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153 Cards in this Set

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What are some pros and cons to sole proprietorship?
Pros: Simplicity in decision making, lower operating and organizational costs.
Major Con: unlimited liability for the owner.
What is a limited liability partnership?
At its core, it is a partnership with general partners and limited partners. Unlimited liability for general partners, liability is limited to amount contributed for limited parters. Limited partners are not allowed to be active in management.
In a corporation, what group has the ultimate responsibility for protecting and managing the stockholders' interests?
Board of Directors
What document is necessary to form a corporation?
The articles of incorporation.
What issue does agency theory examine?
Agency theory examines the relationship between the owners of the firm and the managers of the firm.
Why is agency theory important in a public corporation rather than in a private corporation?
In privately owned firms, management and the owners are usually the same people. Management operates the firm to satisfy its own goals, needs, financial requirements and the like. As a company moves from private to public ownership, management now represents all owners. This places management in the agency position of making decisions in the best interest of all shareholders.
Why are institutional investors important in today's business world?
Because institutional investors such as pension funds and mutual funds own a large percentage of major U.S. companies, they are having more to say about the way publicly owned companies are managed. As a group, they have the ability to vote large blocks of shares for the election of a board of directors, which is suppose to run the company in an efficient, competitive manner. The threat of being able to replace poor performing boards of directors. They have strong incentives to see that the firm is managed in an efficient and ethical way.
Why is profit maximization, by itself, an inappropriate goal?
The problem with a profit maximization goal is that it fails to take account of risk, the timing of the benefits is not considered, and profit measurement is a very inexact process.
What is meant by the goal of maximization of shareholder wealth?
The goal of shareholders wealth maximization implies that the firm will attempt to achieve the highest possible total valuation in the marketplace. It is the one overriding objective of the firm and should influence every decision.
When does insider trading occur?
Insider trading occurs when someone has information that is not available to the public and then users the information to profit from trading in a company's common stock.
What government agency is responsible for protecting against the unethical practice of insider trading?
Securities and Exchange Commission
In the terms of the life of the securities offered, what is the difference between money and capital markets?
Money markets refer to those markets dealing with short-term securities that have a life of one year or less. Capital markets refer to securities with a life of more than one year.
What is the difference between a primary and a secondary market?
A primary market refers to the use of the financial markets to raise new funds. After the securities are sold to the public (institutions and individuals), they trade in the secondary market between investors. It is in the secondary market that prices are continually changing as investors buy and sell securities based on the expectations of corporate prospects.
Assume you are looking at many companies with equal risk, which ones will have the highest stock prices?
Given companies with equal risk, those companies with expectations of high return will have higher common stock prices relative to those companies with poor expectations.
What changes can take place under restructuring?
changes in the capital structure (liabilities and equity on the balance sheet)

selling of low-profit-margin divisions

reallocating resources toward other investment opportunities

removal of the current management team

large reductions in the work force

mergers and acquisitions
In recent times, what group of investors has often forced restructuring to take place?
Institutional investors
What impact has the Internet had on competition for full service brokers such as Merrill Lynch and Salomon Smith Barney?
Shift to internet trading

Lower transaction costs

more precise trades

more competition

price of trading driven down
What is a "income statement?"
profit loss… statement of operations… win-loss record over a period of time
What is a "balance sheet?"
listing of resources.. economic resources, all obligations, debts, etc…
What is a "statement of cash flows?"
where cash came from and how it was used
What is a "statement of stockholders equity?"
how book value changed from one period to the next. What happened to stockholders equity from the beginning of the year.
What is the correct format for the header of a Financial Statement (Income Statement, Balance Sheet, etc...)
Company Name
Statement Type
Date
What is "financial accounting?"
The rules that go into putting the reports together for release to those that are external to the corporation.
What is "gross profit ratio" and how is it calculated?
Gross Profit / Total Sales
What is the "book value per share" and how is it calculated?
Shareholders Equity / Number of Share Outstanding
Market Value Per Share
Share Price / Earnings
List some financial variables that affect the price to earnings ratio
earnings and sales growth of the firm

risk or volatility in performance

debt-equity structure of the firm

dividend payment policy

quality of management

NOTE: The ratio tends to be future-oriented, and the more positive the outlook, the higher it will be.
Calculate: book value per share
cost of assets
-minus liabilities
-minus preferred stock
/
# of common shares outstanding
What is market value per share?
The current assessed value of the firm in the marketplace.
NOTE: market value may differ widely from book value
Why is there a disparity between market value and book value?
Book value is based on the historical cost of the assets, the market value is based on growth prospects for the firm, the quality of management, and the industry outlook.
How does depreciation generate actual cash flows for the company?
By serving as a tax shield against reported income. Amount is deducted before taxes though no direct expense occurs.
What is accumulated depreciation?
Accumulated depreciation is the sum of all past and present depreciation charges.
What is depreciation expense?
Depreciation expense is the current year's charge for depreciation on the income statement.
How is the income statement related to the balance sheet?
Earnings (less dividends) on the income statement are listed in ownership section of the balance sheet as "retained earnings."
What are retained earnings?
Retained Earnings are the profit made by the business that has not been paid out to the owners as Dividends... They are "available funds"
Why does inflation restrict the usefulness of the balance sheet as normally presented?
When prices are rising rapidly, historical cost data may lose much of its meaning–particularly for plant, equipment and inventory.
Why does the statement of cash flows provides useful information that goes beyond income statement and balance sheet data?
Accrual accounting as found in the (income statement and balance sheet) does not attempt to properly assess the cash flow position of the firm. The statement of cash flows does.
What are the three primary sections of the statement of cash flows?
Cash flows from operating activities

Cash flows from investing activities

Cash flows from financing activities
In what finacial statement and section would the payment of a cash dividend be shown?
The statement of cash flows under the category:
financing activities
What is free cash flow?
cash flow from operating activities:

-minus
Capital expenditures (required to maintain the productive capacity of the firm)

-minus
Dividends (required to maintain the payout on common stock and to cover any preferred stock obligation)
Why might free cash flow be important for leveraged buyouts?
The analyst or banker normally looks at free cash flow to determine whether there are insufficient excess funds to pay back the loan associated with the leveraged buy-out.
Why does interest expense cost a firm substantially less than actual expenses?
Interest expense is tax deductible while most other payments are not.
Calculate earnings per share:
Earnings after taxes
/
Share outstanding
Calculate gross profit margin:
Gross profit
/
Sales
Calculate Earnings Per Share (EPS):
Available earnings
/
Share outstanding
On what statement does this item belong?
Taxes
income statement
On what statement does this item belong?
Selling and administrative expenses
income statement
On what statement does this item belong?
Earnings available to common stockholders
income statement
On what statement does this item belong?
Earnings after taxes
income statement
On what statement does this item belong?
Cost of goods sold
income statement
On what statement does this item belong?
Earnings before taxes
income statement
On what statement does this item belong?
Earnings per share
income statement
On what statement does this item belong?
Gross profit
income statement
On what statement does this item belong?
Sales
income statement
On what statement does this item belong?
Operating profit
income statement
On what statement does this item belong?
Preferred stock dividends
income statement
On what statement does this item belong?
Depreciation expense
income statement
On what statement does this item belong?
Interest expense
income statement
On what statement does this item belong?
Shares outstanding
income statement
Does the following item increases or decrease cash flow:
Increase in accrued expenses
increases cash flow (source)
Does the following item increases or decrease cash flow:
Dividend payment
decreases cash flow (use)
Does the following item increases or decrease cash flow:
Increase in inventory
decreases cash flow (use)
Does the following item increases or decrease cash flow:
Decrease in prepaid expenses
increases cash flow (source)
Does the following item increases or decrease cash flow:
Decrease in accounts payable
decreases cash flow (use)
Does the following item increases or decrease cash flow:
Increase in investments
decreases cash flow (use)
Does the following item increases or decrease cash flow:
Depreciation expense
increases cash flow (source)
Does the following item increases or decrease cash flow:
Increase in notes payable
increases cash flow (source)
Does the following item increases or decrease cash flow:
Increase in accounts receivable
decreases cash flow (use)
On what statement does this item belong?
Depreciation Expense
Income Statement
On what statement does this item belong?
Common Stock
Balance Sheet
Stockholders Equity
On what statement does this item belong?
Bonds payable (Maturity 1yr.+)
Balance Sheet
Long-Term Liabilities
On what statement does this item belong?
Selling and Administrative Notes Payable (6 months)
Balance Sheet
Current Liabilities
On what statement does this item belong?
Sales
Income Statement
On what statement does this item belong?
Interest Expense
Income Statement
On what statement does this item belong?
Marketable Securities
Balance Sheet
Current Assets
On what statement does this item belong?
Operating Expenses
Income Statement
On what statement does this item belong?
Plant & Equipment
Balance Sheet
Fixed Assets
On what statement does this item belong?
Selling and Administrative Expenses
Income Statement
On what statement does this item belong?
Cash
Balance Sheet
Current Assets
On what statement does this item belong?
Accrued Expenses
Balance Sheet
Current Liabilities
On what statement does this item belong?
Income Tax Expense
Income Statement
On what statement does this item belong?
Retained Earnings
Balance Sheet
Stockholders Equity
On what statement does this item belong?
Accounts Receivable
Balance Sheet
Current Assets
On what statement does this item belong?
Depreciation Expense
Income Statement
On what statement does this item belong?
Inventories
Balance Sheet
Current Asset
On what statement does this item belong?
Capital in excess of par value
Balance Sheet
Shareholders Equity
On what statement does this item belong?
Net Income (Earnings after Taxes)
Income Statement
On what statement does this item belong?
Income tax payable
Balance Sheet
Current Liability
On what statement does this item belong?
Retained earnings
Balance Sheet
noncurrent
On what statement does this item belong?
Accounts payable
Balance Sheet
current
On what statement does this item belong?
Prepaid expense
Balance Sheet
current
On what statement does this item belong?
Plant and equipment
Balance Sheet
noncurrent
On what statement does this item belong?
Inventory
Balance Sheet
current
On what statement does this item belong?
Common stock
Balance Sheet
noncurrent
On what statement does this item belong?
Bonds payable
Balance Sheet
noncurrent
On what statement does this item belong?
Accrued wages payable
Balance Sheet
current
On what statement does this item belong?
Accounts receivable
Balance Sheet
current
On what statement does this item belong?
Capital in excess of par
Balance Sheet
noncurrent
On what statement does this item belong?
Preferred stock
Balance Sheet
noncurrent
On what statement does this item belong?
Marketable securities
Balance Sheet
current
What ratios would the following group be more interested in?
Short-term lenders
Liquidity because their concern is with the firm's ability to pay short-term obligations as they come due.
What ratios would the following group be more interested in?
Long-term lenders
Leverage because they are concerned with the relationship of debt to total assets. They also will examine profitability to insure that interest payments can be made.
What ratios would the following group be more interested in?
Stock-holders
profitability, with secondary consideration given to debt utilization, liquidity, and other ratios. Since stockholders are the ultimate owners of the firm, they are primarily concerned with profits or the return on their investment ROI.
If the accounts receivable turnover ratio is decreasing, what will be happening to the average collection period?
Accounts receivable will be on the books for a longer period of time. This means the average collection period will be increasing.
Describe:
accounts payable
balance sheet
current liabilities

amount owed on open account to suppliers
Describe:
notes payable
balance sheet
current liabilities

short term, signed obligations to bankers and other creditors
Describe:
accrued expenses
balance sheet
current liabilities

a liability for a service that has been redered to the firm
Describe:
cash
balance sheet
current assets

cash on hand or in banks, any currency that is not highly inflationary. Has to be funtional. We have to have it and control it.
Describe:
marketable securities
balance sheet
current assets

temporary investments of cash by the firm that are not longer than one year
Describe:
accounts receivable
balance sheet
current assets

amounts due from customers
Describe:
-Less allowance for bad debts
balance sheet

can be subtracted from accounts receivable in the case of non-payment
Describe:
inventory
balance sheet
current assets

merchandise acquired but not yet sold, intention has to be to sell. Items that are used are not listed under inventory.
Describe:
prepaid expenses
balance sheet
current assets

future expense items that have already been paid... rent, insurance, etc...
Describe:
investments
balance sheet
other assets

longer term commitment of funds of least 1 year
Describe:
plant and equipment original cost
balance sheet
fixed assets

Equipment – assets used in the business this is without subtracting the accumulated depreciation
Describe:
Less accumulated depreciation
balance sheet

accumulated depreciation that has been expensed in the income statement over time
Describe:
net plant and equipment
balance sheet
current assets

plant and equipment original cost minus accumulated depreciation
Describe:
bonds payable
balance sheet
long-term liabilities

securities that have been issued but are not due within a year
Describe:
preferred stock
balance sheet
stockholders' equity

the total value of all preferred stock than has been issued
Describe:
common stock
balance sheet
stockholders' equity

the total value of all common stock than has been issued
Describe:
capital paid in excess of par
balance sheet
stockholders' equity
additional common stock
Describe:
total stockholders equity
balance sheet
stockholders' equity

preferred stock + common stock + capital in excess of par + retained earnings
Describe:
retained earnings
balance sheet
stockholders' equity

carried across from the income statement's retained earnings
What is a: Income statement
profit loss… statement of operations… win-loss record over a period of time.
What is a: balance sheet
listing of resources.. economic resources, all obligations, debts, etc…
What is a: statement of cash flows
cash came from and how it was used
What is a: Statement of stockholders equity
how book value changed from one period to the next. What happened to stockholders equity from the beginning of the year.
What goes at the last line of the financial statement
Double line at the bottom of the financial statements at the point of “Net Earnings after Taxes”
retained earnings
retained earnings for the year prior + net income after taxes – dividends paid.
three different areas that the statement of cash flows is divided into
Operations
Investment
Financing Activities
on the statement of Cash Flows: Operations
All normal day to day activities… anything that flows during the normal business activities.
on the statement of Cash Flows: Investment
Cash used to buy long term assets and income from the sale of fixed assets.
on the statement of Cash Flows: Financing Activities
Non-current liabilities and capital…
Purchase back company stock….
Cash outflow to pay off debt…
Profit Margin
Profitability Ratio

High profit margin indicates good cost control
Return on Assets
Profitability Ratio
The amount of income generated against the listed assets of the firm
Return on Equity
Profitability Ratio

Shows how profitability compared to the amount of equity invested in the company
Receivable Turnover
Asset Utilization Ratio
How fast does the company collect receivables?
Average Collection Period
Asset Utilization Ratio
How long customer's accounts stay on the book
Inventory Turnover
Asset Utilization Ratio
Generation of sales per dollar of inventory.
Fixed Asset turnover
Asset Utilization Ratio
How often does the company turn over its fixed assets?
Total Asset Turnover
Asset Utilization Ratio
High assets turnover show that assets are being utilized efficiently
Current Ratio
Liquidity Ratio
current assets/liabilities
Quick Ratio
Liquidity Ratio
current assets-inventory / liabilities
Debt to total assets
Debt Utilzation ratio
The amount of debt compared to the amount of assets
Times interest earned
Debt Utilzation ratio
How well are interest obligations covered?
Fixed charge coverage
Debt Utilzation ratio
How well the company meets all fixed obligations... does it have enough cash to cover the bills?
Inflow - Operating Activites
Generation of Funds in normal operations
Outflow - Operating Activites
Expenditure of Funds in normal operations
Inflow - Investing Activities
Sale of plant and equipment... liquidation of any long term assets
Outflow - Investing Activites
Purchase of plant or equipment... Long Term investments...
Inflow - Financing Activites
Sale of bonds... common stock... preferred stock and other securities.
Outflow - Financing Activites
Retirement repurchase of bonds.. stocks... common stock... and securities.. payments of dividends....
Three Categories on the Statement of Cashflows...
1. Operating Activites
2. Investing Activities
3. Financing Activities