AGEC EXAM 3

Quick Ratio Equation

(Current Assets - Inventory) / Current Liabilities

Acid test ratio formula

(cash + marketable securities)/current liabilities

Costs of Goods Sold Equation

Beginning inventory + net purchases - ending inventory

Annuity

Used to evaluate the present value of a series of equal-sized cash flows made over a number of periods Sum of present value factors for period

What factors influence Break Even quantity and price?

higher selling price Lower Fixed Costs Sell more

Liquidity

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

Current Ratio

Relationship between current assets and current liabilities as listed on balance sheet

What is the purpose of an accounting system?

-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

What are some reasons to hold inventory?

1.Matching supply with demand 2.Prevent stockouts 3.Lower purchasing costs

Payback Method =Investment/Annual Return

Accept all projects whose annual returns payback investment in less than X years

Average Rate of Return Method =Annual Return/Investment

Accept all projects with % return above Y% per year

Incremental Costs

Are costs that firms incur that do not involve explicit payments. They relate to firm's use of its own assets

Owner's Equity Equation

Assets - Liabilities = Owner's Equity

Balance Sheet Equation

Assets = Liabilities + Owner's Equity

Solvency

Assets must be greater than liabilities

Calculating the break even point in dollars formula

BEP=TFC/CMP BEP=break even in dollar CMP= contribution margin percentage TFC=Total Fixed costs

Comparative Statement Analysis

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

What are some examples of current assets?

Cash Accounts receivable Inventory Prepaid expanses

Explicit Costs

Costs which are generally for direct purchases of inputs and services which are directly traceable

Accounts Receivable Turnover Ratio

Credit Sales / Accounts Receivable Measures the time it takes to get money from credit sales

Current Ratio Equation

Current Ratio = Current Assets / Current Liabilities

Current liabilities

Debt must be paid within next accounting period

Owners Equity

Difference between a firm's assets and its liabilities

Net Working Capital Analysis

Difference between current assets and current liabilities Expressed on balance sheet

Net Working Capital Uses

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

Break-even output level (volume) occurs where Total Cost __________ Total Revenue

Equals

Capital Budgeting Decisions

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

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 https://www.calculatorsoup.com/calculators/financial/compound-interest-calculator.php

Net Working Capital Sources

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

Break Even Analysis

Helps managers find the right combination of costs, output, and selling price that will allow the firm to just break-even, no profits or losses

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

Times Interest Earned Ratio

Income before taxes & interest expense/ interest expense ratio tells you how many dollars are available to make the interest payments on the loans

What are some examples of explicit costs?

Labor, production, materials

Internal Rate of Return (IRR)

Looking for Discount Rate that has: PV of Cash Inflows = PV of Cash Outflows NPV = 0

Current Assets

Something of value firm owns or uses that is leither cash now or will turn into cash within accounting period (operating cycle)

Net Working Capital Formula

NWC = Current Asset - Current Liabilities

Discounting Formula

PV = FV/(1+i)^n

Net Present Value (NPV)

Present value of cash inflows-present value of cash outflows Net Present Value (NPV) = Present Value of Benefits- Present Value of Costs

Return on Owners' Equity

Profit Before Taxes / Owners Equity Return on owners' equity measures the return to the investors.

Return on Investment (ROI) Ratio

Profit Before Taxes / Total Assets ROIC tells outsiders how efficiently the business is using all of its capital.

Profit as Percentage of Sales Ratio

Profit Before Taxes / Total Sales

What are the main three financial objectives?

Profits Liquidity Solvency

Accounts Payable Turnover Ratio

Purchases On Credit / Accounts Payable

Opportunity cost

Return (measured by highest value)

Income Statment Equation

Revenues - Expenses = Net Income

Operating expenses

The general costs of operating and administering the business, outside of the direct cost of goods sold — Overhead

Profit

The margin between total business receipts and total business expenses

Debt to Equity Ratio

Total Debt = Total Liabilities /Total Equity Tells who owns more of the business—the owners or the firm's debtors

What is contribution?

What is available for paying overhead and profit

Compounding

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

Costs of goods sold

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

Inventory Turnover Ratio

cost of goods sold / inventory level

Break even in units formula

https://www.zoho.com/us/inventory/break-even-point-calculator/