# Shared Flashcard Set

## Details

BEC Financial Management
financial management topics for BEC exam
63
Accounting
Professional
09/13/2009

Term
 How to calculate the effective interest rate on 2/10 net 30 terms?
Definition
 .02/.98 (sum to 1) x 1/20/360that's 1 over 20/360, where 20 is the number of days that the interest is in effect--no interest for 10 days, interest for 20 out of 30 days, then use 360 day year. This = 36.73%
Term
 How to calculate the PV of an annuity due from an ordinary annuity table?
Definition
 The PV of the first payment is the full amount. Then use the PV factor for the N-1 row to get the multiplier for the rest of the pmts, and add these amts together. If you are GIVEN an annuity due table, just proceed normally.
Term
 How to calculate the FV of an annuity due from an ordinary annuity table?
Definition
 Here you use the N+1 row of the table and then SUBTRACT the amount of one pmt. If you are given an annuity DUE table just proceed normally.
Term
 What is the operating cycle and how is it calculated?
Definition
 The operating cycle measures the average length of time to invest cash in inventory, convert the inventory to accounts receivable, and collect the receivables. Thus, operating cycle is the sum of the co's number of days' sales in inventory plus the number of days' sales in trade accounts receivable.Basically, this measures the number of days to go from cash through inventory and accounts receivable, back to cash.
Term
 What do I really need to watch out for in calculating receivables turnover?
Definition
 To use the NRV of the A/R and not the A/R amount--subtract out allowance for doubtful accts from A/R totals before calculating!!!
Term
 EVA =?
Definition
 Economic value added = residual income after cost of ALL capital incl equity has been deducted. = Earnings before Interest less (k times LTdebt + SE)
Term
 If you have a FV and need to figure out payments how can you do this?
Definition
 You'll need a PV table...figure out if it's ord annuity or annuity due and divide the FV by the factor from the table to get the pmt amt
Term
 For present value, the higher the interest or discount rate, the ____ (higher/lower) the present value of a future amount.
Definition
 lower. Since the higher the interest or discount rate, the more that is counted as interest, the less there is in present value. For future value, the higher the interest rate, the greater the future value of a present amount.
Term
 How calculate accounting rate of return?
Definition
 Average Annual Incremental Revenues - Average Annual Incremental Expense ______________________________________________ Initial (or Average) Investment .Note if they are expressly giving you the incremental change they have already taken into acct deprec and you don't have to.
Term
 What's the difference between a firm's capital structure and its financial structure?
Definition
 Financial structure = all debt & all equity; capital strucutre = just long term debt & equity
Term
 What's the difference between pledging and factoring A/R?
Definition
 In pledging of accounts receivables, the receivables are used as collateral in a financing agreement with a lender. In factoring of accounts receivables, the receivables are sold at a discount for cash to a factor. In factoring of accounts receivables, the receivables are sold at a discount for cash to a factor.
Term
 Can current A/P provide short-term financiing? A/R? Inventory?
Definition
 All three can! A/P is through accruing payables...this allows you to put off pmt and is implicitly a type of financing--eg think trade payables
Term
Definition
 Financial risk is the additional risk a firm bears when it uses debt in addition to equity financing. Generally, firms that issue more debt would have higher (financial) risk than firms financed entirely by equity. Therefore, a firm which utilizes only equity financing would not have financial risk. B. Business risk. A firm which utilizes only equity financing would face business risk. Business risk derives from the broad, macro-risk a firm faces largely as a result of the relationship between the firm and the environment in which it operates. The extent of that risk would depend on the susceptible of the firm to changes in the overall economic climate
Term
 Systematic risk vs unsystematic risk? Which can be diversified away?
Definition
 Unsystematic risk, also called diversifiable risk, can be mitigated or eliminated through diversification of investments. Systematic risk, also called non-diversifiable risk or market-related risk, cannot be mitigated or eliminated through diversification of investments. This type of risk is most closely associated with elements of the macroeconomic environment in which a firm operates and would include, for example, interest rate risk and inflation risk.
Term
 What is capital budgeting?
Definition
 Capital budgeting is the process of measuring, evaluating, and selecting long-term investment opportunities
Term
 How does a company decide its hurdle/discount rate?
Definition
 Based on the rate that the company must set in order to attract funding.
Term
 If there is no risk, does that mean that there's no return?
Definition
 No, the risk-free rate is above zero and is the reward expected for deferring consumption
Term
 How calculate NPV? Acceptance rule?
Definition
 Calculate the PV of all the cash inflows associated with the project--use after-tax income CFs, and don't forget to include the PV of the residual value if there is one. From this, subtract the cost of the original investment. Accept the project if NPV =>zero
Term
 How figure out IRR?
Definition
 Take investment cost divided by annual CFs and use that number as your initial estimate of the PV factor. Go to the PV table and interpolate to make your guess as to return
Term
 another name for cost/benefit ratio? how calculated?
Definition
 profitability index. NPV/project cost. Can be used to rank projects....a project may have a higher NPV but given the cost outlay a lower index. NPV and CBR are the preferred methods of evaluating projects
Term
 PM =?
Definition
 NI/S
Term
 AT =
Definition
 S/ATA
Term
 Eq multiplier
Definition
 TA/TSE
Term
 DuPont eqn?
Definition
 ROE (NI/TSE) = PM x AT x EqMult
Term
 Residual income?
Definition
 Income less imputed interest on invested capital (in problems), theoretcallly Net Inc less required rate of return, where required rate of return = avg invested capital x k
Term
 PE ratio
Definition
 market price/EPS
Term
 (CS) dividend payout rate
Definition
 Cash div (to CS/h) / Net Inc (to CS/h) On a per share basis cash div per share div by EPS
Term
 Common stock yield
Definition
 div per CS div by mkt price per share
Term
 capital turnover?
Definition
 SALES over investment ... I've seen it as both over TSE & TA...which is it in the demoninator? (more often in probs seems to be TA)
Term
 Primary disadv of using ROA rather than residual income?
Definition
 Mgrs may end up rejecting projects that yield positive cash flows b/c they don't want to lower their ROA
Term
 What is the difference between participating and nonparticipating bonds?
Definition
 distinguish whether or not preferred shareholders can receive dividends in excess of the stated preference rate.
Term
 formula for price of preferred stock (based on dividend)?
Definition
 PSV = Annual Dividend divided by theRequired rate of Return essentially value is like the PV of the cash flow of dividends, assumed to exist in perpetuity
Term
 *expected* rate of return on dividend on preferred stock =?
Definition
 PSER = Annual Dividend divided by theMarket Price
Term
 for which is the cost of capital more, debt or equity?
Definition
 debt
Term
 what is the hedging principle of financing?
Definition
 This guideline (also called the principle of self-liquidating debt) holds that long-term or permanent investments in assets should be financed with long-term or permanent sources of capital and short-term needs should be financed with short-term sources of financing. Thus, long-term assets (e.g. property, plant, and equipment, among others) and permanent amounts of current assets (e.g. level of accounts receivable and inventory generally on-hand) should be financed with long-term debt or equity.
Term
 should firms with high levels of business risk use more debt or more equity in their financing?
Definition
 Firms with higher business risk have an increased chance that operating results may cause default on fixed obligations and, therefore, should use less debt financing than a firm with steady operating results.
Term
 Financing short-term needs with long-term funds is a ______ strategy (aggressive/conservative).
Definition
 Conservative. (I don't really get this?)
Term
Definition
Term
 what are other names for the "constant coefficient" and the "variable coefficient" in a regression eqn?
Definition
 Constant Coefficient = interceptVariable Coefficient = slope
Term
 three overall steps in doing Process costing?
Definition
 1. Determine Equivalent Units2. Determine Cost per EU3. Determine CGMf
Term
 How to calculate Equivalent Units/Wtd Avg
Definition
 ONLY use Completed, Normal Spoilage, and Ending by their percent complete to do the calculation! (RP method less confusing than CPAExcel)
Term
 Process costing Goal???
Definition
 To value (1) Ending WIP and 2) Cost of Goods MANUFACTURED (i.e, what's still here and what went away)
Term
 two methods to use to apply process costing?
Definition
 weighted average & FIFO
Term
 wtd average = ?
Definition
 TOTAL COSTS/TOTAL Equivalent Units = Cost per unit--need to multiply by units to figure actual costs! To get EUs, use Completed @ 100%, Normal Spoilage @ 100%, & Ending at % Given. Costs = conversion costs for Beg + Started.
Term
 FIFO process costing?
Definition
 Costs from THIS PERIOD divided by Equivalent Units worked on THIS PERIOD gives you Cost per unit==need to multiply by # units to figure transferred costs. EUs are tricky--want JUST this year so pay attention to Beg vs Started when you calc Completed. Beg you want JUST the % worked on this year, so use ** (1-x%) where x% is the % complete the item came in with (everything completed is at 100%, so 1-x gives you the amt completed this year); then started is at 100%. Conversion costs are JUST the ones from this year (started).
Term
 Setup to memorize for process costing
Definition
 Beginning +Started = Total Units to Account for Less Finished/Transferred Less Normal Spoilage = Ending
Term
 Check on costs transferred in process costing
Definition
 total costs (beg + started) given should equal your final allocation to ending inv plus your final allocation to transferred out
Term
 What is goal congruence and goal incongruence?
Definition
 Goal congruence are when the goals of indivs are consistent with the goals of the org; incongruence = goals of indiv (mgrs) incons w/goals of org--eg PDG, each dept head tries to max own rev so the transfer prices they arrange are not in the optimal interest of the org as a whole (relevant to transfer pricing)
Term
 What is the General Transfer Pricing Rule?
Definition
 Transfer Price per Unit = Additional Cost Outlay per unit + Opportunity Cost per unit. Additional cost outlay = variable production costs incurred plus storage, frt, sg&a. Opportunity cost per unit = sales price per unit less additional outlay cost per unit (matters if the unit is wking at capacity & selling all it produes; if not, doesn't matter b/c nothing being given up)
Term
 What is theoretical best transfer price?
Definition
 Market price
Term
 Theoretical transfer price at full capacity vs less than full capacity?
Definition
 at full capacity, transfer price = market price (= sum of costs to produce units + the opportunity cost, or the difference between selling internally vs selling externally); At less than full capacity, price = just cost of add'l outlay b/c opp cost is zero
Term
 Theoretical transfer price at full capacity vs less than full capacity?
Definition
 at full capacity, transfer price = market price (= sum of costs to produce units + the opportunity cost, or the difference between selling internally vs selling externally); At less than full capacity, price = just cost of add'l outlay b/c opp cost is zero
Term
Definition
 by trying to cover fixed costs, FC are treated like VC and decrease calculated profits--may lead to dec to reject a transfer pricing when CM pricing would --> accept decision
Term
 Transfer price==rule to use for less than full vs full capacity
Definition
 Following the general rule, the minimum transfer price (floor) is equal to the avoidable outlay costs, while the maximum transfer price (ceiling) is equal to the market price. However, this is only true where idle capacity exists to make the transfer. If there is no idle capacity, market price = min AND maximum
Term
 How allocate Joint Costs?
Definition
 most freq tested method is to set up 3 pts: initial to Split-off (joint costs), then add'l proc to sales. Wk bkwds f sales: sales less add'l proc cost = joint cost--total and allocate proportionately. If one produce is a byproduct, subtract its revenue from the total costs rather than allocating
Term
 NRV of byproduct & what to do with it?
Definition
 Sales price less separable costs = NRV; subtract it from Joint Product cost rather than giving it its own COGS
Term
 NRV for price allocations of joint products?
Definition
 For purposes of allocating joint costs to joint products, the sales price at point of sale, reduced by cost to complete after split-off
Term
 Four "costs of quality"?
Definition
 Prevention costAppraisal costInternal failure costExternal failure cost.
Term
 EVA =?
Definition
 Economic value Added EVA = NOPAT - WACC (Total Assets - Current Liabilities) 1. NOPAT = net operating profit after tax; WACC = weighted average cost of capital
Term
 CFROI = ?
Definition
 CFROI = (CFO - ED) / cash invested -- 1. For CFROI, economic depreciation (ED) is defined as the annual cash investment required to replace fixed assets; CFO is cash flow from operations. 2. CFROI is a cash-based metric that is designed to compute the real internal rate of return on a company's assets and is stated as a rate. 3. CFO - ED is designed to approximate free cash flow (FCF), which is approximately equal to cash flow from operations (CFO) less net investment in fixed assets. This amount represents cash that is potentially distributable to shareholders. 4. CFROI is often used for incentive compensation, valuation, and capital budgeting. This is likely due to the emphasis on cash flow, and the wide acceptance of cash flow for these purposes
Term
 key themes of value based management?
Definition
 Accrual-based metrics are discredited , Cost of capital is increasingly emphasized , Shareholders and shareholder value as the primary element of interest is common; Relating VBM to strategy and making linkages to drivers of success is important
Term
 What do I really have to watch out for in calculating WACC
Definition
 Remember that there is a tax benefit to bonds..don't just do the straight weighted average, do the tax calc too
Term
 Free Cash Flow calc?
Definition
 Net Op Inc after taxes + deprec add back - change in working capital - capital expenditures
Supporting users have an ad free experience!