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Team 1 - BUSA523 - Corporate Finance > Unit 1 - Conceptual Framework & Accounting Review > Flashcards

Unit 1 - Conceptual Framework & Accounting Review Flashcards

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1
Q

True or false: Both Product and Period costs can be fixed or variable.

A

True.

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2
Q

(Quiz)

What was the intent of the Sarbanes Oxley Act?

A

It was intended to protect investors from corporate abuses

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3
Q

True or false: In an efficient capital market, security prices fully reflect available information.

A

True.

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4
Q

Finanicial Institutions act as ________ between investors (with funds) and firms raising funds.

A

Intermediaries.

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5
Q

(Quiz)

The triple bottom line measures:

A

Measures a company’s economic, social and environmental performance.

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6
Q

_______ allow corporate ownership to be transferred.

A

Shares of stock.

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7
Q

What are non-cash items?

A

Expenses charged against revenues that do not directly affect cash flow. e.g. depreciation.

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8
Q

(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?

A

$2.00

EPS = Net Income/# of shares

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9
Q

What is CSR?

A

Corporate Social Responsibility.

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10
Q

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.

A

General Partners have unlimited liability and run the business for one more more Limited Partners.

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11
Q

What is a big advantage of a sole-proprietorship and partnership?

A

owners keep all the profits.

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12
Q

True or false: Capital Cost Allowance (CCA) is unique to Canada.

A

True.

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13
Q

Operating cash flow refers to the cash flow resulting from…

A

day-to-day activities of producing and selling.

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14
Q

(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.

A

$80

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15
Q

True or false: Long-term debt and Equity are included in a firm’s capital structure?

A

True

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16
Q

True or false: Workers’ wages are a fixed cost.

A

False.

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17
Q

What are capital markets?

A

Financial markets where LONG-term debt and equity securities are bought and sold.

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18
Q

What determines where a firm will get long-term financing to pay for its investments?

A

The Capital Structure determines the mix of debt and equity maintained by a firm to finance long-term investments.

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19
Q

What is a Primary Market?

A

A primary market is where the original sale of securities are made (by a corporation of government).

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20
Q

What is a corporation?

A

A business created as a distinct legal entity by one or more individuals or entities.

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21
Q

The goal of a for-profit business is to…

A

maximize owners’ equity.

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22
Q

What is an individual’s tax rate if the federal tax rate is 40% and the provincial tax rate is 10%.

A

50%. Tax rate is the sum of Federal and Provincial tax rates.

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23
Q

What is a third (or tertiary) market?

A

Third markets trade exchange-listed securities “over the counter” (OTC) and allow investors to trade securities without an exchange.

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24
Q

What is “loss carry-back”?

A

Using a year’s capital losses to offset capital gains of a previous year.

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25
Q

How is Dividents Per Share (DPS) calculated?

A

Dividends/Total # of shares = Dividends Per Share.

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26
Q

(Quiz)

Working Capital Management refers to

A

The levels of cash and inventory held.

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27
Q

(Quiz)

Which of the following is a type of agency cost?

A

The cost of an audit of the firm’s financial statements.

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28
Q

What is a Trust company?

A

A Trust company manage assets for estates, RRSPs and other groups. Trust funds, like chartered banks, also accept deposits and make loans

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29
Q

Variable costs change when…

A

output of the firm changes

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30
Q

True or false: Interest paid is deducted from Earnings Before Interest & Tax (EBIT) in calculating income tax.

A

True.

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31
Q

It is difficult for sole proprietorships to exploit new opportunities because _______.

A

the amount of equity that can be raised is limited to the proprietor’s personal wealth.

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32
Q

What is a Chartered Bank?

A

Chartered banks accept deposits and make loans to invididuals, small businesses and large corporations. Chartered banks are federally regulated.

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33
Q

What is undepreciated capital cost (UCC)?

A

The assets book value for tax purposes. Original (installed) cost - depreciation value (CCA) = UCC

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34
Q

True or false: Shareholders get paid last, after all other obligations are satisfied.

A

True

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35
Q

Under Capital Cost Allowance (CCA) rules Leasehold improvements follow a ______ depreciation method.

A

straight line

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36
Q

Corporate Social Responsibility (CSR) is also known as _________ or ________.

A

Corporate sustainability or The triple bottom line

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37
Q

When financial managers or investment dealers design new securities or financial processes it is called….

A

Financial Engineering

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38
Q

What is another term for “Cash flow from assets?”

A

Free cash flow.

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39
Q

The “Agency Problem” is defined as….

A

The possibility of conflicts of interest between the shareholders and management of a firm.

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40
Q

_______ are the owners of a corporation’s debt.

A

Bondholders

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41
Q

(Quiz)

Financial managers should strive to maximize the current value per share of the existing stock because:

A

They have been hired for the purpose of representing the interest of the current shareholders.

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42
Q

(Quiz)

The term capital structure describes:

A

The mixture of debt and equity a firm uses to finance its operations.

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43
Q

(Quiz)

Which statement best describes hedge funds:

A

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.

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44
Q

Cashflow to shareholders =

A

Dividends paid - new equity raised = Cashflow to shareholders

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45
Q

True or false: Third markets allow investors to trade securities directly without an exchange.

A

True

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46
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.

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47
Q

(Quiz)

Which of the following is considered a “primary market” transaction?

A

You buy shares in the public offering of a start-up company in the computer industry.

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48
Q

__________ and _________ can maximize short-term profits but threaten long-term sustainability.

A

Deferring maintenance and Reducing critical inventories

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49
Q

A money market differs from a capital market in that…

A

Money markets deal in short-term debt securities. (essentially IOUs)

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50
Q

______ refers to the speed and ease with which an asset can be converted to cash.

A

Liquidity

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51
Q

What determines how a firm will manage everyday financial activities?

A

Working Capital Management is planning and managing the firm’s day-to-day (current) assets and liabilities.

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52
Q

True or false: Depreciation is a non-cash item

A

True.

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53
Q

What 2 ways can financial markets be classfied?

A

Money markets or Capital markets

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54
Q

What are the two kinds of secondary markets?

A
  • Dealer (or OTC) markets
  • Auction (or exchange) markets
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55
Q

True or false: Accounts receivable represents the amount not yet collected for goods and services provided.

A

True.

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56
Q

What legal rights do corporations have?

A

Legal power to sue. Unlimited life span (if specified) Ability to issue stock.

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57
Q

True or false: Public offerings are an example of a primary market transaction.

A

True.

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58
Q

What 3 questions does Corporate Finance seek to answer?

A
  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?
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59
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.

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60
Q

Who are the 2 different finance managers that typically report into the CFO?

A
  1. 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?
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61
Q

True or false: Assets - Liabilities = Shareholders’ equity

A

True.

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62
Q

What are Pension funds?

A

Pension funds invest contributions from employers and employees in securities offered by financial markets.

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63
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.

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64
Q

Net Income is….

A

A firm’s earnings after interest and taxes are collected.

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65
Q

The two basic classifications under which most financial goals fall under are ________ and _________.

A
  1. Earning or increasing profits.
  2. Controlling risk. (not cutting cost! Cutting cost is part of increasing profits).
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66
Q

What is a sole proprietorship?

A

A business owned by a single individual

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67
Q

What are Insurance companies?

A

Insurance companies engage in indirect finance by accepting funds in a form similar to deposits and making loans.

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68
Q

___________ is money spent on fixed assets less money received from the sale of fixed assets.

A

Net capital spending

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69
Q

Operating cash flow, capital spending, and additions to net working capital are the 3 components of…

A

Cash flow from assets

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70
Q

What decisions does the Capital Structure support?

A

“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)”

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71
Q

What is “carrying value”?

A

Carrying value (or book value) is the accounting value of an asset.

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72
Q

_________ _________ refers to the rules for corporate organization and conduct.

A

Corporate governance

73
Q

True or false: Equities are issued solely by corporations.

A

True. Note: governments issues Debt Securities.

74
Q

A sole proprietorship has ______ liability for business debts and obligations.

A

Unlimited

75
Q

True or false: The cash flow from assets equals the total cash flow to creditors and shareholders.

A

True.

76
Q

What is “realized capital gains”?

A

The increase in value of an investment, when converted to cash.

77
Q

(Quiz)

The agency problem is best defined as a conflict of interest between a firm’s:

A

Stockholders and the firm’s managers.

78
Q

What is IFRS?

A

International Financial Reporting Standards

79
Q

______ are the owners of a corporation.

A

Shareholders

80
Q

What is “average tax rate”?

A

Total taxes paid/total taxable income

81
Q

What is Working Capital?

A

Current assets – Current liabilities.

82
Q

What is an Initial Public Offering (IPO)?

A

An initial public offering (IPO) is the first time that the stock of a private company is offered to the public.

83
Q

What are some things corporations may require to trade (or “list”) on an organized exchange?

A

Corporations may need to demonstrate - a minimum asset size or revenue - minimum # of share holders - minimum # of board members

84
Q

How is Earnings Per Share (EPS) calculated?

A

Net Income / Total # of shares = Earnings Per Share.

85
Q

True or false: Bond interest payments are a fixed cost.

A

True.

86
Q

The formula to calculate Operating Cash Flow is…

A

EBIT + Depreciation - taxes = operating cash flow. Note: in Canada Interest is calculated as part of EBIT NOT after it.

87
Q

What is the Statement of Comprehensive Income?

A

A financial statement summarizing a firm’s performance over a period of time. Formerly called the Income Statement.

88
Q

What is Financial Engineering?

A

Financial Engineering is the creation of new securities or financial processes.

89
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.

90
Q

True or false: Dividends paid is deducted from Earnings Before Interest & Tax (EBIT) in calculating income tax.

A

False.

91
Q

True or false: Corporations are limited to the lives of its owners.

A

False. Ownership can easily be transferred

92
Q

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.

A

3

93
Q

Corporations are also known as ______ or ______.

A

Joint stock companies or Public limited companies

94
Q

True or false: Personal tax rates apply to income from employment (wages and salary) and from unincorporated businesses.

A

True.

95
Q

What are Mutual funds?

A

Mutual funds pool individual investments to purchase diversified portfolios of securities.

96
Q

(Quiz)

The secondary market is:

A

The market in which securities are bought and sold after original sale.

97
Q

Study this

A

No answers really… just know this diagram :)

98
Q

_____ and _____ are both classified as inventory.

A

Work in Process and Finished Goods

99
Q

A firm’s liabilities are classified as either ____ or _____.

A

Current or Long-term

100
Q

True or false: Capital Cost Allowance (CCA) is the same as depreciation under IFRS rules.

A

False.

101
Q

What is a Capital Structure?

A

The Capital Structure defines the specific mixture of

  • short-term debt
  • long term debt
  • equity the firm uses to finance its operations.

(pg.4)

102
Q

All 4 of these things encourage managers to act in the best interests of the shareholders:

A
  • Managerial compensation tied to performance
  • Stock options and bonuses
  • Monitoring through reports
  • Threat of termination
103
Q

What are Credit Unions?

A

Credit Unions, like banks, take deposits and make loans but they are usually member owned (see Co-op) and not public traded.

104
Q

What is “capital gains”?

A

The increase in value of an investment over its purchase price.

105
Q

Businesses are motivated to form as organizations because stockholder have _______ liability for corporate debts.

A

limited

106
Q
A
107
Q

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.

A

False. Financial Accounting performs this task.

108
Q

(Quiz)

Which of the following is not a capital budgeting question?

A

Credit policy to provide.

109
Q

What is the basic equation of the Income Statement?

A

Revenues - Expenses = Income

110
Q

What is the goal of Financial Management?

A

“to maximize the current value per share of existing stock.” or “to maximize the market value of the owner’s equity.”

111
Q

What are money markets?

A

Financial markets where SHORT-term debt securities are bought and sold.

112
Q

True or false: Trademarks and Patents are intangible AND fixed assets

A

True.

113
Q

The life of a sole proprietorship is limited by _______.

A

the owner’s life span.

114
Q

True or false: In a partnership, business income is taxed as personal income.

A

True.

115
Q

(Quiz)

The best definition of derivative securities is:

A

Investment products whose value derives from the price of another, underlying, asset.

116
Q

What is EPS?

A

Earnings Per Share

117
Q

True or false: Corporations have the right to vote in a general election.

A

False.

118
Q

What is an impairment loss?

A

The amount by which the carrying value of an asset exceeds it’s recoverable amount.

119
Q

What are the effects of a good financial decision?

A

An increase in the value of the firm An increase in the shareholders’ equity

120
Q

Investments held in units of an income trust are generally (more/less) tax efficient than other direct stock market investments.

A

more

121
Q

Forming a corporation involves preparing ____________ and a set of ________.

A
  • Articles of Incorporation (or a charter) - Bylaws
122
Q

What is a Secondary Market?

A

A secondary market is where securities are sold after the original sale (from a corporation or government).

123
Q

(Quiz)

The best definition of corporate governance is:

A

The mechanisms and processes by which corporations are directed and controlled.

124
Q

True or false: Property taxes are a fixed cost.

A

True.

125
Q

What is an Agency Relationship?

A

The relationship between shareholders and management.

126
Q

True or false: Assets + Liabilities = Shareholders’ equity

A

False.

127
Q

(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,

A

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.

128
Q

True or false: A stakeholder is anyone that potentially has a claim on the cash flows of a firm.

A

True.

129
Q

True or false: A law firm is a financial institution.

A

False.

130
Q

List different types of Financial Institutions in Canada:

A
  • Chartered Banks
  • Trust Companies
  • Credit Unions
  • Investment Dealers
  • Insurance companies
  • Pension funds
  • Mutual funds
131
Q

Assets (other than leasehold improvements) under CCA depreciation rules follow the ________ depreciation method.

A

declining balance

132
Q

True or false: Business tax rates apply to income from employment (wages and salary) and from unincorporated businesses.

A

False.

133
Q

True or false: Depreciation (CCA) is deducted in determining income.

A

True.

134
Q

What is a Derivative Security (or derivative)?

A

Derivative Securities are options, futures, and other securities whos value derives from the price of another asset.

135
Q

What are the 3 elements that a company commits to as part of “the triple bottom line”?

A

Economic sustainability Social sustainability Environmental sustainability

136
Q

True or false: In the long run, all business costs are variable.

A

True. (pg.40)

137
Q

True or false: The threat of a hostile takeover from outside the company motivates managers to make good decisions.

A

True.

138
Q

What is a Co-operative (Co-op)?

A

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

139
Q

(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?

A

$35

NWC = Current Assets - Current Liabilities.

Fixed assets = long-term assets

140
Q

A debt that is not due in the coming year is a …

A

long-term liability.

141
Q

The costs due to conflicts of interest (COI) between shareholders and management is called…

A

Agency costs

142
Q

True or false: Dealer markets are a secondary market.

A

True.

143
Q

What is a partnership?

A

A business formed by two or more co-owners.

144
Q

True or false: A common stock is an example of a derivative.

A

False.

145
Q

What decisions does Working Capital Management (or managing Working Capital) support?

A

“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?”

146
Q

When working current assets are equal to current liabilities then Working capital equals…

A

$0

147
Q

True or false: An option is an example of a derivative.

A

True.

148
Q

The mixture of debt and equity maintained by a firm is known as its _______

A

Capital structure

149
Q

True or False: A corporation can be a general partner or limited partner in a partnership.

A

True (pg. 6)

150
Q

What is an auction market?

A

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

151
Q

True or false: General partnerships must pay taxes as a legal entity.

A

False. Partners are taxed on business income as personal income.

152
Q

True or false: Accounts payable represents the amount not yet collected for goods and services provided.

A

False.

153
Q

What is Regulatory Dialectic?

A

The pressures financial institutions and regulatory bodies exert on each other.

154
Q

True or False. An IPO is a secondary market transaction.

A

False.

155
Q

Shareholders’ equity represents…

A

the shareholders’ residual claim against the firm’s assets

156
Q

True or false: Corporation owners have unlimited liability.

A

False.

157
Q

True or false: Private placement markets are a secondary market.

A

False. Private placement markets are Primary markets.

158
Q

What are the 4 types of Co-ops?

A
  • Consumer Co-op
  • Producer Co-op
  • Worker Co-op
  • Multi-stakeholder Co-op
159
Q

Name some of the Financial Institutions in Canada.

A
  • 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
160
Q

True or false: An investment dealer is a financial institution.

A

True.

161
Q

(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.

A

$16,660

162
Q

(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.

A

$435

163
Q

A current asset will be converted to cash in less than ______ months.

A

12

164
Q

(Quiz)

The ultimate responsibility for a corporation rests with:

A

The Board of directors.

165
Q

True or false: CCA calculation begins by assigning every capital asset to a particular class.

A

True.

166
Q

True or false: Bylaws are used by a corporation to regulate its existence.

A

True.

167
Q

True or false: Assets = Liabilities + Shareholders’ equity

A

True.

168
Q

The relationship between stockholders and management can be described as a(n) ________ relationship?

A

Agency relationship. An Agency relationship exists whenever someone (the principal) hires another (the agent) to represent his/her interests (pg.12)

169
Q
A
170
Q

What decisions does the Capital Budget support?

A

“Do we build or buy?” “How many stores should we open?” “How much should we buy?”

171
Q

What is Capital Spending?

A

Capital spent of fixed assets (less money received from the sale of fixed assets).

172
Q

Stakeholders could be a ________, ________, or ______ that potentially has a claim on the cash flows of a firm.

A

Shareholder, creditor or other invidual (or group)

173
Q

What is “marginal tax rate”?

A

Amount of tax payable on the next dollar earned.

174
Q

Statement of Financial Position

A

Study this

175
Q

What is a fourth (or quarterniary) market?

A

Forth markets allow institution-to-institution trading without using brokers or dealers.

176
Q

What are “cash flow from assets”?

A

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.

177
Q

What process determines a firm’s long-term investments?

A

The Capital Budgeting Process plans and manages a firm’s long-term assets.

178
Q

What is Capital Cost Allowance (CCA)?

A

CCA is depreciation for tax purposes in Canada.

179
Q

Some of the cash flow generated by a firm goes back to the financial markets in the form of __________.

A

Dividends and debt payments.

Team 1 - BUSA523 - Corporate Finance (8 decks)

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