Finance 2303 Exam 1-- Chapters 1-4
what is financial management?
activities that create or preserve the economic value of the assets
what is accounts receivable?
amounts owed to the firm by customers who have purchased on credit
what is EBIT?
earnings before interest and taxes
What are annuities?
equal (constant), periodic cash outflows/inflows (rent, lease, mortgage, car loan, etc)
amortized loan
equal periodic payments of principal and interest
what is finance?
finance is a subfield of economics
what is the cycle of money?
financial intermediaries assist in the movement of money, from lenders to borrowers and back again
interest only loan
periodic interest-only payments, principal due at end
examples of long term assets
plant, equipment, land, buildings
discount loan
principal and interest is paid in lump sum at end
what is classified as inventories?
raw materials, work in progress, and finished goods
PMT is
the equal period cash flow
what is the income statement?
the firms revenues and expenses over a period of time
N is for
the number of periods involved
R is for
the rate of interest
future value and compounding interest
the value of money at the end of the stated period is called the future or compound value of that sum of money (determine alternative investments, figure out the effect of inflation on future costs of assets)
what is the purpose of present value and discounting??
useful for determining today's price or the value today of an asset or cash flow that will be received in the future
Finance is about making decisions regarding ____ assets to buy/sell and ____ to buy/sell these assets
what; when
what are financial markets?
Forums where buyers and sellers of financial assets and commodities meet
what are examples of the cycle of money
--a mutual fund issues shares which are bought by individuals
what is the balance sheet/what does it do?
--represents the assets owned by the company and the claims against those assets --provides a snapshot of the firms financial position at a given point in time
Why does money have time value?
-Inflation, depreciating real assets, investment opportunity -There is a utility cost of forgoing consumption today and you must be compensated for the disutility -the rate of return/ interest rate/ discount rate captures this tradeoff
what are the four main financial statements?
1. balance sheet 2. income statement 3. statement of retained earnings (SE) 4. statement of cash flow
Four main interconnected and interrelated areas of finance
1. corporate finance 2. investments 3. financial institutions and markets 4. international finance
accounting identity
Assets = Liabilities + Owner's Equity
future value of an ordinary annuity equation
FV= PMT ((1+r)^N-1/r)
future value of an uneven cash flow stream
FV= PV * (1+r)^n
compounding interest (multiple period) equation
FV= PV(1+r)^N
present value and discounting equation
PV= FV / (1+r)^N
what are current liabilities?
accounts payable, notes payable, and short term debt
a cash flow stream such as rent, lease, and insurance payments which involves equal periodic cash flows that begin right away or at the beginning of each time interval is known as __________
annuity due
finance is both an ______ and ______
art; science
what are long term assets?
assets that produce tangible benefits for more than a year
what are current assets?
cash and other marketable securities (low risk, short term investments)
cash flow from assets equals
cash flow to creditors + cash flow to stockholders
"other current assets"
catch all category that includes items such as prepaid expenses
what are long term liabilities?
long term debt (a loan or debt obligation maturing in more than a year)
______ cash flow is the ultimate source of any return of investment for investors
operating
equal periodic cash flows that begin at the end of each time interval are known as ___________
ordinary annuity
future value (single period) equation
𝐹𝑉=𝑃𝑉(1 +𝑟)
Periodic Rate of Return Formula (ROR)
𝑟𝑡= 𝑊𝑡−𝑊𝑡−1/𝑊𝑡−1
