Comm180

Front 1

Sole Proprietorship
Advantages

Back 1

easy to start
least regulated
single owner who keeps all profit
tax once as personal income

Front 2

Sole proprietorship
Disadvantages

Back 2

limited life of owner
equity capital limited owner's personal wealth
unlimited liability
difficult to seel ownership interest

Front 3

Partnership
Advantages

Back 3

more than 1 owner
more capital available
easy to start
income tax once as personal income

Front 4

Partnership
Disadvantages

Back 4

unlimited liability
partnership dissolves when partner dies
hard to transer ownership

Front 5

Corporation
Advantages

Back 5

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

Front 6

Corporation
Disadvantages

Back 6

separation of ownership and management creates lawsuits
double taxation income tax at corporate rate and then dividends taxed at personal rate

Front 7

Initial Public Offering (IPO)

Back 7

first time company stock is sold to public

Front 8

Seasoned new issue

Back 8

stock offerings by companies that already have common stock traded

Front 9

Incremental Cash Flow (ICF)

Back 9

difference between the cash flows if the project is taken on versus what they will be if the project is not taken on

Front 10

Two ways to make markets less competitive:

Back 10

1. differentiate your product in some way
2. achieve a cost advantage over competitors

Front 11

Efficient market

Back 11

market in which the values of all assets and securities at any instant in time fully reflect all available public information

Front 12

Assets

Back 12

raw materials, machines
resources that have to bought to generate more stuff like inventory and cash through sales

Front 13

Current Assets

Back 13

cash, marketable securities, accounts receivable, inventories

Front 14

Marketable securities

Back 14

liquid investments that can be turned into cash really quickly

Front 15

Accounts receivable

Back 15

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

Front 16

Equity

Back 16

the amount of the funds contributed by the owners (stockholders) plus the retained earnings (losses)

Front 17

Accounts payable

Back 17

credit given to firms from vendors; if firms don't pay on time, vendors could refuse giving credit in the future

Front 18

Long-term debt

Back 18

money borrowed for a period longer than a year

Front 19

Shareholder's equity

Back 19

preferred stock, common stock, paid in capital in excess of par, retained earnings

Front 20

Preferred Stock

Back 20

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

Front 21

Common stock

Back 21

number of shares outstand X par value

Front 22

Paid in capital in excess of par

Back 22

=amount of money shareholders that bought the stock paid over the par value

Front 23

Common stock + Paid in Capital Accounts =

Back 23

amount of money the corporation got form its initial shareholders when stock was sold for the first time

Front 24

Retained earnings

Back 24

all income reinvested in firm and not paid out as dividends

Front 25

Net income

Back 25

difference between revenues and expenses

Front 26

Revenues

Back 26

come about by selling a good or service and equal the number the units sold times price of unit

Front 27

Gross profit

Back 27

sales - cost of goods sold

Front 28

Operating Profit=

Back 28

gross profit - expenses used to operate firm

Front 29

Net income=

Back 29

operating profit - interest and taxes

Front 30

Cash flow from operations

Back 30

accounts for operating costs and gains

Front 31

Cash flow from investing

Back 31

change in non-current assets (long-term assets) like if a firm buys land, cash decreases

Front 32

Cash flow from financing

Back 32

change in non-current liabilities and equity minus cash dividends; paying off debt will decrease cash

Front 33

Asset increases, then

Back 33

something was bought and therefore was a use of cash

Front 34

Asset decreases, then

Back 34

something was sold and therefore was a source of cash

Front 35

Liability goes up, then

Back 35

the firm borrowed and cash increases (source of cash)

Front 36

Liability goes down, then

Back 36

debts were repaid and cash was used

Front 37

Increase in equity

Back 37

means cash was invested in the firm

Front 38

Decrease in equity

Back 38

means that cash was distributed to investors

Front 39

Emerging firm

Back 39

small management team
entrepeneurial
risk high
earnings low, negative
financial goal: survival

Front 40

Growth firm

Back 40

increased sales
production
competition
falling prices
financial goal: revenue growth, market share, profit maximization

Front 41

Mature firm

Back 41

sales increase slowly while prices and profit decline
management team centralized
financial goal: profit maximization, cost minimization

Front 42

Declining firm

Back 42

experiences decline in sales and profits as products lose competitive edge
financing heavily equity
risk low, earnings negative
working capital increases

Front 43

Net working capital

Back 43

difference between a firm's current assets and its current liabilities; useful measure of a firm's short-term financing decisions

Front 44

Investing in marketable securities and inventories

Back 44

lower firm profitability
higher firm liquidity

Front 45

Increasing use of short vs. long term sources of financing

Back 45

higher firm profitability
lower firm liquidity

Front 46

Permanent asset

Back 46

investment in an asset that the firm expects to hold for the forseeable future

Front 47

Temporary asset

Back 47

investment in assets that firms plan to sell (liquidate) within a period of no longer than a year

Front 48

Temporary source of financing

Back 48

another term for current liabilities

Front 49

Permanent source of financing

Back 49

do not mature or come due within the year

Front 50

Spontaneous source of financing

Back 50

trade credit and other sources of accounts payable that arise in the firm's day to day operations

Front 51

Unsecured loans

Back 51

only security is lender's faith in the borrower to repay the funds (wages, taxes, trade credit)

Front 52

Accrued wages and taxes

Back 52

essentially a loan from employees since firms only pay them periodically

Front 53

Trade credit

Back 53

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

Front 54

Line of credit agreement

Back 54

an agreement between a firm and its banker to provide short-term financing to meet its temporary financing needs

Front 55

Revolving credit

Back 55

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

Front 56

Secured loans

Back 56

pledge of specific assets as collateral (commercial banks, finance companies, etc.)

Front 57

Transaction loans

Back 57

unsecured, short-term loan; is usually associated with bank credit and is obtained by signing a promissory note; loan is made for specific purpose

Front 58

Commercial paper

Back 58

short-term promise to pay that is sold in market for short-term debt securities

Front 59

Commercial paper
advantages

Back 59

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

Front 60

Commercial paper
disadvantage

Back 60

involves risk since the commercial paper market is impersonal and denies even the most creditworthy borrower any flexibility in terms of repayment

Front 61

Accounts receivable loans

Back 61

a firm's receivables are among its most liquid assets, thus they are prime collateral for secured loans

Front 62

Pledging accounts receivable

Back 62

borrower pledges accounts receivable as collateral for loan

Front 63

Pledging method 1

Back 63

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

Front 64

Pledging method 2

Back 64

borrower presents invoices to lender with individual accounts pledged; more expensive

Front 65

Pledging
advantage

Back 65

flexibility it provides borrower; financing continuously available

Front 66

Pledging
disadvantage

Back 66

cost can be relatively high compared with other short-term credit sources

Front 67

Factoring accounts receivable

Back 67

outright sale of a firm's accounts to financial institution

Front 68

Factor

Back 68

bears risk of collecting on the receivables
usually doesn't make payment until accounts have been collected or credit terms met

Front 69

Inventory loans

Back 69

secured source of short-term financing based on providing inventory as collateral

Front 70

Floating lien

Back 70

borrower gives lender rights to all inventory but maintains control; least secure form for lender

Front 71

Chattel mortgage agreement

Back 71

inventory is identified in security agreement and borrower retains title to inventory but cannot sell items without consent of lender

Front 72

Field warehouse financing agreement

Back 72

3rd party firm takes control of borrower's inventory pledged as collateral

Front 73

Terminal warehouse agreement

Back 73

inventories used as collateral transported to public warehouse and completely out of borrower's control; less risky for lender, but costs more to borrower

Front 74

Translation exposure

Back 74

arises because foreign operations of multinational corporations have accounting statements denominated in local currency of the country in which the operation is located

Front 75

Transaction exposure

Back 75

transactions often require a payment to be made in the future which may be subject to exchange rate risk

Front 76

Economic exposure

Back 76

exists long-term because value of future cash flows in the reporting currency from foreign operations is exposed to exchange rate risk

Front 77

Firm experiences irregular increases in its cash holdings from:

Back 77

sale of securities
nonmarketable debt contracts with lenders

Front 78

Transaction motive

Back 78

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

Front 79

Precautionary motive

Back 79

buffer stock of liquid assets
these balances are used to satisfy possible needs

Front 80

Speculative motive

Back 80

cash is held to take advantage of potential profit-making situations; least important component of a firm's preference for liquidity

Front 81

Insolvency

Back 81

the situation where the firm is unable to pay bills on time

Front 82

Minimizes chances of insolvency

Back 82

large cash investment; but it penalizes company profitability

Front 83

Small cash investment

Back 83

frees excess balances for investment; enhances company profitability and value of firm's common shares; increases chances of running out of cash

Front 84

Float

Back 84

length of time from when a check if written until the actual recipient can use the "good funds"

Front 85

Mail float

Back 85

caused by the time lapse from the moment a customer mails a check until the firm begins to process it

Front 86

Processing float

Back 86

time required for the firm to process the check before they can be deposited

Front 87

Transit float

Back 87

time necessary for a deposited check to clear through the commercial banking system and become usable funds to the company

Front 88

Disbursing float

Back 88

customer's funds aren't available in the company's bank account until the company's payment check has cleared through the banking system

Front 89

Lock-Box arrangement

Back 89

used for expediting cash gathering
speeds up the conversion of receipts into usable funds by reducing both mail and processing float

Front 90

Concentration banking

Back 90

the selection of a few major banks where the firm maintains significant disbursing accounts

Front 91

Depository transfer checks

Back 91

a non-negotiable instrument that provides the firm with a means to move funds from local bank accounts to concentration bank accounts

Front 92

Zero balance accounts are there for the firm to:

Back 92

achieve better control over its cash payments
reduce excess cash balances held for disbursing purposes
increase disbursing float

Front 93

Zero balance accounts

Back 93

cash management tool that permits centralized control over cash outflows but also maintains divisional disbursing authority

Front 94

Certificates of Deposit

Back 94

CDs; a marketable receipt for funds that have been deposited in a bank for a fixed time period

Front 95

Repurchase agreements

Back 95

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