AG BUS EXAM 3

comparative statement analysis

Balance sheets and P&L statements from two periods are placed side by side and examined for any significant changes that could affect the financial condition of the firm

capital budgeting decision

evaluating profitability of potential investments by firm in new property, plant and equipment

ratio analysis

examines relationships of various components on balance sheet and P&L statement; compares changes over time

incremental cost

an increase in cost between two alternatives

average rate of return method of capital budgeting

annual return/investment

ex of current assets

cash, accounts receivable, inventory, and prepaid expenses

how is the break-even point calculated?

fixed cost/(price-variable cost); from the profit equation when profit is zero

advantages of ratio analysis

easy to calculate, easy to make comparisons, easily understood, and communicates financial position to interested parties

manager determines

economic order quantity (EOQ) and reorder point (ROP)

current assets

either cash now or will turn into cash within accounting period

break even analysis

helps managers find combination of costs, output, and selling price that permits firm to breakeven, no profits and losses

liquidity

the ability of the business to meet its cash commitments in a timely fashion

owners equity

the difference between a firm's assets and its liabilities

profits

total revenue - total costs

annuity

used to evaluate the present value of a series of equal-sized cash flows made over a number of periods (car payments, mortgages, student loans, lottery winnings, etc) usum of present value factors for period

compounding

what money put into a savings account today will be worth at a future date

reasons not to hold inventory

-High Maintenance Costs -High Protection Costs -Depreciation and Obsolescence -Taxes

reasons to hold inventory

-matching supply with demand -prevent stockouts -lower purchasing costs

balance sheet equation

Assets = Liabilities + Owner's Equity

uses of net working capital

DECREASE dividend payment, fixed assets purchase, investments payments, long term repayments, stock retirement

sources of net working capital

INCREASE fixed assets sale, investments sale, long-term loans taken, stock sale, depreciation, profits

solvency

a business is solvent if total assets exceed total liabilities

implicit cost

a non-monetary opportunity cost; does not involve explicit payments

advantages/disadvantages of payback method

advantage- quick and simple disadvantage- puts emphasis on recouping the investment and not based on profitability does not consider returns at end of period nor when the returns are received

advantages/disadvantages of average rate of return

advantages- simple uses returns over the entire life disadvantages- gives equal weight to all years does not consider time value of money size disparity problem measures rate of return not profit

explicit cost

cost for direct purchases of inputs and services which are directly traceable

Liquidity ratios

current, quick, and acid test ratio

current liabilities

debt must be paid within next accounting period

solvency ratios

debt to equity and times interest earned ratio

net working capital analysis (NWC)

difference between current assets and current liabilities tells managers how working capital is acquired

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

activity ratios

inventory turnover, accounts receivable turnover, and accounts payable turnover

payback method of capital budgeting

investment/annual return

cost of goods sold (COGS)

represents the direct costs to business of just goods that are sold this period

4 categories of ratios

liquidity ratios, solvency ratios, activity ratios, and profitability ratios

limitations to ratio analysis

only indicates problems, not cause problems if you change accounting methods

net present value (NPV)

present value of benefits- present value of costs

benefit/cost ratio (B/C)

present value of benefits/present value of costs

financial objectives

profits, liquidity, and solvency

profitability ratios

return on investment (ROI), return on owners equity, profit as percentage of sales ratio

factors influencing BEP and profit

selling price, fixed cost, variable costs by becoming more efficient, selling more

contribution

selling price/unit - variable cost/ unit; what is available for paying overhead and profit

internal rate of return (IRR)

the discount rate that results in an NPV of zero; PV of cash inflows= PV of cash outflows

opportunity cost

the most desirable alternative given up as the result of a decision

Equivalent Annual Cost (EAC)

the present value of a project's costs calculated on an annual basis