Financial Planning Test 1
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79 terms
Terms | Definitions |
|---|---|
 Economics | provides a broad picture of the environment for decision making in many important areas. |
| Accounting | the language of finance |
| income statements, balance sheets, statement of cash flows | three financial statements of accounting. |
| portfolio management | to manage the financial assets of a business |
| risk-return relationships | maximization of return for a given level or risk |
| inflation | the phenomenon of prices increasing with the passage of time. |
| sole proprietorship | represents single-person ownership and offers the advantages of simplicity of decision making and low organizational and operating costs. |
| partnership | two or more people associated to conduct business |
| informal | two people shake hands and say they are in business |
| formal | sit down and write an agreement |
| limited partnership | one or more partners are designated general partner and have unlimited liability for the debts of the firm. |
| corporation | a legal entity that may sue or be sued, engage in contracts, and acquire property. |
| shareholders | who owns a corporation? |
| S corporation | the income is taxed as direct income to the stockholders and ths is taxed only once as normal income, similar to a partnership. |
| financial markets | the meeting place for people, corporations and institutions that either need money or have money to lend or invest. |
| money markets | refer to those markets dealing with short-term securities that have a life of one year or less. |
| capital markets | generally defined as those markets where securities have a life of more than a year. |
| Income statement | device for measuring teh profitability of a firm over a period of time |
| liquidity | convertibility to cash |
| balance sheet | indicates what the firm owns and how these assets are financed in the form of liabilities or ownership interest. |
| net worth | 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. |
| depreciation | 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 |
| equity | what is the difference between what we owe and what we own? |
| current assets | items that can be converted to cash within one year |
| marketable securities | temporary investments of excess cash |
| accounts receivable | allowance for bad debts to determine their anticipated collection value |
| inventory | includes raw materials, goods in progress, or finished goods |
| investments | long-term commitment of funds that includes stocks, bonds or investments in other corporations |
| plant and equipment | carried at original cost minus accumulated depreciation |
| accumulated depreciation | sum of past and present depreciation charges on currently owned assets |
| total assets | financed through liabilities or stockholders equity |
| accounts payable | amount owned on open account to suppliers |
| notes payable | short-term signed obligations to the banker or other creditors |
| accrued expense | 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 |
| liquidity ratios | 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. |
| long-term financing | can assure adequate capital at all times and may be used to cover part of the short-term needs in tight money periods |
| expectation hypothesis | 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. |
| improving collection | 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" |
| automated clearinghouses | transfers information between financial institutions and between accounts using computer tape |
| Society for Worldwide Interbank Financial Telecommunications | what does SWIFT stand for? |
| marketable securities | finds held for other than immediate transaction purposes should be invested in interest earning securities |
| treasury bills | short term borrowings of teh federal government. sold at a discount |
| certificate of deposit | interest bearing time deposits |
| commercial paper | short term unsecure borrowings of major corporations |
| cost-benefit analysis | costs associated with an efficiently maintained cash management program must be compared to the benefits that it provides |
| credit standards | 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. |
| collection policy | a number of qualitative measures are applied to asses credit policy |
| raw materials, work in progress, finished goods | three basic categories of inventory: |
| level production | allows for maximum efficiency in manpower and machinery usage. It may result in high inventory buildup particularly in seasonal business |
| seasonal production | eliminates inventory buildup problems. May result in unused capacity during slack periods and overtime. |
| carrying costs | interest on finds tied up in inventory. It is the implicit cost associated with the risk of obsolescence and perishability |
| ordering costs | 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. |
| Trade Credit | credit provided by sellers or suppliers in the normal course of a business |
| accounts payable | a spontaneous source of funds that grows as the business expands and contracts when business declines |
| payment period | 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 |
| bank credit | provide self liquidating loans and changes in the banking sector today |
| self-liquidating loans | use of funds ensures a built-in or automatic repayment scheme |
| prime rate | the rate a bank charges to its most credit worth customers. It increases as a customer's credit risk increases. |
| LIBOR | rate offered to companies having an international presence and ability to use the London euro dollar market for loans. |
| finance paper | paper sold by financial firms directly to the lender |
| dealer paper | paper sold by companies through dealer network |
| eurodollar loan | 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. |
| factoring | selling accounts receivable to a finance company |
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