Finance - Chapter 1 - Introduction

Front 1

What 3 reasons that economic resources are required to establish and maintain firms?

Back 1

1) to enable materials and processes

2) to assemble a workforce

3) to purchase assets

Front 2

What can be used to show the financial make up and activity of a firm?

Back 2

A balance sheet

Front 3

What's on the left and right of a balance sheet?

Back 3

Left: capital budgeting decision

Right: capital structure decision

Front 4

What two things make up the left side of a balance sheet?

Back 4

1) Current assets

2) fixed assets (tangible, non-tangible)

Front 5

What 3 things make up the right side of the balance sheet?

Back 5

1) current liabilities

2) long-term debt

3) shareholders equity

Front 6

What are 3 responsibilities of a V.P/CFO?

Back 6

1) strategist

2) coordinator

3) authority

Front 7

What are 3 responsibilities of a treasurer?

Back 7

1) cash flow

2) capital expenditures

3) capital structure

Front 8

What are 3 responsibilities of a controller?

Back 8

1) accounting

2) information systems

3) taxes

Front 9

What are 4 forms of business organizations?

Back 9

1) sole proprietorship

2) general partnership

3) limited partnership

4) corporation

Front 10

What are 3 properties of a sole proprietorship?

Back 10

1) funds raised by sole owner

2) debts incurred fall on sole owner

3) taxed on personal level

Front 11

What are 3 properties of a general partnership?

Back 11

1) multiple owners who contribute funds

2) unlimited liability

3) taxed on a personal level

Front 12

What does unlimited liability mean?

Back 12

Debt falls on the owner of the organization

Front 13

What are 2 differences between limited partners compared to general partners?

Back 13

1) limited liability

2) less voting power than a general partner, or no voting power

Front 14

What is limited liability?

Back 14

Only liable for initial investment

Front 15

What are 5 properties of a corporation?

Back 15

1) can be owned by any amount of people

2) owners have limited liability

3) can act like a person (can't vote though)

4) easy to transfer ownership (sell shares)

5) corporations are taxed on their earnings, and dividends played to owners are then taxed on a personal level

Front 16

What is the lifespan of a corporation?

Back 16

Perpetual life

Front 17

What is the lifetime of a partnership?

Back 17

Limited

Front 18

Is it easy to change ownership of a partnership?

Back 18

It's subject to substantial restrictions

Front 19

What are 2 things a firm must do if it is to prosper?

Back 19

1) buy assets that generate more money than they cost

2) sell financial instruments that raise more cash than they cost

Front 20

What is an example of a non-cash expense?

Back 20

Depreciation

Front 21

What is an example of a non-cash revenue?

Back 21

Sales on account

Front 22

What should be the general goal of finanical management?

Back 22

Maximise the value of the existing owners equity

Front 23

What's a problem with just trying to maximise profits?

Back 23

If you raise prices at time of scarcity, competitor could undercut you and you loose business

Front 24

What's the problem with just trying to minimise costs?

Back 24

Cheaper assets are not as efficient

Front 25

What's the problem with just trying to maximise market share?

Back 25

Reducing price to sell more but it won't be very profitable

Front 26

What is the problem with just trying to maximise shareholders wealth?

Back 26

More money given to shareholders is less money for the firm

Front 27

What is the problem with just trying to survive and avoid bankruptcy?

Back 27

Risks need to be taken to grow

Front 28

What is an agency relationship?

Back 28

When stockholders hire managers to run the company

Front 29

What is an agency problem?

Back 29

Conflict of interest between principle and agent

Front 30

What is agency cost?

Back 30

When a manager prevails in a decision to not take on a risk that owners wanted, the long term positive cash flow that is lost is the agency cost

Front 31

What are 4 examples how management goals may be different to shareholders goals?

Back 31

1) expensive prerequisites

2) manager engaging in low risk activity for survival

3) independence (don't want takeover)

4) mangers want larger workforce (more money)

Front 32

What are two ways of lessening agency cost?

Back 32

1) managerial compensation

2) corporate control (threat of takeover should push managers to do better)

Front 33

What are the costs of agency relationships?

Back 33

Direct costs - money spent by managers

Indirect costs - money spent to protect principles (compliance, supervision, risk management)

Front 34

What two acts dictate what companies have to declare when they go public?

Back 34

1) the securities act of 1933

2) the securities exchange act of 1934

Front 35

What did the creation of SEC and reporting requirements (1934) bring about?

Back 35

Once a company is publicly listed, it has to report all its activities

Front 36

What act increased reporting requirements and responsibilities of corporate directors?

Back 36

The Sarbanes-Oxley act of 2002

Front 37

What do the securities act of 1933 and the securities exchange act of 1934 dictate?

Back 37

They dictate what companies have to declare when they go public

Front 38

What did the Sarbanes-Oxley act of 2002 do?

Back 38

Increased reporting requirements and responsibilities of corporate directors (director has to declare the selling of stock, insider trading)

Front 39

Who would receive payments last if a corporation were to close?

Back 39

Shareholders

Front 40

What are 2 reasons accounting profit does not adequately account for cash flow?

Back 40

Depreciation and sales on account are non cash financial activity

Front 41

How is a current liability defined?

Back 41

Debt that must be repaid within 12 months