Unit 1 - Conceptual Framework & Accounting Review Flashcards
True or false: Both Product and Period costs can be fixed or variable.
True.
(Quiz)
What was the intent of the Sarbanes Oxley Act?
It was intended to protect investors from corporate abuses
True or false: In an efficient capital market, security prices fully reflect available information.
True.
Finanicial Institutions act as ________ between investors (with funds) and firms raising funds.
Intermediaries.
(Quiz)
The triple bottom line measures:
Measures a company’s economic, social and environmental performance.
_______ allow corporate ownership to be transferred.
Shares of stock.
What are non-cash items?
Expenses charged against revenues that do not directly affect cash flow. e.g. depreciation.
(Quiz)
RDJ Manufacturing 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
What is CSR?
Corporate Social Responsibility.
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.
What is a big advantage of a sole-proprietorship and partnership?
owners keep all the profits.
True or false: Capital Cost Allowance (CCA) is unique to Canada.
True.
Operating cash flow refers to the cash flow resulting from…
day-to-day activities of producing and selling.
(Quiz)
BassiCorporation had a beginning and ending fixed asset balance of $400 and $650 respectively. During the year its net capital spending was $330. Given this information, determine the company’s depreciation expense.
$80
True or false: Long-term debt and Equity are included in a firm’s capital structure?
True
True or false: Workers’ wages are a fixed cost.
False.
What are capital markets?
Financial markets where LONG-term debt and equity securities are bought and sold.
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.
What is a Primary Market?
A primary market is where the original sale of securities are made (by a corporation of government).
What is a corporation?
A business created as a distinct legal entity by one or more individuals or entities.
The goal of a for-profit business is to…
maximize owners’ equity.
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.
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.
What is “loss carry-back”?
Using a year’s capital losses to offset capital gains of a previous year.
How is Dividents Per Share (DPS) calculated?
Dividends/Total # of shares = Dividends Per Share.
(Quiz)
Working Capital Management refers to
The levels of cash and inventory held.
(Quiz)
Which of the following is a type of agency cost?
The cost of an audit of the firm’s financial statements.
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
Variable costs change when…
output of the firm changes
True or false: Interest paid is deducted from Earnings Before Interest & Tax (EBIT) in calculating income tax.
True.
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.
What is a Chartered Bank?
Chartered banks accept deposits and make loans to invididuals, small businesses and large corporations. Chartered banks are federally regulated.
What is undepreciated capital cost (UCC)?
The assets book value for tax purposes. Original (installed) cost - depreciation value (CCA) = UCC
True or false: Shareholders get paid last, after all other obligations are satisfied.
True
Under Capital Cost Allowance (CCA) rules Leasehold improvements follow a ______ depreciation method.
straight line
Corporate Social Responsibility (CSR) is also known as _________ or ________.
Corporate sustainability or The triple bottom line
When financial managers or investment dealers design new securities or financial processes it is called….
Financial Engineering
What is another term for “Cash flow from assets?”
Free cash flow.
The “Agency Problem” is defined as….
The possibility of conflicts of interest between the shareholders and management of a firm.
_______ are the owners of a corporation’s debt.
Bondholders
(Quiz)
Financial managers should strive to maximize the current value per share of the existing stock because:
They have been hired for the purpose of representing the interest of the current shareholders.
(Quiz)
The term capital structure describes:
The mixture of debt and equity a firm uses to finance its operations.
(Quiz)
Which statement best describes 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.
Cashflow to shareholders =
Dividends paid - new equity raised = Cashflow to shareholders
True or false: Third markets allow investors to trade securities directly without an exchange.
True
True or false: Articles of incorporation (or the charter) are used by a corporation to regulate its existence.
False. Bylaws are used to regulate a corporation’s existence.
(Quiz)
Which of the following is considered a “primary market” transaction?
You buy shares in the public offering of a start-up company in the computer industry.
__________ and _________ can maximize short-term profits but threaten long-term sustainability.
Deferring maintenance and Reducing critical inventories
A money market differs from a capital market in that…
Money markets deal in short-term debt securities. (essentially IOUs)
______ refers to the speed and ease with which an asset can be converted to cash.
Liquidity
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.
True or false: Depreciation is a non-cash item
True.
What 2 ways can financial markets be classfied?
Money markets or Capital markets
What are the two kinds of secondary markets?
- Dealer (or OTC) markets
- Auction (or exchange) markets
True or false: Accounts receivable represents the amount not yet collected for goods and services provided.
True.
What legal rights do corporations have?
Legal power to sue. Unlimited life span (if specified) Ability to issue stock.
True or false: Public offerings are an example of a primary market transaction.
True.
What 3 questions does Corporate Finance seek to answer?
- 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?
What is the “half-year rule” under CCA?
CRA’s requirement to figure depreciation on only one-half of an asset’s installed cost for its first year or use.
Who are the 2 different finance managers that typically report into the CFO?
- 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?
True or false: Assets - Liabilities = Shareholders’ equity
True.
What are Pension funds?
Pension funds invest contributions from employers and employees in securities offered by financial markets.
What are Investment Dealers?
Investment Dealers are non-depository instituions that assist firms in issuing new securities in exchange for a fee income.
Net Income is….
A firm’s earnings after interest and taxes are collected.
The two basic classifications under which most financial goals fall under are ________ and _________.
- Earning or increasing profits.
- Controlling risk. (not cutting cost! Cutting cost is part of increasing profits).
What is a sole proprietorship?
A business owned by a single individual
What are Insurance companies?
Insurance companies engage in indirect finance by accepting funds in a form similar to deposits and making loans.
___________ is money spent on fixed assets less money received from the sale of fixed assets.
Net capital spending
Operating cash flow, capital spending, and additions to net working capital are the 3 components of…
Cash flow from assets
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)”
What is “carrying value”?
Carrying value (or book value) is the accounting value of an asset.
_________ _________ refers to the rules for corporate organization and conduct.
Corporate governance
True or false: Equities are issued solely by corporations.
True. Note: governments issues Debt Securities.
A sole proprietorship has ______ liability for business debts and obligations.
Unlimited
True or false: The cash flow from assets equals the total cash flow to creditors and shareholders.
True.
What is “realized capital gains”?
The increase in value of an investment, when converted to cash.
(Quiz)
The agency problem is best defined as a conflict of interest between a firm’s:
Stockholders and the firm’s managers.
What is IFRS?
International Financial Reporting Standards
______ are the owners of a corporation.
Shareholders
What is “average tax rate”?
Total taxes paid/total taxable income
What is Working Capital?
Current assets – Current liabilities.
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.
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
How is Earnings Per Share (EPS) calculated?
Net Income / Total # of shares = Earnings Per Share.
True or false: Bond interest payments are a fixed cost.
True.
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.
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.
What is Financial Engineering?
Financial Engineering is the creation of new securities or financial processes.
What is a dealer market (OTC)?
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.
True or false: Dividends paid is deducted from Earnings Before Interest & Tax (EBIT) in calculating income tax.
False.
True or false: Corporations are limited to the lives of its owners.
False. Ownership can easily be transferred
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
Corporations are also known as ______ or ______.
Joint stock companies or Public limited companies
True or false: Personal tax rates apply to income from employment (wages and salary) and from unincorporated businesses.
True.
What are Mutual funds?
Mutual funds pool individual investments to purchase diversified portfolios of securities.
(Quiz)
The secondary market is:
The market in which securities are bought and sold after original sale.
Study this
No answers really… just know this diagram :)
_____ and _____ are both classified as inventory.
Work in Process and Finished Goods
A firm’s liabilities are classified as either ____ or _____.
Current or Long-term
True or false: Capital Cost Allowance (CCA) is the same as depreciation under IFRS rules.
False.
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)
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
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.
What is “capital gains”?
The increase in value of an investment over its purchase price.
Businesses are motivated to form as organizations because stockholder have _______ liability for corporate debts.
limited
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.
(Quiz)
Which of the following is not a capital budgeting question?
Credit policy to provide.
What is the basic equation of the Income Statement?
Revenues - Expenses = Income
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.”
What are money markets?
Financial markets where SHORT-term debt securities are bought and sold.
True or false: Trademarks and Patents are intangible AND fixed assets
True.
The life of a sole proprietorship is limited by _______.
the owner’s life span.
True or false: In a partnership, business income is taxed as personal income.
True.
(Quiz)
The best definition of derivative securities is:
Investment products whose value derives from the price of another, underlying, asset.
What is EPS?
Earnings Per Share
True or false: Corporations have the right to vote in a general election.
False.
What is an impairment loss?
The amount by which the carrying value of an asset exceeds it’s recoverable amount.
What are the effects of a good financial decision?
An increase in the value of the firm An increase in the shareholders’ equity
Investments held in units of an income trust are generally (more/less) tax efficient than other direct stock market investments.
more
Forming a corporation involves preparing ____________ and a set of ________.
- Articles of Incorporation (or a charter) - Bylaws
What is a Secondary Market?
A secondary market is where securities are sold after the original sale (from a corporation or government).
(Quiz)
The best definition of corporate governance is:
The mechanisms and processes by which corporations are directed and controlled.
True or false: Property taxes are a fixed cost.
True.
What is an Agency Relationship?
The relationship between shareholders and management.
True or false: Assets + Liabilities = Shareholders’ equity
False.
(Quiz)
The Board of Directors of Beeline, Inc. has decided to base the salary of its financial manager entirely upon the market share of the firm. Accordingly,
The firm may incur some agency costs since the manager will be focused on the market share of the firm rather than acting to maximize earnings.
True or false: A stakeholder is anyone that potentially has a claim on the cash flows of a firm.
True.
True or false: A law firm is a financial institution.
False.
List different types of Financial Institutions in Canada:
- Chartered Banks
- Trust Companies
- Credit Unions
- Investment Dealers
- Insurance companies
- Pension funds
- Mutual funds
Assets (other than leasehold improvements) under CCA depreciation rules follow the ________ depreciation method.
declining balance
True or false: Business tax rates apply to income from employment (wages and salary) and from unincorporated businesses.
False.
True or false: Depreciation (CCA) is deducted in determining income.
True.
What is a Derivative Security (or derivative)?
Derivative Securities are options, futures, and other securities whos value derives from the price of another asset.
What are the 3 elements that a company commits to as part of “the triple bottom line”?
Economic sustainability Social sustainability Environmental sustainability
True or false: In the long run, all business costs are variable.
True. (pg.40)
True or false: The threat of a hostile takeover from outside the company motivates managers to make good decisions.
True.
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
(Quiz)
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
A debt that is not due in the coming year is a …
long-term liability.
The costs due to conflicts of interest (COI) between shareholders and management is called…
Agency costs
True or false: Dealer markets are a secondary market.
True.
What is a partnership?
A business formed by two or more co-owners.
True or false: A common stock is an example of a derivative.
False.
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?”
When working current assets are equal to current liabilities then Working capital equals…
$0
True or false: An option is an example of a derivative.
True.
The mixture of debt and equity maintained by a firm is known as its _______
Capital structure
True or False: A corporation can be a general partner or limited partner in a partnership.
True (pg. 6)
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
True or false: General partnerships must pay taxes as a legal entity.
False. Partners are taxed on business income as personal income.
True or false: Accounts payable represents the amount not yet collected for goods and services provided.
False.
What is Regulatory Dialectic?
The pressures financial institutions and regulatory bodies exert on each other.
True or False. An IPO is a secondary market transaction.
False.
Shareholders’ equity represents…
the shareholders’ residual claim against the firm’s assets
True or false: Corporation owners have unlimited liability.
False.
True or false: Private placement markets are a secondary market.
False. Private placement markets are Primary markets.
What are the 4 types of Co-ops?
- Consumer Co-op
- Producer Co-op
- Worker Co-op
- Multi-stakeholder Co-op
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
True or false: An investment dealer is a financial institution.
True.
(Quiz)
A $40,000 asset was purchased and classified as a Class 10 asset for CCA purposes. If the CCA rate is 30%, calculate UCC for the end of year 3.
$16,660
(Quiz)
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.
$435
A current asset will be converted to cash in less than ______ months.
12
(Quiz)
The ultimate responsibility for a corporation rests with:
The Board of directors.
True or false: CCA calculation begins by assigning every capital asset to a particular class.
True.
True or false: Bylaws are used by a corporation to regulate its existence.
True.
True or false: Assets = Liabilities + Shareholders’ equity
True.
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)
What decisions does the Capital Budget support?
“Do we build or buy?” “How many stores should we open?” “How much should we buy?”
What is Capital Spending?
Capital spent of fixed assets (less money received from the sale of fixed assets).
Stakeholders could be a ________, ________, or ______ that potentially has a claim on the cash flows of a firm.
Shareholder, creditor or other invidual (or group)
What is “marginal tax rate”?
Amount of tax payable on the next dollar earned.
Statement of Financial Position
Study this
What is a fourth (or quarterniary) market?
Forth markets allow institution-to-institution trading without using brokers or dealers.
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.
What process determines a firm’s long-term investments?
The Capital Budgeting Process plans and manages a firm’s long-term assets.
What is Capital Cost Allowance (CCA)?
CCA is depreciation for tax purposes in Canada.
Some of the cash flow generated by a firm goes back to the financial markets in the form of __________.
Dividends and debt payments.
