Term
The most likely explanation of why the proportion of owner financing might differ across these three businesses is that:
Because net income increases equity, we expect to see more profitable companies with a greater proportion of equity than debt.
Equity and debt financing are equally risky and, therefore, we expect the proportion of debt and equity to be approximately equal in equilibrium.
Companies tend to utilize more owner financing because it is less costly.
Companies that face greater uncertainty of cash flows tend to utilize more equity in their capital structure. |
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Definition
| Companies that face greater uncertainty of cash flows tend to utilize more equity in their capital structure. |
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Term
Why would we expect a company like Intel to report a relatively high proportion of equity vis-à-vis liabilities?:
It is less risky due to its higher profitability and, therefore, reduces the willingness of debt holders to lend.
It is more risky due to technology innovation and, therefore, debt holders are less willing to lend at reasonable rates.
It is more profitable, and we know that profits increase equity.
It is less risky and can comfortably carry more equity financing. |
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Definition
| It is more risky due to technology innovation and, therefore, debt holders are less willing to lend at reasonable rates. |
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Term
Which balance sheet account provides the link between the balance sheet and the income statement?
Cash
Net Sales
Retained Earnings
Total Equity |
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Definition
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Term
Which of the following factors might allow a company like Wal-Mart Stores, Inc to reap above-average returns?
Wal-Mart Stores, Inc operates with more assets and equity than the average company.
Wal-Mart Stores, Inc's spends very little on advertising, thus generating a greater profit on sales.
Wal-Mart has considerable market power over suppliers as a result of its considerable size, which may result in product cost savings.
Wal-Mart Stores, Inc's sales level is greater than the typical company. |
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Definition
| Wal-Mart has considerable market power over suppliers as a result of its considerable size, which may result in product cost savings. |
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Term
Does the negative amount for cash from financing activities concern us? Explain.
A negative amount for cash from financing activities implies that the company is unable to pay its debts as they come due and should be interpreted negatively.
A negative amount for cash from financing activities is the result of additional borrowings. Because the additional funds are invested in earnings-generating assets, this should be viewed positively.
A negative amount for cash from financing activities implies that the market value of the company's long-term debt has declined and this change should be viewed negatively.
A negative amount for cash from financing activities reflects the reduction of long-term debt, which is a positive sign of the company’s ability to retire debt obligations. |
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Definition
| A negative amount for cash from financing activities reflects the reduction of long-term debt, which is a positive sign of the company’s ability to retire debt obligations |
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Term
Financial statements are influenced by five important forces that determine a company's competitive intensity:
(A) industry competition, (B) buyer power, (C) supplier power, (D) product substitutes, and (E) threat of entry
True
False |
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Definition
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Term
Publicly traded companies must provide to the Securities Exchange Commission annual audited financial statements (10K reports) and quarterly audited financial statements (10Q reports)
True
False |
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Definition
False
Quarterly reports do not need to be audited |
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Term
| Firms engage in four basic types of activities. List the activities. Describe how financial statements can provide useful information for each activity. How can subsequent financial statements be used to evaluate the success of each of the activities? |
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Definition
| Organizations undertake four major activities: planning, financing, investing, and operating. Financing is the means a company uses to pay for resources. Investing refers to the buying and selling of resources necessary to carry out the organization’s plans. Operating activities are the actual carrying out of these plans. Planning is the glue that connects these activities, including the organization’s ideas, goals and strategies. Financial accounting information provides valuable input into the planning process, and, subsequently, reports on the results of plans so that corrective action can be taken, if necessary. |
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Term
| The accounting equation (Assets 5 Liabilities 1 Equity) is a fundamental business concept. Explain what this equation reveals about a company’s sources and uses of funds and the claims on company resources |
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Definition
| An organization’s financing activities (liabilities and equity = sources of funds) pay for investing activities (assets = uses of funds). An organization’s assets cannot be more or less than its liabilities and equity combined. This means: assets = liabilities + equity. This relation is called the accounting equation (sometimes called the balance sheet equation), and it applies to all organizations at all times. |
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Term
| Companies prepare four primary financial statements. What are those financial statements, and what information is typically conveyed by each? |
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Definition
| The four main financial statements are: income statement, balance sheet, statement of stockholders’ equity, and statement of cash flows. The income statement provides information about the company’s revenues, expenses and profitability over a period of time. The balance sheet lists the company’s assets (what it owns), liabilities (what it owes), and stockholders’ equity (the residual claims of its owners) as of a point in time. The statement of stockholders’ equity reports on the changes to each stockholders’ equity account during the period. The statement of cash flows identifies the sources (inflows) and uses (outflows) of cash, that is, where the company got its cash from and what it did with it. Together, the four statements provide a complete picture of the financial condition of the company. |
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Term
| Does a balance sheet report on a period of time or at a point in time? Explain the information conveyed in the balance sheet |
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Definition
| The balance sheet lists the company’s assets (what it owns), liabilities (what it owes), and stockholders’ equity (the residual claims of its owners) as of a point in time. |
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Term
| Does an income statement report on a period of time or at a point in time? Explain the information conveyed in the income statement |
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Definition
| The income statement provides information about the company’s revenues, expenses and profitability over a period of time. |
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Term
| Does a statement of cash flows report on a period of time or at a point in time? Explain the information and activities conveyed in the statement of cash flows |
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Definition
| The statement of cash flows identifies the sources (inflows) and uses (outflows) of cash, that is, where the company got its cash from and what it did with it. Together, the four statements provide a complete picture of the financial condition of the company. |
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Term
| What ethical issues might managers face in dealing with confidential information? |
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Definition
| Managers deal with a variety of information about their employers and customers that is not generally available to the public. Ethical issues arise concerning the possibility that managers might personally benefit by using confidential information. There is also the possibility that their employers and/or customers might be harmed if certain information is not kept confidential |
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Term
| What are the five important forces that confront the company and determine its competitive intensity? |
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Definition
| The five forces (according to Professor Michael Porter) are (A) industry competition, (B) buyer power, (C) supplier power, (D) product substitutes, and (E) threat of entry |
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Term
| What are the components of a SWOT analysis? For each component, indicate whether it is an internal or external environmental factor |
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Definition
| W SWOT stands for Strengths and Weaknesses (both are internal factors) Opportunities and Threats (both external factors). |
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Term
| Business decision makers external to the company increasingly demand more financial information from the company. Discuss the reasons why companies have traditionally opposed the efforts of regulatory agencies like the SEC to require more disclosure |
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Definition
| While firms acknowledge the increasing need for more complete disclosure of financial and nonfinancial information, they have resisted these demands to protect their competitive position. Corporate executives must weigh the benefits they receive from the financial markets as a result of more transparent and revealing financial reporting against the costs of divulging proprietary information to competitors and others. |
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Term
| Corporate governance has received considerable attention since the collapse of Enron and other accounting-related scandals. What is meant by corporate governance? What are the primary means by which sound corporate governance is achieved? |
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Definition
| Corporate governance is the system of policies, procedures and mechanisms that protect the interests of stakeholders in the business. These stakeholders include investors, creditors, regulatory bodies, and employees, to name a few. Sound corporate governance involves the maintenance of an effective internal auditing function, an independent and effective external auditing function, an informed and impartial board of directors, governmental oversight (such as from the SEC), and the oversight of the courts |
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Term
| Describe a decision that requires financial statement information, other than a stock investment decision. How is financial statement information useful in making this decision |
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Definition
| Financial accounting information is frequently used in order to evaluate management performance. The return on equity (ROE) and return on assets (ROA) provide useful measures of financial performance as they combine elements from both the income statement and the balance sheet. Financial accounting information is also frequently used to monitor compliance with external contract terms. Banks often set limits on such items as the amount of total liabilities in relation to stockholders’ equity or the amount of dividends that a company may pay. Audited financial statements provide information that can be used to monitor compliance with these limits (often called covenants). Regulators and taxing authorities also utilize financial information to monitor items of interest. |
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Term
Net income is on the
Balance sheet
Income statement |
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Definition
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Term
Retained earnings is on the
Balance sheet
Income statement |
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Definition
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Term
Items on a balance sheet include:
A. Retained earnings
B. Expenses
C. Wages payable
D. A and C |
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Definition
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Term
Items on an Income statement include:
A. Sales
B. Net income
C. Expenses
D. all the above |
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Definition
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Term
Assets (including common stock, receivables, buildings, and inventories) and Liabilities (including debt, taxes payable) are included on the balance sheet
True
False |
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Definition
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Term
Sales, expenses, and cost of goods sold are included on the Income Statement
True
False |
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Definition
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Term
Common stock, retained earnings, and additional paid in capital are examples of
A. Liabilities
B. Assets
C. Equity |
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Definition
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Term
Which of the following is included as a component of stockholders' equity?
A. Prepaid property taxes
B. Retained earnings
C. Dividends
D. Buildings
E. Accounts payable |
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Definition
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Term
The statement of cash flows has three main sections: cash flows from operating activities, cash flows from investing activities, and cash flows from capital activities.
True
False |
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Definition
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Term
A publicly traded company must file a Form 8-K with the SEC within four business days following a change in its certified public accounting firm.
True
False |
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Definition
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Term
Accumulated depreciation is on the balance sheet
True
False |
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Definition
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Term
|
Definition
| operating assets - operating liabilities |
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Term
| net operating profit after tax |
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Definition
| = Net operating profit before tax - Tax on operating profit |
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Term
|
Definition
| Tax expense + (Pretax net nonoperating expense x Statutory tax rate) |
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Term
|
Definition
| Current assets/Current liabilities |
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Term
|
Definition
| (Cash + Marketable securities + Accounts receivable)/Current Liabilities |
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Term
|
Definition
| Earnings before interest and taxes/Interest expense,gross |
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Term
| liabilities-to-equity ratio |
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Definition
| total liabilities / stockholder equity |
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Term
A current ratio greater than 1.0 is generally desirable for a company.
True
False |
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Definition
True
A company with a current ratio greater than 1.0 indicates positive working capital. In general, companies prefer greater levels of current assets than current liabilities. |
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Term
OE can be disaggregated into operating and nonoperating returns. Nonoperating return will be positive as long as Spread is positive.
True
False |
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Definition
False
The nonoperating return can be negative (which reduces ROE) if spread is positive and financial leverage (FLEV) is negative.
The correct answer is 'False'. |
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Term
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Definition
| a payment of cash or a commitment to pay cash in the future for the purpose of generating revenues (receiving a benefit) |
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Term
|
Definition
|
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Term
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Definition
| gives a current or immediate benefit only; a cost that is used up now or considered to expire in a period; goes on the Income Statement; like wages or utilities |
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Term
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Definition
| gives a future benefit; contributes to many periods; goes on the Balance Sheet; like a building or inventory |
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Term
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Definition
| an item for which costs are measured and assigned. Items could be a product, department, or an activity |
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Term
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Definition
| costs that can be specifically attributed (identified) to the cost object by direct tracing (considered worthwhile as a traceable cost) |
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Term
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Definition
| costs that are not specifically attributed to the cost object; we are unable or unwilling to directly trace the cost to the cost object; so costs are “allocated” to the cost object |
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Term
| Direct Materials (direct cost) (DM) |
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Definition
| These are seen in the final product and/or considered a significant cost of final product |
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Term
| Direct Labor (direct cost) (DL) |
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Definition
| Hands on people needed for turning the raw material into a finished product |
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Term
| Factory Overhead (indirect cost) (FOH) |
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Definition
| Any other manufacturing cost that is not DM or DL; these are indirect materials (like grease or rags), indirect labor (maintenance people, plant manager, supervisors), plant utilities, plant insurance, plant taxes, equipment depreciation and other items |
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Term
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Definition
DM, DL, & FOH
i. all costs related to the manufacturing process;
ii. can provide a future benefit so considered “inventoriable” and are carried as inventory on the Balance Sheet;
iii. stay in inventory until sold;
iv. when sold are considered Cost of Goods Sold in passing to the Income Statement |
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Term
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Definition
i. Selling and Administrative Expenses all the nonmanufacturing costs;
ii. provide a current benefit so are expensed in the current period;
iii. reported on the Income Statement;
iv. examples include advertising expense, the company president’s salary, sales commissions, depreciation on the corporate headquarters building |
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Term
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Definition
|
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Term
|
Definition
| made up of DL & FOH (And yes, DL is in both groups...Conversion costs and prime costs) |
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Term
|
Definition
| 1) constant in total amount ; (2) inverse relationship to production volume on per unit amount (meaning if production volume goes up then cost per unit goes down). Some product and period costs are fixed. A salary of $40,000 is considered a fixed cost. Rent of $2,000 per month is considered a fixed cost. |
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Term
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Definition
| (1) constant in per unit amount ; (2) direct proportion to production volume on total amount (meaning if production volume goes up then total variable cost goes up). Some product and period costs are variable. Direct Materials and Direct Labor costs are considered variable costs. Sales commissions are considered variable costs. |
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Term
|
Definition
| has both a fixed part and a variable part |
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Term
|
Definition
| Total Fixed Cost + Total Variable Cost |
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Term
|
Definition
| variable cost per unit * number of units |
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Term
|
Definition
| Total units sold * price per unit |
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Term
| Contribution Margin per unit |
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Definition
| Selling price per unit – variable cost per unit |
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Term
|
Definition
| what is left over from every sale to cover fixed cost and then create profit for a business |
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Term
|
Definition
| Total Fixed Costs / CM per unit |
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Term
| Management can cause the break-even point to change by adjusting the selling price, fixed cost, or variable cost. |
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Definition
a. If the selling price of a product goes up then the break-even point can go down. (creates larger CM per unit)
b. If the selling price of a product goes down then the break-even point goes up. (creates a smaller CM per unit)
c. If the variable cost or fixed cost go up then the break-even point goes up.
d. If the variable cost or fixed cost go down then the break-even point goes down. |
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Term
| the three manufacturing costs |
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Definition
1. Direct materials
2. Direct Labor
3. Factory overhead |
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