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ENCN371 > Week 3 > Flashcards

Week 3 Flashcards

1
Q

Define economics

A

Economics is a study of choices made by people who are faced with scarcity.

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2
Q

Define finance

A

Finance consists of investments, the decision of institutions as they chose to invest and managerial finance (Involves element of time and risk)

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3
Q

Financial management

A

Focuses on decisions relating to how much and what type of assets to acquire, how to raise capital needed to buy assets, and how to run the firm so as to maximise its value.

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4
Q

Capital

A

Capital is money and possessions (assets), especially a large amount of money used for producing more wealth or for starting a new business.

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5
Q

Sole Traders

A

Persons that own all the assets of a business and are responsible for all the risks, obligations and debts.

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6
Q

Partnerships and joint ventures

A

Similar to a sole trader but you can combine overseas capital or expertise with business networks and ownership of resources here.

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7
Q

Companies (ltd’s)

A

A company must have a registered name, one or more shares, one or more shareholders, and one or more directors.

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8
Q

Structure of companies

A

Shareholders: Owners of the company

Board of Directors: Elected by the shareholders. Good governance is the effective separation, management and execution of the relationships, duties, obligations and accountabilities of any entity, such that the entity is best able to fulfil its purpose.

Advisory Board: Selected by board to provide defined advice and information to the board and management

Top management: CEO, COO, CFO, etc

Staff

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9
Q

Certainty against market fluctuations

A

Hedging and futures. Using financial means to fix the price (futures). hedging is to offset losses in investment.

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10
Q

Inflation

A

The amount by which prices increases over time

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11
Q

Payback Period

A

Time until cash flows recover the initial investment of the project

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12
Q

Payback rule:

A

Specifies that a project be accepted if its payback period is less than the specified cut off period

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13
Q

Limitations on the payback method

A

Profit margins not taken into account.

Does not take into account the time value of money

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14
Q

Name two most important financial statements

A

Income statement and balance sheet

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15
Q

Purpose of Income statement

A

To show whether or not a company’s business is profitable. it shows:

  • the profit or loss over a period of time (financial year)
  • usually there is a comparison between the figures of the most recent year and that of the year before (separeate columns)
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16
Q

Purpose of Balance sheet

A

to show a company’s financial position at a point in time( end of fiscal year), a snap shot.

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17
Q

What are the three major items in a balance sheet?

A

Assets, liabilities and equity

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18
Q

BEP

A

Break Even Point is where the income from sales is equal to total expenses

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19
Q

Assets

A

Total assets is the sum of
Total current assets (cash, inventory, investments, work done but not billed yet)
and
Fixed or non-current assets, not very ‘liquid’ or long term assets (total value of property, equipment).

20
Q

Liabilities

A 
Liabilities is the sum of 
Current liabilities (accounts payable)
Non-current or long term liabilities (long term bank loans, mortgages, building, land)
21
Q

Equity

A

Total equity is the sum of Capital, Stock and Retained Earnings.

Equity + Total Liabilities = Total Assets

22
Q

Working Capital formula

A

Working capital=Current assets - current liabilities

23
Q

What is working capital?

A

Working capital is a measure of the short term financial strength of a construction company.

24
Q

How to increase working capital?

A

by: making profit, selling equipment or other assets, or have long term loans from the bank.

25
Q

How to decrease working capital?

A

losing money on a project, or purchasing equipment or repaying long term loans.

26
Q

Current ratio

A

Current ratio= current assets/ current liabilities

should be 1.3 or higher for a construction company

27
Q

Where is overbilling and underbilling found?

A

Overbilling is expressed under Current Liabilities.
Underbilling is expressed under Currents Assets.

Both in the balance sheets

28
Q

Gross Profit Margin Ratio

A

Gross profit margin ratio= gross profit/revenue

the goal is 25%

29
Q

Net Profit Margin Ratio

A

Net profit margin ratio = Net profit before tax/ Revenue

the goal is 5%

30
Q

Return on Equity Ratio

A

return on equity ratio = net profit before tax/ owners’ equity

should be between 15 and 40%

31
Q

What are Liquidity Ratios?

A

Company’s ability to pay its obligations

32
Q

Acid Test Ratio or Quick Ratio

A

Acid test ratio = (Cash + accounts receivables) / current liabilities

should be higher than 1.1

33
Q

Current Assets to Total Assets Ratio

A

Current assets to total assets ratio = Current assets/total assets

34
Q

Name all Liquidity Ratios

A

Current ratio, acid test ratio and currents assets to total assets ratio

35
Q

Name all Profitability ratios

A

Gross profit margin ratio, net profit margin ratio, return on equity ratio

36
Q

What are Profitability Ratios?

A

Measure a company’s ability to earn profit from its operation.

37
Q

What are working capital ratios?

A

Measure how well the construction company is utilizing its working capital.

38
Q

What are the two working capital ratios?

A

Working capital turnover and net profit to working capital ratio

39
Q

Working Capital Turnover Ratio

A

Working capital turnover ratio = revenue/ working capital

should be between 8 and 12

40
Q

Net Profit to Working Capital Ratio

A

Net profit to working capital ratio = net profit before tax/working capital

should be between 40 and 60%

41
Q

Cost accounting method: What is Process Costing?

A

All overhead distributed over single product

42
Q

Cost accounting method: What is Job Order Costing?

A

Separates all costs per project

43
Q

Cost accounting method: What is Activity Based Costing?

A

Separates costs per activity

44
Q

SPI?

A

Schedule Performance Index = earned value/planned value

45
Q

CPI?

A

Cost Performance Index = Earned value/actual cost

ENCN371 (12 decks)

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