PART 2: Financing the business Flashcards
The form economic resources or items of value that the firm owes are
assets
All the money that has ever been contributed to the company that never had to be paid back
owner’s equity
In a double entry book-keeping system, the loan from a bank must be recorded in the column of the
assets and liabilities
What is a financial statement
end result of accounting process
Shows the organization’s profitability over a period of time
income statement/P&L
If you want to see a “snapshot”of an organization’s financial position at a given moment, you would as for the
balance sheet
Accounting equation
Assets = Liabilities + Owners equity
Explains how the company’s cash changed from the beginning to the end of the accounting period
cash flow
What are the 3 categories of change in cash
- Cash used for operating activities
- Cash used for investing activities
- Cash from financing activities
In a balance sheet, an operating lease is shown up as
it does not show up
If you are an investor, which ratio or data would you use in order to compare the performance of one company with another on an equal?
per share data
If you are an investor, which ratio would you use in order to measure the amount of operating/net income an organization is able to generate relative to its assets?
profitability ratio
If you are an investor, which ratio would you use in order to measure how well the firm uses its assets to generate $1 of sales (efficient)?
asset utilization ratio
Liquidity ratio
measure the speed with which a company can turn its assets into cash to meet short term debts
Debt utilization ratio
indicates how much of the firm is financed by debt and how much by owner’s equity
If you want to ensure that enough cash flows through the organization quickly and efficiently, companies try to
speed up cash collectiveness from customers
Debt ratio (formula)
debt to assets = debt (total liabilities)/total assets
If you minimize the company investment in inventory without production cutbacks you are
managing current assets
What is accounting used for
use to record, measure and interpret their financial transactions and records
Role of accounting
make business decisions
What is the Financial Accounting Standard Board (FASB)
independent nonprofit organization responsible of establishing accounting and financial reporting standards for companies and nonprofit organizations in the US
What is GAAP
generally accepted accounting principles
The role of Governmental Accounting Standards Board (GASB)
set the rules for state and local governments
Why is a CPA needed for
to certify that the organization followed the accepted accounting principles in preparing the financial statement
What is Certified Public Accountants’s (CPA) opinion
they have an impartial opinion regarding the accuracy of the cllient’s financial statement
Who are private accountants
accountants employed by corporations, government agencies and other organizations
What are bookkeepers responsible for
limited to the routine day to day recording of business transactions
Role of accountants
analyze a firm’s financial position with the information recorded by the bookkeepers
What is a double entry bookkeeping
It’s a system of recording and classifying business transactions in separate accounts in order to maintain the balance of the accounting equation
Internal uses
for managers and owners in order to plan and control
External uses
for reporting results to stockholders, customers, employees, media, filing income taxes, obtaining credit etc.
What does managerial accounting refers to
refers to the internal use of accounting statements by managers in planning and directing the organization’s activities
Greatest single concern from management is…
cash flow
Cash flow
the movement of money through an organization daily, weekly, montly or yearly basis. An organization needs to generate enough cash to pay its bills as they fall due
Budget breakdowns of
cash inflows (entries) and outflows
Shortfall and cash crunch refers to
struggle to make payments to employees, suppliers and lenders due to an inadequate cash flow
Budget
internal financial plan that forecasts expenses and income over a set period of time
Principal value of budget
forecast the expected operating expenses and the operating revenues
Forecast expenses
anticipated costs that a business expects to incur over a specified future period
Top down master budget
Financial plan for an entire organization. Involves breaking down the organization’s financial objectives into specific targets for each business unit, department or cost center
Bottom-up budget
detailed budgets are prepared by individual departments within an organization and then aggregated to form the overall organizational budget
Annual report
summary of the firm’s financial information, products and growth plans
Who are interested in the annual report of a company
government agencies, owners, lenders, employees, suppliers, potential investors, etc.
What does a short-term lender looks for in the annual report
examines cash flows to assess its ability to repay a loan with cash generated from sales
What does a long-term lender look for in the annual report
examine the company profitability and debts to other lenders
Why does labour unions use financial statements
to establish reasonable expectations for salary and other benefits
Accounting process is the…
business language
What are the 4 step procedure of an accounting system
- Gather and examine source documents (checks, receipts, sales slips, etc)
- Record transactions
- Post transactions (trial balance = summary of the balance of all the accounts in the general ledger)
- Prepare financial statement
Liquidity
degree to which an asset or security can be quickly bought or sold in the market without affecting its price (how easily an asset can be converted into cash)
Assets that are either cash or expected to be turn into cash within the next 12 months are…
current/short-term assets
Have a minimum life expectancy that exceeds one year
non-current/fixed assets
Short-term investments in securities that can be converted to cash quickly are…
marketable securities
Obligations to short-term creditors which must be repaid whithin one year
current liabilities
Represents amounts owed to suppliers for goods and services purchased with credit
accounts payable
Managing short-term assets
company use them to generate sales and manage ordinary day-to-day business operations (cash, investing free cash, maximizing accounts receivable and optimizing inventory)
Challenge of managing fixed assets
Obtain long-term finances
What is capital lease
a long-term contract and shows up on the balance sheet as an asset and liability
What is operating lease
short-term cancelable lease and does not show up on the balance sheet
Solution for managing fixed assets
leasing assets involves paying a fee for usage rather than owning the asset
Managing current liabilities
the sources of short-term funds used to finance the business (accounts payable, bank loans, non bank liabilities, etc)
What are the 3 considerations when investing in a new project
- Capital budgeting and project selection
- Assesing risk
- Pricing long term money
Managing long-term liabilities (debts)
the raise of low-cost long-term funds to finance the development of fixed assets
What are bonds
debt instruments that larger companies sell to raise long-term funds
The bond contract is called…and its specifies…
“indeture” and it specifies face value (initial price), maturity date, the annual interest rate (or cupon rate) and the procedures to be followed if organization fails to make the interest payments
Types of bonds
- Unsecured bonds
- Secured bonds
- Floating rate bonds
- Junk bond (“bono basura”)
Sole propietors and partners equity includes their…
money and assets
Corporate owners own…
stocks and shares of the company
Common stock is the single most important source of…
capital for most new companies
Venture capital
a firm that invest in a company’s balance sheet and infraestructure until it reaches a sufficient size so that it can be sold to a corporation/have access to the capital markets
Investment banking
specific division of banking related to the creation of capital for other companies, governments and other entities
Investment banking activities include…
underwriting new debt and equity securities for all types of corporations, aiding in the sale of securities and helping to facilitate mergers and acquisitions, reorganizations and broker trades for both institutions and private investors
A company needs more money to expand may be able to…
obtain financing by issuing stocks
Issuing stocks
going public (Initial Public Offering - IPO), primary market and secondary market
Security markets provide…
a mechanism for buying and selling securities. They make it possible for owners to sell their stocks and bonds to other investors
B.E.P
incomes equal to total costs (FC + VC)
