Finance

Question 1

finance

Answer 1

planning, obtaining, and managing a company’s funds to accomplish its objectives as effectively and efficiently as possible

Question 2

financial managers

Answer 2

executives who develop and implement their company’s financial plan and determine the most appropriate sources and uses of funds—are among the most vital people within an organization

Question 3

vice president for financial management or planning

Answer 3

responsible for preparing financial forecasts and analyzing major investment decisions, such as new products, new production facilities, and acquisitions

Question 4

treasurer

Answer 4

responsible for all of the company’s financing activities, including cash management, tax planning and preparation, and shareholder relations. The treasurer also works on the sale of new security issues to investors.

Question 5

controller

Answer 5

the chief accounting manager. The controller’s functions include keeping the company’s books, preparing financial statements, and conducting internal audits.

Question 6

risk-return trade-off

Answer 6

Process of maximizing the wealth of a firm’s shareholders by striking the optimal balance between risk and return. The potential return rises with an increase in risk. Using this principle, individuals associate low levels of uncertainty with low potential returns, and high levels of uncertainty or risk with high potential returns.

Question 7

financial plan

Answer 7

a document that specifies the funds needed by a company for a given period of time, the timing of inflows and outflows, and the most appropriate sources and uses of funds. Based on forecasts of production costs, required purchases, plant and equipment expenditures, and expected sales activities for the period covered.

Question 8

operating plans

Answer 8

short-term in nature, focusing on projections no more than a year or two in the future.

Question 9

strategic plans

Answer 9

have a much longer time horizon, perhaps up to 5 or 10 years.

Question 10

3 Steps to Preparing Financial Plan

Answer 10

1) forecast of sales/revenue over some future time period. Key variable, that can affect other variables.
2) CFO uses the sales forecast to determine the expected level of profits for future periods.
3) CFO needs to estimate how many additional assets the company will need to support projected sales. (“asset intensity”)

Question 11

financial control

Answer 11

process of comparing actual revenues, costs, and expenses with forecasts.

Question 12

Short-term/current assets

Answer 12

consist of cash and assets that can be, or are expected to be, converted into cash within a year. The major current assets are cash, marketable securities, accounts receivable, and inventory.

Question 13

marketable securities

Answer 13

low-risk securities that either have short maturities or can be easily sold in secondary markets.

Question 14

cash budget

Answer 14

one tool for managing cash and marketable securities because it shows expected cash inflows and outflows for a period of time. The cash budget indicates months when the company will have surplus cash and can invest in marketable securities and months when it will need additional cash.

Question 15

3 Questions of financial planning

Answer 15

1. What funds will the company require during the planning period?
2. When will it need additional funds?
3. Where will it obtain the necessary funds?

Question 16

Accounts receivable

Answer 16

yet-to-be-collected credit sales and can represent a significant percentage of a company’s assets. Management of accounts receivable is composed of two functions: determining an overall credit policy and deciding which customers will be offered credit.

Question 17

Credit Policy

Answer 17

Involves deciding whether the company will offer credit and, if so, on what terms. Often, the overall credit policy is dictated by competitive pressures or general industry practices.

Question 18

Inventory control

Answer 18

more than just managing items going in and out of a company. It involves managing working capital (current assets minus current liabilities) and making sure that too much cash is not tied up in operations.

Question 19

Long-lived (fixed) assets

Answer 19

expected to produce economic benefits for more than one year. Often involve substantial amounts of money on fixed assets like a new plant, machinery, equipment, or real estate.

Question 20

capital investment analysis

Answer 20

process by which decisions are made regarding investments in long-lived assets. Companies make two basic types of capital investment decisions: expansion and replacement.

Question 21

Asset/Accounting Equation

Answer 21

Assets = Liabilities + Owner’s Equity

Question 22

Debt capital

Answer 22

consists of funds obtained through borrowing. Choosing more debt increases the fixed costs a company must pay, which in turn makes a company more sensitive to sales revenues. Debt is frequently the least costly method of raising additional financing dollars, one of the reasons it is so frequently used.

Question 23

Equity capital

Answer 23

consists of funds provided by the company’s owners when they reinvest earnings, make additional contributions, liquidate assets, issue stock to the general public, or raise capital from outside investors.

Question 24

Capital Structure

Answer 24

mix of company’s debt and equity capital.

Question 25

Leverage

Answer 25

Raising needed cash by borrowing allows a company to benefit from the principle of leverage, increasing the rate of return on funds invested by borrowing funds. Companies use borrowed capital as funding source when investing to expand asset base and generate returns on risk capital.

Question 26

Short-term funds

Answer 26

consist of current liabilities, generally less expensive than long-term funds, but they also pose more risk (have to be renewed/rolled-over frequently, and interest rates can be volatile.)

Question 27

Long-term funds

Answer 27

consist of long-term debt and equity.

Question 28

Dividends

Answer 28

Dividends are periodic cash payments to shareholders. The most common type of dividend is paid quarterly and is often labeled as a regular dividend. Earnings that are paid in dividends are not reinvested in the firm and don't contribute additional equity capital.

Question 29

Trade credit

Answer 29

Trade credit is extended by suppliers when a company receives goods or services and agrees to pay for them at a later date.

Question 30

Short-term loans: line of credit

Answer 30

A line of credit specifies the maximum amount the company can borrow over a period of time, usually a year. Most lines of credit require the borrower to repay the original amount, plus interest, within one year.

Question 31

Short-term loans: revolving credit agreements

Answer 31

revolving credit agreement is essentially a guaranteed line of credit—the bank guarantees that the funds will be available when needed. Banks typically charge a fee, on top of interest, for revolving credit agreements.

Question 32

Commercial Paper

Answer 32

Commercial paper is an unsecured, short-term debt instrument issued by corporations. It's typically used to the finance short-term liabilities such as payroll, accounts payable, and inventories. 9 months to avoid SEC registration, usually by large, financially strong corporations.

Question 33

Sources of long-term funds

Answer 33

Organizations acquire long-term funds from three sources. (1) long-term loans obtained from financial institutions such as commercial banks, life insurance companies, and pension funds. (2) bonds—certificates of indebtedness—sold to investors. (3) equity financing that is acquired by selling stock in the company or reinvesting company profits.

Question 34

Venture capitalists

Answer 34

An important source of private equity financing, especially to small, early-stage emerging firms with high growth potential. Venture capitalists raise money from wealthy individuals and institutional investors. In exchange for the risk taken by investing in early-stage companies, venture capitalists become owners, offering strategic advice—and often, assuming control over decisions.

Question 35

private equity funds

Answer 35

investment companies that raise funds from wealthy individuals and institutional investors and use those funds to make large investments in both public and privately held companies.

Question 36

sovereign wealth fund

Answer 36

These companies are owned by governments and invest in a variety of financial and real assets, such as real estate. Generally make investments based on the best risk–return trade-off, political, social, and strategic considerations also play roles in their investment decisions.

Question 37

Hedge funds

Answer 37

Private investment companies open only to qualified large investors with high minimum investments or net worth. Managed by professional fund managers implementing different strategies.

Question 38

Merger

Answer 38

Transaction where two or more companies combine into one. Shareholders of both the buyer and target must vote to approve a merger.

Question 39

Acquisition

Answer 39

Where one company buys out the assets and assumes the obligations of another company. To acquire another company, a company typically offers a higher price than the current market price for the target's shares - can offer cash, securities, or combo of the two.

Question 40

Mutual Funds

Answer 40

A financial vehicle that pools assets from shareholders to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund's assets and attempt to produce capital gains or income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.

Question 41

Secured Bond

Answer 41

A type of investment in debt that is secured by a specific asset owned or revenue stream by the issuer. The asset serves as collateral for the loan. If the issuer defaults on the bond, the title to the asset is transferred to the bondholders.

Question 42

Synergy

Answer 42

(M&A) The notion that the combined company is worth more than the buyer and the target are individually.

Question 43

Leveraged buyouts (LBOs)

Answer 43

public shareholders are bought out, and the company reverts to private status. Many of these transactions are financed with high degrees of debt.

Question 44

Divestiture

Answer 44

The reverse of a merger. That is, a company sells assets such as subsidiaries, product lines, or production facilities. Two types of divestitures exist: sell-offs and spin-offs.

Question 45

Accounting

Answer 45

the process of measuring, interpreting, and communicating financial information to enable people inside and outside a company to make informed decisions.

Question 46

open book management

Answer 46

companies share financial information with employees as partners so they become more business literate and understand financial statements.

Question 47

3 business activities that involve accounting

Answer 47

1.  Financing activities provide necessary funds from investors to start a business and expand it after it begins operating. 2.  Investing activities provide valuable assets required to run a business. 3.  Operating activities focus on selling goods and services, but they also consider expenses as important elements of sound financial management.

Question 48

Types of Accounting Professionals

Answer 48

Public, management, government, and non-for-profit accountants.

Question 49

public accountant

Answer 49

provides accounting services to individuals or companies for a fee. Most public accounting firms provide three basic services to clients: (1) auditing, or examining, financial records; (2) tax preparation, planning, and related services; and (3) management consulting.

Question 50

management accountant

Answer 50

An accountant employed by a business other than a public accounting firm, typically collects and records financial transactions and prepares financial statements used by the company's managers in decision making. AKA corporate accountants, provide timely, relevant, accurate, and concise information that executives can use to operate their companies more effectively and more profitably than they could without this input.

Question 51

Government accountant

Answer 51

Government accountants at the federal level manage public funds, investigate white-collar crime, perform audits for government agencies, and stay up-to-date on emerging accounting and regulatory issues. At state and local levels, they manage use of local revenues; investigate fraud; perform financial, performance, and compliance audits; and recommend corrective action where needed. Government accountants work closely on the budget and financial reporting process.

Question 52

Not-for-Profit Accountant

Answer 52

employed by non-for-profits, and help organizations ensure financial health and stability, maintain standards for financial data, and make decisions based on the fiscal capabilities of the nonprofit.

Question 53

Generally Accepted Accounting Principles (GAAP)

Answer 53

refer to a common set of accounting rules, standards, and procedures issued by the Financial Accounting Standards Board (FASB). Public companies in the U.S. must follow GAAP when their accountants compile their financial statements.

Question 54

Financial Accounting Standards Board (FASB)

Answer 54

primarily responsible for evaluating, setting, or modifying GAAP. Carefully monitors changing business conditions, enacting new rules and modifying existing rules when necessary. It also considers input and requests from all segments of its diverse constituency, including corporations and the SEC.

Question 55

4 basic GAAP principles

Answer 55

consistency, relevance, reliability, and comparability.

Question 56

SEC (Securities and Exchange Commission)

Answer 56

chief federal regulator of the financial markets and accounting industry, actually has the statutory authority to establish financial accounting and reporting standards for publicly held companies.

Question 57

Sarbanes-Oxley Act of 2002

Answer 57

Created the Public Accounting Oversight Board that has the power to set audit standards and to investigate & sanction accounting firms that certify books of publicly traded companies. Board appointed by SEC.

Question 58

Accounting Cycle

Answer 58

The procedure by which accountants convert data about individual transaction to financial statements. Recording, Classifying, Summarizing transactions.

Question 59

asset

Answer 59

anything of value owned or leased by a business (land, buildings, supplies, cash, AR, marketable securities.)

Question 60

liability

Answer 60

anything owed to creditors - include loans, accounts payable, wages/salaries, mortgages, deferred revenue, bonds, warranties, accrued expenses.

Question 61

owner's equity

Answer 61

owner's initial investment in the business plus profits that were not paid out to owners over time in the form of cash dividends.

Question 62

double-entry bookkeeping

Answer 62

process by which accounting transactions are entered - each indiv. transaction always has an offsetting transaction.

Question 63

4 Financial Statements

Answer 63

- balance sheet - income statement - statement of owner's equity - statement of cash flows

Question 64

Balance Sheet

Answer 64

Shows company's financial position on a particular date. On left are assets (shown in descending order of liquidity). On right are claims against assets (liability + owner's eq.) listed in order in which they're due.

Question 65

Liquidity

Answer 65

efficiency/ease with which an asset or security can be converted into ready cash without affecting its market price. Most liquid asset is cash.

Question 66

Income Statement

Answer 66

indicates the flow of resources that reveals the performance of org. over a specific time period. Profit or loss results. Begins with total sales/revenues, costs are deducted.

Question 67

Statement of owner's (shareholder's) equity

Answer 67

designed to show the components of the change in equity from the end of one fiscal year to the end of the next.

Question 68

Statement of Cash Flows

Answer 68

statement showing the sources and uses of cash for a comp. from its operating, investing, and financial activities during a period of time.

Question 69

Leverage Ratio

Answer 69

ratio measuring comp. level of debt relative to another financial metric; extent to which comp. relies on debt financing.

Question 70

Accrual accounting

Answer 70

recognizes revenues and costs when they occur, not when actual cash changes hands.

Question 71

Liquidity ratio (current ratio)

Answer 71

info about comp. ability to pay its current debts as they mature. = current assets / current liabilities

Question 72

Quick Ratio (acid-test ratio)

Answer 72

measures ability of comp. to meet its debt payments on short notice. = (current assets - inventory) / current liabilities

Question 73

Activity ratios

Answer 73

measure effectiveness of management's use of the company's resources. inventory receivables, and total asset turnover ratios.

Question 74

Inventory Turnover Ratio

Answer 74

= cost of goods sold / average inventory

Question 75

Receivables Turnover Ratio

Answer 75

= credit sales / average accts receivable

Question 76

Total Asset Turnover Ratio

Answer 76

= sales / avg. total assets

Question 77

Profitability ratios

Answer 77

measure org. overall financial performance by evaluating its ability to generate revenues in excess of operating costs and expenses.

Question 78

Debt Ratio

Answer 78

= total liabilities / total assets

Question 79

4 categories of financial ratios

Answer 79

liquidity, activity, profitability, and leverage ratios

Question 80

Budget

Answer 80

planning and controlling tool that reflects company's expected sales revenues, operating expenses, and cash receipts and outlays.

Question 81

cash budget

Answer 81

prepared monthly, tracks company's cash inflows and outflows.

Question 82

Financial System

Answer 82

process by which money flows from savers to users

Question 83

Securities

Answer 83

aka financial instruments, represent obligations on the part of the issuers—businesses and governments—to provide the purchasers with expected or stated returns on the funds invested or loaned. 3 categories: money market instruments, bonds, and stock.

Question 84

Money market instruments

Answer 84

short-term debt securities issued by governments, financial institutions, and corporations. All money market instruments mature within one year from the date of issue.

Question 85

Common stock

Answer 85

shares that give owners voting rights but only residual claims to firm's assets and income distributions.

Question 86

capital gain

Answer 86

profit that results from sale of the stock

Question 87

preferred stock

Answer 87

stock whose holders receive preference in the payment of dividends, which is fixed, and have no voting rights.

Question 88

Financial markets

Answer 88

markets in which securities are bought and sold - primary and secondary markets

Question 89

primary market

Answer 89

corp and gov issue securities and sell them initially to the general public

Question 90

underwriting

Answer 90

financial institution would buy (underwrite) securities issued by the company at discount attempting the IPO and then sell those securities in the market for more. They take on risk.

Question 91

Investment bankers

Answer 91

assist companies in raising capital and provide merger and acquisition services

Question 92

secondary market

Answer 92

a collection of financial markets in which previously issued securities are traded among investors

Question 93

financial institutions

Answer 93

intermediary between savers and borrowers, collecting funds from savers and then lending the funds to individuals, businesses, and governments.

Question 94

Mutual funds

Answer 94

financial intermediaries that raise money or a pool of funds, from many investors with the purpose of selling shares in those securities—stocks, bonds, or money market instruments—to the general public. Professionally managed diverse portfolios.

Question 95

Exchange traded funds (ETFs)

Answer 95

type of pooled investment security that operates much like a mutual fund. Typically, ETFs will track a particular index, sector, commodity, or other assets, but unlike mutual funds, ETFs can be purchased or sold on a stock exchange the same way that a regular stock can.