Week 3 Flashcards
Accounting relates to…
Prep of accounting records, preparation, analysing, and interpretation of financial statements.
Economics is study of…
choices made by people who are faced with scarcity.
Finance consists of…
investment decisions.
What are the 3 main forms of businesses in NZ?
(1) Sole traders, (2) Partnerships and joint ventures, and (3) Companies (Itd.’s).
What are sole traders?
Persons that own all the assets of a business and are responsible for all the risks, obligations, and debts.
What are Partnerships and joint ventures?
Similar to sole trader but can combine overseas capital/expertise with business networks and ownership of resources here.
What are companies?
A company must have a REGISTERED NAME, one or more SHARES, one or more SHAREHOLDERS, and one or more DIRECTORS.
What is the typical structure of a company?
Shareholders (owners of the company), board of directors, advisory board, top management (CEO, COO, CFO), Staff
What are some roles of a financial manager?
Make project and investment decisions, invest in marketing, borrowing.
What does the net present value rule state?
That managers increase shareholders’ value by accepting all projects that are worth MORE than they cost.
What does Present Value (PV) mean?
Beginning amount
What does Future Value (FV) mean?
Ending amount in account after N periods.
How is the interest rate determined?
(1) Production Opportunities, (2) Time Preferences for Consumption, (3) Risk, and (4) Inflation
What do Cash Flow Diagrams allow you to do?
Graphically illustrate the timing of the cash (inflows / outflows)
What are the limitations of Cash Flow Diagrams?
Multiple parties to a financial problem eg. a borrower and lender, a buyer and seller, or an investor and an investment.
What is the payback period?
The time until cash flows recover the initial investment of the project.
What does the payback rule specify?
That a project be accepted if its payback period is less than the specified cut-off period.
What are the limitations of the payback method?
(1) PROFIT MARGINS and (2) the TIME VALUE OF MONEY are not taken into account.
How is Return on Investment (ROI) determined?
(Gain from Investment - Cost of Investment) / Cost of Investment
What is a limitation of ROI
Time is not taken into account
What is Equivalent Annual Cost?
The constant cost per period with the same present value as the cost of buying and operating a machine.
Under prisoners dilemma, what is the pareto optimal state?
A state where there is no alternative state where improvements can be made to at least 1 participants well-being without reducing any other participants well-being.
Under prisoners dilemma, what is the nash equilibrium state?
A state in which each players’ strategy is optimal when considering the decisions of other players.
What are the 2 most important financial statements?
(1) Income statement (for Profit & Loss account) and (2) Balance sheet (for statement of financial position).
What is the purpose of the income statement?
To show whether or not a company’s business is profitable.
What is the purpose of a balance sheet?
Shows a company’s financial position at a point in time.
What are the 3 major items in a balance sheet?
(1) Assets, (2) Liabilities, and (3) Equity.
What are assets divided into?
Current Assets (short-term / any time) and Fixed/Non-current assets (long-term).
Liabilities is the sum of…
Current liabilities (accounts payable) and Non-current / Long-Term liabilities.
What is equity?
The capital invested by the owner(s) of a company. The Net Worth of the business.
What is working capital?
Measure of the short-term financial strength of a company.
How can working capital be increased?
(1) By making a profit, (2) by selling equipment/other assets, (3) switch from short to long term loans (this option increases long term liabilities).
How can working capital be decreased?
(1) Losing money on a project, (2) purchasing equipment, and (3) repaying long term loans.
For a construction company to stay healthy, what should the volume of unfinished work include?
(1) unfinished projects in hand should be at most <= 10 * working capital and (2) the biggest unfinished project should be at most <= 5*working capital.
What is the current ratio for a company?
The ratio for a company’s liquidity (or its ability to fulfill short term financial obligations)
How is current ratio calculated and what should it be?
Current Assets / Current Liabilities >= 1.3
What is underbilling (Current Assets)?
Estimated work done that’s not been billed yet.
What is overbilling (Current Liabilities)?
Excess billings for work not done yet.
If Billing > 0, is it over/underbilling?
Overbilling.
What do Profitability ratios measure?
A company’s ability to earn profit from its operation
What are some examples of profitability ratios?
(1) Gross Profit Margin, (2) Net Profit Margin, and (3) Return of Equity Ratio
What do Liquidity Ratios indicate?
The company’s ability to pay its obligations as they come due.
What are common liquidity ratios?
(1) Current Ratio and (2) Acid Test Ratio.
How is current ratio calculated and what should it be?
Current Assets / Current Liabilities >= 1.3 (LONG TERM)
How is acid test ratio calculated and what should it be?
(Cash + Accounts receivables) / Current Liabilities >= 1.1 (SHORT TERM)
What is the Break Even Point (B.E.P)?
When the income from sales = total expenses.
How can BEP be lowered?
Raise prices, cut fixed costs, cut variable costs hence increasing the margin, etc.
What are some cost accounting methods?
Process costing, Job order costing, and Activity based costing.
What does the Schedule Performance Index (SPI) measure?
The schedule efficiency = Earned Value / Planned Value
= Amount of work actually done / Amount of work supposed to have been done.
What does the Cost Performance Index (CPI) measure?
The cost efficiency = Earned Value / Actual Cost
= Amount of cost supposed to have spent / Amount of cost actually spent.
What do S-Curves represent?
The progress (current or projected) of a project over time.
In S-Curves, what does (1) BCWP, (2) ACWP, and (3) BCWS represent?
(1) Earned Value, (2) Actual cost, and (3) Planned Value.
In S-Curves, what does (1) Cost Variance and (2) Schedule Variance represent?
(1) Difference between actual and planned cost and (2) Difference between planned value and earned value.
