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Financial Management > Mid Term 2 > Flashcards

Mid Term 2 Flashcards

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1
Q

What is a cash flow statement

A

Is a measure of total cash in (realized inflows) and total cash out (actual outflows) as related to an opening cash position, over a certain time period (usually 12 months)

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2
Q

What’s on a cashflow sheet (inflows and outflows)

A

Inflows: revenue and other inflows

Outflows: variable costs (direct production expenses and operating expenses), fixed costs and other outflows

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3
Q

Examples of revenue

A

1) Crops sold at the elevator
2) Animals sold at market
3) Snowblowing the neighbours driveway
4) Crop insurance payout

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4
Q

Examples of other inflows

A

1) Operating loan received
2) Cash advance received
3) loan received
4) Agristability
5) Capital sales
6) Personal contributions

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5
Q

Examples of variable costs

A

1) Seed, fertilizer, chemical
2) Fuel
3) Repairs
4) Vet and medicine
5) Operating loan interest

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6
Q

What is a direct production expense

A

Variable expenses that will be directly associated with one enterprise. E.g., seed fertilizer, chemical, vet/medicine, crop insurance

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7
Q

What is an operating expense

A

Are expenses that are not directly associated with any one enterprise, but are also not fixed costs. E.g., fuel, machinery repairs, hired labour, custom work

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8
Q

Revenue definition

A

Inflow of cash typically received in exchange for providing goods or services

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9
Q

Other inflows definition

A

Types of inflows that are not received in exchange for producing a good or service

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10
Q

Variable costs definition

A

Outflow of cash for the purchase of goods or services incurred by a business in the process of earning revenue

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11
Q

Fixed costs definition

A

Are costs that are incurred regardless of if the firm produces. E.g., office expenses or property insurance would need to be paid even if you did not put crop into the ground

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12
Q

Fixed costs examples

A

1) Rent
2) Property taxes
3) Property insurance
4) Office supplies
5) Accounting/banking fees
6) Term loan interest
7) Utilities

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13
Q

Other outflows definition

A

Are outflows that don’t fit into variable or fixed expenses

Are kind of like a mirror of other inflows

Not a category to put miscellaneous item that do not fit into variable or fixed

Always contains the same 5 items

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14
Q

Other outflows examples (5) always

A

1) Operating loan repayment
2) Cash advance repayment
3) Loan principal paid
4) Capital purchases
5) Personal expenses (personal withdrawals)

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15
Q

After the summary of the cash flow statement is calculated we are left with either a…

A

Cash surplus

Cash deficit

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16
Q

What is a cash surplus

A

More inflows than outflows
Left with a positive number
Making more money than u r spending

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17
Q

What happens when u have a cash surplus

A

If ur operating loan is zero it gets carried forward as next months starting cash

Of operating loan is more than zero the excess cash goes to paying the operating loan down by entering the amount of surplus into operating loan paid

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18
Q

What is a cash deficit

A

More outflows than inflows
Temporarily left with (-) number
Spending more than ur earning

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19
Q

What happens when u have a cash deficit

A

Take out more operating loan to pay off dept by entering the exact number found in ending cash a and then into operating loan received under other inflows

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20
Q

Operating loan balance definition

A

Expressed as a positive value

It tracks the balance/use of the operating loan at the end of any given month

Calculation: previous operating loan balance + operating loan received - operating loan paid

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21
Q

What are the two types of cash flow statements

A

1) Actual

2) Projected

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22
Q

Actual cash flow definition

A

Is for a time and period that has already occurred

Provides historical data

Categorizes these transactions according to their timing

Shows exactly where the cash came form and where it went

Excellent measure of a farms liquidity b/c it shows it’s ability to meet it’s debt obligations as they come due

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23
Q

Projected cash flow definition

A

Is for a time in the future

Attempts to project all future transactions that will occur during a certain period

It’s categorization of inflows and outflows are most often the same as actual cash flow

It attempts to show timing and amount of surpluses/deficits over that time period

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24
Q

Balance sheet definition

Study These Flashcards
A

Is a systematic organization of everything owned and owed by a buisness of individual at any given time that concludes with an estimated value of owner equity

25
Income statement definition
A report that summarizes the income and expenses of a buisness over a period of time. It is the financial statement that shows whether the operation has earned a profit or suffered a loss Or A summary of revenue and expenses for a given accounting period
26
Other names for an income statement
- Profit and loss statement - Statement of operations - Statement of operations
27
Income statement components (9)
1) Name (who’s is the statement for) 2) Period of time covered 3) Actual or projected 4) Must be consistent with previous time period if a meaningful comparison is to be done 5) Coordination with the balance sheet and cash flow for the same time period 6) Revenues 7) Expenses 8) Gain or loss on asset disposal 9) Accrual Adjustments
28
What is an income statement basic
Total revenue - total expenses = net farm income
29
Purpose of income statement
An accrual-basedIt’s a representative picture of the profitability of an operation Allows us to further analyze and make management decisions based on shat actually occurred in the production year To analyze profitability To provide basis of comparison with other businesses To help calculate solvency and liquidity
30
Net farm income in income statement
Good starting point because it’s essentially ur bottom line
31
Profitability ratios (2)
Return to equity: NFI over equity Return to capital: (NFI + interest paid + change in accrued interest + rent and lease payments) over total farm capital
32
Efficiency ratios (2)
Capital turnover: gross production over total farm capital Gross expense ratio: production costs over gross production
33
Cash accounting definition
An accounting system that records income and expenses when they actually occur (no adjustments)
34
Accrual accounting definition
An accounting system that recognizes income and expenses when they are incurred/where they belong (uses accrual adjustments)
35
Cash accounting advantages
Simple easy to use Better for income tax management
36
Cash accounting disadvantage
Less accurate (doesn’t truly show what happened in production year)
37
Accrual accounting advantage
Produced much more accurate estimate of profit better suited for analysis and making management decisions
38
Accrual accounting disadvantages
Additional time and knowledge needed to properly use this method Likely not the best method for tax management
39
Who can use cash vs. Accrual accounting for CRA
Only farmers and fishermen can use cash accounting for income tax purpose b/c of large swings in income from year to year All other buisnesses have to use accrual accounting
40
Cash expenses examples
``` Purchase of and payment of feed Fertilizer Seed Fuel Etc ```
41
Non-cash expenses examples
Depreciation Accounts payable Accrued interest Other accrued expense
42
What are the 4 ratios we look at
Liquidity ratios Solvency ratios Profitability ratios Efficiency ratios
43
What is a ratio
Putting one number above another number and dividing the two
44
What are financial ratios used for
To analyze financial performance of an operation To observe and compare ur own operations current financial performance with past years To compare ur financial performance with other farms or with industry standards
45
Liquidity ratios (3)
Current ratio Debt structure ratio Debt servicing ratio
46
Solvency ratios (2)
Equity ratio | Leverage ratio
47
Profitability ratios (2)
Return to equity and living ratio | Return to capital and living ratio
48
Efficiency ratio (2)
Capital turnover ratio | Gross expense ratio
49
Current ratio use
To see if you have the ability to meet short term financial obligations as they come due Basically do u have enough cash to pay off our debts that are due within the next year 2:1 or 200% is considered safe
50
Debt structure ratio use
Tells you the portion of ur total liabilities that are due within the next 12 months
51
Debt servicing ratio use
Gives us an indication of our ability to make the principal and interest payments that are due this year Important ratio in that it indicates how easily the farm is managing repayment of its debt
52
Equity ratio use
Explains the portion of total assets that are owed by the farm, as opposed to assets that are owned by creditors Shows the portion of the farm that is actually paid off Never be higher than 1 average 80%
53
Leverage ratio use
Explains the equity we have to cover/back the total liabilities the operation has 50% means that every dollar I am contributing to the farm (equity) the bank is contributing 50 cents (total liabilities) Lower the ratio the better
54
Profitability ratios use
Indicate if all of ur hard work is worth it in the form of returns The operation may be liquid and solvent but if it isn’t profitable it may be an indicator to diversify or call it a day
55
Return to equity and living ratio use
An indication of the return you are receiving for the equity that u have tied up/invested in the business Want this to be as high as possible
56
Return to capital and living ratio use
Shows u profitability as a percentage of the total (both owned, owed, and rented) assets used to produce Want as high as possible but lower than return to equity and living ratio
57
Efficiency ratios use
Show us how efficient we are at producing what we’re trying to produce
58
Capital turnover ratio use
Gives us an indication of how efficiently we are using our capital to produce commodities (gross production) High as possible but 20% is industry standard which means the farms capital is being turned over every 5 years
59
Gross expense ratio use
An indication as to how much it costs to produce one dollar of production Want as low as possible Typically .76-.85 meaning it costs $0.75-$0.85 to earn 1 dollar

Financial Management (2 decks)

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