Bussiness chapter 17, 18, 19 and part of 20
If an investor pays $1,000,000 for 50% of a company, the company valuation is __________.
$2,000,000
The reserve is the portion of a bank's deposits that the bank lends out to customers.
. True
If a company's income statement shows $3 million in revenue, $1 million in cost of goods sold, and $1 million in operating expenses, what is their net income from operations?
1 million
A person with $300,000 in a checking account at a bank that fails will receive FDIC coverage of ________________.
250,000
If an investor pays $1,000,000 for 25% of a company, the company valuation is __________.
4,000,000
Which of the following statements best describes money as a measure of value?
A one-carat solitaire diamond ring costs $2,800, whereas a 1/2 carat solitaire diamond ring will only set you back $1,500.
Factors to consider when seeking external sources of financing
Amount of financing -Term of financing -Cost of financing -Influence on company operations -External factors
what do banks and financial institutions provide
Banks and financial institutions provide: -Secure place to store money and valuables -Convenient access to money -Access to loans -Business and international services
debt financing
Borrowing money that must be paid back with interest -Used by companies to satisfy their short- and long-term funding needs
Which of the following actions would the Federal Reserve take in order to stimulate the economy and avoid a depression?
Buy government securities
Which of the following policy tools of the Fed would likely increase money supply?
Buy government securities through open market operations
Primary types of financial institutions
Commercial banks Credit unions Savings and loan associations Nonbank financial institutions
Types of financial institutions
Commercial banks Credit unions Savings and loan associations Nonbank financial institutions
Federal Deposit Insurance Corporation (FDIC)
Government agency created to maintain stability and public confidence in the nation's financial system by: •Insuring deposits and overseeing the soundness of banking institutions -Provides basic deposit insurance of $250,000 per depositor
Money multiplier effect
Higher reserve rate results in less deposit expansion -Lower reserve rate results in more deposit expansion
risk tolerance
Higher risk investments tend to be volatile -Investors with limited knowledge of the market should avoid riskier investments -Influenced by economic conditions
Federal reserve important function:
Important function-Use of monetary policy to regulate the nation's supply of money and maintain a healthy economy
Discount rate
Interest rate the Federal Reserve charges for loans to member banks -Lowering interest rates increases access to loans and money supply -Increasing interest rates makes loans less affordable and decreases money supply
On a company's balance sheet, which of the following would not be listed as a long-term asset?
Inventory
Debt-to-equity ratio:
Measures leverage by dividing total liabilities by owners' equity
Current ratio
Measures liquidity by dividing current assets by current liabilities
Functions of money
Medium of exchange -makes economy run smoothy Measure of value -Prices of all products are stated in terms of money Store of value -Method for retaining or accumulating wealth
Mission of the federal reserve
Mission of the federal reserve is to use monetary policy to regulate the nation's supply of money in such ways as to maintain a healthy economy.
Which of the following calculations would you use to determine a company's return on sales?
Net income after taxes divided by revenue
Investment horizon:
Number of years until one needs to use the money that was invested
Which is not a current asset?
Office equipment
Asset allocation
Process of spreading money across several different types of investments to reduce risk -Expressed in percentages -Classes of investments •Stocks •Bonds •Cash
Return on sales is which type of financial ratio?
Profitability
Which of the following actions by the Federal Reserve would have the effect of increasing the money supply?
Reducing the discount rate
Which of the following policy tools of the Fed would likely decrease money supply?
Sell government securities through open market operations
Quantitative easing
Stimulates the economy by purchasing government and nongovernment securities to increase money supply
Structure of the balance sheet
Structure of the balance sheet -Asset categories are listed in order from most liquid to least liquid-Assets and liabilities are divided between current and long-term-Assets minus liabilities always equals owners' equity
Which of the following accurately states the equation for the leverage ratio?
Total liabilities divided by owners' equity
Short term financing options
Trade credit •Unsecured loan: Obtained from a bank or financing company that is not secured by collateral Commercial paper: Short-term promissory note issued by a large corporation Secured loan: Obtained from a bank or financing company that is secured by collateral •Factoring: Involves selling accounts receivable invoices to another firm, called a factor
___________ is a form of short-term financing that uses inventory or accounts receivable as collateral.
Unsecured loans
Capital budget-
a budget of expected investments in new assets such as factories, equipment, and major R&D costs
Operating budget
a budget of expected revenue and expenses from ongoing operations
Statement of cash flows
a financial statement that illustrates how the company operating, investing, and financing activities affect cash over a period of time
store of value
a means of retaining and accumulating wealth
Liquidity
ease at which asset can be converted into cash
The immediate result of the Fed increasing reserve requirements is:
ess money for banks to lend to customers
Balance sheet
is a financials statement that PROVIDES A SNAPSHOT A COMPANY'S financial position by stating assets,liabilities and owners equity
Liabilities
is firm's debts and obligations, what they owe
Jacob's Home Remodeling purchases lumber, drywall, electrical supplies, plumbing supplies and paint for a major job. He has to pay the supplier but will not be paid by the customer until completion of the project. This is an example of:
negative cash flow.
The reserve is the portion of a bank's deposits that the bank lends out to customers.
true
In terms of the debt-to-equity ratio, a ratio over 1 indicates that the company:
has more debt than equity.
Federal reserve
the central bank of the United States that is responsible for regulating the banking industry and the money supply
COGS
the cost of proudcing or purchasing products for sale; varies directly with sales voulume or production volume
Deflation
the decrease of prices in an economy over time Caused by shrinking money supply and can lead to economic recession
Revenue
the dollar amounts earned by a firm from selling goods, providing services, or performing business activities
A bank with a 5% reserve and $200 million in customer deposits will keep _______________ on reserve.
$10 million
If a company's balance sheet shows $2 million in assets and $1 million in liabilities, what is their owner's equity?
$2 million
The FDIC provides basic deposit insurance of _______ per depositor
$250,000
f a company's income statement shows $3 million in revenue, $1 million in gross profit, and $1 million in operating expenses, what is their net income from operations?
$3 million
How much can a bank with $50 million in deposits lend if the reserve requirement is 10%?
$45 million
Banks and financial institutions provide:
-Secure place to store money and valuables -Convenient access to money -Access to loans -Business and international services
inflation
an increase of prices in an economy over time Caused by the rise in money supply -Rapid increase can lead to hyperinflation and lower quality of life for consumers
Open-market operations
Buying and selling of U.S. government securities by the Federal Reserve
Open-market operations:
Buying and selling of U.S. government securities by the Federal Reserve
This "C" of credit assesses the borrower's financial ability to meet credit obligations. .
Capacity
Return on sales is which type of financial ratio?
Cash flow
what does cash flow tell us?
Cash flow tells us where the money came from and where its going
In which section of the statement of cash flows would the payment of wages and salaries to employees be reflected?
Cash flows from operating activities
Which of the following would you expect to see on a company's operating budget?
Changes to revenue from the launch of a new product
Goals of monetary policy
Continued economic growth -Full employment- Stable prices
Reserve requirement:
Directly impacts the money multiplier effect
why was the fdic created
FDIC was created to maintain stability and public confidence in the nation's financial system by insuring deposits and overseeing the soundness of banking institutions
Fractional reserve
Fractional-reserve: System of banking where a portion of customer deposits are kept in reserve and remainder is lent out to customers-Size of the effect depends on the reserve percentage-Referred as deposit expansion
what are the functions of money
Functions of money are to serve as a medium of exchange, a measure of value, and a store of value
Which of the following policy tools of the Fed would likely increase money supply?
Sell government securities through open market operations
equity financing
Selling ownership in the company• Advantage- -Companies can raise a large amount of money which do not have to be paid back• Disadvantages-Equities are limited in number -Shares could become more valuable in the future -Investors are at a risk
Steps for Creating a Financial Plan
Setting goals -Address three timeframes •Short-term goals •Medium-term goals •Long-term goals -Goals should be measurable Control finances and prepare for emergencies -Individuals should look for expenses that can be removed and opportunities to increase income -Emergency fund: Savings account containing enough money to help one pay for unexpected expenses without going into debt •Requires certain changes to control the finances Evaluate alternatives -Different investments have different risks and potential returns -Investments that best fit the goals must be chosen •Implement, monitor, and revise -Major life events have the ability to change the trajectory of plans •Individuals should be ready to adjust their plans accordingly
Money
anything a society uses to purchase products or resources
Medium of exchange
anything accepted as a payment for products or services and resources
Long term financing options
Sources of long-term financing vary with the size and type of business •Long-term loans: Loans from commercial banks and other financial institutions -Must be repaid with interest •Corporate bonds: Loans from investors -Bond - Corporation's written pledge to repay the loan with interest Company stock: Shares of ownership in a company that can be sold to investors as a form of long-term financing -Small companies offer company stock to family and friends in exchange for an investment -Options available for larger companies •Angel investors - Private individuals who invest money in exchange for ownership in the company Private placement - Stock is sold to large institutional investors •Venture capital (VC) - Firms that invest in companies that have the potential to become large and successful •Initial public offering (IPO) - Companies that have high growth potential can explore going public by selling their stock on the open market
Which financial statement will tell you how much a company owns and owes?
Statement of Owner's Equity
Income statement
a financial statement that provides a summary of how much a compnay earned over a period of time; the income statement summarizes revenue, expenses, and net income •Helps to analyze the company's performance •Allows to categorize a firm's expenses
FDIC
a government agency that is created to mainatain stability and public confidence in the nations financial system by insuring deposists and overseeing the soundeness of banking institituions.
m2
a measure of money supply that consists of M1 plus savings accounts and some other types of time based deposit accounts. Savings account
M1
a measure of money supply that essentially consists of currency and checking accounts
Financial ratio
a number that shows the relationship between two elements of a company's financial statements. Financial ratios allow for a fair and accurate comparison between current financial results and results from previous periods of industry competitors
Financial plan
a pla for obtaining and using the money needed to implement an organizations strategic and operational plan
Trade Credit
a short term financing source where a company takes delivery of goods but pays for them at a later time
fractional reserve system-
a system of banking where a portion of customer deposit are kept in reserve and the remainder is lent out to customers -Size of the effect depends on the reserve percentage -Referred as deposit expansion
barter
a system of exchange in which goods or services are traded directly from other good or services
Financial management-
all activities relating to obtaining money and using it effectively for larger companies usually overseen by the chief financial officer. •Financial managers and their staff ensure that the company has the financial resources it needs, when required
Daniela Imports purchased a small store in the downtown area and took out a mortgage to finance the purchase. On its balance sheet, the store would be listed as _______, while the mortgage would be shown as_______.
an asset; a liability
Tyler buys a new combine for his farm for $145,000. To finance the purchase, he obtains a bank loan in the amount of $120,000. On the balance sheet for the farm, the combine would be listed as _______, whereas the loan would be shown as _______.
an asset; a liability
Cash budget-
an estimate of cash receipts and cash expenditres over a specified period of time; based on operating budget, capital budget, and other iformation about timing of the companys cash flows
Debt financing
borrowing money that must be paid back, usually with interest
The planned purchase of new manufacturing equipment would be reflected on the company's:
capital budget.
If a large corporation issues a short-term promissory note in exchange for funds, this is an example of _______________________.
commercial paper
The multiplier effect is calculated by:
dividing the amount of a bank's deposits by the reserve rate.
is a short-term financing method that involves selling accounts receivable invoices to another firm.
factoring
A balance sheet contains a listing of assets, liabilities, and operating expenses
false
A profitable company will always have positive cash flow.
false
An operating budget includes expected investments in new assets, factories, and equipment
false
Commercial paper is a form of shor-term financing that is secured by collateral such as inventory or accounts receivable.
false
Long-term loans are loans from investors that are repaid with interest.
false
Money can only be created by a government or central bank.
false
Only banks can provide traditional banking services, such as offering checking accounts and home loans.
false
On the cash flow statement, payment of cash dividends to shareholders is considered
financing activity
GAAP for presenting financial information, an acronym for
generally accepted accounting principles
Which financial statement will tell you how much the company made in gross profit?
income statement
Operating income and expenses would be listed on the company's:
income statement.
Operating expense
ongoing bussiness expenses such as rent salries utilities and marketing expenses; also called fixed cost because they dont change in direct relation to sales volume
The financial manager uses last year's expenses and revenue as a starting point in projecting the company's performance for this year. This best describes a(n) _______ budget.
operating
_________ is when stock is sold directly to insurance companies, pension funds, and other large institutional investors.
private placement
Managerial accounting
provides information for managers inside an organization to make decisions about a company's financing, investing, marketing and operating activities
Financial accounting
provides information for people outside an organization through the generations of standardized financial statements
Marcus has the opportunity to expand operations by buying a small company with an untested -- but potentially very profitable -- product line. In determining whether to go ahead with this venture, he is likely to calculate the _______ ratio.
risk-return
Financial institutions that started as local community-based associations that give loans are called:
savings and loan associations.
equity financing
selling ownership in the company
Balance sheet
snapshot of a company's financial position by stating assets, liabilities and owner's equity
The goals of monetary policy, as exercised by the Fed, are continued economic growth, full employment, and
stable prices
Money Multiplier effect
the effect of a fractional reserve banking system that allows deposits to expand multiple times; the size of the money multiplier depends on the reserve percentage deposit/reserve=money multiplier effect •Higher reserve rate results in less deposit expansion -Lower reserve rate results in more deposit expansion
A bank pays customers interest of 1.5% on money deposited in savings accounts but charges 4.5% interest on home loans. The difference between these two rates is known as:
the interest-rate spread.
Accounting
the process of systematically collecting, analyzing, and reporting financial information
A balance sheet contains a listing of assets, liabilities, and operating expenses.
true
A capital budget includes expected investments in new assets, factories, and equipment.
true
On an income statement, rent, salaries, and utilities are considered variable expenses
true
Assets
what we own are our assets,resources that a business owns
Negative cash flow cycle
when companies must pay for manufacturing costs before receiving payment from its customers.
Reasons Companies Need Financing
•Seasonality -Certain businesses do not have consistent sales throughout the year -Profitable companies may face yearly cash shortages during a specific season •Return to positive cash position during favourable season