Week 3 Flashcards
(45 cards)
Define economics
Economics is a study of choices made by people who are faced with scarcity.
Define finance
Finance consists of investments, the decision of institutions as they chose to invest and managerial finance (Involves element of time and risk)
Financial management
Focuses on decisions relating to how much and what type of assets to acquire, how to raise capital needed to buy assets, and how to run the firm so as to maximise its value.
Capital
Capital is money and possessions (assets), especially a large amount of money used for producing more wealth or for starting a new business.
Sole Traders
Persons that own all the assets of a business and are responsible for all the risks, obligations and debts.
Partnerships and joint ventures
Similar to a sole trader but you can combine overseas capital or expertise with business networks and ownership of resources here.
Companies (ltd’s)
A company must have a registered name, one or more shares, one or more shareholders, and one or more directors.
Structure of companies
Shareholders: Owners of the company
Board of Directors: Elected by the shareholders. Good governance is the effective separation, management and execution of the relationships, duties, obligations and accountabilities of any entity, such that the entity is best able to fulfil its purpose.
Advisory Board: Selected by board to provide defined advice and information to the board and management
Top management: CEO, COO, CFO, etc
Staff
Certainty against market fluctuations
Hedging and futures. Using financial means to fix the price (futures). hedging is to offset losses in investment.
Inflation
The amount by which prices increases over time
Payback Period
Time until cash flows recover the initial investment of the project
Payback rule:
Specifies that a project be accepted if its payback period is less than the specified cut off period
Limitations on the payback method
Profit margins not taken into account.
Does not take into account the time value of money
Name two most important financial statements
Income statement and balance sheet
Purpose of Income statement
To show whether or not a company’s business is profitable. it shows:
- the profit or loss over a period of time (financial year)
- usually there is a comparison between the figures of the most recent year and that of the year before (separeate columns)
Purpose of Balance sheet
to show a company’s financial position at a point in time( end of fiscal year), a snap shot.
What are the three major items in a balance sheet?
Assets, liabilities and equity
BEP
Break Even Point is where the income from sales is equal to total expenses
Assets
Total assets is the sum of
Total current assets (cash, inventory, investments, work done but not billed yet)
and
Fixed or non-current assets, not very ‘liquid’ or long term assets (total value of property, equipment).
Liabilities
Liabilities is the sum of Current liabilities (accounts payable) Non-current or long term liabilities (long term bank loans, mortgages, building, land)
Equity
Total equity is the sum of Capital, Stock and Retained Earnings.
Equity + Total Liabilities = Total Assets
Working Capital formula
Working capital=Current assets - current liabilities
What is working capital?
Working capital is a measure of the short term financial strength of a construction company.
How to increase working capital?
by: making profit, selling equipment or other assets, or have long term loans from the bank.
