Exam 1 (chp 1-4)

Question 1

Define Finance

Answer 1

Discipline that deals with money management; deals with raising and investing money

Question 2

Real vs financial assets

Answer 2

r: object that provides a service (car, house, factory, machinary)
f: legal document representing a claim to income

Question 3

What does stock ownership mean?

Answer 3

that the holder of the share owns a piece of that compnay issued stock

Question 4

What kind of relationship does a bond mean?

Answer 4

Debt; when a person buys a bond, theyre lending money to the firm issueing the bond

Question 5

How do you raise money?

Answer 5

through debt instruments like loans and mortgages and equity instruments like stocks

Question 6

What do you invest in?

Answer 6

Real and fin assets

Question 7

Financial decision making should be governed by ___ and __

Answer 7

risk and return
more money (from stocks), more risk

Question 8

How should we think of risk?

Answer 8

variability in return

Question 9

What are the goals in finance?

Answer 9

profitability and cash

Question 10

Finance vs. acct

Answer 10

A- focus on preparing fin statements, historical, accrual basis (no cash), monetary info only
F- Focus on analyzing the f/s for decisions, forward looking, cash is king, non monetary info is critical

Question 11

Finance and Accouting both have the same ____

Answer 11

Structure; structurally in same dept; both report to CFO

Question 12

Controller vs Treasurer

Answer 12

Controller is in charrge of acct while the treasurer supervises most other fin functions

Question 13

Goal of financial management

Answer 13

Wealth maximazation; takes profit and other factors (risk, social goals) into account; we see this by looking at share price; long run

Question 14

Whos a stakeholder?

Answer 14

Anyone who has an interest in the company and how it’s managed (shareholder, employees, suppliers, customers, gov)

Question 15

Agent vs principal; explain the problem

Answer 15

An agent is hired by a principal and given decision making authority; the agenccy relationship creates an oppor for abuse by the agent who has control over the assets of the principal (too much compensation for execs, abusing company owned assets, )

Question 16

How do we fight the agency problem?

Answer 16

Tie a large part of mangement compensation to comp profit

employ auditors to periodically review comp books

Question 17

What are numerical representations of a firms activities for an acct period

Answer 17

fin statements

Question 18

In double entry accounting, every entry must

Answer 18

Have 2 sides that balance

Question 19

Books are closed by ____ in the acct system which then creates ____

Answer 19

1 updating the periods transactions

2 creating fin statemtns

Question 20

What shows how much money a comp has earned during the period

Answer 20

income statement

Question 21

IS vs BS

Answer 21

i- reports rev/exp
shows performance and results of operations
over period of time (annually/quarterly)
B- reports assets, liabilities, equity
shows fin position
at specific point in time

Question 22

What lists everything a comp owns and everything it owes at a moment in time

Answer 22

balance sheet

Question 23

IS equation

Answer 23

S-COGS= GP/GM-OP EXPENSES= EBIT (EXPENSES BEFORE INT/TAX)-INT EXP= EBT (EARNING B4 TAX)-T= EARNING AFTER TAX (EAT) OR NI

Question 24

List the 3 current asset accounts

Answer 24

cash
inventory
a/r

Question 25

What goes under the asset side of bs?

Answer 25

``` cash a/r inventory = CA Fixed assets (land, building, equip) acc depr = net fixed CA+ net fixed= total assets ```

Question 26

What goes under the liabilities side of BS

Answer 26

L acct pyable acrruals

Question 27

List two examples of contra asset accts?

Answer 27

allowance for doubtful accts | accu depr

Question 28

What goes under equity side of BS

Answer 28

long term debt equity = total equity

Question 29

What does it mean if there is an overstatemnt on the inventory balance?

Answer 29

firms value is less than the amount on the balance sheet

Question 30

What are incomplete transactions?

Answer 30

accruals

Question 31

What type of ratios measures the ability of the company to pay short term oligations; firms ability to raise money

Answer 31

liquidity ratio

Question 32

What type of ratios measure the efficiency of company with which assets are managed

Answer 32

asset management ratio

Question 33

What type of ratios measure how efficient a comp is in managing liabilities; looks at LR and SR and how this affects comp

Answer 33

debt management

Question 34

What type of ratios measures earning power of company (profitability)

Answer 34

profitability ratio

Question 35

What type of ratios measrue market expectationas and how markt participants view this company

Answer 35

market value ratios

Question 36

When looking at the ratios what should you also consider

Answer 36

1. what does this ratio measure 2. how is it calculated 3 how is it interpreted

Question 37

how do you calculate debt ratio?

Answer 37

1- ER

Question 38

how do you calculate equity multiplier

Answer 38

1/ equity ratio

Question 39

du pont ROE equation

Answer 39

``` ROE= ROS X ATO X EM ROE = ROA X EM ```

Question 40

du pont ROA equation

Answer 40

ROA= ROS x ATO

Question 41

When preparing a common size statement based on IS, how to you calculate the percentages?

Answer 41

take the acct and divide it by sales

Question 42

When preparing a common size statement based on BS, how to you calculate the percentages?

Answer 42

for assets- compare everything to total assets | for lib/equity- compare to total L/E

Question 43

a common size income statemetn presents each line item as a percent of ___

Answer 43

revenue

Question 44

In finance how do we use the fin statement

Answer 44

make short term projections of fin statemtns- only BS and IS