Unit 1 - Conceptual Framework & Accounting Review Flashcards
1
Q
What is EPS?
A
Earnings Per Share
2
Q
What is “realized capital gains”?
A
The increase in value of an investment, when converted to cash.
3
Q
True or false: Articles of incorporation (or the charter) are used by a corporation to regulate its existence.
A
False. Bylaws are used to regulate a corporation’s existence.
4
Q
The “Agency Problem” is defined as….
A
The possibility of conflicts of interest between the shareholders and management of a firm.
5
Q
What is the “half-year rule” under CCA?
A
CRA’s requirement to figure depreciation on only one-half of an asset’s installed cost for its first year or use.
6
Q
The cost of an audit on a firm’s financial statements is a type of ______ cost?
A
Agency
7
Q
__________ and _________ can maximize short-term profits but threaten long-term sustainability.
A
Deferring maintenance and Reducing critical inventories
8
Q
What is a fourth (or quarterniary) market?
A
Forth markets allow institution-to-institution trading without using brokers or dealers.
9
Q
Who are the 2 different finance managers that typically report into the CFO?
A
- The Controller, who manages reporting, accounting, receiving and payments. 2. The Treasurer, who answers the 3 Corp. Finance questions: What investments should be made? How will we receive funding/pay for investments? and How do we manage day-to-day financial activities?
10
Q
______ are the owners of a corporation.
A
Shareholders
11
Q
True or false: General partnerships must pay taxes as a legal entity.
A
False. Partners are taxed on business income as personal income.
12
Q
What are Investment Dealers?
A
Investment Dealers are non-depository instituions that assist firms in issuing new securities in exchange for a fee income.
13
Q
What is IFRS?
A
International Financial Reporting Standards
14
Q
The ultimate responsibility for a corporation rests with:
A
The Board of directors.
15
Q
(Quiz)
What was the intent of the Sarbanes Oxley Act?
A
It was intended to protect investors from corporate abuses
16
Q
What are Mutual funds?
A
Mutual funds pool individual investments to purchase diversified portfolios of securities.
17
Q
True or false: Equities are issued solely by corporations.
A
True. Note: governments issues Debt Securities.
18
Q
What is “marginal tax rate”?
A
Amount of tax payable on the next dollar earned.
19
Q
What is a dealer market (OTC)?
A
A dealer market is where dealers sell stocks/equities they previously purchased to buyers. Dealer markets are also known as over-the-counter (OTC) markets.
20
Q
What is Capital Cost Allowance (CCA)?
A
CCA is depreciation for tax purposes in Canada.
21
Q
Given the following statement of financial position data, calculate net working capital: cash = $110, accounts receivable = $410, inventory = $350, net fixed assets = $1,000, accounts payable = $60, short-term debt = $375, and long-term debt = $510.
A
$435
22
Q
What is undepreciated capital cost (UCC)?
A
The assets book value for tax purposes. Original (installed) cost - depreciation value (CCA) = UCC
23
Q
True or false: Assets = Liabilities + Shareholders’ equity
A
True.
24
Q
True or false: CCA calculation begins by assigning every capital asset to a particular class.
A
True.
25
True or false: Corporation owners have unlimited liability.
False.
26
\_\_\_\_\_\_\_\_\_ _________ refers to the rules for corporate organization and conduct.
Corporate governance
27
(Quiz)
Working Capital Management refers to
The levels of cash and inventory held.
28
What is CSR?
Corporate Social Responsibility.
29
What decisions does the Capital Structure support?
“Should we get short-term or long-term debt?” “Should we borrow from banks or shareholders?” “What is the least expensive way of borrowing this money? (e.g. repayment terms, interest rates)”
30
What decisions does the Capital Budget support?
"Do we build or buy?" "How many stores should we open?" "How much should we buy?"
31
A firm's liabilities are classified as either ____ or \_\_\_\_\_.
Current or Long-term
32
If total assets = $550, fixed assets = $375, current liabilities = $140, equity = $265, long-term debt = $145, and current assets is the only remaining item on the statement of financial position, what is the value of net working capital?
$35
NWC = Current Assets - Current Liabilities.
Fixed assets = long-term assets
33
\_\_\_\_\_\_\_ allow corporate ownership to be transferred.
Shares of stock.
34
What is "average tax rate"?
Total taxes paid/total taxable income
35
Some of the cash flow generated by a firm goes back to the financial markets in the form of \_\_\_\_\_\_\_\_\_\_.
Dividends and debt payments.
36
Corporate Social Responsibility (CSR) is also known as _________ or \_\_\_\_\_\_\_\_.
Corporate sustainability or The triple bottom line
37
True or false: A stakeholder is anyone that potentially has a claim on the cash flows of a firm.
True.
38
True or false: Capital Budgeting includes the providing financial information about an enterprise, which is useful to a wide range of users in making economic decisions.
False. Financial Accounting performs this task.
39
What is a Derivative Security (or derivative)?
Derivative Securities are options, futures, and other securities whos value derives from the price of another asset.
40
What is a big advantage of a sole-proprietorship and partnership?
owners keep all the profits.
41
How is Dividents Per Share (DPS) calculated?
Dividends/Total # of shares = Dividends Per Share.
42
Assets (other than leasehold improvements) under CCA depreciation rules follow the ________ depreciation method.
declining balance
43
How is Earnings Per Share (EPS) calculated?
Net Income / Total # of shares = Earnings Per Share.
44
What is "loss carry-back"?
Using a year's capital losses to offset capital gains of a previous year.
45
True or false: Depreciation is a non-cash item
True.
46
Stakeholders could be a \_\_\_\_\_\_\_\_, \_\_\_\_\_\_\_\_, or ______ that potentially has a claim on the cash flows of a firm.
Shareholder, creditor or other invidual (or group)
47
What process determines a firm's long-term investments?
The Capital Budgeting Process plans and manages a firm's long-term assets.
48
List different types of **Financial Institutions** in Canada:
* Chartered Banks
* Trust Companies
* Credit Unions
* Investment Dealers
* Insurance companies
* Pension funds
* Mutual funds
49
True or false: Capital Cost Allowance (CCA) is unique to Canada.
True.
50
Forming a corporation involves preparing ____________ and a set of \_\_\_\_\_\_\_\_.
- Articles of Incorporation (or a charter) - Bylaws
51
The goal of a for-profit business is to...
maximize owners' equity.
52
Statement of Financial Position
Study this
53
Financial managers should strive to maximize the current value per share of the existing stock because:
They have been hired for the purpose of **represent**ing the **interest of the current shareholders**.
54
What is a third (or tertiary) market?
Third markets trade exchange-listed securities "over the counter" (OTC) and allow investors to trade securities without an exchange.
55
True or False: A corporation can be a general partner or limited partner in a partnership.
True (pg. 6)
56
\_\_\_\_\_\_\_ are the owners of a corporation's debt.
Bondholders
57
Study this
No answers really... just know this diagram :)
58
Name some of the **Financial Institutions in Canada.**
* Royal Bank of Canada (RBC)
* Toronto Dominion Bank (TD)
* Bank of Nova Scotia (Scotiabank)
* Bank of Montreal
* Manulife Financial corp.
* Canadian Imperial Bank of Commerce (CIBC)
* Brookfield Asset Managment inc.
* Great-West Lifeco Inc.
* Sun Life Financial inc.
* Power Financial Corp.
* National Bank of Canada
59
True or false
Net income is a firm's earnings after interest and taxes are collected.
True
60
Operating cash flow, capital spending, and additions to net working capital are the 3 components of...
Cash flow from assets
61
True or False. An IPO is a secondary market transaction.
False.
62
When working current assets are equal to current liabilities then Working capital equals...
$0
63
The life of a sole proprietorship is limited by \_\_\_\_\_\_\_.
the owner's life span.
64
A current asset will be converted to cash in less than ______ months.
12
65
What is a Co-operative (Co-op)?
A Co-op is an enterprise that is equally owned by its members, who share the benefits of co-operation based on how much they use the co-op's services
66
In a limited partnership, one or more _______ \_\_\_\_\_\_\_ has unlimited liability runs the business for one more more ______ \_\_\_\_\_\_ who do not actively participate in the business.
General Partners have unlimited liability and run the business for one more more Limited Partners.
67
True or false: Corporations have the right to vote in a general election.
False.
68
True or false: Public offerings are an example of a primary market transaction.
True.
69
What is Working Capital?
Current assets – Current liabilities.
70
What are the 4 types of Co-ops?
* Consumer Co-op
* Producer Co-op
* Worker Co-op
* Multi-stakeholder Co-op
71
What are **Insurance companies**?
Insurance companies engage in *indirect finance* by accepting funds in a form similar to deposits and making loans.
72
What is "capital gains"?
The increase in value of an investment over its purchase price.
73
True or false: In an efficient capital market, security prices fully reflect available information.
True.
74
What decisions does Working Capital Management (or managing Working Capital) support?
“Should we sell/buy on credit?” if so “What terms should we agree to?” “How much cash/inventory should we hold? Or return to our creditors?”
75
Net Income is....
A firm's earnings after interest and taxes are collected.
76
What is a corporation?
A business created as a distinct legal entity by one or more individuals or entities.
77
What is an auction market?
An auction market/exchange matches stock/equity buyers and sellers directly without a dealer. Note: dealers are not excluded from buying and selling in auction markets
78
What are money markets?
Financial markets where SHORT-term debt securities are bought and sold.
79
True or false
Is buying shares in a public offering of a start-up company considered a "primary market" transaction?
True
80
Cashflow to shareholders =
Dividends paid - new equity raised = Cashflow to shareholders
81
What 2 ways can financial markets be classfied?
Money markets or Capital markets
82
A company had 300 million shares of stock outstanding at the end of 2015. During 2015, the company reported net income of $600 million, retained earnings of $900 million, and $240 million in dividends paid. What is RDJ's earnings per share?
$2.00
EPS = Net Income/# of shares
83
True or false: Assets - Liabilities = Shareholders' equity
True.
84
It is difficult for sole proprietorships to exploit new opportunities because \_\_\_\_\_\_\_.
the amount of equity that can be raised is limited to the proprietor's personal wealth.
85
The agency problem is best defined as a conflict of interest between a firm's _____ and the firm's \_\_\_\_\_\_.
Stockholders and the firm's managers.
86
Under Capital Cost Allowance (CCA) rules Leasehold improvements follow a ______ depreciation method.
straight line
87
What is a **Trust company**?
A Trust company manage assets for estates, RRSPs and other groups. Trust funds, like chartered banks, also accept deposits and make loans
88
A money market differs from a capital market in that...
Money markets deal in **short-term** debt securities. (essentially IOUs)
89
A sole proprietorship has ______ liability for business debts and obligations.
Unlimited
90
What is a Capital Structure?
The Capital Structure defines the specific mixture of
* short-term debt
* long term debt
* equity the firm uses to finance its operations.
(pg.4)
91
True or false: Long-term debt and Equity are included in a firm's capital structure?
True
92
Investments held in units of an income trust are generally (more/less) tax efficient than other direct stock market investments.
more
93
True or false: In the long run, all business costs are variable.
True. (pg.40)
94
When calculating loss carry-back a capital loss can be used to reduce capital gains no more than the (1/2/3/4) prior years.
3
95
True or false: The threat of a hostile takeover from outside the company motivates managers to make good decisions.
True.
96
True or false: A law firm is a financial institution.
False.
97
True or false: Trademarks and Patents are intangible AND fixed assets
True.
98
What is a Chartered Bank?
Chartered banks accept deposits and make loans to invididuals, small businesses and large corporations. Chartered banks are federally regulated.
99
\_\_\_\_\_\_\_\_\_\_\_ is money spent on fixed assets less money received from the sale of fixed assets.
Net capital spending
100
What 3 questions does Corporate Finance seek to answer?
1. What long-term investments should you take on? 2. Where will you get the long-term financing to pay for your investment? 3. How will you manage your everyday financial activities?
101
The formula to calculate Operating Cash Flow is...
EBIT + Depreciation - taxes = operating cash flow. Note: in Canada Interest is calculated as part of EBIT NOT after it.
102
True or false: Business tax rates apply to income from employment (wages and salary) and from unincorporated businesses.
False.
103
True or false: Property taxes are a fixed cost.
True.
104
What are the two kinds of secondary markets?
* Dealer (or OTC) markets
* Auction (or exchange) markets
105
True or false: An option is an example of a derivative.
True.
106
The relationship between stockholders and management can be described as a(n) ________ relationship?
Agency relationship. An Agency relationship exists whenever someone (the principal) hires another (the agent) to represent his/her interests (pg.12)
107
When financial managers or investment dealers design new securities or financial processes it is called....
Financial Engineering
108
True or false: Both Product and Period costs can be fixed or variable.
True.
109
What are the 3 elements that a company commits to as part of "the triple bottom line"?
Economic sustainability Social sustainability Environmental sustainability
110
What is a derivative security?
Investment products whose value derives from the price of another, underlying, asset.
111
What is Financial Engineering?
Financial Engineering is the creation of new securities or financial processes.
112
The costs due to conflicts of interest (COI) between shareholders and management is called...
Agency costs
113
What is Capital Spending?
Capital spent of fixed assets (less money received from the sale of fixed assets).
114
True or false: Personal tax rates apply to income from employment (wages and salary) and from unincorporated businesses.
True.
115
What is the basic equation of the Income Statement?
Revenues - Expenses = Income
116
What determines where a firm will get long-term financing to pay for its investments?
The Capital Structure determines the mix of debt and equity maintained by a firm to finance long-term investments.
117
What are capital markets?
Financial markets where LONG-term debt and equity securities are bought and sold.
118
What is another term for "Cash flow from assets?"
Free cash flow.
119
True or false: Accounts receivable represents the amount not yet collected for goods and services provided.
True.
120
The triple bottom line measures:
Measures a company's economic, social and environmental performance.
121
Finanicial Institutions act as ________ between investors (with funds) and firms raising funds.
Intermediaries.
122
True or false: Third markets allow investors to trade securities directly without an exchange.
True
123
What is a Secondary Market?
A secondary market is where securities are sold after the original sale (from a corporation or government).
124
True or false: The cash flow from assets equals the total cash flow to creditors and shareholders.
True.
125
What are **Pension funds**?
Pension funds invest contributions from employers and employees in securities offered by financial markets.
126
What are some things corporations may require to trade (or "list") on an organized exchange?
Corporations may need to demonstrate - a minimum asset size or revenue - minimum # of share holders - minimum # of board members
127
Businesses are motivated to form as organizations because stockholder have _______ liability for corporate debts.
limited
128
The two basic classifications under which most financial goals fall under are ________ and \_\_\_\_\_\_\_\_\_.
1. Earning or increasing profits.
2. Controlling risk. (not cutting cost! Cutting cost is part of increasing profits).
129
Corporations are also known as ______ or \_\_\_\_\_\_.
Joint stock companies or Public limited companies
130
What is an individual's tax rate if the federal tax rate is 40% and the provincial tax rate is 10%.
50%. Tax rate is the sum of Federal and Provincial tax rates.
131
\_\_\_\_\_ and _____ are both classified as inventory.
Work in Process and Finished Goods
132
What is an Agency Relationship?
The relationship between shareholders and management.
133
What is "carrying value"?
Carrying value (or book value) is the accounting value of an asset.
134
What is the Statement of Comprehensive Income?
A financial statement summarizing a firm's performance over a period of time. Formerly called the Income Statement.
135
What are "cash flow from assets"?
The total of cash flow to bondholders and cash flow to shareholders. It consists of operating cash flow, capital spending and additions to net working capital.
136
What determines how a firm will manage everyday financial activities?
Working Capital Management is planning and managing the firm’s day-to-day (current) assets and liabilities.
137
The mixture of debt and equity maintained by a firm is known as its \_\_\_\_\_\_\_
Capital structure
138
True or false: Corporations are limited to the lives of its owners.
False. Ownership can easily be transferred
139
All 4 of these things encourage managers to act in the best interests of the shareholders:
* Managerial compensation tied to performance
* Stock options and bonuses
* Monitoring through reports
* Threat of termination
140
A debt that is not due in the coming year is a ...
long-term liability.
141
What is a sole proprietorship?
A business owned by a single individual
142
Operating cash flow refers to the cash flow resulting from...
day-to-day activities of producing and selling.
143
True or false: Bylaws are used by a corporation to regulate its existence.
True.
144
True or false: Capital Cost Allowance (CCA) is the same as depreciation under IFRS rules.
False.
145
True or false: Bond interest payments are a fixed cost.
True.
146
True or false: Workers' wages are a fixed cost.
False.
147
True or false: Depreciation (CCA) is deducted in determining income.
True.
148
True or false: In a partnership, business income is taxed as personal income.
True.
149
True or false: Interest paid is deducted from Earnings Before Interest & Tax (EBIT) in calculating income tax.
True.
150
True or false: Assets + Liabilities = Shareholders' equity
False.
151
The term capital structure describes the mix of ____ and ____ a firm uses to finance it's operations.
The mixture of **debt** and **equity** a firm uses to finance its operations.
152
What is a Primary Market?
A primary market is where the original sale of securities are made (by a corporation of government).
153
What is a partnership?
A business formed by two or more co-owners.
154
True or false
The capital budget defines the credit policy of the firm.
False
155
What is Regulatory Dialectic?
The pressures financial institutions and regulatory bodies exert on each other.
156
What is an Initial Public Offering (IPO)?
An initial public offering (IPO) is the first time that the stock of a private company is offered to the public.
157
True or false: An investment dealer is a financial institution.
True.
158
What is corporate governance?
The mechanisms and processes by which corporations are directed and controlled.
159
True or false: Dealer markets are a secondary market.
True.
160
What are hedge funds?
Hedge funds are largely **unregulated** and **privately managed** investment funds **catering to sophisticated investors,** which look to earn **high returns** using aggressive financial **strategies prohibited by mutual funds**.
161
True or false: Shareholders get paid last, after all other obligations are satisfied.
True
162
Shareholders' equity represents...
the shareholders' residual claim against the firm's assets
163
What is the goal of Financial Management?
“to maximize the current value per share of existing stock.” or “to maximize the market value of the owner’s equity.”
164
The secondary market is:
The market in which securities are bought and sold after original sale.
165
What legal rights do corporations have?
Legal power to sue. Unlimited life span (if specified) Ability to issue stock.
166
\_\_\_\_\_\_ refers to the speed and ease with which an asset can be converted to cash.
Liquidity
167
Variable costs change when...
output of the firm changes
168
True or false: Dividends paid is deducted from Earnings Before Interest & Tax (EBIT) in calculating income tax.
False.
169
True or false: Accounts payable represents the amount not yet collected for goods and services provided.
False.
170
True or false: Private placement markets are a secondary market.
False. Private placement markets are Primary markets.
171
True or false: A common stock is an example of a derivative.
False.
172
What are the effects of a good financial decision?
An increase in the value of the firm An increase in the shareholders' equity
173
What are non-cash items?
Expenses charged against revenues that do not directly affect cash flow. e.g. depreciation.
174
What is an impairment loss?
The amount by which the carrying value of an asset exceeds it's recoverable amount.
175
What are **Credit Unions?**
Credit Unions, like banks, take deposits and make loans but they are usually member owned (see Co-op) and not public traded.
