Term
| pros and cons of sole proprietorship |
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Definition
pros:
owned by one person, goals are specific to them
simple to create
few regulations
taxed like an individual
cons:
unlimited personal liability
hard to obtain capital
ownership is hard to transfer |
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Term
| pros and cons of sole partnership |
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Definition
goals specific to few owners
taxed like an individual
simple to create
few regulations
cons:
unlimited personal liability
hard to transfer ownership
difficult to obtain capital |
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Term
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Definition
| an LP is special partnership general partners control the firm and accept liability, while limited partners cannot control the firm but their liability is limited |
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Term
| what is a corporation and what is it's goal |
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Definition
a corporation is a separate and distinct business entity chartered by the state
the goal of a corporation is to maximize long term shareholder value |
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Term
| pros and cons of a corporation? |
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Definition
pros:
unlimited life
easy transfer of ownership
limited liability
access to capital
cons:
agency issues can arise between owners and managers
double taxation
not easy to create |
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Term
| what is an S corporation? |
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Definition
a type of corporation where its earnings are transfered to owners and not subject to double taxation
the owners must be US citizens or resident aliens and number no more than 100 |
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Term
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Definition
an LLC is another special type of corporation who's owners dont need to be US citizens, they can be institutions. income passes to owners for taxation
liability is limited |
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Term
| what does a deduction to? |
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Definition
| a deduction shelters income from taxation |
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Term
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Definition
| taxable income = gross income - deductions - exemptions |
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Term
| what is a marginal tax rate? |
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Definition
| the marginal tax rate is the rate paid on the taxpayer's last dollar of taxable earnings-- so generally the highest tax rate applied (progressive system in place) |
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Term
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Definition
| average tax rate = income tax expense/taxable income |
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Term
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Definition
| tax credits are credits that can be subtracted from your income tax expense |
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Term
| what is the balance sheet and how is it calculated? |
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Definition
| the balance sheet reports assets = debt + equity accounts at a specific moment in time |
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Term
| how are assets listed on the balance sheet? |
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Definition
in order of liquidity:
cash
marketable securities
accounts recievable
inventory
prepaid expenses
other current assets
total current assets
gross property, plant & equipment
accumulated depreciation
net property plant & equipment
good will
other non current assets
total assets |
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Term
| how are debts listed on the balance sheet? |
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Definition
accounts payable
accured liabilities
other current liabilities
total current liabilities
long term debt
other non current liabilities
total non current liabilities
total debt |
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Term
| how are equities listed on the balance sheet |
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Definition
common stock + additional paid in capital (gone public)
retained earnings (accumulated transfer of net income minus dividend payouts) **it is not cash, and cannot be spent like cash. |
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Term
| what are retained earnings |
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Definition
| retained earnings are the accumulated transfer of net income minus dividend payouts to the balance sheet. its not cash and cannot be spent like cash. it represents the the owners increasing stake in the firm-- if the firm increases the dividends paid to owners, it reduces the owners' stake in the firm |
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Term
| what is the income statement |
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Definition
| the income statement (aka profit and loss statement) reports the income and expenses during a specified period of time |
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Term
| how is the income statement set up? |
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Definition
sales revenue
less: COGS
gross profit
less: depreciation expense
less: SG&A expense
operating income (EBIT)
+/- interest and other
earnings before taxes (EGT)
less income tax expense
net income |
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Term
| net income is not equal to ____ ____ |
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Definition
| net income is not equal to cash flow. because not all sales were immediately paid in cash by customers, not all expenses were immediately paid in cash by the firm. so firms can have positive net income and negative cash flow and vice versa. |
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Term
| what is the statement of changes in retained earnings? |
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Definition
the statement of changes in retained earnings is a bridge between the income statement and the balance sheet. its
net income is added to retained earning and dividends are subtracted from retained earnings |
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Term
| what is operating cash flow? |
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Definition
operating cash flow is the after tax cash flow generated by day to day operations
= EBIN + depreciation expense - income taxes
= Net income + depreciation expense +/- income expense/income |
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Term
| what is free cash flow? and how do you calculate it? |
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Definition
free cash flow is a measurement of the OCF will be left over after the company sends some of its cash on necessary investments in fixed assets and net working capital.
1. calculate OCF
2. calculate the investment in net working capital:
increase/decreasing in net working capital = current period net working capital - prior period net working capital
3. calculate the investment in long term assets:
increase/decrease in long term assets = current period long term assets - prior long term assets + depreciation expense
4. free cash flow = operating cash flow -increase (+decrease) in net working capital -increase(+decrease) in long term assets |
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