FIN 3060 TEST 1

Net capital spending = net fixed assets - beginning net fixed assets ____

+ depreciation

which of these questions can be answered by reviewing a firms balance sheet?

-How much debt is used to finance the firm -What is the total amount of assets the firm owes

Management compensation motivation

-based on job performance -based on job prospectives (better management gets a bonus)

What are the interest of financial manager?

-capital budgeting -working capital management -capital structure

What are the three subjects a financial manager is concerned with?

-capital structure -capital budgeting -working capital management

Assets can be categorized as

-current and fixed -tangible and intangible

a general partnership has which of the following characteristics?

-each owner has unlimited liability -all partners share in gains or losses

advantages of corporation

-easy to transfer -unlimited life -borrows money in corporation name -limited liability

which of the following are included in a firms capital structure?

-equity -long term debt

depreciation is the accountants estimate of the cost of ___ used in the production process matched with the benefits produced from owning it

-fixed assets -equipment

Who is considered a non-owner stakeholder in a company?

-gov -employees -suppliers

marginal tax rates are the most important tax rates because ___

-incremental cash flows are taxed at marginal tax rates -financial decisions are usually based off the new cash flows

Which of the following are defining features of the primary market?

-it is a market where the initial public offerings are made -proceeds from the sale of securities goes to issuing firm

In other countries, corporations are commonly referred to as ___

-joint stock companies -public limited companies -limited liability companies

a treasurer's responsibilities include:

-managing capital expenditure decisions -handling cash flow -managing financial plans

In over-the-counter, which is true?

-many dealers are connected electronically -most buying and selling is done by the dealer

Where does the cash generated by a corporation typically go?

-reinvested in the firm -to pay corporate taxes -paid to shareholders and creditors

According to GAAP, when is revenue recognized on an income statement?

-when the earnings process is virtually complete -when value of an exchange of goods or services is known or reliably determined

Do managers act in the stockholders interest? Provide the questions of proof that they do.

1. How closely are mgt goals aligned with stockholders? 2. Can mgt be replaces if they do not pursue stockholders goals?

Why study finance?

1. To make informed economic decisions 2. to make informed personal and business investment decisions 3. to make informed career decisions based on a basic understanding of business finance

Four Basic Areas of Finance

1. corporate finance 2. investments 3. financial institutions 4. international finance

3 Business finance questions to ask

1. what long-term investments should you take on? 2. where will you get the long-term financing to pay for your investments? 3. How will you manage your everyday financial activities?

current assets are assets that can be turned into cash within ___ months

12

partnership

2+ owners; easy and inexpensive to form; taxed as personal income; equity limited to partners combined wealth; not easy to transfer ownership

Which is considered most liquid? A. accounts receivable B. land C. equipment D. inventory

A. accounts receivable

agency problem

Conflict of interest between principal and agent

the cash flow from the firm's day-to-day activities of producing and selling is called

OCF (operating cash flow)

public offerings must be registered with ___

Securities and Exchange Commission (SEC)

Working Capital Management

The day to day management of finances that determines how much cash and inventory should be kept on hand, whether to sell on credit to customers, and how to obtain short-term financing (focus on the short-term)

Gaol of financial management?

To maximize the current value per share of existing stock To maximize the market value of the existing owner's equity

how is the average income tax rate computed?

Total tax bill/Total taxable income

According to GAAP, when is income reported?

When it is earned or accrued

balance sheet

a "snapshot" of an organization's financial position at a given moment

Sole Proprietorship

a business owned by one person; easy to start; least regulated; owner keeps all the profits; unlimited liability; limited life; equity limited to owners wealth

Corporation

a legal entity separate from it's owners and has many rights, duties, and privileges of an actual person; starting is complex and requires "articles of incorporation" and "bylaws"

A balance sheet reflects a firm's ___

accounting value on a specific date

a customer has yet to pay the bill for products purchased form firm A on credit. This customer's trade credit is recorded in which of Firm A's balance sheet accounts?

accounts receivable

amounts not yet collected on sales already made are called ___

accounts receivable

net earnings refers to income earned

after interest and taxes

General Partnership

all the partners share in the gains and losses, and all have unlimited liability for all partnership debts

highly liquid

assets that are quickly sold without significant loss of value

the balance sheet shows the ____ value

book

Under GAAP, assets are generally carried on a firm's balance sheet at ___

book value and historical value

the short-run is a period when there are ____ cost

both fixed and variable

illiquid

cannot be quickly converted into cash without much loss of value

which term applies to the mixture of debt and equity maintained by a firm?

capital structure

non-cash items do not affect

cash flow

product cost are usually shown on the income statement under the heading:

cost of goods sold

Increasing shareholder wealth means increasing _

current common stock value

what is a non-cash item on the income statement?

depreciation

Cash flow to stockholders equal ___

dividends paid- new equity raised

disadvantage of corporation

double taxation

T/F profit maximization is the goal for the management of a corporation in the short-run only

false

T/F: current assets + current liabilities = NWC

false

T/F: ending net fixed assets + beginning net fixed assets - depreciation = net investment in fixed assets

false

the purpose of a ___ is to measure performance over a set period of time

income statement

Sarbanes-Oxley Act

intended to strengthen protection against corporate accounting fraud and financial malpractice (makes mgt personally responsible)

cash flow to creditors equals ____

interest paid - net new borrowing

what is a current asset?

inventory

on a balance sheet, assets are on the ___ side

left

Capital budgeting is concerned with managing expenditure on ___

long-term assets

Since ___________ and ownership are separated, a corporation's life is unlimited.

management

In a shareholder-manager relationship, who is the agent?

managers

current assets ___ current liabilities = NWC

minus

accounts payable

money the firm owes to its suppliers (current liability)

Is profit max the primary objective of a business?

no; it may not take into account the other strategic objectives necessary to maximize shareholder value

A positive operating cash flow indicated that the firm is generating enough cash to ___

pay everyday cash outflows

Agency Relationship

relationship between stockholders and management

on a balance sheet, liabilities and equity are on the ___ side

right

bylaws

rules describing how the corporation regulates its existence (can be amended and extended by stockholders)

Secondary Market

securities are bought and sold after the original sale to transfer ownership of corporate security (auction and over-the-counter)

residual value

shareholder's equity; portion of money left after creditors are paid

In a shareholder-manager relationship, who is the principal?

shareholders

what 3 factors to watch for in capital budgeting?

size, risk, cash flow

limited partnership

some partners have limited liability that is limited to their personal contribution and can be sold without dissolving the partnership

Stakeholder

someone other than a stockholder or creditor that has claim on the cash flows of the firm

Managerial compensation is often tied to financial performance. One way to make this tie is to offer payment in terms of __

stock options

__ __ can be used to encourage managers to maximize the value of the stock

stock options

proxy

the authority to vote someone else's stock

market value is ___

the cash value you'd receive if it sold

changes in capital spending can be negative if

the firm sold more fixed assets than it purchased

proxy fight

the mechanism by which unhappy stockholders can act to replace existing management

Primary market

the original sale of securities by governments and corporations (public offerings and private placement)

capital budgeting

the process of planning and managing a firm's long-term investments (cost < value generated)

capital structure

the specific mixture of long-term debt and equity that the firm uses to finance to support its operations how to support those long-term investments (how to get the money and from where)

What is the purpose of the income statement?

to measure performance over a set period of time

on a balance sheet, total assets must always equal ___

total liabilities + shareholders equity

Officer for measuring/ managing the firms cash flow is the ___

treasurer

the officer responsible for cash flows is the ___

treasurer

T/F stakeholders have claim on cash flows

true

T/F: Interest paid-net new borrowing equals cash flow to creditors

true

T/F: free cash flow is also known as cash flow from assets

true

T/F: long-term liabilities are not due in the current year

true

T/F: most fixed assets are illiquid

true

T/F: on the balance sheet, the most liquid assets are listed first

true

T/F: operating cash flow does not include depreciation or interest

true

market value =

true value

financial leverage refers to a firms ____

use of debt in its capital structure

total value of stock= ___

value of owner's equity

___ changes as the output of the firm changes

variable cost