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95 Cards in this Set

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Sole Proprietorship
Advantages
easy to start
least regulated
single owner who keeps all profit
tax once as personal income
Sole proprietorship
Disadvantages
limited life of owner
equity capital limited owner's personal wealth
unlimited liability
difficult to seel ownership interest
Partnership
Advantages
more than 1 owner
more capital available
easy to start
income tax once as personal income
Partnership
Disadvantages
unlimited liability
partnership dissolves when partner dies
hard to transer ownership
Corporation
Advantages
limited liability
unlimited life
separation between ownership and management
transfer of ownership is easy because the issue of shares can be sold
easier to raise capital
Corporation
Disadvantages
separation of ownership and management creates lawsuits
double taxation income tax at corporate rate and then dividends taxed at personal rate
Initial Public Offering (IPO)
first time company stock is sold to public
Seasoned new issue
stock offerings by companies that already have common stock traded
Incremental Cash Flow (ICF)
difference between the cash flows if the project is taken on versus what they will be if the project is not taken on
Two ways to make markets less competitive:
1. differentiate your product in some way
2. achieve a cost advantage over competitors
Efficient market
market in which the values of all assets and securities at any instant in time fully reflect all available public information
Assets
raw materials, machines
resources that have to bought to generate more stuff like inventory and cash through sales
Current Assets
cash, marketable securities, accounts receivable, inventories
Marketable securities
liquid investments that can be turned into cash really quickly
Accounts receivable
extends credit to customer, customer buys something and has gotten the product but has yet to pay for it; when this is paid off, firm's cash increases and accounts receivable decreases
Equity
the amount of the funds contributed by the owners (stockholders) plus the retained earnings (losses)
Accounts payable
credit given to firms from vendors; if firms don't pay on time, vendors could refuse giving credit in the future
Long-term debt
money borrowed for a period longer than a year
Shareholder's equity
preferred stock, common stock, paid in capital in excess of par, retained earnings
Preferred Stock
acts like debt and equity, buyers of this stock get a fixed dividend payment like interest, but in case of bankruptcy, they get distributions after debt holders; lasts as long as the firm lasts
Common stock
number of shares outstand X par value
Paid in capital in excess of par
=amount of money shareholders that bought the stock paid over the par value
Common stock + Paid in Capital Accounts =
amount of money the corporation got form its initial shareholders when stock was sold for the first time
Retained earnings
all income reinvested in firm and not paid out as dividends
Net income
difference between revenues and expenses
Revenues
come about by selling a good or service and equal the number the units sold times price of unit
Gross profit
sales - cost of goods sold
Operating Profit=
gross profit - expenses used to operate firm
Net income=
operating profit - interest and taxes
Cash flow from operations
accounts for operating costs and gains
Cash flow from investing
change in non-current assets (long-term assets) like if a firm buys land, cash decreases
Cash flow from financing
change in non-current liabilities and equity minus cash dividends; paying off debt will decrease cash
Asset increases, then
something was bought and therefore was a use of cash
Asset decreases, then
something was sold and therefore was a source of cash
Liability goes up, then
the firm borrowed and cash increases (source of cash)
Liability goes down, then
debts were repaid and cash was used
Increase in equity
means cash was invested in the firm
Decrease in equity
means that cash was distributed to investors
Emerging firm
small management team
entrepeneurial
risk high
earnings low, negative
financial goal: survival
Growth firm
increased sales
production
competition
falling prices
financial goal: revenue growth, market share, profit maximization
Mature firm
sales increase slowly while prices and profit decline
management team centralized
financial goal: profit maximization, cost minimization
Declining firm
experiences decline in sales and profits as products lose competitive edge
financing heavily equity
risk low, earnings negative
working capital increases
Net working capital
difference between a firm's current assets and its current liabilities; useful measure of a firm's short-term financing decisions
Investing in marketable securities and inventories
lower firm profitability
higher firm liquidity
Increasing use of short vs. long term sources of financing
higher firm profitability
lower firm liquidity
Permanent asset
investment in an asset that the firm expects to hold for the forseeable future
Temporary asset
investment in assets that firms plan to sell (liquidate) within a period of no longer than a year
Temporary source of financing
another term for current liabilities
Permanent source of financing
do not mature or come due within the year
Spontaneous source of financing
trade credit and other sources of accounts payable that arise in the firm's day to day operations
Unsecured loans
only security is lender's faith in the borrower to repay the funds (wages, taxes, trade credit)
Accrued wages and taxes
essentially a loan from employees since firms only pay them periodically
Trade credit
accounts payable that arise out of the normal course of business when the firm purchases from its suppliers who allow the firm to make payment after the delivery of the merchandise of services
Line of credit agreement
an agreement between a firm and its banker to provide short-term financing to meet its temporary financing needs
Revolving credit
a special type of line of credit agreement in which the line of credit is eventually covered into a term loan that requires period payments
Secured loans
pledge of specific assets as collateral (commercial banks, finance companies, etc.)
Transaction loans
unsecured, short-term loan; is usually associated with bank credit and is obtained by signing a promissory note; loan is made for specific purpose
Commercial paper
short-term promise to pay that is sold in market for short-term debt securities
Commercial paper
advantages
interest rates lower than those on bank loans
compensating balance requirements: no minimum balance requirements
amount of credit: single source for all short-term financing
prestige
Commercial paper
disadvantage
involves risk since the commercial paper market is impersonal and denies even the most creditworthy borrower any flexibility in terms of repayment
Accounts receivable loans
a firm's receivables are among its most liquid assets, thus they are prime collateral for secured loans
Pledging accounts receivable
borrower pledges accounts receivable as collateral for loan
Pledging method 1
general line given, which is when borrower pledges all accounts receivable for loan; simple and inexpensive but loan will be a low percent of face value
Pledging method 2
borrower presents invoices to lender with individual accounts pledged; more expensive
Pledging
advantage
flexibility it provides borrower; financing continuously available
Pledging
disadvantage
cost can be relatively high compared with other short-term credit sources
Factoring accounts receivable
outright sale of a firm's accounts to financial institution
Factor
bears risk of collecting on the receivables
usually doesn't make payment until accounts have been collected or credit terms met
Inventory loans
secured source of short-term financing based on providing inventory as collateral
Floating lien
borrower gives lender rights to all inventory but maintains control; least secure form for lender
Chattel mortgage agreement
inventory is identified in security agreement and borrower retains title to inventory but cannot sell items without consent of lender
Field warehouse financing agreement
3rd party firm takes control of borrower's inventory pledged as collateral
Terminal warehouse agreement
inventories used as collateral transported to public warehouse and completely out of borrower's control; less risky for lender, but costs more to borrower
Translation exposure
arises because foreign operations of multinational corporations have accounting statements denominated in local currency of the country in which the operation is located
Transaction exposure
transactions often require a payment to be made in the future which may be subject to exchange rate risk
Economic exposure
exists long-term because value of future cash flows in the reporting currency from foreign operations is exposed to exchange rate risk
Firm experiences irregular increases in its cash holdings from:
sale of securities
nonmarketable debt contracts with lenders
Transaction motive
cash held for transactions purposes allow the firm to meet cash needs
used to meet irregular outflows and planned acquisition of fixed assets and inventories
Precautionary motive
buffer stock of liquid assets
these balances are used to satisfy possible needs
Speculative motive
cash is held to take advantage of potential profit-making situations; least important component of a firm's preference for liquidity
Insolvency
the situation where the firm is unable to pay bills on time
Minimizes chances of insolvency
large cash investment; but it penalizes company profitability
Small cash investment
frees excess balances for investment; enhances company profitability and value of firm's common shares; increases chances of running out of cash
Float
length of time from when a check if written until the actual recipient can use the "good funds"
Mail float
caused by the time lapse from the moment a customer mails a check until the firm begins to process it
Processing float
time required for the firm to process the check before they can be deposited
Transit float
time necessary for a deposited check to clear through the commercial banking system and become usable funds to the company
Disbursing float
customer's funds aren't available in the company's bank account until the company's payment check has cleared through the banking system
Lock-Box arrangement
used for expediting cash gathering
speeds up the conversion of receipts into usable funds by reducing both mail and processing float
Concentration banking
the selection of a few major banks where the firm maintains significant disbursing accounts
Depository transfer checks
a non-negotiable instrument that provides the firm with a means to move funds from local bank accounts to concentration bank accounts
Zero balance accounts are there for the firm to:
achieve better control over its cash payments
reduce excess cash balances held for disbursing purposes
increase disbursing float
Zero balance accounts
cash management tool that permits centralized control over cash outflows but also maintains divisional disbursing authority
Certificates of Deposit
CDs; a marketable receipt for funds that have been deposited in a bank for a fixed time period
Repurchase agreements
legal contracts that involve the actual sale of securities by a borrower to the lender, with a commitment on the part of the borrower to repurchase the securities as the contract price plus a stated interest charge