EXAM #3

Management 1010 02 with Poor at University of Missouri- Columbia

About this deck

By: Kimberly Duncan
Created: 2011-04-28
Size: 58 flashcards
Views: 50

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accounting

comprehensive system for collecting, analyzing, and communicating financial information to a firm's owners and employees, to the public, and to various regulatory agencies

bookkeeping

records of taxes paid, income received, and expenses incurred

accounting information system (AIS)

organized procedure for identifying, measuring, recording, and retaining financial information

users of accounting information

business managers
employees & unions
investors & creditors
tax authorities
government regulatory agencies

controller

person who manages all of a firm's accounting activities (chief accounting officer)

financial accounting

external information users (outside consumers)

managerial accounting

internal information users (managers)

certified public accountant (CPA)

accountant licensed by the state & offers accounting services to the public

private accountant

accountant hired by a business to carry out its day-to-day financial activities

audit

systematic examination of a company's accounting system to determine whether its financial reports are accurate

assurance and information integrity

variety of services that improve and assure the quality of information for business activities

management consulting & performance

knowledge & advice on an organization's strategic, operational, and financial performance

financial planning

various services that help clients better understand, interpret, and utilize the full range of financial information

strategic & critical thinking skills (core competencies)

provide competent advice for strategic action

communication skills (core competencies)

exchange information meaningfully with to a variety of businesses effectively

focus on the customer, client, and market (core competencies)

meet the changing needs better than the competition

interpreting converging information (core competencies)

interpret new meaning by combining financial and non-financial information

accounting equation

assets = liabilities + owners' equity

asset

any economic resource expected to benefit a firm or an individual who owns it

liability

debt owned by a firm to an outside organization

owners' equity

amount of money owners would receive if they sold all assets & paid all liabilities

balance sheets

supply detailed information about the accounting equation factors: assets, liabilities, owners' equity

current assets

cash and assets that can be converted into cash within a year

fixed assets

asset with long-term use or value, such as land or equipment

intangible assets

monetary value in the form of expected benefits, such as patents or trademarks

current liabilities

debts that must be paid within one year

long-term liabilities

debts not due for at least one year

paid-in capital

money invested by owners

retained earnings

net profits kept by a firm rather than paid to stock holders

income statement

lists a firm's annual revenues & expenses to emphasize either annual profit or loss

revenues

funds that flow into a business from the sale of goods or services

operating expenses

resources that must flow out of a company in order to earn revenue

operating income

operating income = gross profit from operations - operating expenses

net income

net income = operating income - income tax

revenue recognition

formal recording and reporting of revenues in financial statements

matching

principle stating that expenses will be matched with revenue (determines future net income)

full disclosure

financial statements should not just include numbers

solvency ratios

using both short & long-term ratios to estimate risk

liquidity ratio (short-term)

measures a firm's ability to pay its immediate debts

debt ratio (long-term)

measures a firm's ability to pay its long-term debts

profitability ratios

measure potential earnings (includes "return on equity" & "earnings per share")

return on equity

measures income for each dollar invested

earnings per share

measures the size of the dividend that a firm can pay shareholders

activity ratios

reflect management's use of assets (includes "inventory turnover rate")

inventory turnover rate

measures the average number of times that inventory is sold and restocked during the year

hurdle rate

projects that yield a return greater than the minimum acceptable; should be higher for riskier projects and reflect the financing mix

financing mix

a combination of owners' funds (equity) & borrowed money (debt)

objective of corporate finance

maximize the value of the firm

hurdle rate equation

hurdle rate = riskless rate + risk premium

Capital Asset Pricing Model

uses variance to measure risk

variance can be diversified away, which would not be rewarded

measures non-diversified risk with beta, translated into expected return

expected return equation (measuring using beta & the Capital Asset Pricing Model)

expected return = riskfree rate + beta * risk premium

(uses cash flow as a measure of return)

net present value (NPV)

NPV = sum of all present cash flow - hurdle rate (cost of capital if cash flow is to the firm or cost of equity if cash flow is to the investors)

accept if NPV>0

two ways that a business can raise money

1. debt

2. equity

raising money through debt

promise to make fixed payments in the future (interest payments); upon failure of payment, the business is lost

*private = bank loans, public = bonds*

raising money through equity

leftover cash flows after debt payments are made go to the business

*small = investments, large = venture capital, public trade = common stock

debt to capital ratio equation

debt to capital ratio = debt/(debt + equity)

tax benefit equation

tax benefit = tax rate * interest payment

three propositions of the tax benefits of debt

the higher the marginal tax rate of a business, the more debt it will have
the greater the indirect bankruptcy cost, the less debt the firm can afford to use
the greater the agency problems associated with lending, the less debt the firm can afford to use

About this deck

By: Kimberly Duncan
Created: 2011-04-28
Size: 58 flashcards
Views: 50

About StudyBlue

“Simply amazing. The flash cards are smooth, there are many different types of studying tools, and there is a great search engine. I praise you on the awesomeness.”
Dennis