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71 Cards in this Set
- Front
- Back
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Financial management deals with two activities: |
1. raising money 2. managing a company's finances in a way that achieves the highest rate of return |
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A company can't be viable in the long run unless... |
it is successful financially |
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Most entrepreneurial firms have four main financial objectives: |
profitability liquidity efficiency stability |
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the ability to earn a profit |
profitability |
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a company's ability to meet its short-term financial obligations |
liquidity |
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money owed to it by its customers |
accounts receivable |
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the merchandise, raw materials, and products waiting to be sold |
inventory |
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how productively a firm utilizes its assets relative to its profits |
efficiency |
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the strength and vigor of the firm's overall financial posture |
stability |
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calculated by dividing its long-term debt by its shareholders' equity |
debt-to-equity ratio |
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a written report that quantitatively describes a firm's financial health |
financial statement |
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an estimate of a firm's future income and expenses based on its past performance, its current circumstances, and its future plans |
forecasts |
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itemized forecasts of a company's income, expenses, and capital needs and are also an important tool for financial planning and control |
budgets |
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Forecasts are used to prepare... |
a firm's pro forma financial statement |
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a pro forma financial statement, along with its more fine-tuned budgets... |
constitute its financial plan |
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depict relationships between items on a firm's financial statements |
financial ratios |
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reflect past performance and are usually prepared on a quarterly and annual basis |
historical financial statements |
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a report similar to the annual report except that it contains more detailed information about the company's business |
10-k |
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projections for future periods based on forecasts and are typically completed for two to three years into the future |
pro forma financial statements |
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Historical financial statements include... |
the income statement, the balance sheet, and the statement of cash flows |
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reflects the results of the operations of a firm over a specified period of time |
income statement |
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The three numbers that receive the most attention when evaluating an income statement are the following: |
Net sales Cost of sales operating expenses |
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consist of total sales minus allowances for returned goods and discounts |
net sales |
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includes all the direct costs associated with producing or delivering a product or service, including the material costs and direct labor |
cost of sales |
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include marketing, administrative costs, and other expenses not directly related to producing a product or service |
operating expenses |
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profit margin |
computed by dividing net income by sales |
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a simple ratio that measures the price of a company's stock against its earnings |
Price-to-Earnings ratio |
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a snapshot of the company's assets, liabilities, and owners' equity at a specific point in time |
balance sheet |
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A balance sheet must always balance, meaning... |
that a firm's assets must always equal its liabilities plus owner's equity |
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The major categories of assets listed on a balance sheet are the following: |
current assets fixed assets other assets |
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include cash plus items that are readily convertible to cash, such as accounts receivable, marketable securities, and inventories |
current assets |
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assets used over a longer time frame, such as real estate, buildings, equipment, and furniture |
fixed assets |
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miscellaneous assets, including accumulated good will |
other assets |
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The major categories of liabilities listed on a balance sheet are the following: |
current liabilities long-term liabilities owners' equity |
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include obligations that are payable within a year, including accounts payable, accrued expenses, and the current portion of long-term debt |
current liabilities |
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include notes or loans that are repayable beyond one year, including liabilities associated with purchasing real estate, buildings, and equipment |
long-term liabilities |
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the equity invested in the business by its owners plus the accumulated earnings retained by the business after paying dividends |
owners' equity |
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Balance sheets are somewhat deceiving for four reasons: |
1. A company's assets are recorded at cost rather than fair market value. 2. intellectual property receive value on the balance sheet in some cases and in some cases they don't. 3. Intangible assets are not recognized. 4. the goodwill accumulated is not represented |
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When evaluating a balance sheet, the two primary questions are: |
whether a firm has sufficient short-term assets to cover its short term debts whether it is financially sound overall |
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What is working capital? |
current assets - current liabilities |
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Current ratio |
firms current assets/current liabilities |
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Debt ratio |
total debt/total assets |
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summarizes the changes in a firm's cash position for a specified period of time and details why the change occurred. |
statement of cash flows |
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The statement of cash flows is divided into three separate activities: |
operating activities investing activities financing activities |
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include net income (or loss), depreciation, and changes in current assets and current liabilities other than cash and short-term debt |
opreating activities |
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include the purchase sale or investment in fixed assets, such as real estate, equipment, and buildings |
investing activities |
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include cash raised during the period by borrowing money or selling stock stock and/or cash used during the period by paying dividends, buying back outstanding stock, or buying back outstanding bonds |
financing activities |
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The uses of cash are recorded as... |
negative figures |
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sources of cash are recorded as... |
positive figures |
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Profitability ratios... |
associate the amount of income earned with resources used to generate it |
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Return on assets = |
net income/average total assets |
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Return on equity = |
net income/average shareholders equity |
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profit margin = |
net income/net sales |
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liquidity ratios measure... |
the extent to which a company can quickly liquidate assets to cover short-term liabilities |
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current = |
current assets/current liabilities |
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Quick = |
quick assets/current liabilities |
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Overall financial stability ration measures.. |
the overall financial stability of the firm |
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debt = |
total debt/total assets |
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Debt to Equity = |
total liabilities/owners' equity |
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predictions of a firm's future sales, expenses, income, and capital expenditures |
forecasts |
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an explanation of the sources of the numbers for the forecast and the assumptions used to generate them |
assumptions sheet |
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a projection of a firm's sales for a specified period, though most firms fore case their sales for two to five years into the future |
sales forecast |
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A sales forecast for an existing firm is based on (3) |
1. its record of past sales 2. its current production capacity and product demand 3. any factor or factors that will affect its future production capacity and product demand |
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a statistical technique used to find relationships between variables for the purpose of predicting future values |
regression analysis |
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a method for expressing each expense item as a percentage of sales |
percent-of-sales method |
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The net result is that each expense item on its income statement will grow at the same rate as sales |
constant ratio method of forecasting |
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the point where total revenue received equals total costs associated with the output of the restaurant or the sale of the product |
break-even point |
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The formula for break even analysis is: |
total fixed costs/(price - average variable costs) |
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provides a firm a sense of how its activities will affect its ability to meet its short-term liabilities and how its finances evolve over time |
pro forma balance sheet |
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shows the projected flow of cash into and out of the company during a specified period |
pro forma statement of cash flows |
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it is extremely important for a firm to understand its financial position at all times and for new ventures to... |
base their financial projections on solid numbers. |
