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