the total value of the liabilities

60
Q

Balance Sheet Equation

A

Assets = Liabilities + Equity

61
Q

Net Working Capital (NWC)

A

= Current Assets - Current Liabilities

62
Q

Liquidity

A

The speed and ease with which an asset can be converted to cash

63
Q

Shareholders’ Equity

A

= Assets - Liabilities

64
Q

Financial Leverage

A

The use of debt in a firm’s capital structure; the more debt a firm has (as a percentage of assets) the greater is it’s degree of financial leverage

65
Q

Book Value

A

Values shown on the balance sheet for a firm’s assets

66
Q

Generally Accepted Accounting Principles (GAAP)

A

The common set of standards and procedures by which audited financial statements are prepared

67
Q

Market Value

A

What an asset COULD be sold for

68
Q

Income Statement

A

Measures the firm’s performance over some period of time, usually quarterly or annually

69
Q

Income Statement Equation

A

Revenues - Expenses = Income

70
Q

What are the three things that a financial manager needs to keep in mind when looking at income statements?

A

GAAP, cash vs. non-cash items, and time & costs

71
Q

GAAP & the income statement

A

Will show revenue when it accrues (recognition principle) and expenses are matched to those revenues at the time they occur (matching principle)

72
Q

Non-cash Items

A

Expenses charged against revenues that do not directly affect cash flow; i.e. depreciation

73
Q

Product Costs

A

Such things as raw materials, direct labor expense, and manufacturing overhead (CoGS)

74
Q

Period Costs

A

Costs incurred during a particular time period and might be reported as selling, general, and administrative expenses

75
Q

What can be one of the largest cash outflows that a firm experiences?

A

Corporate Taxes

76
Q

What is the Average Tax Rate?

A

The firm’s tax bill divided by the taxable income; the percentage of income that goes to pay taxes

77
Q

What is the Marginal Tax Rate?

A

The rate of the extra tax you would pay if you earned one more dollar

78
Q

Flat-Rate Tax

A

There is only one tax rate, so the rate is the same for all income levels

79
Q

Describe Cash Flow

A

The difference between the number of dollars that came in and the number that went out

80
Q

Cash Flow Identity

A

Cash Flow from Assets = Cash Flow from Creditors + Cash Flow to Stockholders

81
Q

What are the three components of Cash Flow from Assets?

A

Operating Cash Flow, Capital Spending, and Change in Net Working Capital

82
Q

Operating Cash Flow

A

Refers to the cash flow that results form the firm’s day-to-day activities of producing and selling

83
Q

Capital Spending

A

Refers to net spending on fixed assets (purchases of fixed assets less sales of fixed assets)

84
Q

Change in Net Working Capital (NWC)

A

Measured as the net change in current assets relative to current liabilities for the period being examined

85
Q

“Free” Cash Flow

A

Cash that the firm is free to distribute to creditors and stockholders because it is not needed for working capital or fixed asset investments

86
Q

Cash Flow to Creditors

A

= Interest Paid less Net New Borrowing

87
Q

Cash Flow to Stockholders

A

= Dividends Paid less New Equity Raised

ULL MBA 512 (3 decks)

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