Slides 6 Flashcards
What is the basic structure of financial statements?
They follow the same basic structure as Ikea’s, despite being lengthy.
Define institutional equilibrium.
The balance between stakeholders’ contributions and rewards/benefits.
What are core stakeholders?
All core stakeholders share the values, objectives, governance, and organization of the firm.
What is accounting?
Collecting, recording, measuring, classifying, summarizing business and financial transactions.
Define profitability.
An indicator of a firm’s ability to cover negative components with positive income.
Define solvency.
The firm’s ability to cover debt at any given moment.
What does a profit and loss account measure?
The gains or losses from both normal and abnormal operations over a period of time.
What is a cash flow statement?
A report of the inflows and outflows of cash, linking elements of the balance sheet and income statement.
What are the three main financial statements?
- Income Statement * Balance Sheet * Cash Flow Statement
What does a balance sheet represent?
A snapshot of the assets used by the company and the funds related to these assets at an instant in time.
What are assets?
Resources controlled by the firm from which future economic benefits are expected to flow.
What are liabilities?
The financial obligations a company owes to outside parties.
Define fixed assets.
Physical items needed for the operations of the firm, such as machineries and buildings.
What are net fixed assets?
Physical items minus accumulated depreciation needed for operations.
Define investments in fixed assets.
Shares in other (non-consolidated) companies.
What are intangible assets?
Assets that do not have a physical presence but have value for the firm’s activities.
What is goodwill?
The value of intangibles in another company that the focal one has acquired.
What are current assets?
Assets expected to be converted into cash within a year.
Define accounts receivable.
Amounts due from customers within a year (trade credit).
What are cash and equivalents?
Liquidity available to the firm.
What are inventories?
Goods and raw materials held for the purpose of resale.
What are owner’s funds?
The capital that is invested by the owners in the firm.
Define issued common stocks.
Shares of ownership of the firm held by the investors (stockholders).
What is the nominal value of a stock?
The price of a stock when it was issued, rather than its current market value.
What are capital reserves?
Amounts retained in the company generated from sources other than normal trading.
What are revenue reserves?
Amounts retained in the company generated by trading profits, often used to finance firm growth.
What are long-term loans?
Financial obligations that are due after more than one year.
What are long-term loans?
Debts that shall be paid within 3-5 years (medium-term) or even more than 20 years (long-term)
Includes issued bonds (not due within 12 months) and mortgage loans.
What is a mortgage?
A loan used to purchase or maintain a home, land, or other real estate, secured by the property as collateral
Regular payments are divided into principal and interest.
What are corporate bonds?
Investments in the debt of a business, commonly used by firms to raise debt capital.
What defines short-term loans?
Debts towards financial institutions due within one year
Application includes bonds to be paid within 12 months.
What are accounts payable?
Amounts due to suppliers within one year.
What does accounts payable represent?
The amount due to suppliers for goods or services received.
What are miscellaneous current liabilities?
Other debts that shall be paid within 1 year
Examples include current taxes and due-dividends.
What is the cash conversion cycle (CCC)?
A metric that expresses the number of days it takes for a company to convert its inventory into cash flows from sales.
How is total assets calculated?
Total assets = fixed assets + current assets (or also ∑ liabilities).
What is capital employed?
Owners’ funds + long-term loans (or also = fixed assets + current assets - current liabilities).
How is working capital defined?
Current assets - current liabilities (or also = owners’ funds + long-term liabilities - fixed assets).
What does working capital indicate?
The amount of day-to-day operating liquidity available to a business.
What does very low (negative) working capital indicate?
It may pose the firm at risk of running out of money.
What does excessive working capital mean?
Funds which earn no profit and cannot earn the required rate of return on investment.
What is the formula for owners’ funds?
Owners’ funds = fixed assets + current assets - current liabilities - long-term loans.
