Chapter 1. Overview of Corporate Finance Flashcards
(85 cards)
1
Q
Who is the primary Internal Financial statement user
A
Management
2
Q
What are the two main External Users of financial statements (and list some others as well)
A
1) Shareholders
2) Creditors
Regulators Tax Authorities Other Corporations Stock analysts credit rating agencies labour unions journalists
3
Q
What is interesting about Shareholders being external financial statement users
A
Shareholders includes the owners and board of directors.
-This is interesting because even though these are the owners, they are considered an external user. they will not have access to day to day information and will only get information quarterly.
4
Q
A company is owned by its ______
A
Shareholders
5
Q
There may be a single shareholder in the case of a ________ or many thousands of shareholders in the case of a _______
A
private company
public company.
6
Q
In situations where there are numerous shareholders, they elect a ______ to represent their interests.
A
board of directors
7
Q
The board of directors is given the responsibility of overseeing whom?
A
the management team that has been hired to operate the company
8
Q
What are the two major categories of Creditors
( a creditor is described as “those who lend money or otherwise extend credit to a company rather than invest in it directly as investors do.”)
A
- Financial institutions (i.e. banks, credit unions)
- Suppliers, employees, and the various levels of government ( These groups often sell goods or provide services prior to receiving payment – for example providing services and not requiring payment for 30 days)
9
Q
There are two main types of corporations: public and private companies. What is the difference between the two?
A
- the shares of public companies trade on public stock exchanges (shares often held by a large number of individuals/entities)
- the shares of private companies trade privately and are not available through public exchanges (usually narrowly held
10
Q
What are the distinguishing features of a Corporation in regard to the questions below? (as compared with Proprietorship and Partnership). {EXHIBIT 1.4}
A) Number of owners B) Separate legal entity? C) Owner(s) responsible for debts of the business? D) Taxed? E) Costs to establish F) Cost to maintain
A
A) Can be a single owner or multiple owners
B) Yes, personal assets of shareholders are not at risk in the event of legal action against company
C) Only to extent of investment
D) Yes, taxed separately
E) Most expensive
F) Most expensive
11
Q
What are the distinguishing features of a Proprietorship in regard to the questions below? (as compared with Corporation and Partnership). {EXHIBIT 1.4}
A) Number of owners B) Separate legal entity? C) Owner(s) responsible for debts of the business? D) Taxed? E) Costs to establish F) Cost to maintain
A
A) Single owner B) No, personal assets of owner are at risk in the event of legal action C) Yes D) No, profits taxed in hands of owner E) Least expensive F) Least expensive
12
Q
What are the distinguishing features of a Partnership in regard to the questions below? (as compared with Proprietorship and Corporation). {EXHIBIT 1.4}
A) Number of owners B) Separate legal entity? C) Owner(s) responsible for debts of the business? D) Taxed? E) Costs to establish F) Cost to maintain
A
A) Multiple owners B) No, partners' personal assets are at risk in the event of legal action c) Yes D) No, profits taxed in hands of owners E) Moderately expensive F) Moderately expensive
13
Q
What Are the Three Categories of Business Activities?
A
(1) financing activities
(2) investing activities, and
(3) operating activities
Each of these involves inflows and outflows of cash into and out of the company.
14
Q
What is considered the first financing activity
A
The first activities of all companies involve obtaining the funding needed to purchase what they need to start operations
15
Q
What are the two primary sources that companies receive their funding from?
A
- investors, through the issuance of shares
* creditors, through taking out loans or making purchases on credit
16
Q
What are the two ways shareholders can get a return on their investments
A
1) Dividends
2) capital appreciation
17
Q
What are dividends
A
a portion of a companies profits that is distributed to shareholders.
18
Q
What is capital appreciation
A
When a shareholder sells their shares to other investors for more than they paid for the shares.
19
Q
If a company is operating profitably, it has an internal source of new funding because generally not all of those profits are being paid out to shareholders as dividends. Any profits that are kept or retained by the company are known as what?
A
retained earnings.
20
Q
What are the typical financing activities?
A
Inflows:
Borrowing money
Issuing shares
Outflows:
Repaying loan principal
Paying dividends
21
Q
What are the typical investing activities?
A
Inflows:
Proceeds from the sale of property, plant, and equipment
Proceeds from the sale of shares of other companies
Outflows:
Purchase of property, plant, and equipment
Purchase of shares of other companies
22
Q
What are the typical Operating activities?
A
Inflows:
Sales to customers
Collections of amounts owed by customers
Outflows: Purchases of inventory Payments of amounts owed to suppliers Payments of expenses such as wages, rent, and interest Payments of taxes owed to the government
23
Q
What are the Components of the Financial Statements
A
Statement of income Statement of changes in equity Statement of financial position Statement of cash flows Notes to the financial statements
24
Q
the objective of the statement of income is to measure the company’s what?
A
performance by the results of its operating activities for a month, a quarter, or a year
25
At the bottom of the statement of income is an earnings per share disclosure. Define
Basic earnings per share?
the company's net income divided by the average number of common shares that are outstanding during the year.
(Shareholders find this calculation useful since it puts the performance of their investment into perspective.)
26
Common Statement of Income Items: Sales revenue
The total amount of sales of goods and/or services for the period.
27
Common Statement of Income Items: Other Income
Various types of revenues or income to the company other than sales, including interest or rental income
28
Common Statement of Income Items: Costs of Goods sold
The cost of the inventory that was sold during the period.
29
Common Statement of Income Items: Selling, general and administrative expense
The total amount of other expenses (such as wages and rent) during the period that do not fit into any other category.
30
Common Statement of Income Items: Depreciation expense
The allocation of part of the cost of long-lived items such as equipment or a patent.
31
Common Statement of Income Items: Interest expense
The amount of interest incurred on the company's debt during the period.
32
Common Statement of Income Items: Interest tax expense
The taxes levied on the company's profits during the period.
33
A statement of income will always have _____ in order to put it into context for the users
comparative results
34
Common Statement of income items (FULL REVIEW)
Sales revenues:
The total amount of sales of goods and/or services for the period.
Other income:
Various types of revenues or income to the company other than sales, including interest or rental income.
Cost of goods sold:
The cost of the inventory that was sold during the period.
Selling, general, and administrative expense:
The total amount of other expenses (such as wages and rent) during the period that do not fit into any other category.
```
Depreciation expense (amortization expense):
The allocation of part of the cost of long-lived items such as equipment or a patent.
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Interest expense:
The amount of interest incurred on the company's debt during the period.
Income tax expense (provision for taxes):
The taxes levied on the company's profits during the period.
35
The statement of changes in equity provides details on ....
how each component of shareholders' equity changed during the period
36
How to Calculate Retained Earnings
Retained Earnings =
```
Opening Retained Earnings
+
Net Income
−
Dividends Declared
=
Ending Retained Earnings
```
37
2 main components of The statement of changes in equity
Share Capital
Retained Earnings
38
What is Share capital
represents what the company received when the shares were initially issued
39
What are retained earnings
The company's earnings that have been kept (retained) and not paid out as dividends.
40
The statement of financial position is also known as the ____________. What is the point of having a statement of financial position?
balance sheet
--this statement presents the company's financial status at a particular point in time.
41
define working capital
The liquid funds available for use in a company, calculated as current assets minus current liabilities.
42
what are current assets
assets that are cash or will become cash within the next 12 months
43
what are current liabilities
liabilities that must be settled within the next 12 months
44
what is the Working Capital Equation
Working capital = current assets - current liabilities
45
what is the accounting equation
Assets = Liabilities + Shareholders equity
46
Assets must meet three criteria... What are these 3 characteristics?
1. Is a resources contained by an entity that..
2. The company expects future economic benefits from (via the use or sale of the resource) and...
3. The event that gave the company control of the resource has already happened.
47
List the CURRENT assets Found on a Statement of Financial Position
```
Cash
Short term investments
Accounts Receivable
Inventory
Prepaid expense and deposits
```
48
List the NON-CURRENT Assets Found on a Statement of Financial Position
Property, Plant and equipment (PPE)
Intangible assets
goodwill
49
What is "cash" on a Statement of Financial Position
The amount of currency that the company has, including amounts in bank accounts
(current asset)
50
What are "short term investments" on a Statement of Financial Position
Short-term investments in shares of other companies.
| current asset
51
What are "accounts receivable" on a Statement of Financial Position
Amounts owed to the company by its customers as a result of credit sales.
(current asset)
52
What is "inventory" on a Statement of Financial Position
Goods held for resale to customers. (current asset)
53
what are "prepaid expenses and deposits" a Statement of Financial Position
Amounts that have been paid by the company but the underlying service has not yet been used. Common examples include insurance premiums or rent paid in advance.
(current asset)
54
What is "property, plant, and equipment" on a Statement of Financial Position
Land, buildings, equipment, vehicles, and so on that the company purchases to use to generate revenues in the future; they are not purchased to resell.
(non-current asset)
55
What are "intangible assets" on a Statement of Financial Position
Licenses, patents, trademarks, copyrights, computer software, and other assets that lack physical form. These are also acquired to generate revenues in the future.
(non-current assets)
56
what is "Goodwill" on a Statement of Financial Position
A premium that has been paid on the acquisition of another company related to factors such as management expertise and corporate reputation that will result in higher future earnings.
(non current assets)
57
EXHIBIT 1.19 Assets Found on a Statement of Financial Position -- FULL BREAKDOWN
Current assets
Cash
The amount of currency that the company has, including amounts in bank accounts.
Short-term investments
Short-term investments in shares of other companies.
Accounts receivable
Amounts owed to the company by its customers as a result of credit sales.
Inventory
Goods held for resale to customers.
Prepaid expenses and deposits
Amounts that have been paid by the company but the underlying service has not yet been used. Common examples include insurance premiums or rent paid in advance.
Non-current assets
Property, plant, and equipment
Land, buildings, equipment, vehicles, and so on that the company purchases to use to generate revenues in the future; they are not purchased to resell.
Intangible assets
Licences, patents, trademarks, copyrights, computer software, and other assets that lack physical form. These are also acquired to generate revenues in the future.
Goodwill
A premium that has been paid on the acquisition of another company related to factors such as management expertise and corporate reputation that will result in higher future earnings.
58
List the 3 characteristics of a liability
1. It is a present obligation of the entity.
2. The company expects to settle it through an outflow of resources that represent future economic benefits.
3. The obligation results from an event that has already happened.
59
What are the Common Liabilities Found on a Statement of Financial Position?
Current:
```
Bank indebtedness
accounts payable
deferred revenue
dividends payable
accrued liabilities
income taxes payable
```
Non-Current:
Notes payable
Long-term debt
Deferred Income Taxes
60
What is "bank indebtedness" on a Statement of Financial Position
Amounts owed to the bank on short-term credit.
| current liabilities
61
What are "accounts payable" on a Statement of Financial Position
Amounts owed to suppliers from the purchase of goods on credit
(current liabilities)
62
what is "deferred revenue" on a Statement of Financial Position
Amounts owed to customers for advance payments until the related goods or services have been provided.
(current liabilities)
63
What are "dividends payable" on a Statement of Financial Position
Amounts owed to shareholders for dividends that have been declared by the board of directors.
(current liabilities)
64
What are "Accrued liabilities" on a Statement of Financial Position
Amounts owed related to expenses that are not yet due, such as interest and warranty expense.
(current liabilities)
65
What are "income taxes payable" on a Statement of Financial Position
Amounts owed to taxing authorities.
| current liabilities
66
What are "notes payable" on a Statement of Financial Position
Amounts owed to a creditor (bank or supplier) that are represented by a formal agreement called a note (sometimes called a promissory note). Notes payable often have an interest component, whereas accounts payable usually do not
(non-current liabilities)
67
What is "long-term debt" on a Statement of Financial Position
Amounts owed to creditors due beyond one year
| non-current liabilities
68
What is "deferred income tax" on a Statement of Financial Position
Amounts representing probable future taxes the company will have to pay
(non-current liabilities)
69
Common Liabilities Found on a Statement of Financial Position -- FULL REVIEW
Current liabilities
Bank indebtedness
Amounts owed to the bank on short-term credit.
```
Accounts payable (trade payables)
Amounts owed to suppliers from the purchase of goods on credit.
```
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Deferred revenue (unearned revenue)
Amounts owed to customers for advance payments until the related goods or services have been provided.
```
Dividends payable
Amounts owed to shareholders for dividends that have been declared by the board of directors.
Accrued liabilities
Amounts owed related to expenses that are not yet due, such as interest and warranty expense.
Income taxes payable
Amounts owed to taxing authorities.
Non-current liabilities:
Notes payable
Amounts owed to a creditor (bank or supplier) that are represented by a formal agreement called a note (sometimes called a promissory note). Notes payable often have an interest component, whereas accounts payable usually do not.
Long-term debt
Amounts owed to creditors due beyond one year.
Deferred income taxes
Amounts representing probable future taxes the company will have to pay.
70
What is Shareholders equity, (also known as net assets)?
the amount of assets that would remain after all of the company's liabilities were settled.
The Accounting Equation (Rearranged):
Assets - Liabilities = shareholders' equity (net assets)
71
What is "market value"
The price at which shares are trading in the stock market
72
How information flows -- what are the first 3 categories of information on a Financial Statement in order
1) Statement of income
2) statement of changes in equity
3) statement of financial position
73
Subsections of the Statement of Cash Flows
Cash flow from operating activities
Cash flow from financing activities
Cash flow from investing activities
74
Operating activities include what?
all inflows and outflows of cash related to the sale of goods and services
-activities that the company provides in its normal operation
75
What are financing activities? (List some typical activities)
transactions that either resulted from new funds being received from investors or creditors or from the return of funds to these two groups
ex) issuance of shares,
the proceeds of new borrowings,
the repayment of debt,
or the payment of dividends.
76
Investing activities generally involve ________________
the purchase and sale of long-term assets such as property, plant, and equipment, and investments in other companies.
77
Summary of the Financial Statements: What are the types of statements?
Statement of income
Statement of changes in equity
Statement of financial position
Statement of cash flows
78
Summary: What is the purpose of the statement of income
Measures the operating performance of a company over a period of time.
79
Summary: What is the purpose of the statement of changes in equity
Measures the changes in the equity of the company over a period of time, differentiating between changes that result from transactions with shareholders and those resulting from the company's operations.
80
Summary: What is the purpose of the Statement of Financial Position
Measures the resources controlled by a company (assets) and the claims on those resources (by creditors and investors) at a given point in time.
81
Summary: what is the purpose of the statement of cash flows
Measures the change in cash flow through operating, financing, and investing activities over a period of time.
82
There are only 4 main financing activities - what are they?
2 inflows (proceeds from issuing shares and from taking out a loan
2 outflows (paying dividends and repaying loan principal)
83
There are only 4 investing activities... What are they?
2 inflows ( proceeds from selling long term assets i.e. equipment, and the shares of another company)
2 outflows ( purchasing long term assets, like equipment, and the shares of other companies)
84
Remember, financing activities only have 4 categories. investing activities only have 4 categories. Everything that does not fall under these categories is considered what?
Operating activities
85
What is financial accounting
- A process
- -Information on transactions of an organization is captured an analyzed
- --used to report to decision makers outside the organizations management team
