440 Test 1

What is equity?

Exchanging a share or portion of ownership of the organization for money.

Financial management usually operates with what end goal in mind?

Maximizing wealth or the overall value of the firm.

Accounting decisions-particularly in regard to depreciation and inventory-are frequently influenced by the goal of...

Minimizing taxes

What is an income statement?

A statement that shows the organization's income over a specified period of time and is typically issued on an annual or quarterly basis. (revenues and expenses)

What is double-entry bookkeeping?

A system that requires that every entry on an account have a corresponding entry to a different account.

What is standard deviation?

A measure of variability in a distribution of numbers and, in the case of an investment, indicates the riskiness of the investment. (Lower-risk investment will take the form of a tighter distribution curve.)

What is a beta coefficient?

A measurement of the volatility of a stock compared to market return, reflecting the degree to which the stock increases or decreases with an increase or decrease in the overall market.

What is a balance sheet?

A picture or snapshot of the financial condition of an organization at a specific time. (The condition on the date it is prepared) (Assets, liabilities, owners' equity)

What is the difference between a quick ratio and a current ratio?

A quick ratio does not include inventory

What is reinvestment rate risk?

A risk that reflects the fact that the investor may lose income if at the time the funds are reinvested the interest rate on the bonds has gone down.

What are the three basic financial statements?

1. Balance sheet 2. Income statement 3. Statement of cash flows

What are the three main sources of risk?

1. Economic conditions 2. Political developments 3. Global Issues

The Bureau of Labor Statistics allocates the 200+ smaller categories into nine larger categories. What are these categories?

1. Food and Beverages 2. Housing 3. Clothing 4. Transportation 5. Medical Care 6. Recreation 7. Education 8. Communication 9. Other (Then estimates the percentage of spending for each category for a typical U.S. household)

The economic cycle is made up of four stages. What are they?

1. Growth 2. Peak 3. Recession 4. Recovery

What is the single-entity ownership model?

A single group or an individual owns the league and all of the teams in that league. (Typically startup leagues)

Some of the major North American professional sports leagues have attempted to address the risks of deferred salaries. How?

1. MLB: Teams must show that money deferred can be paid off in the next four years, even if the money is contractually deferred beyond four years. 2. NFL: The team must place deferred payments in a league fund for administration and future disbursement. 3. NBA: Only 30% of a total contract value may be deferred, and it must be paid within two years of the contract's completion. 4. NHL: No restriction on teams regarding deferred payments.

What three sections are cash flows typically organized into?

1. Operations (Cash flow from normal business operations, such as from the sale of products) 2. Investing (The buying and selling of fixed assets, such as property) 3. Financing (The company's debt and equity financing)

What are the five main factors that affect the economics of sport?

1. The impact of the current economic cycle on sport 2. The effects of television revenues 3. The relationship between sport teams and real estate holdings 4. A continued push for sustainability (Meeting today's needs without compromising future generations' ability to meet their own needs.) 5. The impact of politics and governance of sport

What are the three models for sharing revenue?

1. The league provides increased revenue allocations to teams with low local revenues. (MLB and NBA use this model) 2. The league provides equal allocations to all teams in the league. (For the most part, this is how NFL currently shares revenue.) 3. Franchises are rewarded for the effective financial management of their clubs, favoring the teams that generate higher revenue. (Premier League)

Why would a financial manager engage in a ratio analysis?

1. To evaluate how well a company is operating in the current time period 2. To compare its current performance to its past performance 3. To compare its current and historical performance to industry standards 4. To study the efficiency of its operations.

What is the multiple owners/publicly traded corporation model? (Typically used in European professional soccer franchises)

A franchise is governed by a board of directors, elected by shareholder vote. The board then appoints the team's senior management.

What is a loan pool?

A league-financed fund from which franchises can borrow at relatively low cost.

What is a portfolio?

A combination of assets held by investors to eliminate some risk.

What is level of risk?

A comparative evaluation of risk. It is determined by comparing the risk of one asset or firm to that of another. (The NFL is much less risky than other professional sports since a lot of money is guaranteed via television contracts and because of the league's strict rules when it comes to expenses and player salary.)

What is an auction-rate bond?

A form of long-term debt that acts like short-term debt, in which interest rates are reset through auctions held no more than 35 days apart. They are intended to reduce the borrowing costs for long-term financing. (Common method for financing facility construction) (State of Indiana financed Lucas Oil Stadium with auction-rate bonds)

What is a probability distribution?

A list of all possible outcomes (projected returns) of an investment, with a probability assigned to each outcome. (Sum of probabilities must equal 1.0)

What is the difference between money markets and capital markets?

Money markets are markets for highly liquid, short-term securities. Capital markets are markets for intermediate or long-term debt, as well as corporate stock.

What is the Sherman Antitrust Act?

An act that forbids contracts and other actions among businesses in restraint of trade.

What is owners' equity?

An estimated measure of the ownership value of the company; it includes paid-in capital and retained earnings. (Assets minus liabilities)

What are liabilities?

An organization's financial obligations or debts owed to others.

When does economic growth occur?

When the economy is increasing in real terms (faster than the rate of inflation)

What is the single owner/private investor model?

Where one individual owns the firm. The owner may play an active role in the operation of the franchise, or, after selecting key managers, may be hands off.

What are synthetic fixed-rate bonds?

Bonds that have elements of both a fixed-rate bond and a variable-rate bond.

What is the difference between cash basis-accounting and accrual basis-accounting?

Cash basis recognizes transactions when money is either received or paid out. Accrual basis accounts for income when it is earned and expenses when they are incurred, rather than when money is exchanged. (Accrual is more popular)

What does the statement of cash flows track?

Cash in and cash out. This helps provide information as to whether the company has sufficient cash on hand to meet its debts and obligations. (Not provided by balance sheet or income statement)

Each league has two basic pools of revenue that may or may not be shared by teams within the league. What are they?

Central and local revenues. Central: Revenues paid directly to the league that are then distributed to member organizations. Local: Team earnings from home ticket sales, local television and radio, advertising, and sponsorship, shared within the league.

What is a Gift?

Charitable donations, either cash or in-kind.

What is cost of goods sold?

Costs that are directly attributable to the production of goods or products to be sold, including raw materials and labor costs.

What is the difference between current assets and long-term assets?

Current assets are those that are likely to be converted to cash within one year, while long-term assets are those that will take longer than a year to convert.

What is the distributed club ownership model?

Each individual franchise has its own ownership group. League-wide revenues are collected at the league level and distributed to each team to cover net costs.

What was the world's first motorsports stadium? End of Chapter 3

Daytona International Speedway

What is the main difference between debits and credits?

Debits show increases to asset or expense accounts, and are entered on the left-hand side of the ledger of the T-account. Credits reflect increases to liability or equity accounts, and they are entered on the right-hand side.

What are contingent liabilities?

Debts that may or may not occur

CAPM divides risk into two components: diversifiable risk and market risk. What are these?

Diversifiable risk: The portion of a stock's risk that can be removed through a well-diversified portfolio. This type of risk is caused by events that are unique to the company issuing the stock. Market risk: The portion of a stock's risk that cannot be eliminated. It is caused by factors that affect most organizations similarly. (Economy, inflation, interest rates, etc.)

Risk often leads to what?

Financial losses (Much harder to predict what is going to happen in sports in five years than in five days. Therefore most sport managers are reluctant to invest cash for a long period unless the payoff would be significant.)

What is the definition of government?

Funding provided by federal, state, or municipal sources, including land use, tax abatements, direct stadium financing, state and municipal appropriations, and infrastructure improvements.

What is GAAP?

Generally accepted accounting principles: a standard set of guidelines and procedures for financial reporting.

To determine the size of the sport industry, we calculate the ____.

Gross Domestic Sports Product (GDSP) (This is the nation's output of sport-related goods and services in a given year.)

We can determine the size of any industry by calculating its ____.

Gross product

What does the total asset turnover ratio measure?

How efficiently the organization is using its assets to make money.

What is inventory turnover ratio?

How often the organization sells and replaces its inventory over a specified period of time.

What is liquidity?

How quickly a security can be turned into cash.

What is debt ratio?

How the organization finances its operation with debt and equity.

What is the key to building a successful portfolio that reduces overall risk?

It must not contain assets that are highly positively correlated.

What is a drawback for single-entity status?

It provides little economic incentive at the club level. There is no advantage to the clubs operating well, since everything is shared.

What are the least risky-riskiest types of bonds?

Least Risky: 1. US Treasury Bonds 2. Municipal Bonds (AAA Insured) 3. Municipal Bonds (AA) 4. Corporate Bonds (AAA) Riskiest

Why don't professional sports teams typically issue stock to raise equity capital?

Little can remain hidden when a company is publicly traded and teams that issue stock must answer to their shareholders. (Stockholder demands for profitability may run counter to the goal of winning on the field.)

What is a drawback of equity?

Ownership interest will be diluted and the original owners may lose control as additional investors are added.

What are retained earnings?

Reinvestment of prior earnings.

For sport organizations, risk is reduced when...

Revenues are guaranteed

What is net income?

Revenues minus expenses (Also referred to as profit or earnings)

What is deferred compensation?

Salary whose payment is delayed under contractual terms. (In sports, this is usually from salary cap)

What is a risk-free investment?

Short-term investments deemed to have no chance of loss. Example: U.S. Treasury securities with a 90-day maturity are backed by the federal government's guarantee to pay.

The largest sector of the industry is what?

Sport products and services

What government agency is responsible for calculating the CPI?

The Bureau of Labor Statistics

Which North American professional sports league is most affected by global issues on a consistent basis? Why?

The National Hockey League. This league has the highest percentage of Canadian franchises. Most of the Canadian franchise revenue is earned in Canadian dollars, whereas the NHL's collective bargaining agreement requires that all player contracts be paid in U.S. dollars. Because of the exchange rate, a Canadian team's revenue increases while its expenses decrease. As a result, Canadian teams become more profitable.

In the U.S, federal agencies use what system to measure and track the business economy?

The North American Industrial Classification System.

What is volatility?

The amount of fluctuation that occurs in a series of similar investment returns and the degree to which those returns deviate from the average. (More volatility translates into greater risk)

What is the definition of interest?

The cost of borrowing money

Why is dollar return problematic?

Without knowing the size of the investment, we cannot meaningfully evaluate the sufficiency of the return. The timing of the return is also important. (Lesser risk of an investment is, lower the return. Greater the risk, higher the return.)

What does the correlation coefficient measure?

The degree of the relationship between two variables. (Ranges from +1.0 to -1.0)

What is covariance?

The degree to which two variables change together. (When stock X does this, stock Y does this, etc.)

What is inflation?

The devaluation of money over time.

What is risk premium?

The difference between rate of return for the risky investment and the risk-free rate.

What is the risk of time?

The fact that risk increases as the length of time on risk.

What is rate of return?

The gain or loss of an investment over a period of time.

What is risk-free rate?

The interest paid on risk-free investments that provide a guaranteed return.

What is nominal interest rate?

The interest rate actually charged for a given marketable security, consisted of the real risk-free rate of interest plus multiple risk premiums.

What does investment risk measure?

The likelihood of low or negative future returns. As the chance for a low or negative investment return increases, the riskiness of the investment increases.

The overall size of an economy is measured by its Gross Domestic Product. (GDP) What is this?

The market value of the goods and services produced within the borders of a county, state, country, or other region in a given year.

What is a T-account?

The method accountants have historically used to track revenues and expenses and to create accounts to be entered on balance sheets and income statements.

What does the current ratio measure?

The organization's ability to meet its current liabilities (Due in one year)

What is interest coverage ratio? End of Chapter 2

The organization's ability to pay interest on debt owed.

What is the net profit margin ratio?

The percentage of total sales or revenues that was net profit or income. It measures the effectiveness and efficiency of the organization's operations.

What is an inflation premium?

The portion of an investment's return that compensates the investor for loss of purchasing power over time.

What is rate of required return?

The profit an investor would require in order to consider the investment worth purchasing, given its riskiness.

What is the real risk-free rate?

The rate of interest on a risk-less security if inflation were not expected.

What is the Consumer Price Index? (CPI)

The result of a calculation based on the prices of roughly 80,000 goods and services in more than 200 categories reflecting the current lifestyle of the typical American consumer. It is intended to reflect the overall change in real prices during this time.

What is dollar return?

The result of subtracting the the amount invested from the amount received.

What is stand-alone risk?

The risk that an asset would present if only that single asset were held.

What is interest rate risk?

The risk that interest rates will increase, causing a decline in the value of the security. (Interest rates affect long-term securities more than short-term securities.)

What is revenue sharing?

The sharing of revenues among teams in a league to support weaker franchises and maintain the competitive balance in the league. A byproduct of revenue sharing is that each individual organization's risk is lessened.

What does the coefficient of variation measure?

The stand-alone risk of an investment. It is useful when comparing expected returns on two alternative projects whose returns are not the same. (Lower CV suggests less risk)

What is expected rate of return?

The sum of each possible outcome multiplied by its probability.

Why is the multiple owners (private) model the most common?

The value of franchises has risen so high that it is rare for one individual to be able to afford to purchase a franchise on his or her own. (The NFL also forbids it)

What is an asset?

What a company owns, including items such as cash, inventory, and accounts receivable. (Assets=Liabilities+Owners' equity)

When does a recession occur? End of Chapter 1

When GDP is negative for two consecutive quarters and usually lasts for six to 18 months. (A depression is an extreme recession and lasts two or more years.)

What is debt?

When an organization borrows money that must be repaid over a period of time, usually with interest. (Short-term: Less than one year, Long-term: over one year)

What is the multiple owners/private investment model? (Most common)

When individuals pool their resources to purchase a franchise and incorporate as a partnership, LLC, or the like.

What is an advantage of equity?

You can obtain funds for operations without incurring debt and without having to repay a specific amount of money at a given time.