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ENCN371 > Week 3 > Flashcards

Week 3 Flashcards

1
Q

Accounting relates to…

A

Prep of accounting records, preparation, analysing, and interpretation of financial statements.

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2
Q

Economics is study of…

A

choices made by people who are faced with scarcity.

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3
Q

Finance consists of…

A

investment decisions.

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4
Q

What are the 3 main forms of businesses in NZ?

A

(1) Sole traders, (2) Partnerships and joint ventures, and (3) Companies (Itd.’s).

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5
Q

What are 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

What are Partnerships and joint ventures?

A

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

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7
Q

What are companies?

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

What is the typical structure of a company?

A

Shareholders (owners of the company), board of directors, advisory board, top management (CEO, COO, CFO), Staff

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9
Q

What are some roles of a financial manager?

A

Make project and investment decisions, invest in marketing, borrowing.

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10
Q

What does the net present value rule state?

A

That managers increase shareholders’ value by accepting all projects that are worth MORE than they cost.

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11
Q

What does Present Value (PV) mean?

A

Beginning amount

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12
Q

What does Future Value (FV) mean?

A

Ending amount in account after N periods.

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13
Q

How is the interest rate determined?

A

(1) Production Opportunities, (2) Time Preferences for Consumption, (3) Risk, and (4) Inflation

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14
Q

What do Cash Flow Diagrams allow you to do?

A

Graphically illustrate the timing of the cash (inflows / outflows)

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15
Q

What are the limitations of Cash Flow Diagrams?

A

Multiple parties to a financial problem eg. a borrower and lender, a buyer and seller, or an investor and an investment.

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16
Q

What is the payback period?

A

The time until cash flows recover the initial investment of the project.

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17
Q

What does the payback rule specify?

A

That a project be accepted if its payback period is less than the specified cut-off period.

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18
Q

What are the limitations of the payback method?

A

(1) PROFIT MARGINS and (2) the TIME VALUE OF MONEY are not taken into account.

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19
Q

How is Return on Investment (ROI) determined?

A

(Gain from Investment - Cost of Investment) / Cost of Investment

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20
Q

What is a limitation of ROI

A

Time is not taken into account

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21
Q

What is Equivalent Annual Cost?

A

The constant cost per period with the same present value as the cost of buying and operating a machine.

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22
Q

Under prisoners dilemma, what is the pareto optimal state?

A

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.

23
Q

Under prisoners dilemma, what is the nash equilibrium state?

A

A state in which each players’ strategy is optimal when considering the decisions of other players.

24
Q

What are the 2 most important financial statements?

A

(1) Income statement (for Profit & Loss account) and (2) Balance sheet (for statement of financial position).

25
Q

What is the purpose of the income statement?

A

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

26
Q

What is the purpose of a balance sheet?

A

Shows a company’s financial position at a point in time.

27
Q

What are the 3 major items in a balance sheet?

A

(1) Assets, (2) Liabilities, and (3) Equity.

28
Q

What are assets divided into?

A

Current Assets (short-term / any time) and Fixed/Non-current assets (long-term).

29
Q

Liabilities is the sum of…

A

Current liabilities (accounts payable) and Non-current / Long-Term liabilities.

30
Q

What is equity?

A

The capital invested by the owner(s) of a company. The Net Worth of the business.

31
Q

What is working capital?

A

Measure of the short-term financial strength of a company.

32
Q

How can working capital be increased?

A

(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).

33
Q

How can working capital be decreased?

A

(1) Losing money on a project, (2) purchasing equipment, and (3) repaying long term loans.

34
Q

For a construction company to stay healthy, what should the volume of unfinished work include?

A

(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.

35
Q

What is the current ratio for a company?

A

The ratio for a company’s liquidity (or its ability to fulfill short term financial obligations)

36
Q

How is current ratio calculated and what should it be?

A

Current Assets / Current Liabilities >= 1.3

37
Q

What is underbilling (Current Assets)?

A

Estimated work done that’s not been billed yet.

38
Q

What is overbilling (Current Liabilities)?

A

Excess billings for work not done yet.

39
Q

If Billing > 0, is it over/underbilling?

A

Overbilling.

40
Q

What do Profitability ratios measure?

A

A company’s ability to earn profit from its operation

41
Q

What are some examples of profitability ratios?

A

(1) Gross Profit Margin, (2) Net Profit Margin, and (3) Return of Equity Ratio

42
Q

What do Liquidity Ratios indicate?

A

The company’s ability to pay its obligations as they come due.

43
Q

What are common liquidity ratios?

A

(1) Current Ratio and (2) Acid Test Ratio.

44
Q

How is current ratio calculated and what should it be?

A

Current Assets / Current Liabilities >= 1.3 (LONG TERM)

45
Q

How is acid test ratio calculated and what should it be?

A

(Cash + Accounts receivables) / Current Liabilities >= 1.1 (SHORT TERM)

46
Q

What is the Break Even Point (B.E.P)?

A

When the income from sales = total expenses.

47
Q

How can BEP be lowered?

A

Raise prices, cut fixed costs, cut variable costs hence increasing the margin, etc.

48
Q

What are some cost accounting methods?

A

Process costing, Job order costing, and Activity based costing.

49
Q

What does the Schedule Performance Index (SPI) measure?

A

The schedule efficiency = Earned Value / Planned Value
= Amount of work actually done / Amount of work supposed to have been done.

50
Q

What does the Cost Performance Index (CPI) measure?

A

The cost efficiency = Earned Value / Actual Cost
= Amount of cost supposed to have spent / Amount of cost actually spent.

51
Q

What do S-Curves represent?

A

The progress (current or projected) of a project over time.

52
Q

In S-Curves, what does (1) BCWP, (2) ACWP, and (3) BCWS represent?

A

(1) Earned Value, (2) Actual cost, and (3) Planned Value.

53
Q

In S-Curves, what does (1) Cost Variance and (2) Schedule Variance represent?

A

(1) Difference between actual and planned cost and (2) Difference between planned value and earned value.

ENCN371 (7 decks)

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