Week 2 Flashcards
1
Q
mathematical formulas in finance
A
= concept of hte time value of money gets to hte heart of every calculation. nb/c the calculations are driven by the fundamental principles
2
Q
value of cash flow in time
A
- use formulas to calculate the value of cash flows when either pushing them out in time (calculate a future value) or pulling them back in time (calculate a present value)
3
Q
source of funds corporations use to fund their operations
A
corporations use other people’s money (from debtors or common stock holders) to fund their operations. those investers deserve to be paid for the use of their money
4
Q
cost of money
A
raising money costs money
5
Q
2 general forms of how corporations raise money
A
debt = borrowing money
equity = selling partial ownership in the firm
6
Q
debt =
A
borrowing money
7
Q
equity =
A
selling partial ownership in the firm
8
Q
what is the cost of debt
A
interest
9
Q
what does interest rte mean to the borrower & lender
A
borrower = interest rate represents cost
lender = interest rate represents income (aka yield/return)
10
Q
what does interest rate represent to borrowers
A
interest rate represents the cost of debt
11
Q
what does the interest rate represent to the lender
A
interest rate represents income to the lender. aka yield/return
12
Q
yield or return
A
interest rate the lender of debt gets for letting someone borrow money
13
Q
2 costs of equity
A
dividends = quarterly payment of cash
capital gains = increases in teh stock market price
14
Q
dividends
A
quarterly payments of cash
15
Q
quarterly payments of cash
A
dividends
16
Q
capital gains
A
increases in the stock market price
17
Q
increases in the stock market price
A
capital gains
18
Q
total yield to equity holders =
A
dividend yield and the capital gains yield
19
Q
what is the value of an asset with the present value of cash flow
A
value of an asset with the present value of the cash flows the asset is expected to produce
20
Q
discounting
A
when discounting is done more frequently than annually, that inccreases the discount rate so the present value of hte cash flow decreases
21
Q
what happens when you increase the discount rate
A
when you increase the discount rate, that decreases the present value of cash flow
22
Q
why do people save their money
A
so it can earn interest over time
- they are free to consume their income now but can choose to postpone consumption and instead invest their money in order to have more money available in the future
**money has time value b/c investing it will lead to having additional funds available in the fture
**a dollar today is worth more than a dollar due one year from now b/c it can be invested today to be worth more than a dollar one year for now
23
Q
APR
A
annual percentage rate
24
Q
deposit $1,000 into an account that pays 5% APR (annual percentage rate) compounded annually, how much money will you have one year from today
A
$1050.
so $1K today is worth $1050 tomorrow
25
what is income earned in a savings account
= income to the account holder
&
expense to the bank
26
why do account holders deposit their money into banks
account holders deposit their money in order to earn interest and have more money available in the future
27
why do banks pay interest to account hoolders
banks pay interest to account holders so they can use their money to invest elsewhere (car/house loans) at a rate of return higher than the interest paid to the account holder
***b/c the bank can earn a higher return b/c they end to make investments that have more RISK than a savings account. so they earn a higher return than the savings account pays
28
what is interest rate for invested money dependent on
interest rate earned on invested money is dependent upon the amount of risk the investor is willing to bear
29
nominal risk free rate
least amount a rational investors should be willing to accept for postponing consumption of their income.
-interest rate paid on an investment that bears no risk other than the risk of the cost of inflation
= pure time value of money. the cost paid for postponing consumption w/o taking any risk other than inflation
**beyond that, the return of the investor earns should increase w/their willingness to bear more risk
30
calculating the FV
future value
- determine the value of current cash flows inteh future
31
mathematic method for calculating present values
discounting
32
compounding
calculating future values based on the cash flow growing larger over time as it continues to earn compound interest
33
what is discounting
calculating present values
-results in cash flow growing smaller the farther back in time the value is calculated
34
multiplier used to calculate the present value of a single cash flow
discounting (calculating present value) results in cash flow growing smaller the further back in time the value is calculated(
-so the multipler to calculate the present value will be less than one (how much less than one is dependent on the interest rate used and number of periodis back in time required)
35
calculating future versus present values
compounding = calculating future values as they groun as they continue to earn cound interest(multiplier is more than one)
discounting = calculating present values growing smaller the farther back in time the present value is calculated (multiplier is less than one)
36
multipliers used to calculate the future and present values of cash
future = compounding = more than one
present = discounting = less than one
37
how do you calculate the present value of a bond
present value of a bond is calculated by removing the required yield on the bond over the life of the bond
38
how do you calculate the present value of stock
by removing the required return on the stock
39
how do you calculate the present value of a production project
by removing the cost of money to all investors (bond holers and shareholders)
40
how do you calculate the present value of the firm
removing the cost of money to all investors (bond holers and shareholders)
41
what is the purpose of discounting when you are valuing an asset
when valuing an asset, the purpose of disocunting is to acount for the return the firm owes to its investors for being able to use their money
42
what does the discount rate represent when calculating the future cash flows
w/future cash flos, the discount rate represents the opportunity cost of hte investment - the yield on the next best investment avalilable
43
what is a tool that is helpful in time value caulcations
time line
-lists cash flows based on when they occur, whether those cash flows are being compounded to calcuate a future value or discounted to calculate a present value
44
how is compound interest earned
both on the principle (initial cash flow) and accurued interst
45
initial cash flow
principle
46
principle
initial cash flow
47
how do you determine the future value of a series of unequal cash flows
sum the future values of hte individual cash flows
** compound each cash flow out to the future period in question. then sum those future values to get the value of the series of cash flowsi n the future
48
discounting
procedure for calculating the present value of cash flow
- determines the economic equivalent today of a cash flow to be received in the future, assuming a given discount rate
49
coumpounding/discounting & interest
compounding = adds interest over time to calculate the future value of the cash flow
discounting= removes interest going back in time to determine the present value of hte cash flow
** discount rate represents the opportunity cost for hte cash flow - the interest rate your would earn/pay if hte cash flow was available today to invest
50
what does the APR mean when it is quoted to you
Annual rate banks/financial firms/businesses that extend credit quote you for the transaction being considered
- when you buy a new car, the dealer will quote you an annual interest rate for financing the purchase
*since car/credit card payments are made monthy, the interest paid on teh car loan/credit card debt is compunded monthly
**each loan, result is that you pay a higher effective annual interest rate
51
how do you determine the periodic interest rate of APR
you must divide the APR by the number of compounding/discounting periods per year to determine the periodic interest rate
52
what happens when compounding/discounting is done more frequently than annually
your time line is no longer inyears. it is in months
** the rate of interest paid/earned increases
53
AR
effective annual rate
54
what happens to interest paid when the APR
when compounding is done more frequently, the actual interest paid exceeds the quoted APR (annual rate)
*more frequent compounding results in a higher value
55
annuity
series of equal cash flows paid at regular intervals for a finite period of time
56
choices of lottery winners
single lump sum
or
series of equal (annunity) payments over 20 yers
57
2 types of annunities
ordinary & annunities due
ordinary annunity: payments come at the end of hte period
annunities due: payments come at the beginnign of hte period
58
what happens if annunity payments are made at the beginning of the period (annunity due)
if annunity payments are made at the beginning of hte period, they will be discounted for one less peroid thant he present value calculation
59
perpetuity
an annunity with no scheduled end date
e.g. preferred stock dividend (fixed in ammount and paid on a scheduled basis w/o end)
60
annunity w/o scheduled end date
perpetuity
61
amortized loan
debt for which payments are calculated to be of equal value over the life of hte loan and which contribute to both the interest owed onthe loan as well as the repayment of hte principle
62
for amortized loans, when is the principle owed the highest
early in the life of hte loan, the principle owed is at its highest sot he earlier payments contribute more to interest than repayment of the principle
- over time, the principal is reduced more and more so later in the life of the loan, the payments contribute more to repayment of hte principle than to interest (e.g. as more principle is repaid, less is owed)
- so the makeup of hte payments is mostly interest at first buyt over time, becomes less interest and more repayment of hte principle
* amount ofht e payments does not change o ver time but the makeup of hte payments (interest versus principle) change sw/each payment
63
how to think about financial statements of a corporation
"roadmap" of how the firm's managers have been making decisions on behalf of hte firm's stakeholders
= serves as the basis of a firm's value
- contains data about how many transactions the firm has been involved in over the period fo time the statement represents (quarterly/annual reports)
64
how can a firm use ratio analysis
ratio analysis offers tools to determine what the firm is doing well and where it needs to improve. helps to give an overall picture of hte firm's current/future prospects
65
skill that all corporate managers must be able to do
read/understand/analyze
- income statement
- balance sheet
66
topics about financial theory
three principles of finance
three precepts
67
4 financial statements published by corporations
balance sheet
income statement
statement of cash flows
statement of retained earnings
68
what is a balance sheet
snapshot of hte firm's financial position at a point in time
- shows value of asset accounts
- liabilities & owners equity accounts on a s pecific date
69
what is it called a balance sheet
assets on top//side
liabilities/equity at the bottom/side
MUST EQUAL to balance
70
what does the assets part of the balance sheet show
where the firm is utilizing its capital
71
what does the liabilities/owners equity part of the balance sheet sow
sources of funds being utilized
72
what accounts for differences in balance sheets on a daily basis
inventories bought/sold, receiviables incurred/collected, checks written or cashed, seasonal issues,
73
when do firms typically end their fiscal year
firms generally end their fiscal year during a slow season when monthly sales/inventories are at their lowest
74
how is the assets side of the balance sheet organized
Includes: things the firm owns and utilizes in the production of their product/services
* listed in descended order of liquidity
75
liquidity
ability to turn an asset into cash quickly at a fair market value
76
more liquid an asset is...
liquidity = ability to turn an asset into cash quickly at a fair market value
- the more liquid an asset, the more likely you are to be able to sell it quickly if necessary and therefore, the lower the asset's risk
77
2 types of assets found on the balance sheet
current assets and fixed asets
78
current assets
expected to be turned over (consumed/replenished) in one year or less
- inventories should be sold off in less than one year
79
fixed assets
expected to be in service for a long time
80
how are liabilities on the blaance sheet organized
listed in the order they need to be paid
** owner's equity is last bc/ shareholder's claims represent ownershiop & don't get paid off
81
2 reasons why owner's equity is listed last on the balance sheet
- shareholders claims represent ownership so they are never paid off
- shareholders have a residual claim so they get paid first
82
amounts listed on the balance sheet accounts
book value
83
total common equity line on the balance
= book value of common equity
84
how are book values different from market values
market values = current determind in the marketplace
book values = historic determined at the point of sale
85
aka short term investments listed as current assets on the balance sheet
aka marketable securities
86
cash equivalents
marketable securities that mature very quickly, are high liquid. sometimes included w/the cash
87
what are the cash equivalents listed on the balance sheet
checksd received but not yet deposited, checkings acounts, savings accounts, money markety accounts, short term but very liquid investments w/maturities of three months or less (commercial paper/ US T-bills)
88
why does a corporation hold cash
cash is held to support operations (machine breaks or a supplier offers a great deal on a part but requires a purchase much larger than your usual order)
89
how does a firm decide how much cash to hold to support operations
many firms have a policy to hold cash based on sales (2% of annual sales)
90
how does a firm classify cash
"operating account" - cash is held in support of operations and tends to vary w/sales
91
accounts receivable
credit sales to customers that has not yet been collected
92
credit sales to customers that has not yet been collected
accounts receivable
93
how monitors accounts receivable monitord
AR = credit sales to customers that has not yet been collected
* by the firm's credit department and reported in the "aging report"
94
aging report
used by the firm's credit department
- shows the amount of current and past due store credit
-
95
what kind of account is accounts receivable
operating account
96
what do "inventories" represent on the balance sheet
amount invested in raw materials, work in process, finished goods avaluable for sale
97
FIFO
first in, first out
prioritization of inventory
98
LIFO
last in, first out
prioritization of inventories
99
FIFO versus LIFO strategies
first in, first out
last in, first out
* FIFO gives higher inventory value/lower cost of goods sold than LIFO on the firm's financial statement
100
what is important to remember about financial statements of firms when you are comparing them
FIFO has a higher inventory value/lower cost of goods sold on the income staement. so inventory method used canhave a large effect onthe firm's financial statement
* level of inventories is driven by the level of sales. when sales increase, inventories should as well (inventories is an operating account)
101
relationshipo between level of inventory and sales
the level of inventory is driven by the level of sales
- when sales increase, inventory should as well
- SO inventories account is an operating acocunt
102
what type of account is an inventories account
operating account
when sales increase, inventory should as well
103
examples of a firm's long-term physical assets
buildings, trucks, machines...
104
how are a firm's long-term physical assets like buildings, trucks, machines... reported
as net of depreciation
105
depreciation
the spreading of the purchase amount of a long-term asset over their economic life to match the expense of using them to the revenue they generate over time
106
spreading the purchase amount of a long-term asset over their economic life to match the expense of using them to the revenues they generate over time
depreciation
107
why does the federal government allow the deduction of depreciation?
the federal government allows the deduction of depreciation to permit the firm to be in a position to replenish assets when they expire so that the firm can continue to operate and offer the economy jobs as well as their products/services
108
PP&E
plant, property, and equipment
109
what is the value of fixed (long-term) assets
based on the purchase price. accumulated depreciation is removed from the gross amount so the net value is the value recorded on the balance sheet
- long-term assets are clearly used forproducing the products or services, their value often does not change in resonse to the change in sales
110
Good Will
the amount an acquiring firm pays above market value for the firm it acquires
111
calculate total assets
= current assets + long-term assets
112
current liabilities
liabilities that the firm is expected to pay within a year
- accounts payable, notes payable, accrued expednses like wages/taxes)
113
accounts payable
firm's credit purchases from their suppliers for things like inventories or supplies
(operating account)
114
what type of account is accounts payable
firm's credit purchases from their suppliers for supplies/inventories
(operating account)
115
accruals
accrued expenses included staff wages and taxes
(operating account)
116
what type of account is accrued expenses
like staff wages & taxes
operating account
117
notes payable
short-term debt instruments that must be repayed in less than one year
118
what type of account is notes payable
raising funds through debt is a strategic, not operating choice. so notes payable is NOT an operating account
119
long-term debt
represents bonds issued by the firm still in circulatinjg
120
what type of accounts are debt and equity accounts
use of debt is a strategic, not operating choice
SO
there are no debt or equity operating accounts
121
what type of account is pension obligations
NOT an operating accoutn
122
how are preferred shareholders affected a firm grows
the preferred dividend is fixed so if the firm grows, preferred shareholders d not get to share the wealth
123
who gets paid first/ranked first if a corporation goes bankrupt
preferred dividends must be paid before common dividends
- in bankrupcy, preferred shareholders rank below debtholders but above common shareholders in their claim against the firm
124
what does common equity include
the value of common stock & retained earnings
125
aka common equity
net worth
b/c if the firm's assets could be sold at book value and used to pay off the liabilities (debt and preferred equity), the ramining cash would be long to the common shareholders
126
what type of count is equity
the use of debt, preferred equity, and common equity are strategic choices. so these accounts aren't operating accounts
127
total liabilities & equity
current liabilities + long-term debt+ liabilities + preferred equity + comomn equity
128
common stock account
reflects funds acquired by selling common shares
129
retained earnings
net income that is plowed back into the fiurm (not paid to the shareholders as dividends)
130
EBITDA
earnings before interest, taxes, depreciation, and amortization
131
amortization
depreciation for intangible assets
132
depreciation for intangible assets
amortization
133
why do some think EBITDA a better measure of finanancial strength
amortization & depreciation are non-cash expenses so some thing EBITDA is a better measure of financial strength than net infome
134
EBITDA - depreciation & amortization =
EBIT = earnings before interest and taxes aka operating earnings
135
operating earnings
EBIT
136
EBIT
earnings before interest and taxes
137
net income aka
net income aka profit/earnings
138
calculate net income
aka profit or earnings
=
EBIT minus interest and taxes
this is what is available to distribut to firm stockholders
139
EPS
earnings per share
140
calculate EPS
earnings per share
net income available to common shareholders divided by the number of common shares outstanding
141
what changes does analyzing the income statement
analyzing the income statement reveals changes in the firm's revenues and expenses -thus, the changes in the firm's overall profitability
142
dividends
cash payments to the firm's shareholders
-net income is the shareholder money. the firm is obligated to return it to the shareholders unless it is able to earn a higher return by reinvesting it into the firm's operations
143
how is retained earrnings used
retained earnings may be used to purchase new assets, pay interest/retire debt, buy back common stock, increase inventories, finance accounts receivable, invest in short-term securities, keep as cash
144
3 catagories of activities
operating activities
investing activities
financing activities
145
most important item on the cash flow statement
total line at the bottom of hte first section (cash flow from operating activities). if that line is positive, the firm is producing cash from its from its operations
* if negative, the firm is burning cash by producing their products and a new source of cash is necessary to keep producing the ir products
146
data found on the statement of retained earnings
- amount of retained earnings at the beginning of the year
- the amount of net income availabel to common shareholders at the ned of hte year
- amount paid out as dividends over the year
- the amount added to retained earnings over the year
- amount of retained earnings at the end of the year
147
purpose of analyzing financial statements
uses data to uncover strengths and weaknesses in the firm's perfomrance over time
148
what do creditors want to know about firms
creditors want to make sure the firm is going to be able to pay back its debt
149
what do shareholders want to know about a firm
shareholders want to determine if they should continue to own the stock or sell it
150
what do brokers want to know about a firm
brokers use the firm's financial information to sell the stock to potential shareholders
151
what do firm's managers want to know about a firm
firm managers use a firm's financial information to see where they need to focus their attention to improve performance
152
5 catagories of financial ratios
liquidity
asset management
debt management
profitability
market value ratios
153
liquidity
abiulity to turn an asset into cash quickly at a fiari rmarket value
154
what does the inventory turnover ratio point out
points out excessive, slow moving inventories
155
problem of inventory that sits on the floor rather than getting shipped out to customers
susceptible to damage, pillage, obsolescence
- in teh firm's best interest to minimize the amount of inventory held to only what is needed to support sales (seasonal
156
FAT
fixed asset turnover ratio
measures how effectively the firm's assets (bhuildings/machines) are being used to generate sales
157
TAT
total asset turnover ratio
158
3 implications for use of debt by a firm
1. raising money through debt does not erode the control of hte firm's current shareholders
2. use of debt increases the return of return to the firm's shareholders while also increasing the firm's risk of bankruptcy
3. as the proportion of debt use din the balance sheet increases, it becomes more expensive/more difficult for hte firm to borrow
159
calculate debt ratio
total liabilities divided by total assets
160
how is the debt management ratio used
used to determine the potential bankruptcy risk for the firm based on teh current level of debt and ability to pay for their current interest obligations
161
TIE
times interest earned ratio
162
what does TIE measure
times interest earned ratio
* measures the firm's ability to pay its interest obligations from operating earnings
- creditors prefer this # to be far above one so they care very confident that the firm will be able to pay its interest obligations on time and in full
163
gross profit
sales less the cost of goods sold
164
COGS
cost of goods sold
- all the costs and expenses directly related to the production of goods
165
ROA
return on assets
166
what is return on assets
ROA
measures the % of total assets that is returned to the shareholders in the form of earnings
167
ROE
return on equity
measures the % of common equity thtat is returned to the shareholders in the form of earnigns
*rate of return paid to the firm's owners
168
P/E ratio
price/earnings ratios
*indicates how much the market is willing to pay for each dollar of reported earnings
169
M/B ratio
market to book ratio
*comapres the market price of hte stock to the book value per share of hte firm's stock. calculated as the common equity line on the balance sheet divided by the number of shares outstanding
170
how is cash flow different from earnings
cash flow differs from earnings b/c some revenues and expenses are non cash
171
barter
no cash changes hands
172
ROIC
return on invested capital
mneasures the net return form operations as a % of operating capital
173
WACC
weighted average cost of capital
174
MVA
market value added
extent to which the stock market recognizes the value added to hte firm via the decisions made by the firm's managers
- if the market approves of management decisions, the market price of hte stock will rise above its book value creating market value added
175
Du Point equation
helps us understand the drivers of returns to the firm's assets and to its shareholders
176
value of the Du Pont analysis
return earned by the firm's shareholders is a function of 3 different activities
- ability of hte managers to control expenses (reflected in net margin)
- ability to use the firm's assets to generate sales (reflected in TAT)
- judicuious use of debt in the capital structure (reflected in teh EM)
177
comparision to industry leaders that have performance measures you wish to emulate
benchmarking
178
benchmarking
comparing your firm's results to a competitors whose performance you wish to emulate
179
pro forma statement
"for the sake of the form"
-method of calculating financial results using certain projections or persumptions
180
importance of business case analysis
one of hte most important activities a finance department can undertake in support of a company's decision-making process
- bringing new product on/off require reliable information like a financial analysis of the rsulting revenue/cost/profit
181
stakeholders
people on whom the decision would have substantial impact
182
Q's in market research
- what leads you to believe the proposed product will generate additional revenue?
- is there evidence from previous product rollouts?
- what about external sources of information like trade association datea?
- how credible is the available evidence?
- how much will it cost to obtain the data?
183
Q's regarding promotion and advertising
Promotion and advertising: How much must you pay different media to run your advertisements? How much will it cost to produce new brochures and other product literature? Should you purchase mailing lists? What does all this imply for your web presence?
184
specifying the costs
Specifying the Costs
To complete an initial quantitative picture, you need to give Excel information about the incremental costs associated with bringing the proposed product to market. In particular, it’s useful to take these costs into account:
Market research: What leads you to believe that the proposed product will generate additional revenue? Is there evidence from previous product rollouts? What about external sources of information, such as trade association data? How credible is the available evidence? How much will it cost to obtain the data?
Distribution channels: What are the costs, such as reseller discounts, late penalties, and warehousing, of getting the product to your customers?
Promotion and advertising: How much must you pay different media to run your advertisements? How much will it cost to produce new brochures and other product literature? Should you purchase mailing lists? What does all this imply for your web presence?
Rollout and implementation: Is it necessary to travel to meet with your distributors or sales force? Should you offer special incentives to those in the distribution channel so that they will focus their efforts on selling this product? Does the distribution channel need any special training to understand the product’s price structure, its market niche, and its competitive strengths and weaknesses? Should you double-compensate when a vertical market intersects a horizontal market? That is, if you employ one sales manager for the petroleum industry and one for the state of Texas, should you compensate both managers when you sell something to an Exxon office in Houston?
Product cross-elasticities or cannibalization: Is the proposed product or pricing likely to enhance or cut into the sales of existing product lines? If so, those lines might gain or lose some revenue. How much?
Objectives for market share and penetration: Will the cost of attaining one more percentage point of market share outweigh the additional revenue? Is the cost of filling the last seat in the plane more than the price of the ticket? More generally, can you estimate the product’s price elasticity?
Technology: Is the technology you need to produce this product in hand, or do you have to buy it? How much will it cost to purchase and maintain it? If you already have the necessary production capacity, what is the opportunity cost of using it? In other words, what is the cost of redirecting the technology to the new product, from its originally intended use?
Systems: Are the required methods and processes in place, or must you develop them? These systems usually include sales support, product tracking, billing and collections, inventory management, and the software needed to manage them.
Implementation plans: Are the plans feasible? Are the timelines reasonable with existing staff, or do you need to do more hiring?
Training: Will your staff or customers need additional training to produce or use the proposed product? If so, should you develop the training in-house or obtain it externally? How much will the training cost? How much will it cost to deliver it? Will you need to send trainers around the country, or can you get by with webinars?
185
WHAT DOES ebitda
represents the best estimate of a product's contribution to a company's profitability which includes the products revenues and the costs that are directly associated w/creating those revenues
186
discounting
estimation of hte present value of future cash flows
*every dollar you invest today will have a different value in the future
187
payback period
the length of time between an initial investment and the recovery of hte investment from its ongoing cash flow (length of time to break even on an investment)
188
assets versus liabilities
A = what we own versus what we owe
189
examples of assets
cash, receivables, inventories, building, equipment
190
what does the cash flow statement quantify
cash flow statement quantifies operating m, investing, and financing activities
191
what does the balance sheet quantify
balance sheet quantifies assets, liabilities, and net worth
192
oneminuteeconomics.com
193
who started IMF and World Bank
both are banks started by countries
194
IMF
bank that helps countries currently in trouble who can't get money from other means. lender of last resort you go to when no one else
195
World Bank
goal is to eradicate poverty and funds projects to meet these goals
196
austerity measures
government policies that aim to reduce public sector debt
-uncontrolled increases in acountry's public debt tend to increase financial instability within the country and can, if left unchecked, cause a national or even regional recession
197
balance sheet job
summary of the financial position of a company at a particular date
- everything they own and ow
198
owner's equity is...
net assets after all obligations have been satisfied
199
calculate income statement
net income = revenue - expenses
revenue = assets created via business operations
expenses = assets consumed through business operaitons
200
statement of retained earnings
a financial statement that identifies changes in retained earnings from one accounting period to the next
201
statement of cash flows
reports the amount of cash collected and paid out by a company for a period of time
202
indicates the company's ability to generate future income
statement of cash flow
203
4 things accounting allows a business to do
understand performance
what is working well
what isn't working well
make strategic decisions
204
IFRS
international financial reporting standards
205
GAAP
Generally Accepted Accounting Principles
*sets out to standardize the classifications, assumptions, and procedures used in accounting in industries across the US
206
GASB
Government Accounting Standards Board
207
what are the 4 principles of GAAP
The four basic constraints associated with GAAP include objectivity, materiality, consistency and prudence. Objectivity includes issues such as auditor independence and that information is verifiable.
208
how to think about value in finance
you can calculate present (now) value of a sum at the beginning of a time period or calculate the future (later) value of hte sum at the end of hte time period
209
3 factors that play a role in almost all valuation decisions
spending
risk
value of currency
210
what type of spending do people prefer
present versus future spending
- b/c we are an "instant gratification" society and many are risk adverse
211
how to think about expected monetary value
a measure of probabilistic value
212
important about bad decisions made...
bad decisions base don emotion rather than logic (listen to rumors)
