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FM > Unit 5 > Flashcards

Unit 5 Flashcards

1
Q

A company can be considered as a ___________ of ________ and __________.

A

succession

investing and financing projects

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2
Q

The following steps describe how a company works from a financial point of view:

  1. To acquire the desired investments, the company will need an amount of money.
  2. __________________
A
  1. The company has to raise the needed money by issuing capital or liabilities (debt), thereby defining the
    financial structure of the company.
  2. The company commits itself to remunerate the fund providers in return.
  3. The firm uses the raised funds to acquire the different assets needed for the investment
    project.
  4. By doing its operations, the assets of the company will be consumed and, as a result, other assets of (expected) higher value will arise.
  5. Therefore, the operations of the company are expected to increase the value of the assets that belong to the company.
  6. As the company committed itself to remunerate the fund providers, it will use the operations
    income to fulfill that commitment.
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3
Q

The financial structure of a company is defined by its _____________.

A

capital and liabilities

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4
Q

Liabilities are __________.

A

debts

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5
Q

The financial structure of a company is _______________.

A

the specific mixture of capital and liabilities a company uses to finance its operations.

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6
Q

An asset can be defined as ______________.

A

any resource with economic value which is expected to generate future cash-flows

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7
Q

If a company buys a good for 10 € and sells it for 12 €, the company will ___________ that good (that asset “disappears” or it is consumed) but, in exchange, ______________ (money or a credit).

A

lose

it receives a new asset whose value is higher

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8
Q

“Losing” a good means _______________.

A

that asset “disappears” or it is consumed

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9
Q

The operations of the company are expected to ___________ the value of the assets that belong to the company.

A

increase

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10
Q

The increasing in the value of the assets of a company in a given period of time is called ___________.

A

the Operating Income of that period

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11
Q

As the company committed itself to remunerate the fund providers, it will use the operations
income to fulfill that commitment. This remuneration is done in the following order:

A
  1. The company will pay to the debt holders.

2. The company pays the stockholders

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12
Q

Remuneration of debt holders is called ___________, and it is composed mainly of ____________.

A

the cost of debt

the interests of the loans and bonds

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13
Q

The remaining money after paying the debt holders (and the __________) is the ______, which
belongs to the stockholders of the company.

A

income tax

Net Income

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14
Q

____________ belongs to the stockholders of the company.

A

Net income

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15
Q

Net income can be used in two ways:

A
  1. It can be paid to the stockholders

2. The company can decide not to pay a dividend to the stockholders and to retain the net income

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16
Q

If net income is paid to stockholders, the company ____________ (generally, but not necessarily ________) to the stockholders. These payments are called ____________.

A

will give an amount of assets
money
dividends

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17
Q

Dividends are

A

an amount of assets, usually, but not always, money, paid to stockholders of a company.

net income paid to the stock holders

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18
Q

Net income is an amount of assets, usually, but not always, money, paid to stockholders of a company.

A

True

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19
Q

When a company decides not to pay a dividend to the stockholders, but to retain the net income instead, that net income _________, and it will be used by the company to ____________ (rather than to issue new capital). In this case, the stockholders will receive
___________, but the value of the stockholder’s equity (____________) will grow.

A

will become reserves
fund future investments
no assets
the value of the stockholder’s investment in the company

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20
Q

To pay dividends or to retain earnings are not necessarily exclusive options. The company can
decide ___________ and to _____________ or ___________ and ______________.

A

to pay a given proportion of earnings as dividends
retain the rest as reserves

not pay dividends
retain the entire income as reserves

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21
Q

Operating income is part of _______.

A

assets

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22
Q

It is possible that the interests to be paid to the debtholders are __________ than the operating income. In this case,____________ we
will get a negative net income, that is a _________. In a net loss, the value of the stockholders equity will _________.

A

higher
by subtracting the interests from the operating income
net loss
decrease

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23
Q

Net loss is when _________________.

A

the interests to be paid to the debtholders are higher than the operating income

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24
Q

It is also possible that, in the development of its operations, the company will ____________, but assets of lower value. In this case, the operations
will produce an ____________. In addition to that loss, the company will still have to ____________, so those interests must be ______________. Again, the value of the stockholders equity will decrease.

A

not receive assets of higher value
operating loss
pay the interests to the debtholders
added to the operating loss to produce an even larger net loss

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25
Q

An operating loss is when ____________.

Net loss is when _____________.

A

a company receives assets of lower value

a company receives assets of lower value, and in addition to that loss, the company still has to pay interest to the debtholders, which means the interests must be added to the operating loss to produce an even larger loss.

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26
Q

The financial position of the company must keep a ___________ between its____________ to guarantee the business continuity.

A

proper balance

assets and financial structure

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27
Q

The possible long-term balances of the financial position of a company are the following:

A
  1. Maximum stability (Assets = Shareholder’s Equity)
  2. Normal Situation (Assets = Stockholder’s equity + debt)
  3. Bankruptcy (Assets + Stockholder’s equity = Debt)
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28
Q

In maximum stability balance, _____________.

A

The company has no debt, so it cannot fail its commitments

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29
Q

In a normal long-term balance financial position, ___________.

A

The company has debt, but the value of the assets exceeds the value of the debt. Consequently,
the company will probably fulfill its debt commitments.

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30
Q

The greater the difference between assets and debt, the higher the financial stability of the company.

A

True

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31
Q

In a bankruptcy situation, _________________.

A

The assets of the company are not enough to payback the company’s debt. Consequently, all the assets are due to the debtholders and the value of the equity is negative.

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32
Q

The assets of a company are______________. That is to say: an asset is any economic resource controlled by the company, which is expected to produce cash inflows in the future.

A

the investments of that company

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33
Q

Assets are ____________.

A

any economic resource controlled by the company, which is expected to produce cash inflows in the future.

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34
Q

In the development of its operations, the assets of the company will ___________, and they will
be replaced by _____________. The
disappearance of an asset is called the _______________.

A

disappear
other assets that are expected to be of the same or higher value
consumption of that asset

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35
Q

The consumption of an asset is the _______.

A

disappearance of an asset

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36
Q

In terms of cash-flows, translate the following:

Buy raw materials -> Convert raw materials into finished products -> Sell finished products -> Collect the price

A

Money disappears and Raw materials appear -> Raw materials disappear and Finished products appear ->
Finished products disappear and Receivable (assets/ amount owed to company) appears -> Receivable disappears and Money appears

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37
Q

We can classify the assets into two groups depending on the time required to be consumed. However, to make this classification, we have to define first the
company’s life cycle.

A

True

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38
Q

A company’s life cycle is composed of the set of procedures that take place in the
company from __________.

A

the moment in which the company makes an investment in its operations, till the moment the invested money is returned

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39
Q

The life cycle of a commercial and an industrial companies would be the following:

A

Commercial:
Purchase goods -> Sell goods -> collect receivables -> Purchase goods

Industrial:
Acquire raw material -> Production -> Sell Finished goods -> Collect Receivables -> Acquire raw material

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40
Q

Current assets are those _______________. Therefore, they are expected to________.

A

which are expected to be fully consumed within the company’s life cycle

turn to cash in the short term

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41
Q

Current assets are typically the following:

A
  1. Cash and short-term financial investments
  2. Accounts receivable and other receivables
  3. Inventoried assets
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42
Q

Cash and short-term financial investments are ________.

A

these are the most liquid assets.

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43
Q

In cash and short-term financial investments, cash can be directly used as __________, while short-term financial investments can ______________.

A

a means of payment

be quickly converted into cash without value loss

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44
Q

In accounts receivable and other receivables, the receivables are ________________. Examples of accounts receivable and other receivables are:

A

the amounts of money the company has a right to collect in the future

goods and/or services that have not been paid for
other receivables can be tax refunds, cash advances, etc

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45
Q

In accounts receivable and other receivables, the receivables are ________________. Examples of accounts receivable and other receivables are:

A

the amounts of money the company has a right to collect in the future

goods and/or services that have not been paid for
other receivables can be tax refunds or cash advances

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46
Q

Inventoried assets are ____________. Examples of inventories are _______________.

A

goods and other real materials the company holds for their consumption in the business operations

raw materials, work in process, finished goods, manufacturing and packaging supplies, office
supplies, etc…

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47
Q

Fixed or noncurrent assets are _______________.

A

are those which will not be consumed in the company’s life cycle.

48
Q

There are three main kinds of fixed assets:

A
  1. Plant, property and equipment
  2. Intangible assets
  3. Long-term investments
49
Q

Plant, property and equipment are _________________. They comprise ________________.

A

tangible assets that are typically used in the
operations of the company.

land, buildings, furniture and equipment

50
Q

Intangible assets are _____________. They usually represent _______________. Examples of intangible assets are ____________.

A

assets that lack real substance, but they are expected to generate future cash-flows.

rights, privileges and competitive advantages backed by a legal agreement.

patents, copyrights, trademarks, goodwill, software licenses, etc …

51
Q

Long-term investments are ____________.

A

financial investments of the company that are in another company’s debt or equity; it is also long-term collection rights.

52
Q

Long-term investments will be consumed _________-. _____________ (that is, those which are tangible or intangible assets), however, will be
consumed _______________, although they will not be fully consumed in one single life cycle, but in __________.

A

as the collection rights are fulfilled
Real fixed assets
in the operations of the company
various life cycles

53
Q

The partial consumption of the value of the fixed asset occurred in a period of time is called _________ (in the case of tangible assets) or ________ (in the case of intangible assets).

A

depreciation

amortization

54
Q

Not all the tangible assets are depreciated. ___________ are not depreciated because _____________, that is to say, it would be consumed in infinitum life cycles.

A

land assets

it is assumed to have an unlimited useful life

55
Q

The value of the depreciation or amortization of a fixed asset depends on the following variables:

A
  1. Its useful life
  2. The depreciation basis
  3. The depreciation method
56
Q

An asset’s useful life is ____________.

A

an estimate of how long the asset will be able to be

useful for the business.

57
Q

The useful life will depend on _____________.

A

the frequency of use of the asset, its age, its possible depletion, or its obsolescence

58
Q

The useful life is typically measured in _____________, but it can be also measured in _____________.

A

time units,
other technical units (for example, number of
items produced, number of items consumed, kilometers run…)

59
Q

The depreciation basis is ______________. This basis is computed as ______________.

A

it is the part of the value of the asset that will be consumed during the useful life of the asset.

the value of the asset minus its salvage value.

60
Q

The salvage value is _______________-.

A

the estimate of the price the company could sell the asset for once it is done with

61
Q

The depreciation method is __________. The most common method is ___________, in which it is considered that _______________.

A

the way in which the amount of depreciation is calculated.

the straight-line method,

the amount of the depreciation is proportional to the consumed useful life.

62
Q

The cost value of a car is 30,000 €. The company estimates that this car will be used during 4 years, being sold after that time by 5,000 €. Estimate the annual depreciation of this car.

A

Annual depreciation: 25,000 €/4 years = 6,250 €

63
Q

The cost value of a car is 30,000 €. The company estimates that this car will be used until it has run 300,000 Km, being then sold by 5,000 €. If the car has run 130,000 Km this year, estimate the depreciation for this year.

A

Useful life: 300,000 Km
Depreciation basis: 30,000 € − 5,000€ = 25,000 €
Depreciation per Km: 25,000 €/300,000 km = 0,083 €/km
Depreciation for this year: 130,000∙0,083 = 10,833,33 €

64
Q

A financial statement is ____________.

A

an official document of a company, which aims to provide information about the financial aspects of said company

65
Q

There are three basic financial statements:

A
  1. Balance Sheet
  2. Income Statement
  3. Cash-flow Statement
66
Q

The balance sheet ____________.

A

summarizes what a company owns and owes at a point in time

67
Q

The income statement _______________.

A

reports on how much a firm earned in the period of analysis

68
Q

The cash-flow statement ____________.

A

reports on cash inflows and outflows to the company during the period of analysis

69
Q

The balance sheet reports the financial position of the company at a point in time, summarizing the company’s _____________. These three
segments inform about _____________.

A

assets, liabilities and stockholders’ equity

what the company owns and owes

70
Q

The balance sheet is divided into two parts: 1. ___________ (what the firm owns), and 2. _____________ (what the
firm owes)

A
  1. the assets or investments of the company
  2. the liabilities and equity of the company

** firm = company

71
Q

the balance sheet of a company will follow this formula:

A

value of assets = value of liabilities + value of equity

72
Q

Assets can be __________ or ____________.

A

Current

Non-current

73
Q

Current assets include:

A

Cash
Short-term investments
Accounts receivable
Inventories

74
Q

Non-current assests include:

A

Plant, property and equipment
Intangible assets
Accumulated depreciation and amortization
Long-term investments

75
Q

Short-term liabilities include:

A

Accounts payable

Other short-term liabilities

76
Q

Long-term liabilities are _____________, which include ____________.

A

Stockholders’ equity

Earnings
Reserves
Common stock

77
Q

The income statement relates _______________ during a given period, and, by the difference, _____________.

A

the company’s income and expenses

the net income earned during that period.

78
Q

income is _____________.

A

is any increase in the value of stockholder’s equity unrelated to contributions from equity participants.

79
Q

There are two types of income:

A
  1. revenue

2. gains

80
Q

Revenue arises _______________ (mainly, the sale of the finished goods) or by ____________.

A

in the course of the company’s ordinary activities as a consequence of the sale of the inventoried elements

providing a service

81
Q

Gains arise __________.

A

from the sale of a fixed asset for a price higher than its

accounting value.

82
Q

Expenses are ____________.

A

decreases in the value of the stockholder’s equity, other than those related to distributions to the equity participants

83
Q

Some examples of expenses would be:

A
  1. The consumption of inventories, such as raw materials, work-in-process, finished goods…
  2. The consumption of fixed assets (depreciation and amortization)
  3. The reception of services, such as labor costs, legal fees, advertising costs, insurance costs, rent costs…
  4. Taxes
  5. Interests, commissions and other financial expenses
  6. Losses in the disposals of fixed assets.
84
Q

Both income and expenses can be classified into Income/Expenses from ___________ and Income/Expenses from ___________, depending on if the income/expense has been originated in an ___________.

A

assets operations
financial operations
investing or a financing operation

85
Q

Most income is related to _______________. Sales revenues, gains in the disposal of
fixed assets, or revenues and gains on financial investments are _____________.

A

assets operations

income related to the investments of the company

86
Q

Income from____________ is much less usual. The only example we will study is the _____________.

A

financial operations

periodic recognition of the income generated by a grant

87
Q

Expenses related to asset operations are ____________. For instance, the consumption of inventories, depreciation, wages and salaries, services, losses in assets disposals….

A

all those expenses the company has to incur to produce and sell its products

88
Q

Financial-related expenses are ____________.

A

the interests paid for the money the company borrows,

as well as the commissions, fees and other costs associated to the liabilities operations

89
Q

INCOME FROM ASSETS include:

A
  1. (+) Sales and other revenues (+ bcz you gain money)
  2. (−) Costs of sales (- bcz you spend money)
  3. (−) Gains or losses in fixed assets disposal
  4. (±) Income tax of assets operations
90
Q

Costs of sales include:

A

− Cost of raw materials and other inventories
− Salaries and wages
− Power costs
− Depreciation and amortization
− Other production costs
− Selling, general and Administrative expenses

91
Q

INCOME FROM FINANCIAL OPERATIONS include:

A

(+) Financial revenues (recognition of grants)
(−) Interests and other financial expenses
(±) Income tax of financial operations

92
Q

NET INCOME DISTRIBUTION are your:

A

Dividends

Reserves

93
Q

Parts of an income statement are:

A
  1. Current and Previous years
  2. INCOME FROM ASSETS
  3. NET INCOME (assets operations)
  4. INCOME FROM FINANCIAL OPERATIONS
  5. NET INCOME (financial operations)
  6. NET INCOME (TOTAL)
  7. NET INCOME DISTRIBUTION
94
Q

The cash-flow statement ____________.

A

reports the variation in the cash account, showing the origins of the cash-inflows and the destinations of the cash-outflows

95
Q

Cash-flows can be divided into:

A
  1. Cash-flow from assets

2. Cash-flow from financial operations

96
Q

Cash-flow from assets is _____________, and it is computed as ___________.

A

the cash flow generated by the firm’s assets

the cash-inflows from assets minus the cash-outflows from assets

97
Q

The cash-inflows from assets are ______________.

A

collections of sales and fees, collections of fixed assets disposals, etc …

98
Q

The cash-outflows from assets are _________.

A

the payment of assets purchases, payment

of production and selling costs, etc …

99
Q

Cash-flow from financial operations is composed of __________.

A

the cash-inflows from financial operations minus the cash-outflows of financial operations

100
Q

The cash-inflows from financial operations are ______________.

A

collections of loans and stock issues, collection of grants, etc…

101
Q

The cash-outflows of financial operations are _____________.

A

the interest expenses and other loans costs, repayments of a loan’s principal, dividends paid to stockholders, payments of capital reductions, etc …

102
Q

Parts of a cash outflow statement are:

A
  1. CASH FLOW FROM ASSETS
  2. TOTAL CASH-FLOW FROM ASSETS
  3. CASH-FLOW FROM FINANCIAL OPERATIONS
  4. TOTAL CASH-FLOW FROM FINANCIAL OPERATIONS
  5. TOTAL CASH-FLOW
103
Q

CASH FLOW FROM ASSETS include:

A
  1. (−) Fixed assets purchases
  2. (±) Working capital variations
  3. (+) Fixed assets disposals
  4. (+) Cash receipts from customers (sales and other revenues)
  5. (−) Cash paid for costs of sales
  6. (±) Receipt/Payment for income tax of assets operations
104
Q

Cash paid for costs of sales include:

A

− Payments for purchases of raw materials and other inventories
− Payments for salaries and wages
− Payments for power costs
− Payments for other production costs
− Payments for selling, general and administrative expenses

105
Q

CASH-FLOW FROM FINANCIAL OPERATIONS include:

A
  1. (+) New stock issues
  2. (−) Cost of issuing equity
  3. (−) Dividends paid
  4. (−) Capital reductions
  5. (+) Cash borrowed
  6. (−) Interests paid
  7. (−) Principal repayments
  8. (±) Receipt/Payment of income tax of financial operations
106
Q

The three financial statements are interrelated.

A

True

107
Q

The balance sheet reports both ____________. The income statement _____________, whereas the cash-flow statement _____________.

A

the balance of the cash account and the net income account

informs about how the balance of the net income has been obtained

explains the causes of the variation in the cash balance

108
Q

On a balance sheet, the cash under the current assets section reflects __________, and the earnings under the stockholder’s equity reflects ___________.

A

the cash-flow statement

the income statement

109
Q

Although there is a close relationship between cash-inflows (_________) and incomes (_________), as well as between __________, we can not
forget the fact that they are different concepts.

A

collections
payments
expenses and cash-outflows

110
Q

We can see that there are ________ that, simultaneously, can suppose as much cash-inflow as an income for the same amount (for example, ___________).

A

operations

a sale of merchandise charged in cash

111
Q

It is also possible that an income is obtained ___________, but it is expected to occur in the future
(for example, ____________).

A

at a time without its associated charge occurring at that moment

the sale of goods with deferred collection, the increase in the value of assets of the company

112
Q

It is possible that incomes and cash-inflows are produced, but for a ___________ (for example, the sale of a non-current asset for a price higher than its book value)

A

different amount

113
Q

Although income usually involves a ___________ (simultaneously or at another moment in time), the reverse is not always true, since ____________. An example is the collections received as a result of the company’s funding sources.

A

collection

there are collections that do not have associated revenues

114
Q

There are operations that, simultaneously, can suppose both an ___________ for the same amount (for example, a purchase of merchandise paid in cash).

A

expense and a payment

115
Q

It is possible that an expense is obtained ________________ (for example, the purchase of goods with deferred payment, purchase of non-current assets / amortization).

A

at a time without its associated payment occurring at that moment, but will be made in the future

116
Q

Although expenses usually have ___________ (simultaneously or at another time of the time), the _________ is not always true, since __________. This would be the case of payments to amortize financial sources or _____________.

A

a payment associated with it
inverse
there are payments that are not associated with expenses
the payment of dividends as remuneration of own
capital

FM (11 decks)

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