Elements of Financial Statements (8 Questions)
Revenue
Expenses
Income
Assets
Liabilities
Equity
Revenue
Amount generated by sale of
... [Show More] products and services
Expenses
Amount incurred to manufacture products
Income
The difference between revenues and expenses
Liabilities
Amounts owed by the company to others
Equity
Amounts invested in the company by shareholders
Income Statement (recorded in two methods)
Accrual Principal = Revenue must be recorded the moment the has delivered the goods or services to the customer. The earning process (the moment you sell, you've completed the earning process) is complete and thus must record. The moment company incurs an expense, they must record it in the income state.
Matching Principal = All expenses necessary to manufacture a product in respective to whether cash is paid or not must be recorded in the income statement as expense.
What is included in the income statement and not included in the statement of cash flows?
Depreciation Expense = the using of machine and equipment to manufacture the product. Must be recorded in the income statement as a result of the matching principle (cash will never be paid for it as a result of the matching principle).
Statement of Retained Earnings
How much of income a company earns every year is distributed to stock holders as dividends and how much of that income is retained by the company to grow the company in the future.
Dividend
Always paid out of income
What is Coupon Rate?
Is the interest rate that a company promises to pay on bonds.
What is Market Rate?
Is the interest rate on other comparable bonds.
In order words, what other companies are paying.
Market Rate is equal to what?
Is equal to yield to maturity (YTM)
What is Par Value?
Is the amount payable on maturity of the bond.
GGM: Gordon Growth Model
Assumes stable growth rates and does not incorporate risk.
Think about Efficient Frontier
CAPM Model: Capital Asset Pricing Model
Allows to determine expected return on stocks and incorporate risk.
Pubic companies maximizes
Maximizes shareholder value by maximizing earnings per share.
Private companies maximizes
Maximizes shareholder value by keeping control within the company.
Positive credit rating impact
It lowers the cost of capital. A downgrade in credit rating will increase the cost of capital.
Cash flow from operating activities
Are cash flows generated for sale of products and services to customers.
Formula for Retained Earnings
Ending RE = Beginning RE + Net Income - Dividends
Estimates are?
Depreciation and salvage value on an asset.
An example of ACCOUNTING Difference is
Companies using different accounting methods.
An example of TIMING Difference is
Companies using different fiscal years.
Voting Rights
Only shareholders have voting rights.
What is included in Initial Outlay (IO) of Cash Budgeting.
Purchase price of new equipment, shipping cost, and investment in working capital.
Risks associated with debt financing
Too much debt can lead to bankruptcy.
Inventory Related costs includes ...
Production costs, storage costs, and opportunity costs.
SEC requires all publically traded companies to do what annually?
Every publically traded company is required to file Annual audited statements to the SEC.
Issues with foreign financial statements
Use international financial reporting standards and they are different from the US accounting standards.
CFI measure what?
CFI measures investments in long term assets such as building, equipment, and machinery.
Efficient Frontier
Maximizes expected return for a given level of risk.
What does the efficient Frontier measure?
It maximizes expected return for a given level of risk.
(Think about the graph)
Objective of Portfolio diversification?
The objectives of Portfolio diversification reduces risk.
Current Assets are?
Current assets are cash or any other asset that can be converted to cash within 12 months.
Current Liabilities
Are liabilities that a has to be paid within 12 months.
Differential Annual Cash Flow
Is net cash flow generated by a new asset on a yearly basis.
Current Ratio
Measures short term liquidity to pay short term obligations.
SEC regulates...
The SEC regulates public disclosures of entities that sell debt and equity to the public
Increased Frequency in compounding leads to what?
Increase frequency in compounding leads to an increase in APY
Treasury bonds
Are taxed at a federal level while municipal bonds are tax free.
Two benefits of unbundling and offshoring
1. It reduces the costs and results in higher sales and employment.
2. Allows for sale of intermediate and final goods at lower prices and increases employment.
Two basic types of financial instruments
Stocks and bonds
Primary markets
Are where companies directly sells securities to investors (IPO: I
Secondary markets
Securities are sold from third parties such as the NYSE or Nasdaq.
When do companies not need permission from SEC to sell debt and equity?
1. Regulation S: when they sell to foreign investors.
2. Rule 144A: when they sell to a large institutional investor.
Dodd-Frank Act (2009 After 2008 Financial Crises regulates the banking industry)
Dodd-Frank created the Financial Stability Oversight Council, does an annual stress test on banks.
Volcker Rule
Limits investment in hedge funds by banks.
Sarbanes-Oxley Act (2002 after massive fraud)
Requires companies to Have strong internal audit controls, prepare honest and accurate financial statements.
FINRA (Financial Industry Regulatory Authority)
Regulates US stock brokers also need to maintain up to date sales records.
Foreign Corrupt Practices Act 1977 (FCPA)
Prohibits bribing of foreign officials.
DFL: Degree of Financial Leverage
Is a ratio that measures the sensitivity of a company's earnings per share to fluctuations in its operating incomes, as a result of changes in its capital structure.
Earnings per Share (EPS)
Is a portion of a company's profit allocated to each outstanding share of common stock. It serves as an indicator of a company's profitability.
What does the Degree of Financial Leverage Indicate?
The reliance on debt.
DOL: Degree of Operating Leverage aka Business Risk
The more fixed costs a company has in its operating structure, the more fixed costs they would have, sometimes called business risk.
is a measure used to evaluate how a company's operating income changes with respect to a percentage change in its sales. ... A company with a high degree of operating leverage has high fixed costs relative to its variable costs.
Example of DOL meaning
a DOL of 2.5 means that if there is a 1% increase/decrease in Sales, will lead to a 2.5% increase/decrease in EBIT.
Working Capital Management: Short Term Liquidity
refers to a company's managerial accounting strategy designed to monitor and utilize the two components of working capital, current assets and current liabilities, to ensure the most financially efficient operation of the company. [Show Less]