Financial Accounting (Econ 4)

Front 1

Entity Assumption

Back 1

A business is separate from its owners or other businesses.

Front 2

Going Concern Assumption

Back 2

The business will be in operation indefinitely.

Front 3

Monetary Unit Assumption

Back 3

Transactions will be quantified in nominal dollars or other stable currency, unadjusted for inflation.

Front 4

Perios Assumption

Back 4

Business activities will be reported over specific periods of time-quarterly and annually.

Front 5

Cost Principle

Back 5

The business will report amounts based on the acquisitions costs, rather than at fair market value (FMV), with only selective excerptions.

Front 6

Realization Principle (Revenue Principle)

Back 6

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.

Front 7

Matching Principle

Back 7

Expense should be "matched" with revenues. This provides a timely connection between sacrifices and rewards in order to facilitate an evaluation of profitability.

Front 8

Disclaimer Principle

Back 8

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.

Front 9

Objectivity Principle

Back 9

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.

Front 10

Materiality Principle

Back 10

The significance of a reportable item determines how it will be reported. Thus, small transactions are usually aggregated and reported together.

Front 11

Consistency Principle

Back 11

Business should apply the same accounting choices and methods year after year.

Front 12

The Principle of Conservatism

Back 12

When making accounting choices or deciding on reporting methods, businesses should make these decisions based on understating the value of assets and income.

Front 13

Value Proposition

Back 13

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.

Front 14

Business Model

Back 14

The commercial process that brings the good or service to the customer.

Front 15

Real Capital

Back 15

Stuff that initiate the business model---computers, desks, supplies, etc.. Money is needed to get real capital.

Front 16

Funding Plan

Back 16

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.

Front 17

Financial Capital

Back 17

Money. What buys real capital and therefore, equates to it.

Front 18

Quote 1

Back 18

Every REAL thing that you own must have a FINANCIAL source.

Front 19

Proforma

Back 19

Profit and loss statement. Estimate of the business profits which is one of the things needed in a company's report card.

Front 20

Historical Report

Back 20

An actual, historical profit and loss statement.

Front 21

Financial reports

Back 21

The income statements, balance sheets, and cash flow statements.

Front 22

Investments Banks

Back 22

Institutions that help companies buy money from capital markets.

Front 23

A company's CFO (Chief Financial Officer)

Back 23

Ensures that the company has enough cash at all times to support its business model.

Front 24

How does a CFO minimize the cost of capital?

Back 24

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.

Front 25

Corporate Finance teaches us what?

Back 25

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.

Front 26

Quote 2

Back 26

A company as an idea operationalized by a collection of assets financed by a particular capital structure.

Front 27

Four sources of Financial Capital

Back 27

1)Interest-bearing debt (IBD) usually in the form of BONDS
2)Common & preferred STOCKS, the company's own internal source
3)Profits
-------------These considered INVESTED CAPITAL
4)Trade Credit----WORKING CAPITAL.

Front 28

Where can a COMPANY ACQUIRE FUNDS?

Back 28

1)Selling Bonds
2)Selling Stock
3)Producing Earnings
4)Using Trade Credit

Front 29

Selling Bonds

Back 29

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.

Front 30

Selling Stock

Back 30

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.

Front 31

Producing Earnings

Back 31

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.

Front 32

Using Trade Credit

Back 32

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.

Front 33

Direct Source of Cash

Back 33

The initial sale and only the initial sale of stocks and bonds.

Front 34

Shares

Back 34

What investors buy to gain "share of the business."

Front 35

Interest rate on loans

Back 35

The "cost" of debt capital. The rent that a company pays on the use of the bank's money.

Front 36

Liquidity

Back 36

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.