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CPA > CPA BEC Flashcards > -Financial Management > Flashcards

-Financial Management Flashcards

1
Q

What is the primary focus of working capital management?

A

The primary focus of working capital management is managing inventory and receivables (current assets and liabilities).

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2
Q

How is Net Working Capital calculated?

A

NWC = Current Assets - Current Liabilities

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3
Q

What are the characteristics of effective Working Capital Management?

A

An effective Working Capital Management shortens the cash conversion cycle.

It doesn’t negatively impact operations.

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4
Q

What is the Inventory Conversion Period?

A

The Inventory Conversion Period is the average time needed to convert materials into finished goods and sell them.

Average Inventory
= (BI + E) / 2

Inventory Conversion Period
= Average Inventory / (COGS / 365)

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5
Q

What is the Receivables Collection Period?

A

Receivables Collection Period refers to the average time needed to collect A/R.

Ending A/R / (Net Sales / 365)

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6
Q

What is the Payables Deferral Period?

A

Payables Deferral Period is the average time between materials and labor purchase and their A/P payment.

Average Payables = (BP + EP) / 2

Payables Deferral Period = Average Payables / (COGS/365)

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7
Q

What is the Cash Conversion Cycle?

A

Cash Conversion Cycle is the amount of time it takes to receive a cash inflow (Customers) after making a cash outflow (Vendors).

Cash Conversion Cycle =

Inventory Conversion Period

+ Receivables Collection Period

- Payables Deferral Period

(Inventory Really (-Pays) Cash)

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8
Q

What traits should Cash and Short-Term Investments have?

A

Liquid & Safe

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9
Q

What are Letters of Credit used for?

A

Letters of Credit are used for importing goods. They are being issued by importer’s bank.

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10
Q

What is the advantage of using Trade Credit?

A

No interest cost if paid timely.

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11
Q

What is a Lockbox System? What are the advantages?

A
  • Customer Payments are sent to a bank-managed PO box.
  • Employees don’t have access to cash.
  • Deposits are more timely.
  • Interest income from deposits should pay for the Lockbox fees (If they don’t, the lockbox is not beneficial).
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12
Q

What is float?

A

Float refer to the time it takes to mail a payment and have it clear your bank account.

  • Maximize float on cash payments
  • Minimize float on cash receipts
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13
Q

What are Zero Balance Accounts?

A

Regional bank sends enough cash to cover daily checks.

Advantages:

  • Checks take longer to clear - more float
  • Low amounts of cash tied up for compensating (minimum) balances
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14
Q

What are the differences between Treasury Bills, Notes and Bonds?

A

Treasury Bills: Short term (less than one year)

Think: $1 Bill

Treasury Notes: Medium-term

(1 to 10 years)

Treasury Bonds: Long term (greater than 10 years)

Think: the government is in long-term bondage to you; they owe you money

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15
Q

What is commercial paper?

A

Commercial paper is similar to T-Bill, but issued by corporations instead of government.

  • Greater than Nine Months Maturity
  • Unsecured
  • Issued by large firms
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16
Q

What are the advantages and disadvantages of Commercial Paper?

A

Advantages:

  • Financing at less than Prime.
  • No compensating balances required.

Disadvantages:

  • Unpredictability of markets.
  • Credit crisis emerges and large insurance/investment companies aren’t lending.
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17
Q

What is Economic Order Quantity?

A

Economic Order Quantity is the order quantity that minimizes inventory costs.

EOQ: Square Root of (2DO/C)

D: Unit Demand (Annual)

O: Order Cost

C: Cost of Inventory

18
Q

What is Carrying Cost?

A

Carrying Cost is the cost of keeping inventory.

19
Q

What is Order Cost?

A

Order Cost is the cost of executing an order and starting product production.

20
Q

What is inventory reorder point?

A

How low inventory should get before it should be re-ordered.

IOP = Average Daily Demand x Average Lead Time

21
Q

What is a Just In Time (JIT) system?

A

Orders inventory so that you get it just in time for when it’s needed.

JIT is valuable when Order Cost is low and Cost of Carrying Inventory is high.

22
Q

What is Factoring of receivables?

A

Receivables are sold to a financing company where they pay less than the value of the receivables due to a discount related to risk of non-collection.

23
Q

What is a Trade Discount?

A

Buyer saves if paid early.

Example: 1/10 Net 30

1% discount if paid within 10 days

If not, bill is still due in 30 days

24
Q

What is the cost of forgoing a discount?

A

(Discount % x 365) / [(100% - Discount) x (Pay Period - Discount Period)]

25
Q

What is the Prime Rate?

A

The Prime Rate is a benchmark used for lending only to the best customers.

Most customers will be charged Prime + 3%, for example.

If the lending institution and the customer are not in the same country, the LIBOR rate is often used.

26
Q

What is the Nominal (Face- Coupon- Stated) Rate?

A

Interest rate stated on the face of a bond.

27
Q

How is Current Yield calculated?

A

CY = Interest Payment / Bond Price

28
Q

What is the Effective (YTM - Market) Rate?

A

PV of Principal + Interest = Bond Price

29
Q

What is a Zero Coupon Bond?

A
  • No interest payments made.
  • Bond sold at a discount
  • Interest reflected when bond matures
30
Q

What are the characteristics of a Junk Bond?

A

A Junk Bond has:

  • High interest rate
  • High default risk
31
Q

What are debenture bonds?

A

Debenture bonds are bonds unsecured by collateral.

32
Q

What are subordinated debentures?

A

Subordinated debentures are debenture bonds that will be repaid if any assets are left after liquidation of a company.

33
Q

What are Redeemable Bonds?

A

Provision in Bond contract allows demand of bond payment under certain circumstances.

34
Q

What is a Callable Bond?

A

With Callablee bond, borrower can pay off debt early.

35
Q

What is a Convertible Bond?

A

The lender can demand payment via company stock instead of money.

36
Q

What is a Sinking Fund?

A

Borrower deposits regular sums into an account that will eventually pay off the debt.

37
Q

What is the disadvantage of Common Stock in comparison to bonds?

A

Common Stock is more expensive to issue than debt.

Why? Investors demand a greater ROI than debtors (bondholders).

38
Q

What is the advantage of Preferred Stock?

A

Preferred Stock holds dividend priority over common stock.

39
Q

What is Weighted Average Cost of Capital?

A

A company uses this to determine the true cost of their capital.

Example:

Debt costs 5%; 40% of Cap.

Equity costs 12%; 60% of Cap.

(5% x 40%) + (12% x 60%)

WACC = 9.2%

40
Q

What is CAPM?

A

A stock’s expected performance is based on its beta (risk) compared to that of the stock market.

More risk = more expected return.

41
Q

How is Cost of Debt calculated?

A

(Interest Expense - Tax Benefit) / Carrying Value of Debt

CPA BEC Flashcards (9 decks)

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