FINANCE EXAM #1

Which one of the following applies to a general partnership?

Any one of the partners can be held solely liable for all of the partnership's debt.

Financial Institutions

Companies that specialize in financial matters: Banks (commercial and investment) credit unions savings and loans Insurance companies Brokerage firms

peer group analysis. (benchmarking)

Compare to similar companies or within industries

What does a receivables turnover ratio of 57 mean?

Customers took, on average, 57 days to pay

uses of cash

Decrease long-term debt Decrease equity Decrease current liabilities Increase current assets Increase fixed assets

change in net working capital

Ending NWC - Beginning NWC

time trend analysis (benchmarking)

How the firm's performance is changing through time Internal and external uses

sources of cash

Increase long-term debt Increase equity Increase current liabilities Decrease current assets Decrease fixed assets

Basic areas of finance

Investments Financial institutions International finance Corporate finance = Business finance

categories of financial ratios

Liquidity ratios or Short-term solvency Financial leverage ratios or Long-term solvency ratios Asset management or Turnover ratios Profitability ratios Market value ratios

goal of financial management

Maximize the current value per share of the company's existing stock Maximize the market value of the existing owners' equity (better than book value)

What does an inventory period of 111 days mean?

On average, inventory sat for about 111 days before it was sold

cash budget

Primary tool in short-run financial planning Identify short-term needs and opportunities Identify when short-term financing may be required How it works: 1. Identify sales and cash collections 2. Identify various cash outflows 3. Subtract outflows from inflows and determine investing and financing needs

cash cycle

The time between payment for inventory and receipt from the sale of inventory Cash cycle = operating cycle - accounts payable period The cash cycle measures how long we need to finance inventory and receivables

Which is true about financial ratios?

They are used for comparison purposes They are developed from a firm's financial information

operating cycle

Time required to receive inventory, sell it, and collect on the receivables generated from the sale of the inventory Operating cycle = inventory period + accounts receivable period

Investments

Work with financial assets such as stocks and bonds Value of financial assets, risk versus return, and asset allocation Job opportunities: Stockbroker or financial advisor, Portfolio manager, Security analyst

Partnership

a business owned by two or more people all partners share gains and losses and have unlimited liabilities for debts limited partnerships: one partner has unlimited liability and the other one has limited liability all income is taxed as personal income and the amount of equity that can be raised is limited to their combined wealth ownership is hard to transfer

In the long run, costs may be considered as ______.

all variable

flexible finance policy

always implies short term cash surpluses and a large investment in cash and marketable securities firm finances internally will have greater investment in NWC

cash collections

beginning receivables + sales - cash = ending receivables usually cash collections are found using given percentages of sales in a quarter

Uptown Markets is financed with 45 percent debt and 55 percent equity. This mixture of debt and equity is referred to as the firm's:

capital structure

In finance, the value of a firm depends on its ability to generate ______.

cash flows

A flexible short-term financing strategy implies ______.

cash surpluses a relatively large pool of marketable securities

Matt and Alicia created a firm that is a separate legal entity and will share ownership of that firm on a 75/25 basis. Which type of entity did they create if they have no personal liability for the firm's debts?

corporation

Net working capital

current assets - current liabilities net working capital is positive when assets > liabilities

Which of the following are activities that increase cash?

decreasing fixed assets increasing long-term debt

The more debt a firm has, the greater its:

degree of financial leverage.

compromise financial policy

firm keeps a reserve of liquidity that it uses to initially finance seasonal variations in current asset needs. short term borrowing is used when the reserve is exhausted

Common-size statements are best used for comparing:

firms of different sizes year-to-year for your firm competitors

Will and Bill both enjoy sunshine, water, and surfboards. Thus, the two friends decided to create a business together renting surfboards, paddle boats, and inflatable devices in California. Will and Bill will equally share in the decision making and in the business profits or losses. Which type of business did they create if they both have full personal liability for the firm's debts?

general partnership

liquidity

how quickly an asset can be converted into cash

Which of the following are characteristics of commercial paper?

issued by large, highly rated firms interest often below prime rate issued directly by the firm

Sole Proprietorship

most common type of business A business owned by one person they get to keep all the profits but they have unlimited liability so they are always responsible for the business debts all business income is taxed as personal income

Corporation

most important business type in terms of size A business owned by stockholders who share in its profits but are not personally responsible for its debts double taxed, once at corporate level and then again at personal level when it is paid out to employees corporation is a legal separate entity hard to start one stockholders have limited liability they are not responsible for company debt

Which of the following firm activities decrease cash?

paying off debt repurchasing stock

Carrying costs ______ with the level of investment in current assets.

rise

In a common-size income statement, each item is expressed as a percentage of total:

sales

Ideally, short-term assets are financed with ______.

short-term liabilities

Capital budgeting includes the evaluation of which of the following?

size, timing, and risk of future cash flows

Margie opened a used bookstore and is both the 100 percent owner and the store's manager. Which type of business entity does Margie own if she is personally liable for all the store's debts?

sole proprietorship

accounting income

the change in net assets during a reporting period, excluding any receipts from or disbursements to owners. It is also calculated as revenues minus all expenses. income statement

cash flow

the difference between cash coming in and cash going out of a business. one of the most important pieces of information that can be derived from financial statements The accounting Statement of Cash Flows does not provide the same information that we are interested in here Our focus: how cash is generated from utilizing assets and how it is paid to those who finance the asset purchase

The primary concerns in short-term finance are

the firm's short-run operating and financing activities.

working capital management

the managing of short-term assets and liabilities

capital structure

the mixture of debt and equity maintained by a firm decide how and where to raise money

agency problem

the possibility of conflict of interest between the stockholders and management of a firm

capital budgeting

the process of planning and managing a firm's long-term investments want cash flow of asset > cost of asset

Under a conventional factoring, ______.

the receivables are sold at a discount the collection of the receivables is the factor's responsibility

Which one of the following best explains why financial managers use a common-size balance sheet?

to track changes in a firm's capital structure

A common-size balance sheet expresses accounts as a percentage of ______.

total assets

Financial leverage refers to a firm's ______.

use of debt in its capital structure

restrictive finance policy

uses long term financing for permanent asset requirements only and short term borrowing for seasonal varieties firm finances externally

market value

value of a company according to the stock market the amount for which something can be sold on a given market.

book value

value of an asset/liability/equity according to its balance sheet cost of a depreciable asset and its related accumulated depreciation BV = Equity

in the short run, costs are considered

variable and fixed

The daily financial operations of a firm are primarily controlled by managing the:

working capital

Theo's BBQ has $48,000 in current assets and $39,000 in current liabilities. Decisions related to these accounts are referred to as:

working capital management