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