Agec 1003 test 3 fannin

Annuity Definition

Used to evaluate the present value of a series of equal-sized cash flows made over a number of periods help us determine loan payments for things such as car payments, mortgages, and even student loans.

operating expenses

are the general costs of operating and administering the business, outside of the direct cost of goods sold AKA Overhead

Profits

businesses are profit motivated Profit is the margin between total business receipts and total business expenses

current assets

cash accounts receivable inventory

Compounding /Discounting Definition

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

Compounding/Discounting Problem

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 discounting formula FV = VN(1 + i)N divide both sides by (1 + i)N VN = FV/(1 + i)N = FV(1 + i)-N or VN = FV(1 + i)-N

incremental cost

the additional total cost incurred for an activity

explicit costs

those cost which are generally for direct purchases of input and services which are directly traceable

Current Liabilities

Notes Payable Accounts Payable $ Due this YR on LT Debt

Solvency

A business is solvent if total assets exceed total liabilities Assets must be greater than liabilities

Owner's Equity

AKA Net Worth difference between a firm's assets and its liabilities Uses the accounting equation

accounting purpose

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

Balance Sheet accounting equation

Assets = Liabilities + Owners' Equity

comparative statement analysis

Balance sheets and P&L statements from two periods (usually consecutive) are placed side by side and examined for significant changes

examples of annuities

Car payments Mortgages Student loans Lottery winnings

Factors influencing Break-even Quantity and price

Constant selling price Constant price of input Constant efficiency Constant product mix Constant relationship hold

Net Working Capital (Including sources and uses)

Difference between current assets and current liabilities Expressed on balance sheet NWC = Current Asset - Current Liabilities Net Working Capital Analysis tells managers How working capital is acquired •Where firm's money comes from •Where firm is spending money

factors driving change in net working capital

Dividend payment Fixed assets purchase Investments payments Long term repayment Stock retirement

Capital Budgeting Decision

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

factors driving change in net working capital - Increase

Fixed assets sale Investments sales Long-term loans taken Stock sale Depreciation Profits

break-even analysis

Helps managers find combinations of cost, output, and selling price that permits firms to break-even, no profit and losses

examples of explicit costs

Labor Production materials

Reasons to hold inventory

Matching supply demand Prevent stockouts Lower purchasing cost

Profitability Ratio problem

Measures of the operating success of a company for a given period of time.

Net Present Value / Benefit Cost Definition

Net present value is the preferred method for the corporate world because it gives you a profit on your investment that accounts for the time value of money. benefit present value of benefit/present value of costs Measures relative profitability rather than total net benefits (NPV) Measure of the benefits generated for each dollar invested Can give different measurements than NPV Good to use when all acceptable investments cannot be undertaken

Financial Objectives

Profits Liquidity Solvency

solvency ratio problem

Solvency is all about having more assets than liabilities. Ability to meet all liabilities Impacts how much the firm can borrow

Activity Ratio problem

The activity ratios give a general measure of the efficiency of the firm. Activity ratios relate to inventory levels, credit payments, and bill paying.

Liquidity Ratios problem

determine whether the firm has sufficient cash to pay its bills on time. current assets/current liabilities

Contribution definition

is what is available for paying overhead and a profit

Payback method/average return definition

payback evaluates capital budgeting opportunities by determining the number of periods (months or years) required for the sum of the benefits to be equal to the investment does not consider returns at the end of period and when returns are received. average return This is just the flip side of the payback method. Here the annual return is divided by the investment. Those projects with a percentage return greater than X% are deemed acceptable.

Ratio definition

ratios of various items from the balance sheet and p&l statement and compare them to industry averages, and look a how they have changed over time.

Liquidity

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

Contribution formula

selling price/unit - variable cost/unit

Gross Margin

subtraction of cost of goods sold from revenue. It shows income that remains to cover the expenses of selling the product & administering the business

opportunity cost

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

Cost of Goods Sold (COGS)

the purchased cost of goods from outside suppliers Ex. A wholesale or a retail firm such as a nursery retailer, grocery store or farm supply store buys its goods for resale