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36 Cards in this Set

  • Front
  • Back
Entity Assumption
A business is separate from its owners or other businesses.
Going Concern Assumption
The business will be in operation indefinitely.
Monetary Unit Assumption
Transactions will be quantified in nominal dollars or other stable currency, unadjusted for inflation.
Perios Assumption
Business activities will be reported over specific periods of time-quarterly and annually.
Cost Principle
The business will report amounts based on the acquisitions costs, rather than at fair market value (FMV), with only selective excerptions.
Realization Principle (Revenue Principle)
The business will report revenue only when realized, i.e when activities related to selling goods or services are complete and cash collection is reasonably likely, not simple when cash is received.
Matching Principle
Expense should be "matched" with revenues. This provides a timely connection between sacrifices and rewards in order to facilitate an evaluation of profitability.
Disclaimer Principle
This principle recognizes that not all information relevant to financial decision-making is quantitative. Some important information is narrative. It also acknowledges that information is costly and therefore burdensome on businesses.
Objectivity Principle
Reported information should be based on objective evidence. The results of actual transactions with other entities are the preferred basis for the objectivity because it lends independence to the reporting process.
Materiality Principle
The significance of a reportable item determines how it will be reported. Thus, small transactions are usually aggregated and reported together.
Consistency Principle
Business should apply the same accounting choices and methods year after year.
The Principle of Conservatism
When making accounting choices or deciding on reporting methods, businesses should make these decisions based on understating the value of assets and income.
Value Proposition
An idea of good or service that provides a positive, net benefit to a customer. Described in a business plan that articulates a business model.
Business Model
The commercial process that brings the good or service to the customer.
Real Capital
Stuff that initiate the business model---computers, desks, supplies, etc.. Money is needed to get real capital.
Funding Plan
Plan describes what the company needs (real capital) to get started and where the owners expect to find the cash (financial capital). Articulates how much cash is required and on what terms the company is willing to buy the cash from creditors/banks or investors.
Financial Capital
Money. What buys real capital and therefore, equates to it.
Quote 1
Every REAL thing that you own must have a FINANCIAL source.
Profit and loss statement. Estimate of the business profits which is one of the things needed in a company's report card.
Historical Report
An actual, historical profit and loss statement.
Financial reports
The income statements, balance sheets, and cash flow statements.
Investments Banks
Institutions that help companies buy money from capital markets.
A company's CFO (Chief Financial Officer)
Ensures that the company has enough cash at all times to support its business model.
How does a CFO minimize the cost of capital?
CEO's and CFO's make promises. They promise high returns from a "hot" value proposition nd back-up these promises with a well-written business plan and slightly exaggerated anecdotes of their own past experiences.
Corporate Finance teaches us what?
1) Best choose what assets to buy to maximize profits
2) Determine the optional combination of bonds/debt and stocks/equity with which to fund the purchase of assets.
Quote 2
A company as an idea operationalized by a collection of assets financed by a particular capital structure.
Four sources of Financial Capital
1)Interest-bearing debt (IBD) usually in the form of BONDS
2)Common & preferred STOCKS, the company's own internal source
-------------These considered INVESTED CAPITAL
4)Trade Credit----WORKING CAPITAL.
1)Selling Bonds
2)Selling Stock
3)Producing Earnings
4)Using Trade Credit
Selling Bonds
Create long-term liabilities for itself. Companies borrow money by issuing bonds that promise to pay periodic interest and then returns the face amount of the bond in 10 or 20 yrs.
Selling Stock
Offer investors Equity claims. Companies sell shares, which are ownership claims on its profits. The company;s shareholders are its owners. Sometimes owners pay the company's profits to themselves; more often, the company's profits are retained by the company for future use or to repay bonds.
Producing Earnings
Make and retain profits. The company's own profits are a source of financial capital if they are retained, i.e. not distributed to shareholders as dividends.
Using Trade Credit
Create short-term liabilities for itself. A credit card is a form of trade credit, much like purchasing inventory and signaling an invoice which gives the vendor an account payable. Another is when customers pay in-advance for something. This gives the company a cash head-start and this form of financial capital is recorded as a current liability.
Direct Source of Cash
The initial sale and only the initial sale of stocks and bonds.
What investors buy to gain "share of the business."
Interest rate on loans
The "cost" of debt capital. The rent that a company pays on the use of the bank's money.
An important aspect of markets because it gives creditors and investors the option to undo their purchase of stocks or bonds. It gives creditors and investors an exit.