Module 3: Finance & Accounting (In Lecture) Flashcards
What is the current economic (GDP) growth?
2.5% 4Q (www.bea.gov)
What is the current inflation rate?
2.2% / 1.8% excluding food/energy (data.bls.gov)
What is the current unemployment rate?
4.1% (data.bls.gov)
What is the bond rate?
2.84% (10 year) – quite low (markets.wsj.com/us)
Why shouldn’t equity market averages be overemphasized?
Close to all time highs (~2% all time high)
You can “look under the hood” of individual companies using your knowledge of… (3 things)
- Accounting
- Finance
- Financial Statement Analysis (see Harvard Business School reading)
What are the two things important to know about debt market?
- They’re huge
2. They have an outsize effect on some industries such as real estate
Right now, as younger people, you are more likely to be ___ to fund for college, your first car, etc. than you are to be ___.
borrowing, investing
What is the accounting equation?
Business Assets = Liabilities or Debts + Stockholders Equity
Liabilities or debts come from funding, banks, and venture capitalists.
Why are car loans easier to get than credit card loans?
Car loans are secured - if you don’t pay a loan, your car just gets taken away. But credit card loans are insecure - you can’t get your money back.
What is a secured loan (asset-backed loan)?
Loan to finance an asset, backed by the borrower pledging the asset as collateral to the lender
What is collateral?
Asset pledged for the fulfillment of repaying a loan
What is an example of collateral that Toys R Us could provide?
Real estate
What are some examples of collateral (3 things)?
Land, Property (fixed assets), Account receivable (financial assets), Royalties from David Bowie’s music (intangible assets)
What is an unsecured loan?
Loan for which collateral is not required
What is a loan principal?
Amount of money that is loaned and must be repaid
What is interest?
Periodic payments that must be made on a loan or bond
Would the government or Tesla have a higher interest rate if borrowing?
Tesla would have the higher interest, because it is risky! The government is more likely to pay the money back.
What is a corporate bond?
Formal pledge obligated the issuer (the company) to pay interest periodically (usually every 6 months) and repay the principal at maturity
What is a bond indenture (bond contract)?
Legal document containing complete details of a bond issue. Says how much you’re borrowing, when you’re borrowing, when you’re going to pay it back, and what is the interest on that. The bond contract ends when the money is paid back.
What is maturity date (due date)?
Future date when repayment of a bond principal is due from the bond issuer (borrower)
What is face value (par value)?
Amount of money that the bond buyer (lender) will receive on the maturity date.
What is default?
Failure of a borrower to make payment (of interest or principal) when due to a lender
What is a bondholders’ claim?
Request for court enforcement of a bond’s terms of payment
What happens when Toys R Us defaults?
Toys R Us can’t get more toys. The bondholder knows that they have their senior client, but they need to enforce the claim and seize the assets of Toys R Us.
Tesla is to cars the way ___ is to ___. Why?
Apple, smartphones.
Apple and Tesla both have the ability to make the hardware and the software!
Who are angel investors?
Outside investors who provide new capital for firms in return for a share of equity ownership
Angels tend to invest in smaller sums than…
venture capital.
What is venture capital?
Private funds from wealthy individuals seeking investment opportunities in new growth companies. May be managed by professional investors as a VC fund.
What is an initial public offering (IPO)?
First sale of a company’s stock to the general public
What does Uber want to happen?
Ubiquity. Once this happens, they can convince the public sector buy stock.
Uber is making revenue, but not…
profit. It’s losing the hundreds of millions per quarter.
What is market capitalization?
Total dollar value of all the company’s outstanding shares. Found by multiplying share price by number of shares outstanding.
Stock is valued based on…
future earnings expectations.
If a profit margin or growth in profits is expected to be high, a company’s stock will be more valuable. Dividend yield is also a contributor.
What is a dividend?
Cash payment paid by company to the stockholder for each share they hold
What is dividend yield?
Annual dividend paid divided by stock price
What is the price earnings ratio?
Stock price divided by earnings per share (EPS)
Similar companies usually have a similar…
price earning (PE).
Most “household name” stocks are in what kind of capitalization category?
Large-Cap
What is revenue?
Income generated from sale of goods or services.
How do you calculate revenue?
Unit Price times # of Units Sold
Total cost is equal to…
fixed costs + variable costs.
What is the breakeven point (BEP)?
Total sales amount the company has to achieve in order to cover its total cost
Profit is…
Revenue minus cost.
What is a company’s profit for the breakeven profit?
Zero - the company is only selling enough to cover the cost.
What is the break-even unit value?
Number of units a company has to sell in order to achieve BEP
What is the contribution margin (CM)?
Represents incremental profit earned for each unit sold
Unit value for a mug is 5 dollars. The production cost per unit is 2 dollars. What is the contribution margin?
$3
BEP = ?
FC / CM
CM = ?
Unit Price - Unit VC
If the autoslicer will increase the breakeven point for Jack’s Pizza, is it a good idea to buy it?
It depends - if pizza sales are high, you reach your breakeven point sooner, so everything beyond that is profit.
A = ?
L + SE
where A = assets, L = liabilities, S = stockholders equity
What is accounting?
An information system, a comprehensive set of principles and procedures for collecting, analyzing, and communicating the company’s financial information
Balance Sheet
Tells you what the company owns and owes and how well it’s doing in terms of profitability.
Accounting is ___ ___.
decision relevant
Accounting is distinct from ___.
bookkeeping
Financial Accounting vs. Managerial Accounting (page 41 of the textbook)
…
There are two main subsets of users of accounting information. What are they?
- Internal decision makers (e.g. managers within a firm)
2. External decision makers (e.g. investors, workforce and unions, governmental bodies)
Internal decision makers are users of the firm’s ___ accounting system.
management
External decision makers are users of the firm’s ___ accounting system.
financial
Why would you not want to publish every single detail of a company’s financials? Who wants to know that information?
Competitors - external information has to be less detailed than internal information, because
What are the three main financial statements?
Statement of operations, balance sheet, statement of cash flows
What’s the fourth of the main financial statements that we won’t really delve into but god this class is tricky?
Statement of Stockholders’ Equity
Financial statements must be prepared under the…
direction of the company’s management, often by private accountants within the firm.
What’s important to know about audits?
Audits have nothing to do with putting together financial statements – they just review and approve of disapprove them.
Financial statements are the ___’s legal responsibility, not the ___.
management, accountants
A private accounting is…
a salaried accountant hired by a business to carry out its day-to-day financial activities (including bookkeeping). Industrial.
A management accountant is…
a private accountant who provides financial services to support managers in carious business activities within a firm.
A Certified Public Accountant (CPA) is an Accountant licensed by the ___.
state
What can a Certified Public Accountant do?
- Offer services to the public as an independent CPA (only independent CPAs can perform audits)
- Work for a company as a management accountant
Who can perform audits?
Certified Public Accountants
In order to perform an audit, you must be…
independent.
What is an audit?
A systematic examination of a company’s accounting system to determine whether its financial reports are in accordance with GAAP, including reliably representing its operations
An audit only provides ___ ___ that there are no ___ errors.
reasonable assurance, material
What are the Generally Accepted Accounting Principles (GAAP)?
Accounting guidelines that govern the content and form of financial reports
You only count expenses for things that you’ve already…
sold.
The Fed has a ___ mandate.
dual
What are the two components to the Fed’s dual mandate?
- Stabilizing prices (no inflation)
- Maximizing employment
International trade links the countries of the world so that countries who have a ___ ___ in making a good make more of it.
comparative advantage
What are they talking about when they say “retirement crisis”?
Who takes the risk of providing the modern worker with a retirement income. This has been transferred from employer to employee.
Personal financial planning…
Planning personal finances and liabilities to achieve your life goals
You need to manage your __ __ most of all.
Human capital
One theme in modern personal finance is the __ __ ___ from ___ to ___.
transfer of risk, employers, employees
The average 401k that people build up to pay themselves a pension is…
$99,900
The expectation is that you will pay __% of your 401k each year.
4
With the average 401k, what is the annual retirement income?
~$4000
__% of households don’t have any retirement planning.
40
What is a defined benefit pension?
Pension depends on the number of years you work
Defined benefit pension schemes are…
decreasing.
What is a defined contribution scheme?
Pension depends on amount you save
Defined contribution schemes are…
increasing.
__% of elderly marries couples and __% of singles depend on Social Security for more than half their income.
50, 71
What is a pension?
Income paid to the retired employee after they have retired
Contribution is going to build up…
into the sum you’re going to withdraw.
The benefit is ___ with a defined contribution.
uncertain
You’re not going to be able to set aside __%+ of your income for retirement. It’s just not practical.
20
__% of stock funds to match average returns.
80
Rule of thumb?
Take a percentage of your age. As you get older, a larger percentage should be put into bonds. ???
