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[FINMAN]
| Term | Definition |
|---|---|
| Balance Sheet | Represents a “picture” taken on a specific date that shows a firm’s assets (investments) and how those assets are financed (amount of debt and amount of equity). |
| Current Assets | Cash and equivalents, accounts receivables, and inventory |
| Non-current/Fixed Assets | Property, Plant, and Equipment |
| Current Liabilities | Accounts Payable, Accruals (wages and taxes), Notes Payable |
| Owners' Equity | Common stock, Retained Earnings |
| Income Statement | Presents the results of business operations during a specified period |
| Income Statement | Summarizes the revenues generated and the expenses incurred during a particular accounting period, such as one fiscal year |
| Statement of Cash Flows | Reports the effect of the firm’s activities—operating, investing, and financing—on its cash position over some period |
| Statement of Cash Flows | Provides information concerning investment decisions (uses of cash) and financing decisions (sources of cash) |
| Statement of Cash Flows | This statement not only provides insight into a company’s investment, financing and operating activities, but also ties together the income statement and previous and current balance sheets |
| Borrow (Liability), Issue stock (Equity), Sell inventory (Asset) | Sources of Cash |
| In operating activities, an increase in accounts receivable causes a _____ in the cash provided by operating activities | decrease in cash |
| Statement of Retained Earnings | reconciles the net income earned during a given year, and any cash dividends paid, with the change in retained earnings between the start and the end of that year. |
| Financial Statement (Ratio) Analysis | Involves methods of calculating and interpreting financial ratios to analyze and monitor the firm’s performance. |
| Ratios | These are designed to show relationships between financial statement accounts within firms and between firms, no matter their sizes |
| To provide an indication of the future financial health of the firm | Primary purpose of ratio analysis |
| Cross-sectional analysis | A type of ratio comparison: The comparison of different firms’ financial ratios at the same point in time; involves comparing the firm’s ratios to those of other firms in its industry or to industry averages |
| Benchmarking | A type of ratio comparison: a type of cross-sectional analysis in which the firm’s ratio values are compared to those of a key competitor or group of competitors that it wishes to emulate |
| Time-series analysis | A type of ratio comparison: the evaluation of the firm’s financial performance over time using financial ratio analysis |
| Time-series analysis | A type of ratio comparison: Comparison of current to past performance, using ratios, enables analysts to assess the firm’s progress |
| Liquidity Ratio | Measures the ability of the firm to meet its short-term obligations |
| Acid Test / Quick Ratio | excludes inventory, which is generally the least liquid current asset |
| Difficulty in meeting future obligations | What happens if one's liquidity or quick ratio is below the industry's average? |
| Inventory Turnover Ratio | Measures the activity, or liquidity of a firm’s inventory |
| Days Sales Outstanding (DSO) | Measures the average number of days it takes for a company to collect cash from credit purchases |
| The firm is not collecting quickly as it should. | What happens if the DSO ratio is higher than the average? |
| Fixed Assets Turnover Ratio | Reveals how efficient a company is at generating sales from its existing fixed assets |
| Total Assets Turnover Ratio | Indicates the efficiency with which the firm uses its assets to generate sale |
| The firm is not utilizing its assets as efficiently compared to other firms | What happens if the total assets turnover ratio is below the industry average? |
| Debt Management Ratios | These ratios analyze if the firm can handle more liabilities / debt |
| Debt Ratio | A type of debt management ratio: Measures the proportion of total assets financed by the firm’s creditors |
| Times-Interest-Earned Ratio (TIE) | A type of debt management ratio: Measures the firm’s ability to make contractual interest payments |
| Fixed Charge Coverage Ratio | A type of debt management ratio: Measures the firm’s ability to meet all fixed-payment obligations |
| Debt Ratio, Times-Interest-Earned Ratio, Fixed Charge Coverage Ratio | The debt management ratios |
| It will be difficult for the firm to borrow additional funds until its debt position is improved | If the firm have higher debt ratio, with corresponding lower coverage ratios |
| Profitability Ratios | A ratio that combines the effects of liquidity, asset, and debt management affect profits (income)? |
| Net Profit Margin | a type of profitability ratio: Measures the percentage of each sales dollar remaining after all costs and expenses, including interest, taxes, and preferred stock dividends, have been deducted |
| Return on Total Assets (ROA) | a type of profitability ratio: Management in generating profits with its available assets |
| Return on Common Equity (ROE) | a type of profitability ratio: Measures the return earned on common stockholder’s investment in the firm |
| Market Value Ratios | A type of ratio that delves about what do investors think about the firm’s future financial prospects? |
| Price / Earnings Ratio | A type of market value ratio: Measures the amount that investors are willing to pay for each dollar of a firm’s earnings |
| Market/Book Ratio | A type of market value ratio: provides an assessment of how investors view the firm’s performance |
| Common Size Analysis | Involves expressing financial data, including entire financial statements, in relation to a single financial statement item, or base. |
| Vertical Common-size balance sheet | prepared by dividing each item on the balance sheet by the same period’s total assets and expressing the results as percentages, highlights the composition of the balance sheet |
| Horizontal common-size balance sheet | prepared by computing the increase or decrease in percentage terms of each balance sheet item from the prior year or prepared by dividing the quantity of each item by a base year quantity of the item, highlights changes in items |
| DuPont System Analysis | An analysis is used to dissect the firm’s financial statements and to assess its financial condition |
| Net Profit Margin * Asset Turnover Ratio | DuPont Formula (ROA) |
| ROA * FLM (Financial Leverage Multiplier) | Modified DuPont Formula (ROE) - Return on Common Equity |
| Financial Leverage Multiplier | the ratio of total assets to common stock equity |
| DuPont Equation | Deconstructs one ratio into multiple individual ratios to attain more detail |
| Window Dressing | can make ratios look better than they really are |
| Financial Markets & Institutions, Investments, Financial Services, and Managerial Finance | Four areas of Finance |
| Financial markets and institutions | include banks, insurance companies, savings and loans, and credit unions, are an integral part of the general financial services marketplace |
| Investments | This area of finance focuses on the decisions made by businesses and individuals as they choose securities for their investment portfolios. |
| Financial services | refer to functions provided by organizations that deal with the management of money. |
| Managerial Finance | deals with decisions all firms make concerning their cash flows, both inflows and outflows. |
| Management, Marketing, Accounting | In what non-finance areas does finance relate to? |
| Financial managers rely on accounting information. Therefore, financial managers create strategies | Difference between accounting and finance |
| Management, Marketing, Accounting, Information Systems, & Economics | What areas of non-finance do finance relate to? |
| Treasurer and the Controller | Who are the key subordinates of the financial vice president? |
| Treasurer | They supervise the credit manager, inventory manager, and the director of capital budgeting, who analyzes decisions relation to investments in fixed assets. |
| Controller | Responsible for the activities of the accounting and tax departments |
| Sole proprietorship | an unincorporated business owned by one individual. |
| Inexpensive to form, minimal regulation from the government, individual is taxed not the company (taxed only once) | "Pros" of Sole Proprietorship |
| Unlimited liability, limited life (dependent on the owner), transferring of ownership takes time Difficult to obtain large capital | "Cons" of Sole Proprietorship |
| Partnerships | can operate under different degrees of formality, ranging from informal, oral understandings to formal agreements filed with the appropriate department |
| Corporate Charter | A document filed with the appropriate department of the state in which a business is incorporated that provides information about the company, including its name, address, directors, and amount of capital stock. |
| bylaws | A set of rules drawn up by the founders of the corporation that indicates how the company is to be governed; includes procedures for electing directors, rights of stockholders, and how to change the bylaws when necessary. |
| Risk-Return Tradeoff | A Principle in Finance: Investors expect to be compensated for taking on additional risk. |
| Time Value of Money | A Principle in Finance: A dollar received today is worth more than a dollar received in the future. |
| Cash is King | A Principle in Finance: The importance of cash flow in financial decision-making. |
| Incremental Cash Flows | A Principle in Finance: Focus on the cash flows generated by an investment or project. |
| The Agency Problem | A Principle in Finance: The potential for conflicts of interest between the goals of a firm's owners and its managers. |
| Taxes Bias Business Decisions | A Principle in Finance: Consideration of tax implications in financial decision-making |
| All Risk is Not Equal | A Principle in Finance: Different types of risk require different investment and financing strategies |
| Ethical Behavior | A Principle in Finance: Operating in an ethical manner is essential for long-term success. |
| Mergers and Acquisitions | A Principle in Finance: These activities can create or destroy shareholder value. |
| Basic Valuation Model | A Principle in Finance: The value of any investment is determined by the present value of its future cash flows. |
| Financial Institutions | are intermediaries that channel the savings of individuals, businesses, and governments into loans or investments |
| Financial Markets | Represent a “system” that brings together borrowers and savers (investors), no matter the location. |
| Money markets | a type of financial market: the markets for short-term financial instruments |
| Capital markets | a type of financial market: the markets for long-term financial instruments |
| Debt markets | a type of financial market: Where loans are traded |
| Equity markets | a type of financial market: Where stocks are traded |
| Secondary markets | a type of financial market: are financial markets in which preowned securities (those that are not new issues) are traded. |
| Primary markets | a type of financial market: is the financial market in which securities are initially issued |
| Derivatives markets | a type of financial market: Values are determined or derived directly from other assets |
| Investment Banker | Helps corporations and governments design securities attractive to investors |
| Electronic Communications Networks | Electronic systems used to transfer transaction information quickly |
| Securities and Exchange Commission (SEC) | Jurisdiction over interstate offerings of new securities to the general public & they have the power to prohibit manipulation of securities’ prices |
| Stage 1 Decisions | What stage decision comprise: • Decision about amount to be raised • Type of securities used to raise funds • Selection of an investment banker |
| Stage 2 Decisions | What stage decision comprise: • Reevaluate the initial decisions • Best efforts or underwritten issues |
| Underwritten Arrangement | investment bank guarantees the sale by purchasing the securities from the issuer |
| Best Effort Arrangement | investment bank gives no guarantee all the securities will be sold |
| Flotation costs | the costs that are incurred by a company when issuing new securities |
| Underwriting Syndicate | a group of investment firms formed to spread the risk associated with the distribution of a new security issue |
| Lead or Managing Underwriter | The member of an underwriting syndicate who manages the distribution and sale of a new security offering |
| Selling Group | a network of brokerage firms formed for the purpose of distributing (selling) a new issue of securities |
| Shelf Registrations | The process of securities registered with the SEC for sale at a later date. in other words, it will be held "on the shelf" until the sale. |
| Corporate Charter | A document filed with the appropriate department of the state in which a business is incorporated that provides information about the company, including its name, address, directors, and amount of capital stock. |
| bylaws | A set of rules drawn up by the founders of the corporation that indicates how the company is to be governed; includes procedures for electing directors, rights of stockholders, and how to change the bylaws when necessary. |
| general partnership | each partner is personally liable for any of the debts of the business. |
| limited liability partnership (LLP) | A partnership wherein at least one partner is designated as a general partner with unlimited personal financial liability, and the other partners are limited partners whose liability is limited to amounts they invest in the firm. |
| limited liability company (LLC) | Offers the limited personal liability associated with a corporation; however, the company’s income is taxed like that of a partnership. |
| S Corporation | A corporation with no more than 100 stockholders that elects to be taxed in the same manner as proprietorships and partnerships, so that business income is only taxed once. |
| The major differences between an S corporation and an LLC are that an LLC can have more than 100 stockholders (members) and more than one type of stock (membership interest). | Difference of LLC and S Corporation |
| stockholder wealth maximization | The appropriate goal for management decisions; considers the risk and timing associated with expected cash flows to maximize the price of the firm’s common stock. |
| capital structure decisions | decisions about how much and what types of debt and equity should be used to finance the firm |
| capital budgeting decisions | what types of assets should be purchased to help generate expected cash flows |
| dividend policy decisions | what to do with net cash flows generated by the firm—reinvest them in the firm or pay dividends |
| Value | The present, or current, value of the cash flows that an asset is expected to generate in the future. |
| agency relationship | when one or more individuals, who are called the principals, hire another person, the agent, to perform a service and delegate decision-making authority to that agent. |
| agency problem | A potential conflict of interest between outside shareholders (owners) and managers who make decisions about how to operate the firm. |
| Managerial compensation (incentives) | A common method used to motivate managers to operate in a manner consistent with stock price maximization is to tie managers’ compensation to the company’s performance. |
| Shareholder intervention | When it an action is needed to realign management decisions, they exercise their influence by suggesting possible remedies to management or by sponsoring proposals that must be voted on by stockholders at the annual meeting. |
| Hostile takeovers | The acquisition of a company over the opposition of its management. |
| Business ethics | A company’s attitude and conduct toward its stakeholders (employees, customers, stockholders, and community). Ethical behavior requires fair and honest treatment of all parties. |
| Corporate governance | Deals with the set of rules a firm follows when conducting business; these rules identify who is accountable for major financial decisions. |
| stakeholders | Those who are associated with a business, including managers, employees, customers, suppliers, creditors, stockholders, and other parties with an interest in the firm’s well-being. |
| proxy votes | Voting power that is assigned to another party, such as another stockholder or institution |
| industrial groups | Organizations of companies in different industries with common ownership interests, which include firms necessary to manufacture and sell products; networks of manufacturers, suppliers, marketing organizations, distributors, retailers, and creditors |
| multinational companies | Firms that operate in two or more countries. |
| exchange rates | The prices at which the currency of one country can be converted into the currencies of other countries. |
| annual report | A report issued by a corporation to its stockholders that contains basic financial statements as well as the opinions of management about the past year’s operations and the firm’s future prospects. |
| balance sheet | A statement that shows the firm’s financial position—assets and liabilities and equity—at a specific point in time. |
| stockholders’ equity | The funds provided by common stockholders—common stock, paid-in capital, and retained earnings; equals total assets minus total liabilities. |
| common size balance sheet | Dollar amounts on the balance sheet are stated as percentages of total assets. |
| retained earnings | The amount of the firm’s earnings that has been reinvested in the firm rather than paid out as dividends. |
| common stock at par | equal the total value of the stock issue stated in terms of its par value (# of shares issued * par value per share) |
| paid-in capital | The amount paid above the par value is reported in the ____ account. |
| Book Values | The values, or accounting numbers, that are reported on the balance sheet |
| No. In terms of depreciation for long-term assets, their value decreases overtime, eventually leading to a lower market value compared to the issued value (book value). | Do book values and market values equate to one another? |
| Income statement | A statement summarizing the firm’s revenues and expenses over an accounting period, generally one quarter or one year. |
| Earnings per share (EPS) | It is called as “the bottom line” because it is often considered the most important item on the income statement. |
| Net operating Income / Earnings before interest and taxes) | this figure represents the result of normal operations before considering the effects of the firm’s financing choices (financial structure). |
| statement of cash flows | A statement that reports the effects of a firm’s operating, investing, and financing activities on cash flows over an accounting period. |
| Operating cash flows | those associated with the production and sale of goods and services. |
| Investment cash flows | arise from the purchase or sale of plant, property, or equipment. |
| Financing cash inflows | result when the firm issues debt or common stock; financing cash outflows occur when the firm pays dividends, repays debt (loans), or repurchases stock. |
| statement of retained earnings | A statement reporting the change in the firm’s retained earnings as a result of the income generated and retained during the year. |
| liquid asset | An asset that can be easily converted into cash without significant loss of the amount originally invested. |
| liquidity ratios | Ratios that show the relationship of a firm’s cash and other current assets to its current liabilities; they provide an indication of the firm’s ability to meet its current obligations. |
| Asset management ratios | A set of ratios that measures how effectively a firm is managing its assets. |
| Inventory turnover | an indication of how well the firm is managing its inventory. |
| Days Sales Outstanding/ Average Collection Period | used to evaluate the firm’s ability to collect its credit sales in a timely manner. |
| Fixed assets turnover | measures how effectively the firm uses its plant and equipment to help generate sales. |
| Financial leverage | affects the expected rate of return realized by stockholders for two reasons. |
| Only interest on debt, not dividends | are both interest on debt and dividends tax deductible? |
| 1 − Debt ratio | represents the proportion of the firm’s funds that is provided by stockholders. |
| net profit margin | measures the profit (earnings) per dollar of sales; that is, the percentage of each $1 of sales that remains after all expenses, including taxes, are paid. |
| P/E ratio | shows how much investors are willing to pay for the firm’s stock for each dollar of reported profits. |
| market-to-book ratio | gives another indication of how investors regard the company. |
| comparative ratio analysis | An analysis based on a comparison of a firm’s ratios with those of other firms in the same industry at the same point in time. |
| trend analysis | An evaluation of changes (trends) in a firm’s financial position over a period of time, perhaps five years. |
| would be the same | If the company were financed only with common equity—that is, if it had no debt—the ROA and the ROE would ____, |
| financial markets | a system that includes individuals and institutions, instruments, and procedures that bring together borrowers and savers, no matter the location |
| financial markets | A system consisting of individuals and institutions, instruments, and procedures that bring together borrowers and savers. |
| direct transfer | occurs when a business sells its stocks or bonds directly to savers (investors) without going through any type of intermediary or financial institution. |
| financial intermediary | uses funds to buy/create loans and other financial instruments |
| investment banker | helps cooperation issue securities |
| economic efficiency | Funds are allocated to their optimal use at the lowest costs in the financial markets. |
| Weak-form efficiency | states that all information contained in past price movements is fully reflected in current market prices. |
| Semistrong-form efficiency | states that current market prices reflect all publicly available information, whether it is historical or newly released (perhaps a few minutes earlier). |
| abnormal return | Return that exceeds what is justified by the risk associated with the investment. |
| Strong-form efficiency | states that current market prices reflect all pertinent information, whether it is publicly available or privately held. |
| money markets | The segments of the financial markets where the instruments that are traded have original maturities equal to one year or less. |
| capital markets | the segments of the financial markets where the instruments that are traded have original maturities greater than one year. |
| debt markets | Financial markets where loans are traded. |
| equity markets | Financial markets where corporate stocks are traded. |
| Primary markets | Markets in which various organizations raise funds by issuing new securities. |
| Secondary markets | Markets where financial assets that have previously been issued by various organizations are traded among investors. |
| derivatives markets | Financial markets where options and futures are traded. |
| initial public offering (IPO) market | Market consisting of stocks of privately held companies that have recently gone public for the first time. |
| physical stock exchanges & regional exchanges | two stock markets in the United States |
| over-the-counter (OTC) market | consists of a network of dealers around the country and includes the well-known NASDAQ market. (equity market for not listed stocks). |
| demutualization | The process of converting an exchange from a mutual ownership organization to a stock ownership organization |
| Trading floor brokers | act as agents for investors who want to buy or sell securities. |
| Designated market makers (DMMs) | their role is to ensure the auction trading process is completed in a fair and efficient manner |
| Supplemental liquidity providers (SLPs) | deal with high-volume trades to ensure the best price quotes are received y maintaining continuous up-to-date prices for the securities they are assigned. |
| listing requirements | Characteristics a firm must possess to be listed on a stock exchange. |
| over-the-counter (OTC) market | A collection of brokers and dealers, connected electronically, that provide for trading in securities not listed on the physical stock exchanges. |
| dealers | who hold inventories of OTC securities and who are said to “make a market” in these securities |
| brokers | act as agents in bringing the dealers together with investors |
| electronic networks | a communications link between dealers and brokers. |
| market makers | who continuously monitor trading activities in various stocks to ensure such stocks are available to traders who want to buy or sell them. |
| Securities and Exchange Commission (SEC) | The U.S. government agency that regulates the issuance and trading of stocks and bonds. |
| Electronic Communications Networks (ECN) | are electronic systems that quickly transfer information about securities transactions to facilitate the execution of orders at the best available prices |
| dual listing | When stocks are listed for trading in more than one stock market. |
| National Market Structure (NMS) | mandates that the trade-through rule be used when securities are traded. |
| investment banker | An organization that underwrites and distributes new issues of securities; it helps businesses and other entities obtain needed financing. |
| Dollars to be raised, Type of securities Competitive bid vs. negotiated Selection of an investment banker | Stage 1 Decisions in Raising Capital |
| Dollars to be raised | How much new capital is needed? |
| Type of securities used | Should stock, bonds, or a combination of these instruments be used? |
| Competitive bids | Offer a block of its securities for sale to the investment banker that submits the highest bid of all interested investment bankers |
| Negotiated deal | sit down and negotiate a deal with a single investment banker |
| Selection of an investment banker | the process of deciding which investment banker should be used. |
| underwritten arrangement | Agreement for the sale of securities in which the investment bank guarantees the sale by purchasing the securities from the issuer, thus agreeing to bear any risks involved in selling the securities in the financial markets. |
| best-efforts arrangement | Agreement for the sale of securities in which the investment bank handling the transaction gives its best effort to sell a company’s securities, but does not guarantee the entire issue will be sold. |
| shelf registration | Registration of securities with the SEC for sale at a later date. The securities are held “on the shelf” until the sale. |
| financial intermediation | The process by which financial intermediaries transform funds provided by savers into funds used by borrowers |
| financial intermediaries | Organizations that create various loans and investments from funds provided by depositors. |
| Commercial banks | traditional “department stores of finance”—that is, they offer a wide range of products and services to a variety of customers. |
| Credit Unions | depository institution that is owned by its depositors, who often are members of a common organization or association, such as an occupation, a religious group, or a community. |
| Thrift institutions | also known as savings and loan associations or S&Ls, cater to savers, especially individuals who have relatively small savings or need long-term loans to purchase houses. |
| Mutual Funds | investment companies that use funds provided by savers to buy various types of financial assets, including stocks and bonds. |
| Whole-Life Insurance Companies | provide a beneficiary, such as a spouse or other family members, with protection against financial distress or insecurity that might result from the premature death of a breadwinner or other principal wage earner |
| Premium | The cost of term insurance |
| Pension Funds | retirement plans funded by corporations or government agencies for their workers. |
Created by:
RamRamRam