AGEC EXAM 3
Quick Ratio Equation
(Current Assets - Inventory) / Current Liabilities
Acid test ratio formula
(cash + marketable securities)/current liabilities
Costs of Goods Sold Equation
Beginning inventory + net purchases - ending inventory
Annuity
Used to evaluate the present value of a series of equal-sized cash flows made over a number of periods Sum of present value factors for period
What factors influence Break Even quantity and price?
higher selling price Lower Fixed Costs Sell more
Liquidity
Refers to the ability of the business to meet its cash commitments in a timely fashion
Current Ratio
Relationship between current assets and current liabilities as listed on balance sheet
What is the purpose of an accounting system?
-An accurate picture of firm's current profitability -An estimate of firm's current and future financial position -Input to firm's management information system -An accurate record of past financial performance
What are some reasons to hold inventory?
1.Matching supply with demand 2.Prevent stockouts 3.Lower purchasing costs
Payback Method =Investment/Annual Return
Accept all projects whose annual returns payback investment in less than X years
Average Rate of Return Method =Annual Return/Investment
Accept all projects with % return above Y% per year
Incremental Costs
Are costs that firms incur that do not involve explicit payments. They relate to firm's use of its own assets
Owner's Equity Equation
Assets - Liabilities = Owner's Equity
Balance Sheet Equation
Assets = Liabilities + Owner's Equity
Solvency
Assets must be greater than liabilities
Calculating the break even point in dollars formula
BEP=TFC/CMP BEP=break even in dollar CMP= contribution margin percentage TFC=Total Fixed costs
Comparative Statement Analysis
Balance sheets and P&L statements from two periods (usually consecutive) are placed side by side and examined for significant changes
What are some examples of current assets?
Cash Accounts receivable Inventory Prepaid expanses
Explicit Costs
Costs which are generally for direct purchases of inputs and services which are directly traceable
Accounts Receivable Turnover Ratio
Credit Sales / Accounts Receivable Measures the time it takes to get money from credit sales
Current Ratio Equation
Current Ratio = Current Assets / Current Liabilities
Current liabilities
Debt must be paid within next accounting period
Owners Equity
Difference between a firm's assets and its liabilities
Net Working Capital Analysis
Difference between current assets and current liabilities Expressed on balance sheet
Net Working Capital Uses
Dividend payment Fixed assets purchase Investments payments Long term repayment Stock retirement
Break-even output level (volume) occurs where Total Cost __________ Total Revenue
Equals
Capital Budgeting Decisions
Evaluating profitability of potential investments by firm in new property, plant, and equipment
Compounding Formula
FV = VN(1 + i)^N FV = future value VN = present value i = interest rate per period N = number of times interest is paid https://www.calculatorsoup.com/calculators/financial/compound-interest-calculator.php
Net Working Capital Sources
Fixed assets sale Investments sales Long-term loans taken Stock sale Depreciation Profits
Break Even Analysis
Helps managers find the right combination of costs, output, and selling price that will allow the firm to just break-even, no profits or losses
Discounting
How much money do I have to put into a savings account today to have a certain amount at a specific time in future
Times Interest Earned Ratio
Income before taxes & interest expense/ interest expense ratio tells you how many dollars are available to make the interest payments on the loans
What are some examples of explicit costs?
Labor, production, materials
Internal Rate of Return (IRR)
Looking for Discount Rate that has: PV of Cash Inflows = PV of Cash Outflows NPV = 0
Current Assets
Something of value firm owns or uses that is leither cash now or will turn into cash within accounting period (operating cycle)
Net Working Capital Formula
NWC = Current Asset - Current Liabilities
Discounting Formula
PV = FV/(1+i)^n
Net Present Value (NPV)
Present value of cash inflows-present value of cash outflows Net Present Value (NPV) = Present Value of Benefits- Present Value of Costs
Return on Owners' Equity
Profit Before Taxes / Owners Equity Return on owners' equity measures the return to the investors.
Return on Investment (ROI) Ratio
Profit Before Taxes / Total Assets ROIC tells outsiders how efficiently the business is using all of its capital.
Profit as Percentage of Sales Ratio
Profit Before Taxes / Total Sales
What are the main three financial objectives?
Profits Liquidity Solvency
Accounts Payable Turnover Ratio
Purchases On Credit / Accounts Payable
Opportunity cost
Return (measured by highest value)
Income Statment Equation
Revenues - Expenses = Net Income
Operating expenses
The general costs of operating and administering the business, outside of the direct cost of goods sold — Overhead
Profit
The margin between total business receipts and total business expenses
Debt to Equity Ratio
Total Debt = Total Liabilities /Total Equity Tells who owns more of the business—the owners or the firm's debtors
What is contribution?
What is available for paying overhead and profit
Compounding
What money put into a savings account today will be worth at a future date
Costs of goods sold
represents the direct costs to business of just goods that are sold this period
Inventory Turnover Ratio
cost of goods sold / inventory level
Break even in units formula
https://www.zoho.com/us/inventory/break-even-point-calculator/