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BUSN > Test 2 > Flashcards

Test 2 Flashcards

1
Q

What is a sole proprietorship?

A

A business that is owned, and usually managed, by a single individual.

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2
Q

What are the advantages of a sole proprietorship?

A
  1. You get all the money.
  2. You get to make all the decisions.
  3. You’re your own boss.
  4. Ease of establishment - little paperwork to start.
  5. Income is taxed as personal income.
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3
Q

What are the disadvantages of a sole proprietorship?

A
  1. If it goes bad it’s all on you.
  2. Unlimited liability (personal assets at risk)
  3. Lack of performance.
  4. Limited financial resources (only your worth is considered in a bank loan)
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4
Q

What is a partnership?

A

A voluntary agreement under which two or more people act as co-owners of a business for profit.

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5
Q

What is a general partnership?

A

Each partner has the right to participate in the company’s management and share in profits - but also has unlimited liability for any debts the company incurs.

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6
Q

What are the advantages of a general partnership?

A
  1. Bigger talent pool - share resources.
  2. Ease of establishment.
  3. Share responsibility.
  4. Income taxed as personal income.
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7
Q

What are the disadvantages of a general partnership?

A
  1. Potential for disagreements.
  2. Unlimited liability.
  3. Lack of continuity.
  4. Difficulty in withdrawing from a partnership.
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8
Q

What is a limited partnership?

A

A partnership arrangement that includes at least one general partner and at least one limited partner.

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9
Q

What is a limited liability partnership (LLP)?

A

A form of partnership in which all partners have the right to participate in management and have limited liability for company debts.

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10
Q

What are the characteristics of a limited partnership and LLP?

A
  1. Money invested.
  2. Ran by general partner.
  3. Only held accountable for your own investment.
  4. Responsible for your own work.
  5. Doctors/Lawyers offices.
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11
Q

What is a corporation?

A

A form of business ownership in which the business is considered a legal entity that is separate and distinct form its owners.

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12
Q

What are the advantages of a corporation?

A
  1. Limited liability.
  2. Permanence.
  3. Easy to transfer ownership.
  4. Ability to raise large amounts of money.
  5. Ability to make use of specialized management.
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13
Q

What are the disadvantages of a corporation?

A
  1. Difficult to establish and regulate.
  2. Double taxation (Corp is taxed on profit & personal tax)
  3. Conflicts - 51% ownership.
  4. More paperwork, less secrecy.
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14
Q

What is a limited liability company (LLC)?

A

Formed like corporations but treated like partnerships.

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15
Q

What are the advantages of LLCs?

A
  1. Limited liability.
  2. Flexible ownership.
  3. Income taxed as personal income.
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16
Q

What are the disadvantages of LLCs?

A
  1. Recognized in a single state.
  2. State franchise tax.
  3. Limits on types of firms that can form LLCs.
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17
Q

What are 3 types of mergers?

A
  1. Horizontal - in the same business.
  2. Vertical - in the same supply chain.
  3. Conglomerate - completely unrelated businesses.
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18
Q

What is a franchise?

A

A licensing agreement under which a franchisor allows franchisees to use its name, trademark, products, business methods, and other property in exchange for monetary payments and other considerations.

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19
Q

What are the advantages of a franchise?

A
  1. Name recognition.
  2. Business plan mapped out for you (less risk)
  3. Training and support.
  4. Easier access to funding.
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20
Q

What are the disadvantages of a franchise?

A
  1. Cost.
  2. Lack of control.
  3. Negative halo effect.
  4. Growth challenges.
  5. Restrictions on sale.
  6. Poor execution.
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21
Q

What is financial accounting?

A

The branch of accounting that prepares financial statements for use by owners, creditors, suppliers, and other external stakeholders.

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22
Q

What is managerial accounting?

A

The branch of accounting that provides reports and analysis to managers to help them make informed business decisions.

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23
Q

What are 3 basic financial statements?

A
  1. Balance Sheet
  2. Income Statement
  3. Statement of cash flows
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24
Q

What does the Balance Sheet report?

A

Reports the financial position of a firm by identifying and reporting the value of the firm’s assets, liabilities, and owner’s equity.

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25
Q

What does the Income Statement report?

A

Reports the revenues, expenses, and net income that resulted from a firm’s operations over an accounting period.

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26
Q

What does the Statement of cash flows report?

A

Identifies the firm’s sources and uses of cash in a given accounting period.

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27
Q

What is the fundamental accounting equation?

A

Assets = Liabilities + Owner’s Equity

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28
Q

What are the characteristics of a Balance Sheet?

A

Has the following accounts:

  1. Assets
  2. Liabilities
  3. Owner’s Equity
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29
Q

What are the characteristics of the Income Statement?

A

Has the following accounts:

  1. Revenue
  2. Costs and Expenses
  3. Net Income
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30
Q

What are the characteristics of the Statement of cash flows?

A

Has the following accounts:

  1. Operating cash flows
  2. Investing cash flows
  3. Financing cash flows
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31
Q

What is the difference between gross profit and net income?

A

Gross profit is the total profit BEFORE costs and expenses is taken out. Net income is total income AFTER costs and expenses is taken out.

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32
Q

How do you calculate cost of goods sold?

A

accural-basis accounting: method of accounting that recognizes revenue when it is earned and matches expenses to the revenues they helped produce.

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33
Q

What is an operating budget?

A

Budgets that communicate an organization’s sales and production goals and the resources needed to achieve these goals.

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34
Q

What is a financial budget?

A

Budgets that focus on the firm’s financial goals and identify the resources needed to achieve these goals.

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35
Q

Define GAAP

A

Generally Accepted Accounting Principles (GAAP): A set of accounting standards that is used in the preparation of financial statements.

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36
Q

Define FASB

A

Financial Accounting Standards Board (FASB): The private board that establishes the generally accepted accounting principles used in the practice of financial accounting.

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37
Q

Define owner’s equity

A

The claims a firm’s owners have against their company’s assets (often called “stockholder’s equity”)

38
Q

Define retained earnings

A

The accumulated earnings reinvested in the company (rather than paid to owners).

39
Q

Define revenue

A

Increases in a firm’s assets that result from the sale of goods, provision of services, or other activities intended to earn income.

40
Q

Define cash flow

A

The flow of cash in and out of the following accounts: operating activities, investing activities, financing activities.

41
Q

Define operating expenses

A

Costs the firm incurs in the regular operation of its business.

42
Q

Define assets

A

Resources owned by a firm.

43
Q

Define horizontal analysis

A

Analysis of financial statements that compares account values reported on these statements over two or more years to identify changes and trends.

44
Q

Define financial ratios

A

Comparing one financial indicator in light of another.

45
Q

What are the 3 types of financial ratios?

A
  1. Liquidity ratio: Current ratio
  2. Leverage ratio: debt-to-equity or debt-to-assets
  3. Profitability ratio: return on equity or return on assets
46
Q

What is a current ratio?

A

A firm’s ability to pay short-term debts.

Current Assets/Current Liabilities

47
Q

What is a debt-to-equity ratio?

A

Measures the extent to which a firm relies on debt to meet its financing needs.
Liabilities/Equity

48
Q

What is a debt-to-assets ratio?

A

Measure the extent to which a firm relies on debt to meet its financing needs.
Liabilities/Assets

49
Q

What is a return on equity ratio?

A

Compares profit to resources invested.

Income/Equity

50
Q

What is a return on assets ratio?

A

Compares profit to resources invested.

Income/Assets

51
Q

What is an earnings per share ratio?

A

Compares profit to resources invested.

Income/# of shares

52
Q

What are sources of short term operating funds?

A

Trade credit, factoring, short-term bank loans, commercial paper

53
Q

Define trade credit

A

Spontaneous financing granted by sellers when they deliver goods and services to customers without requiring immediate payment.

54
Q

Define factor

A

A company that provides short-term financing to firms by purchasing their accounts receivables at a discount.

55
Q

What are short-term bank loans?

A

Loans through the bank that are usually due within 30-90 days. Two types: line of credit, revolving credit agreement

56
Q

Define line of credit

A

A financial arrangement between a firm and a bank in which the bank pre-approves credit up to a specified limit, provided that the firm maintains an acceptable credit rating.

57
Q

Define revolving credit agreement

A

A guaranteed line of credit in which a bank makes a binding commitment to provide a business with funds up to a specified credit limit at any tie during the term of the agreement.

58
Q

Define commercial paper

A

Short-term (and usually unsecured) promissory notes issued by large corporations.

59
Q

What are sources of long-term operating funds?

A

Direct investments from owners, long-term debt, term loans, corporate bonds

60
Q

Define covenant

A

A restriction lenders impose on borrowers as a condition of providing long-term debt financing.

61
Q

Define time value of money

A

The principle that a dollar received today is worth more than a dollar received in the future.

62
Q

Define net present value

A

The sum of the values of expected future cash flows from an investment, minus the cost of that investment.

63
Q

Define collateral

A

Owned assets that are used as assured payment if funds are not collected on a loan.

64
Q

Define pro forma balance sheet

A

Forecasts the types and amounts of assets a firm will need to implement its future plans. Also helps determine the amount of additional financing the firm must arrange to acquire those assets.

65
Q

Define pro forma income statement

A

Uses information from the sales budget and various cost budgets to develop a forecast of net income for the planning period.

66
Q

Define cash budget

A

A detailed forecast of future cash flows that helps financial managers identify when their firm is likely to experience temporary shortages or surpluses of cash.

67
Q

Define leverage

A

How much a firm relies on debt.

68
Q

Define bond

A

A formal debt instrument issued by a corporation or government entity.

69
Q

What are the characteristics of a bond?

A
  1. Long-term debt
  2. No ownership
  3. Obligation to repay
  4. Secured

terms: coupon rate, maturity date, par value, callable, convertible

70
Q

Define coupon rate

A

The interest paid on a bond, expressed as a percentage of the bond’s par value.

71
Q

Define maturity date

A

The date when a bond will come due.

72
Q

Define par value (of a bond)

A

The value of a bond at its maturity; what the issuer promises to pay the bondholder when the bond matures.

73
Q

Define callable

A

special circumstance Can pay back early (decided by bond holder)

74
Q

Define convertible

A

Can convert value of bond into stock.

75
Q

What are the characteristics of a stock?

A
  1. Ownership - people bought into the company
  2. Voting rights
  3. No obligation to repay
  4. Residual claim on assets
  5. Tax consequences - double taxation

terms: common stock, preferred stock, dividends

76
Q

Define common stock

A

Basic form of ownership in a corporation. - Get to vote

77
Q

Define preferred stock

A

A type of stock that gives its holder preference over common stockholders in terms of dividends and claims on assets. - No voting rights.

78
Q

Define dividends

A

Quarterly profits paid out to shareholders per stock.

79
Q

Define capital gain

A

If the price of the stock rises above the amount paid for it.

80
Q

What is a primary securities market?

A

Where corporations raise additional financial capital by selling newly issued securities.

81
Q

What is a secondary securities market?

A

Where previously issued securities are traded.

82
Q

What are 5 investment strategies?

A
  1. Investing for income
  2. Market timing
  3. Value investing
  4. Investing for growth
  5. Buying and holding
83
Q

Explain “investing for income”

A

Focus on buying bonds and preferred stocks to generate a steady, predictable flow of income.

84
Q

Explain “market timing”

A

Try to make quick gains by buying low and selling high over a relatively short time horizon.

85
Q

Explain “value investing”

A

Try to find stocks that are undervalued in the market. - competitive.

86
Q

Explain “investing for growth”

A

Look for companies that have the potential to grow much faster than average for a sustained time, which they believe will lead to a stead rise in the stock’s price.

87
Q

Explain “buying and holding”

A

Involves purchasing a diversified set of securities and holding them for a long period of time.

88
Q

Define Dow Jones

A

An index that tracks stock prices of thirty large, well-known US corporations.

89
Q

Define IPO

A

initial public offering (IPO): The first time a company issues stock that may be bought by the general public.

90
Q

Define market order

A

An order telling a broker to buy or sell a specific security at the best currently available price.

91
Q

Define limit order

A

An order to a broker to buy a specific stock only if its price is below a certain level, or to sell a specific stock only if its price is above a certain level.

92
Q

Define mutual funds

A

An institutional investor that raises funds by selling shares to investors and uses the accumulated funds to buy a portfolio of many different securities.

BUSN (2 decks)

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