provides a broad picture of the environment for decision making in many important areas.
the language of finance
income statements, balance sheets, statement of cash flows
three financial statements of accounting.
to manage the financial assets of a business
maximization of return for a given level or risk
the phenomenon of prices increasing with the passage of time.
represents single-person ownership and offers the advantages of simplicity of decision making and low organizational and operating costs.
two or more people associated to conduct business
two people shake hands and say they are in business
sit down and write an agreement
one or more partners are designated general partner and have unlimited liability for the debts of the firm.
a legal entity that may sue or be sued, engage in contracts, and acquire property.
who owns a corporation?
the income is taxed as direct income to the stockholders and ths is taxed only once as normal income, similar to a partnership.
the meeting place for people, corporations and institutions that either need money or have money to lend or invest.
refer to those markets dealing with short-term securities that have a life of one year or less.
generally defined as those markets where securities have a life of more than a year.
device for measuring teh profitability of a firm over a period of time
convertibility to cash
indicates what the firm owns and how these assets are financed in the form of liabilities or ownership interest.
stockholders equity minus the preferred stock component
statement of cash flows
to emphasize the critical nature of cash flow to the operations of the firm.
represents an attempt to allocate the initial cost of an asset over its useful life
statement of retained earnings
indicates disposition of earnings with any adjustments to previously reported income, any restrictions on cash dividends
what is the difference between what we owe and what we own?
items that can be converted to cash within one year
temporary investments of excess cash
allowance for bad debts to determine their anticipated collection value
includes raw materials, goods in progress, or finished goods
long-term commitment of funds that includes stocks, bonds or investments in other corporations
plant and equipment
carried at original cost minus accumulated depreciation
sum of past and present depreciation charges on currently owned assets
financed through liabilities or stockholders equity
amount owned on open account to suppliers
short-term signed obligations to the banker or other creditors
payment not made for the obligation incurred on the services received
operating, investing, financing
What are the three primary sections of the statement of cash flows?
Asset utilization ratios
ratios that relate the balance sheet to the income statement
ratios that determine if the firm can meet each maturing obligation as it comes due
debt utilization ratios
measures teh prudence of the debt management policies of the firm
dupont system of analysis
a satisfactory return on assets might be dervived through a high profit margin, a rapid turnover of assets, or both
working capital management
the management and financing of current assets.
can assure adequate capital at all times and may be used to cover part of the short-term needs in tight money periods
any long-term rate is an average of the expectations of future short-term rates over the applicable time horizon
liquidity preference theory
the theory indicates that long-term rates should be higher than short-term rates. the premium of long term rates over short term rates exists because short term securities have greater liquidity and therefore higher rates have to be offered to potential long-term bond buyers to entice them to hold these less liquid and more price sensitive securities.
market segmentation theory
banks prefer short-term liquid securities. Life insurance companies prefer long-term bonds. These two institutions often put pressure on short-term and long term rates.
alternative financing plans
comparing alternative financing plans for working capital.
setting up multiple collection centers at different locations
extended disbursement float
allows companies to hold onto their cash balances for as long as possible.
electronic funds transfer
funds are moved between computer terminals without the use of a "check"
transfers information between financial institutions and between accounts using computer tape
Society for Worldwide Interbank Financial Telecommunications
what does SWIFT stand for?
finds held for other than immediate transaction purposes should be invested in interest earning securities
short term borrowings of teh federal government. sold at a discount
certificate of deposit
interest bearing time deposits
short term unsecure borrowings of major corporations
costs associated with an efficiently maintained cash management program must be compared to the benefits that it provides
determine the nature of credit risk based on prior records of payment and financial stability, current net worth and other related factors
character, capital, capacity, conditions, collateral
What are the 5 C's of credit?
Terms of Trade
stated term of credit extension that has a strong impact on the eventual size of accounts receivable balance and creates a need for firms to consider the use of cash discounts.
a number of qualitative measures are applied to asses credit policy
raw materials, work in progress, finished goods
three basic categories of inventory:
allows for maximum efficiency in manpower and machinery usage. It may result in high inventory buildup particularly in seasonal business
eliminates inventory buildup problems. May result in unused capacity during slack periods and overtime.
interest on finds tied up in inventory. It is the implicit cost associated with the risk of obsolescence and perishability
costs of ordering, processing inventor into shock
just in time inventory management
a system that stresses taking possession of inventory just before the time it is needed for production or sale. It greatly reduces the cost of carrying inventory.
credit provided by sellers or suppliers in the normal course of a business
a spontaneous source of funds that grows as the business expands and contracts when business declines
trade credit is usually extended for 30-60 days
cash discount policy
allows reduction in price if payment is made within a specified time period
provide self liquidating loans and changes in the banking sector today
use of funds ensures a built-in or automatic repayment scheme
the rate a bank charges to its most credit worth customers. It increases as a customer's credit risk increases.
rate offered to companies having an international presence and ability to use the London euro dollar market for loans.
paper sold by financial firms directly to the lender
paper sold by companies through dealer network
denominated in dollars and made by foreign bank holding dollar deposits. It is short term to intermediate term in maturity. LIBOR is the base interest.
selling accounts receivable to a finance company