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153 Cards in this Set
- Front
- Back
What are some pros and cons to sole proprietorship?
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Pros: Simplicity in decision making, lower operating and organizational costs.
Major Con: unlimited liability for the owner. |
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What is a limited liability partnership?
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At its core, it is a partnership with general partners and limited partners. Unlimited liability for general partners, liability is limited to amount contributed for limited parters. Limited partners are not allowed to be active in management.
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In a corporation, what group has the ultimate responsibility for protecting and managing the stockholders' interests?
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Board of Directors
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What document is necessary to form a corporation?
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The articles of incorporation.
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What issue does agency theory examine?
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Agency theory examines the relationship between the owners of the firm and the managers of the firm.
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Why is agency theory important in a public corporation rather than in a private corporation?
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In privately owned firms, management and the owners are usually the same people. Management operates the firm to satisfy its own goals, needs, financial requirements and the like. As a company moves from private to public ownership, management now represents all owners. This places management in the agency position of making decisions in the best interest of all shareholders.
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Why are institutional investors important in today's business world?
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Because institutional investors such as pension funds and mutual funds own a large percentage of major U.S. companies, they are having more to say about the way publicly owned companies are managed. As a group, they have the ability to vote large blocks of shares for the election of a board of directors, which is suppose to run the company in an efficient, competitive manner. The threat of being able to replace poor performing boards of directors. They have strong incentives to see that the firm is managed in an efficient and ethical way.
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Why is profit maximization, by itself, an inappropriate goal?
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The problem with a profit maximization goal is that it fails to take account of risk, the timing of the benefits is not considered, and profit measurement is a very inexact process.
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What is meant by the goal of maximization of shareholder wealth?
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The goal of shareholders wealth maximization implies that the firm will attempt to achieve the highest possible total valuation in the marketplace. It is the one overriding objective of the firm and should influence every decision.
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When does insider trading occur?
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Insider trading occurs when someone has information that is not available to the public and then users the information to profit from trading in a company's common stock.
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What government agency is responsible for protecting against the unethical practice of insider trading?
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Securities and Exchange Commission
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In the terms of the life of the securities offered, what is the difference between money and capital markets?
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Money markets refer to those markets dealing with short-term securities that have a life of one year or less. Capital markets refer to securities with a life of more than one year.
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What is the difference between a primary and a secondary market?
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A primary market refers to the use of the financial markets to raise new funds. After the securities are sold to the public (institutions and individuals), they trade in the secondary market between investors. It is in the secondary market that prices are continually changing as investors buy and sell securities based on the expectations of corporate prospects.
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Assume you are looking at many companies with equal risk, which ones will have the highest stock prices?
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Given companies with equal risk, those companies with expectations of high return will have higher common stock prices relative to those companies with poor expectations.
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What changes can take place under restructuring?
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changes in the capital structure (liabilities and equity on the balance sheet)
selling of low-profit-margin divisions reallocating resources toward other investment opportunities removal of the current management team large reductions in the work force mergers and acquisitions |
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In recent times, what group of investors has often forced restructuring to take place?
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Institutional investors
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What impact has the Internet had on competition for full service brokers such as Merrill Lynch and Salomon Smith Barney?
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Shift to internet trading
Lower transaction costs more precise trades more competition price of trading driven down |
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What is a "income statement?"
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profit loss… statement of operations… win-loss record over a period of time
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What is a "balance sheet?"
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listing of resources.. economic resources, all obligations, debts, etc…
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What is a "statement of cash flows?"
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where cash came from and how it was used
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What is a "statement of stockholders equity?"
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how book value changed from one period to the next. What happened to stockholders equity from the beginning of the year.
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What is the correct format for the header of a Financial Statement (Income Statement, Balance Sheet, etc...)
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Company Name
Statement Type Date |
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What is "financial accounting?"
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The rules that go into putting the reports together for release to those that are external to the corporation.
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What is "gross profit ratio" and how is it calculated?
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Gross Profit / Total Sales
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What is the "book value per share" and how is it calculated?
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Shareholders Equity / Number of Share Outstanding
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Market Value Per Share
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Share Price / Earnings
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List some financial variables that affect the price to earnings ratio
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earnings and sales growth of the firm
risk or volatility in performance debt-equity structure of the firm dividend payment policy quality of management NOTE: The ratio tends to be future-oriented, and the more positive the outlook, the higher it will be. |
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Calculate: book value per share
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cost of assets
-minus liabilities -minus preferred stock / # of common shares outstanding |
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What is market value per share?
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The current assessed value of the firm in the marketplace.
NOTE: market value may differ widely from book value |
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Why is there a disparity between market value and book value?
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Book value is based on the historical cost of the assets, the market value is based on growth prospects for the firm, the quality of management, and the industry outlook.
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How does depreciation generate actual cash flows for the company?
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By serving as a tax shield against reported income. Amount is deducted before taxes though no direct expense occurs.
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What is accumulated depreciation?
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Accumulated depreciation is the sum of all past and present depreciation charges.
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What is depreciation expense?
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Depreciation expense is the current year's charge for depreciation on the income statement.
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How is the income statement related to the balance sheet?
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Earnings (less dividends) on the income statement are listed in ownership section of the balance sheet as "retained earnings."
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What are retained earnings?
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Retained Earnings are the profit made by the business that has not been paid out to the owners as Dividends... They are "available funds"
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Why does inflation restrict the usefulness of the balance sheet as normally presented?
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When prices are rising rapidly, historical cost data may lose much of its meaning–particularly for plant, equipment and inventory.
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Why does the statement of cash flows provides useful information that goes beyond income statement and balance sheet data?
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Accrual accounting as found in the (income statement and balance sheet) does not attempt to properly assess the cash flow position of the firm. The statement of cash flows does.
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What are the three primary sections of the statement of cash flows?
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Cash flows from operating activities
Cash flows from investing activities Cash flows from financing activities |
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In what finacial statement and section would the payment of a cash dividend be shown?
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The statement of cash flows under the category:
financing activities |
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What is free cash flow?
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cash flow from operating activities:
-minus Capital expenditures (required to maintain the productive capacity of the firm) -minus Dividends (required to maintain the payout on common stock and to cover any preferred stock obligation) |
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Why might free cash flow be important for leveraged buyouts?
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The analyst or banker normally looks at free cash flow to determine whether there are insufficient excess funds to pay back the loan associated with the leveraged buy-out.
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Why does interest expense cost a firm substantially less than actual expenses?
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Interest expense is tax deductible while most other payments are not.
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Calculate earnings per share:
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Earnings after taxes
/ Share outstanding |
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Calculate gross profit margin:
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Gross profit
/ Sales |
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Calculate Earnings Per Share (EPS):
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Available earnings
/ Share outstanding |
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On what statement does this item belong?
Taxes |
income statement
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On what statement does this item belong?
Selling and administrative expenses |
income statement
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On what statement does this item belong?
Earnings available to common stockholders |
income statement
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On what statement does this item belong?
Earnings after taxes |
income statement
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On what statement does this item belong?
Cost of goods sold |
income statement
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On what statement does this item belong?
Earnings before taxes |
income statement
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On what statement does this item belong?
Earnings per share |
income statement
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On what statement does this item belong?
Gross profit |
income statement
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On what statement does this item belong?
Sales |
income statement
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On what statement does this item belong?
Operating profit |
income statement
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On what statement does this item belong?
Preferred stock dividends |
income statement
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On what statement does this item belong?
Depreciation expense |
income statement
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On what statement does this item belong?
Interest expense |
income statement
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On what statement does this item belong?
Shares outstanding |
income statement
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Does the following item increases or decrease cash flow:
Increase in accrued expenses |
increases cash flow (source)
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Does the following item increases or decrease cash flow:
Dividend payment |
decreases cash flow (use)
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Does the following item increases or decrease cash flow:
Increase in inventory |
decreases cash flow (use)
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Does the following item increases or decrease cash flow:
Decrease in prepaid expenses |
increases cash flow (source)
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Does the following item increases or decrease cash flow:
Decrease in accounts payable |
decreases cash flow (use)
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Does the following item increases or decrease cash flow:
Increase in investments |
decreases cash flow (use)
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Does the following item increases or decrease cash flow:
Depreciation expense |
increases cash flow (source)
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Does the following item increases or decrease cash flow:
Increase in notes payable |
increases cash flow (source)
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Does the following item increases or decrease cash flow:
Increase in accounts receivable |
decreases cash flow (use)
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On what statement does this item belong?
Depreciation Expense |
Income Statement
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On what statement does this item belong?
Common Stock |
Balance Sheet
Stockholders Equity |
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On what statement does this item belong?
Bonds payable (Maturity 1yr.+) |
Balance Sheet
Long-Term Liabilities |
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On what statement does this item belong?
Selling and Administrative Notes Payable (6 months) |
Balance Sheet
Current Liabilities |
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On what statement does this item belong?
Sales |
Income Statement
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On what statement does this item belong?
Interest Expense |
Income Statement
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On what statement does this item belong?
Marketable Securities |
Balance Sheet
Current Assets |
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On what statement does this item belong?
Operating Expenses |
Income Statement
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On what statement does this item belong?
Plant & Equipment |
Balance Sheet
Fixed Assets |
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On what statement does this item belong?
Selling and Administrative Expenses |
Income Statement
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On what statement does this item belong?
Cash |
Balance Sheet
Current Assets |
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On what statement does this item belong?
Accrued Expenses |
Balance Sheet
Current Liabilities |
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On what statement does this item belong?
Income Tax Expense |
Income Statement
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On what statement does this item belong?
Retained Earnings |
Balance Sheet
Stockholders Equity |
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On what statement does this item belong?
Accounts Receivable |
Balance Sheet
Current Assets |
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On what statement does this item belong?
Depreciation Expense |
Income Statement
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On what statement does this item belong?
Inventories |
Balance Sheet
Current Asset |
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On what statement does this item belong?
Capital in excess of par value |
Balance Sheet
Shareholders Equity |
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On what statement does this item belong?
Net Income (Earnings after Taxes) |
Income Statement
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On what statement does this item belong?
Income tax payable |
Balance Sheet
Current Liability |
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On what statement does this item belong?
Retained earnings |
Balance Sheet
noncurrent |
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On what statement does this item belong?
Accounts payable |
Balance Sheet
current |
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On what statement does this item belong?
Prepaid expense |
Balance Sheet
current |
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On what statement does this item belong?
Plant and equipment |
Balance Sheet
noncurrent |
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On what statement does this item belong?
Inventory |
Balance Sheet
current |
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On what statement does this item belong?
Common stock |
Balance Sheet
noncurrent |
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On what statement does this item belong?
Bonds payable |
Balance Sheet
noncurrent |
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On what statement does this item belong?
Accrued wages payable |
Balance Sheet
current |
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On what statement does this item belong?
Accounts receivable |
Balance Sheet
current |
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On what statement does this item belong?
Capital in excess of par |
Balance Sheet
noncurrent |
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On what statement does this item belong?
Preferred stock |
Balance Sheet
noncurrent |
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On what statement does this item belong?
Marketable securities |
Balance Sheet
current |
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What ratios would the following group be more interested in?
Short-term lenders |
Liquidity because their concern is with the firm's ability to pay short-term obligations as they come due.
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What ratios would the following group be more interested in?
Long-term lenders |
Leverage because they are concerned with the relationship of debt to total assets. They also will examine profitability to insure that interest payments can be made.
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What ratios would the following group be more interested in?
Stock-holders |
profitability, with secondary consideration given to debt utilization, liquidity, and other ratios. Since stockholders are the ultimate owners of the firm, they are primarily concerned with profits or the return on their investment ROI.
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If the accounts receivable turnover ratio is decreasing, what will be happening to the average collection period?
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Accounts receivable will be on the books for a longer period of time. This means the average collection period will be increasing.
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Describe:
accounts payable |
balance sheet
current liabilities amount owed on open account to suppliers |
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Describe:
notes payable |
balance sheet
current liabilities short term, signed obligations to bankers and other creditors |
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Describe:
accrued expenses |
balance sheet
current liabilities a liability for a service that has been redered to the firm |
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Describe:
cash |
balance sheet
current assets cash on hand or in banks, any currency that is not highly inflationary. Has to be funtional. We have to have it and control it. |
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Describe:
marketable securities |
balance sheet
current assets temporary investments of cash by the firm that are not longer than one year |
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Describe:
accounts receivable |
balance sheet
current assets amounts due from customers |
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Describe:
-Less allowance for bad debts |
balance sheet
can be subtracted from accounts receivable in the case of non-payment |
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Describe:
inventory |
balance sheet
current assets merchandise acquired but not yet sold, intention has to be to sell. Items that are used are not listed under inventory. |
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Describe:
prepaid expenses |
balance sheet
current assets future expense items that have already been paid... rent, insurance, etc... |
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Describe:
investments |
balance sheet
other assets longer term commitment of funds of least 1 year |
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Describe:
plant and equipment original cost |
balance sheet
fixed assets Equipment – assets used in the business this is without subtracting the accumulated depreciation |
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Describe:
Less accumulated depreciation |
balance sheet
accumulated depreciation that has been expensed in the income statement over time |
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Describe:
net plant and equipment |
balance sheet
current assets plant and equipment original cost minus accumulated depreciation |
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Describe:
bonds payable |
balance sheet
long-term liabilities securities that have been issued but are not due within a year |
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Describe:
preferred stock |
balance sheet
stockholders' equity the total value of all preferred stock than has been issued |
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Describe:
common stock |
balance sheet
stockholders' equity the total value of all common stock than has been issued |
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Describe:
capital paid in excess of par |
balance sheet
stockholders' equity additional common stock |
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Describe:
total stockholders equity |
balance sheet
stockholders' equity preferred stock + common stock + capital in excess of par + retained earnings |
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Describe:
retained earnings |
balance sheet
stockholders' equity carried across from the income statement's retained earnings |
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What is a: Income statement
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profit loss… statement of operations… win-loss record over a period of time.
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What is a: balance sheet
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listing of resources.. economic resources, all obligations, debts, etc…
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What is a: statement of cash flows
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cash came from and how it was used
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What is a: Statement of stockholders equity
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how book value changed from one period to the next. What happened to stockholders equity from the beginning of the year.
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What goes at the last line of the financial statement
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Double line at the bottom of the financial statements at the point of “Net Earnings after Taxes”
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retained earnings
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retained earnings for the year prior + net income after taxes – dividends paid.
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three different areas that the statement of cash flows is divided into
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Operations
Investment Financing Activities |
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on the statement of Cash Flows: Operations
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All normal day to day activities… anything that flows during the normal business activities.
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on the statement of Cash Flows: Investment
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Cash used to buy long term assets and income from the sale of fixed assets.
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on the statement of Cash Flows: Financing Activities
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Non-current liabilities and capital…
Purchase back company stock…. Cash outflow to pay off debt… |
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Profit Margin
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Profitability Ratio
High profit margin indicates good cost control |
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Return on Assets
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Profitability Ratio
The amount of income generated against the listed assets of the firm |
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Return on Equity
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Profitability Ratio
Shows how profitability compared to the amount of equity invested in the company |
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Receivable Turnover
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Asset Utilization Ratio
How fast does the company collect receivables? |
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Average Collection Period
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Asset Utilization Ratio
How long customer's accounts stay on the book |
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Inventory Turnover
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Asset Utilization Ratio
Generation of sales per dollar of inventory. |
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Fixed Asset turnover
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Asset Utilization Ratio
How often does the company turn over its fixed assets? |
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Total Asset Turnover
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Asset Utilization Ratio
High assets turnover show that assets are being utilized efficiently |
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Current Ratio
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Liquidity Ratio
current assets/liabilities |
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Quick Ratio
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Liquidity Ratio
current assets-inventory / liabilities |
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Debt to total assets
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Debt Utilzation ratio
The amount of debt compared to the amount of assets |
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Times interest earned
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Debt Utilzation ratio
How well are interest obligations covered? |
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Fixed charge coverage
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Debt Utilzation ratio
How well the company meets all fixed obligations... does it have enough cash to cover the bills? |
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Inflow - Operating Activites
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Generation of Funds in normal operations
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Outflow - Operating Activites
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Expenditure of Funds in normal operations
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Inflow - Investing Activities
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Sale of plant and equipment... liquidation of any long term assets
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Outflow - Investing Activites
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Purchase of plant or equipment... Long Term investments...
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Inflow - Financing Activites
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Sale of bonds... common stock... preferred stock and other securities.
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Outflow - Financing Activites
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Retirement repurchase of bonds.. stocks... common stock... and securities.. payments of dividends....
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Three Categories on the Statement of Cashflows...
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1. Operating Activites
2. Investing Activities 3. Financing Activities |