mgt 3210 midterm
physical inventory
a count of all the inventory being held for sale at a specific point in time
property
a general term for real estate, but can also be applied as a legal term for anything owned or possessed
plant
a general term for the facilities of a business
capital leases
a lease in which at the end of the lease period the asset becomes the property of the lessee, possibly with an additional payment
tax abatements
a legal reduction in taxes by a government primarily used to encourage specific activities that are expected to improve blighted areas or to provide additional employment
operating leases
a long-term rental in which ownership of the asset never passes to the person paying for the lease
liquidity
a measure of how quickly a company can raise money through internal sources by converting assets to cash
financial leverage
a measure of the amount of debt relative to total investment
what are operating expenses
can be classified into selling, general and administrative, research and development, and other
what happens during the maturity stage of a business
can include the the exit from of the entrepreneur from the business. the process of planning/preparing for this is called exit planning and should begin planning this at the beginning of the business venture. exits happens by either selling the business, transitioning to the next generation in a family business, going bankrupt, or dying.
difference between wealth and income
income is the cash that is available from the business to pay the entrepreneur's salary, whereas wealth is the value of the business if sold
external cost factor examples
inflation changes in supply and demand economic shocks such as war
what does ipo stand for
initial public offering
activity ratios
measure how productive a particular asset is in producing sales activity
profitability ratios
measure management effectiveness in creating wealth from sales and from invest funds
liquidity ratios
measure the business's ability to pay debts and expenses that are due in the current accounting period
leverage ratios
measure the relative risk that a business setback could cause bankruptcy
return on assets
measures managements effectiveness in using the assets of the business to provide profits. higher return is preferred. net income/ average total assets
debt-to-equity ratio
measures the extent to which the business can meet its obligations for the long haul. calculated by dividing total liabilities by total owners' equity. a lower ratio indicated greater solvency, a higher ratio indicates increased business risk
accounts receivable turnover
measures the frequency with which receivables are converted to cash. a higher turnover provides faster access to cash that can be used in the business net credit sales/ average net accounts receivable
times interest earned
measures the risk of being forced into bankruptcy for not meeting required interest payments. higher is preferred operating income before interest and taxes/ interest expense
what is included in the cost of disposing of an asset
meeting environmental regulations, disassembly, advertising, commissions, shipping, insurance, and fees
what is inventory
merchandise held by a company to be sold to its customers. typically the most significant asset for merchandising or manufacturing firms
outside equity
money from selling part of your business to people who are not and will not be involved in the management of the business
cash
money that is immediately available to be spent
long-term liabilities
obligations that are not due within the current year. includes borrowing from banks or the issuance of bonds
cash flow management
planning and tracking the amounts and timing of money to be received and paid during the business cycle
what are the three essential long-term assets
property, plant, and equipment (PPE)
types of profitability ratios
return on sales asset turnover return on assets dupont model
safety stock
the amount of inventory carried to ensure that you will not run out of inventory because of fluctuating levels of sales
optimum stocking level (reorder point)
the amount of inventory that results in the minimum cost, when considering the cost of lost sales resulting from running out of stock, the number of units sold per day, and the number of days required to receive inventory
currency
the bills and coins printed by governments to represent money
processes
the business activities necessary to convert inputs into desired outputs
JOBS Act
the jumpstart our business startups act, signed into law in 2012. the law specifically provides for raising equity funds by crowdfunding, very complex
inputs
the materials, labor, and energy put into the production of a good or service
disposable value
the net amount realized after subtracting the costs of getting rid of an asset from its selling price
contributed capital
the original investment in the company by the owners. in a partnership or sole proprietorship it is called capital
cost of capital
the percentage cost of obtaining future funds
economic order quantity (eoq)
the quantity at which the total cost of inventory is minimized
productivity
the ratio measure of how well a firm does in using its inputs to create outputs. literally, productivity is outputs divided by inputs
cash to cash cycle
the time that is required for a business to acquire resources, convert them into product, sell the product, and receive cash from the sale
replacement cost
the total cost of replacing an asset with an essentially identical asset
what are the 3 key steps in transforming revenue forecasts to cash flow forecasts
1) the entrepreneur needs to determine whether they will be extending credit to customers 2) if credit is extended, the entrepreneur should estimate the percentage of the sales that will be on credit and the percentage that will be cash 3) the entrepreneur will need to determine how long it will take to collect credit sales
what are the 9 common accounting functions
1. accounts receivable 2. accounts payable 3. payroll 4. fixed asset 5. inventory 6. credit card sales 7. insurance register 8. investment 9. leasehold
what are the 4 broad categories of financial ratios
1. activity ratios 2. profitability ratios 3. liquidity ratios 4. leverage ratios
what are the three basic financial reports for a business
1. balance sheet 2. income statement 2. cash flows statement
what are the three forecasting scenarios
1. best-case scenarios 2. most-likely-case scenarios 3. worst-case scenarios
what are the 2 forms of short-term financing?
1. commercial paper 2. short-term debt
what are the three ways to record cogs
1. fifo 2. lifo 3. average cost
what are the 4 main steps in the operations process
1. inputs 2. operations 3. outputs 4. feedback
what are the 3 most common forecasting mistakes
1. linear forecasting mistake 2. hockey stick forecast mistake 3. the 20/80 vs. 80/20 mistake
what are the two basic types of leases
1. operating leases 2. capital leases
what are 3 of the most common financial ratios
1. roi 2. current ratio 3. debt-to-equity ratio
what is the accounting equation
Assets = Liabilities + Owner's Equity
how to improve productivity
1. efficiency 2. quality
what are the four differing degrees of components for services
1. explicit service 2. supporting facility 3. implicit service 4. supporting good
formula for breakeven in units
= fixed costs for the period / (price of one unit-variable cost of one unit)
secured debt
Loans that provide the lender with the legal right to seize specific assets in the event of nonpayment. Most automobile loans are secured debt and if you don't make your payments, your car will be repossessed.
types of activity ratios
account receivable turnover dso ratio COGs
which type of financing is the best
depends on your business
is cogs a revenue or expense?
expense
multiple-step income statement
lists revenues from operations separately from other income and gains
quick ratio
measures how much money can be made available very quickly to pay obligations within the fiscal year. a higher ratio is preferred. current assets - (inventories+prepaid assets) / current liabilities
return on investment (roi)
measures management's effectiveness in using the invested capital of the business to provide profits. ROI is calculated by dividing the net income generated by a project by the average assets invested in the project. ROI is a percentage, and the higher the percentage return, the better.
demand deposits
money held in checking and savings accounts
financial strength
the ability of a business to survive adverse financial events
what is the relationship between the marketing plan and revenue forecasts
they tell the same story (information) in different ways. the marketing plan is in a narrative format while the revenue forecasts use numeric data
what are 4 common accounting methods to determine value
1. book value 2. disposable value 3. replacement value 4. fair market value
what are the 6 items that must be reported in the statement of cash flows
1. cash flows from operating activities 2. cash flows from investing activities 3. cash flows from financing activities 4. net effect of foreign exchange rates 5. net change in cash balance during the period 6. non cash investing and financing activities
steps for crowdfunding
1. document your business 2. make a business plan 3. create a compelling story 4. create a professional-looking video 5. develop a list of potential investors
advantages of renting over buying assets
1. the exact amount and timing of cash outflows is specified in the rental contract 2. renting provides a fall-back position should your projections prove to be incorrect
disadvantages of renting over buying assets
1. you do not have an ownership position 2. rental requires that you make regular, timely payments 3. the number of dollars paid in rent usually exceeds the number of dollars you would spend to own the asset
credit reporting agency (cra)
a business that collects, collates, and reports information concerning an entity's use of debt
financial flexibility
a business's ability to manage cash flows in such a manner that the company can respond appropriately to unexpected opportunities and needs
what is a business plan
a comprehensive document describing the intended course that the entrepreneur wants the business to take. it is developed from the business model and used to translate the visual model into a written document that can be used to communicate the details that support the model to outsiders, such as bankers and investors
cost-volume-profit analysis
a method for planning operations necessary to attain a specific profit goal. break-even analysis is a specific application of this
royalty financing
a method of raising capital where investors provide money to a business in return for a guaranteed percentage of revenues
quality
a product or service's fitness for use, measured as durability, reliability, serviceability, style, ease of use, and dependability
financial management
a set of theories and techniques used to optimize the receipt and use of capital assets
fractional ownership
an ownership structure similar to joint ventures created by some leasing companies that offer buses, airplanes, and yachts under arrangements in which a small business may buy only that share that it can reasonable use during the course of business.
short-term debt
any debt that must be paid in less than one year from that date of the financial statement on which it is reported
what are noncurrent assets
assets that are not expected to be turned into cash within a year or have a useful life longer than one year. includes land, buildings, equipment, furniture, and fixtures
cash equivalents
assets that may be quickly converted to cash
what is the linear forecasting mistake
assuming a simple linear growth in revenues
what is the hockey stick forecasting mistake
assuming that sales will begin slowly and then suddenly increase dramatically for no documented reason other than blind faith in the business
formula for retained earnings
beg r/e + net income - dividends = end r/e
business model vs business plan
business model is a visual representation of various aspects of the business that is later used to develop the business plan, which is a more comprehensive document that translates the visuals into words and are usually shown to outsiders like bankers or investors
what is the most essential element of an accounting system, regardless of your businesses size
cash accounting
how to improve operations management in a service firm
choosing one of the four components of your service to focus on and improving them one at a time
ebt
earnings before taxes most users want to know this amount because it is a contractual obligation
what happens during the prelaunch stage of a business
entrepreneur develops the business model and plan and does all the work necessary to open the business, such as securing needed resources, setting up operations, and hiring and training staff
where do personal financing gifts come from?
family or occasionally from friends
how is managerial accounting different from financial accounting?
financial accounting deals mostly with reporting what has happened historically (backwards looking) managerial account relates to accounting information prepared internally to help managers make decisions for the business (forward looking)
what is a balance sheet
financial statement that reports what a company owns and owes at a given point in time. uses assets, liabilities, and equity classifies assets and liabilities as either current (<1 year) or long-term (>1 year)
where do institutional financing gifts come from?
government agencies and foundations
point-of-sale inventory
hardware and software combinations that integrate inventory management directly into accounting software
unsecured debt
loans that do not allow a lender to seize specific assets in the event of nonpayment
what are the 4 Cs of borrowing
1. character of the managers of the business 2. capacity of the business to repay both principal and interest on time 3. conditions of the industry and economy in which the business operates 4. collateral that can be used to secure the loan
what are the steps to perform a npv analysis
1. estimate the amount and timing of al cash flows of the project 2. select an appropriate discount rate 3. discount to present value each cash flow using the selected discount rate and timing 4. sum the discounted cash flows
what are the three types of accounting
1. financial accounting 2. tax accounting 3. managerial accounting
what are the three types of capital financing
1. financing with equity 2. financing with debt 3. financing with gifts
what are the steps of stakeholder analysis
1. identify the relevant stakeholders 2. determine the basic ethical principles and values that guide the entrepreneur's interaction with each of these stakeholders 3. apply these principles specifically to the financial resource management of the business
what are 6 common financial statements
1. income statement 2. statement of comprehensive income 3. statement of retained earnings 4. statement of owner's equity 5. balance sheet 6. cash flows
what are the 3 types of angel investors
1. individual angel 2. angel network 3. angel fund
what are the two general sources of gift financing?
1. institutional 2. personal
what are the three characteristics of services
1. intangibility 2. inseparability 3. perishability
4 rules to follow to get the greatest benefit from outsourcing
1. know yourself 2. keep strategy decisions in-house 3. fully specify tasks that are to be outsourced 4. know with whom you are contracting
what are the two more complex financial ratios for comparing investment alternatives
1. net present value 2. internal rate of return
what are the 5 main sources of funding for small businesses?
1. owner capital (personal savings, home equity credit line, etc.) 2. owner loans/ retained earnings/ owners' equity investments (when there is cash flow in the business) 3. loans or investments from family/ friends/ fools and trade credit 4. external loans from motivated (high-cost) lenders 5. external loans from commercial-rate lenders
what are the two most commonly used financial ratios for comparing investment alternatives
1. payback period 2. return on investment
what are the three most common approaches to maintaining records of inventory in small businesses
1. periodic inventory 2. perpetual inventory 3. point-of-sale inventory
what are the 4 stages of growth that businesses go through
1. prelaunch 2. start-up 3. growth 4. maturity
what are the 8 steps in making a master budget
1. sales budget 2. plan for inventory purchases 3. cogs budget 4. labor budget 5. selling, general, and admin expense budget 6. cash receipts budget 7. cash disbursements budget 8. cash budget
what are the 4 parts of the financial management model
1. setting financial goals 2. revenue forecasting 3. expense forecasting 4. monitoring performance
what are the 4 costs all capital assets cause you to incur over time?
1. the cost of acquiring the asset 2. the cost of owning the asset 3. the cost of operating the asset 4. the cost of disposing of the asset
what is included in the costs of carrying inventory
1. the opportunity cost of the funds invested in inventory 2. the cost of keeping inventory secure and in sellable condition 3. cost of warehouse or other storage facilities (utilities, physically moving inventory into, within, and out of the storage area, security guards, fencing, access control, etc) 4. insurance and taxes on inventory 5. inventory shrinkage (loss from waste, spoilage, and theft) 6. the transaction costs for counting and record keeping
what are the three primary CRAs
1. transunion 2. equifax 3. experian
perpetual inventory
a system of recording the receipt and sale of each item as it occurs
the budget cycle process
a term applied to the schedule and the process for setting the schedule for making purchases by an individual or an organization
what are the two critical short-term assets
accounts receivable and inventory
what are liabilities
amounts owed to others. includes accounts payable, wages payable, taxes payable, notes payable, bank loans, etc
what are bad debts
an estimate of what is uncollectible at the time of sale (what a customer will be unable to pay you)
outsourcing
contracting with people or companies outside your business to do work for your business
what are the two main categories of equity
contributed capital and retained earnings
cost of disposition
cost incurred in the activities necessary to get rid of an asset
what are two managerial accounting procedures that depend on being able to forecast future revenues and expenses?
cost-volume-profit analysis and the budget cycle process
types of liquidity ratios
current ratio quick ratio (aka acid test ratio)
types of leverage ratios
debt to equity ratio debt ratio times interest earned
inventory valuation
determination of the amount of assets held by the firm for sale or production
what is the worst-case scenario
developed by pushing all the critical assumptions to the extreme, often a scenario of failure
tax credits
direct reduction in the amount of taxes that must be paid, dependent on meeting some legal criteria primarily used to encourage investment in specific types of assets, to increase economic activity in specified disadvantaged geographic areas, increase the welfare of specific groups of citizens, or support industries that are held to be of national strategic interest
ebit
earnings before interest and taxes usually considered a key measurement of managements ability to utilize a firm's assets to generate income gross profits-operating income
ebitda
earnings before interest, taxes, depreciation, and amortization often used by entrepreneurs and bankers as a quick measure of cash flow
fifo
first in first out assumes that the oldest costs in inventory are moved to cogs first, the result is that ending inventory consists of the most recent costs
internal cost factor examples
functions of how your business works
grants
gift of money made to a business for a specific purpose available from the u.s. government, most state governments, and semiprivate and private economic development agencies
what is included in the cost of owning an asset
interest on funds borrowed and the opportunity cost of funds invested to acquire it, insurance the asset, property taxes, value of the space that the asset occupies, and the cost of record keeping and security for the asset
lifo
last in first out assumes that the newest costs in inventory are the first ones moved to cogs, resulting in the oldest costs remaining on the balance sheet
equipment
machinery, tools, or materials used in the performance of the work of the business
asset turnover
measures how efficiently a business uses all its assets to produce sales. a higher ratio is better than a lower ratio net sales revenue/ [average total assets (beg. assets + end assets)/2]
current ratio
measures how much money can be made available to pay obligations within the fiscal year. calculated by dividing current assets by current liabilities. a higher ratio is preferred
return on sales
measures managements effectively in managing all costs relative to sales. higher ratio is preferred net income/sales revenue
accounts receivable
money owed to your business by customers who purchased your product on credit
commercial paper
notes issued by creditworthy corporations
unearned/deferred revenues
occur when customers pay for products or services in advance. recorded as liabilities because the company has the cash up front but has done nothing to earn the payment
pro forma financial statements
planning documents for future business activities that are formatted to look like the common financial statements of the income statement, balance sheet, and statement of cash flows
inventory
products that are held for sale to customers. it is the largest current asset that most manufacturing, wholesale, and retail firms have
single-step income statement
provides little detail, it simply lists all revenues and gains together, then lists all expenses and losses together
what are the three types of inventories for a manufacturing company
raw materials work in process finished goods
what is the 20/80 vs. 80/20 mistake
refers to the allocation of time spent in creating the two main sections of the income statement, forecasting revenues and forecasting expenses. typically, 20% of time is spent developing the revenue portion of the forecast while 80% is spent on the expenses portion
what is owner's equity
represents the ownership rights of the investors, the owners' claims to assets after all liabilities have been satisfied. aka stockholder's equity, net assets, and book value of the company
what are assets
resources owned by an entity. includes cash, accounts receivable, prepaid expenses, inventory, land, equipment, patents, copyrights, etc.
what happens during the growth stage of a business
revenues, and hopefully profits, begin to grow quickly. the biz may begin to experience many stresses/strains on systems and staff. management team and operating systems need to be put in place and upgraded to manage growth effectively
what is the formula for net income
revenues-expenses
what is accounts receivable
sales to customers on credit
what is an income statement
shows how a company has performed, it's income or loss for a given period of time only two categories: revenues and expenses
what are the two income statement formats?
single-step and multiple-step
work instructions
specific guidance for completing steps in a process
what is the most valuable function in planning for future business activities
standard budgeting (profit planning)
which of the 6 common financial statements parallels your monthly bank statement
statement of retained earnings
marketable securities
stocks and bonds that are traded on an open market
what is the most-likely-case scenario
taking 3-5 critical assumptions and adjusting them all downward to reflect a less than ideal set of circumstances
payback period
the amount of time it takes a business to earn back the funds it paid out to obtain a capital asset
profitability
the amount that revenues exceed expenses
personal equity
the amount that you may contribute to your business from your own resources. it's determined by how much you are worth and how easy it is for you to use what you have
average cost method
the average cost of all the purchases is used to determine the cogs
efficiency
the comparison of productivity ratios to see the extent that an organization has generated more outputs with fewer inputs
replacement value
the cost incurred to replace on asset with an identical asset
what is working capital
the difference between current assets and current liabilities management uses concerning this relate to seasonal cycles, which dictate a need for planning cash in/outflows
what is gross profit
the difference between sales and the cogs
book value
the difference between the original cost of an asset and the total amount of depreciation expense that has been recognized to date
net present value
the difference between the present value of cash inflows and the present value of cash outflows over a specified period of time
cost of operating
the direct cost incurred in using an asset for the purpose for which it was intended
internal rate of return (irr)
the discount rate at which the present value of the cash inflows of the project exactly equals the present-value of the cash outflows
what is included in the cost of operating an asset
the energy the asset consumes, maintenance, loss of economic value resulting from wear and obsolescence, and any necessary training of operators
weighted average cost of capital (WAC)
the expected average future cost of funds
just in time inventory
the practice of purchasing and accepting delivery of inventory only after it has been sold to the final customer
fair market value
the price at which goods and services are bought and sold between willing sellers and buyers in an arm's-length transaction
feedback
the process of communicating within or to the organization about how the outputs worked or were received
capital budgeting
the process of deciding among various investment opportunities to create a specific spending plan the goal of this is to improve the quality of decisions about how to best use the scare resources of the business
variance analysis
the process of determining the effect of price and quantity changes on revenues and expenses at the most basic level, variances occur because of one of two events: (1) the effect of changes in prices and (2) the effect of changes in the quantity used or produced
periodic inventory
the process of physically counting business assets on a set schedule
operations
the process of transforming materials, labor, and energy into goods and services
microinventory
the purchase of inventory only after a sale is made, very typical with internet firms
optimum capital structure
the ratio of debt to equity that provides the maximum level of profits
what is a business model
the rationale of how an organization creates, delivers, and captures value typically done with a visual representation of the various aspects of the venture
procedure
the series of steps and activities required to complete a process
outputs
the services or products that are produced for sale
whole of life costs
the sum of all costs of capital assets, including acquisition, ownership, operation, and disposal
acquisition cost
the total cost of acquiring an asset, including such costs as purchase price, transportation, installation, testing, and calibrating in order to ready it for its first productive use
what happens during the start-up stage of a business
the venture is launched and begins basic operations. entrepreneur is very hands on with the biz, building customer base and refining the product/service to meet the needs of the market. can last until the business produces well over $1M in revenue
what is included in the eoq graph
total annual cost purchase and carrying cost cost of ordering order quantity
what is a cash flows statement
tracks the sources and uses of cash in the company
fair credit reporting act (FCRA)
u.s. federal legislation specifying consumers rights vis-a-vis credit reporting agencies. requires all information reported by CRAs be accurate, but does not require that CRAs independently confirm any info, so the consumer must notify the CRA in writing of any mistakes
financial risk
uncertainty of returns; the probability of losing money
bootstrapping
using low-cost or free techniques to minimize your cost of doing business
what two categories are costs separated into in a cvp analysis
variable costs and fixed costs
what is the best-case scenario
what the entrepreneur believes is likely to occur
