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41 Cards in this Set
- Front
- Back
What 3 reasons that economic resources are required to establish and maintain firms? |
1) to enable materials and processes 2) to assemble a workforce 3) to purchase assets |
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What can be used to show the financial make up and activity of a firm? |
A balance sheet |
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What's on the left and right of a balance sheet? |
Left: capital budgeting decision Right: capital structure decision |
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What two things make up the left side of a balance sheet? |
1) Current assets 2) fixed assets (tangible, non-tangible) |
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What 3 things make up the right side of the balance sheet? |
1) current liabilities 2) long-term debt 3) shareholders equity |
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What are 3 responsibilities of a V.P/CFO? |
1) strategist 2) coordinator 3) authority |
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What are 3 responsibilities of a treasurer? |
1) cash flow 2) capital expenditures 3) capital structure |
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What are 3 responsibilities of a controller? |
1) accounting 2) information systems 3) taxes |
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What are 4 forms of business organizations? |
1) sole proprietorship 2) general partnership 3) limited partnership 4) corporation |
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What are 3 properties of a sole proprietorship? |
1) funds raised by sole owner 2) debts incurred fall on sole owner 3) taxed on personal level |
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What are 3 properties of a general partnership? |
1) multiple owners who contribute funds 2) unlimited liability 3) taxed on a personal level |
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What does unlimited liability mean? |
Debt falls on the owner of the organization |
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What are 2 differences between limited partners compared to general partners? |
1) limited liability 2) less voting power than a general partner, or no voting power |
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What is limited liability? |
Only liable for initial investment |
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What are 5 properties of a corporation? |
1) can be owned by any amount of people 2) owners have limited liability 3) can act like a person (can't vote though) 4) easy to transfer ownership (sell shares) 5) corporations are taxed on their earnings, and dividends played to owners are then taxed on a personal level |
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What is the lifespan of a corporation? |
Perpetual life |
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What is the lifetime of a partnership? |
Limited |
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Is it easy to change ownership of a partnership? |
It's subject to substantial restrictions |
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What are 2 things a firm must do if it is to prosper? |
1) buy assets that generate more money than they cost 2) sell financial instruments that raise more cash than they cost |
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What is an example of a non-cash expense? |
Depreciation |
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What is an example of a non-cash revenue? |
Sales on account |
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What should be the general goal of finanical management? |
Maximise the value of the existing owners equity |
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What's a problem with just trying to maximise profits? |
If you raise prices at time of scarcity, competitor could undercut you and you loose business |
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What's the problem with just trying to minimise costs? |
Cheaper assets are not as efficient |
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What's the problem with just trying to maximise market share? |
Reducing price to sell more but it won't be very profitable |
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What is the problem with just trying to maximise shareholders wealth? |
More money given to shareholders is less money for the firm |
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What is the problem with just trying to survive and avoid bankruptcy? |
Risks need to be taken to grow |
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What is an agency relationship? |
When stockholders hire managers to run the company |
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What is an agency problem? |
Conflict of interest between principle and agent |
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What is agency cost? |
When a manager prevails in a decision to not take on a risk that owners wanted, the long term positive cash flow that is lost is the agency cost |
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What are 4 examples how management goals may be different to shareholders goals? |
1) expensive prerequisites 2) manager engaging in low risk activity for survival 3) independence (don't want takeover) 4) mangers want larger workforce (more money) |
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What are two ways of lessening agency cost? |
1) managerial compensation 2) corporate control (threat of takeover should push managers to do better) |
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What are the costs of agency relationships? |
Direct costs - money spent by managers Indirect costs - money spent to protect principles (compliance, supervision, risk management) |
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What two acts dictate what companies have to declare when they go public? |
1) the securities act of 1933 2) the securities exchange act of 1934 |
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What did the creation of SEC and reporting requirements (1934) bring about? |
Once a company is publicly listed, it has to report all its activities |
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What act increased reporting requirements and responsibilities of corporate directors? |
The Sarbanes-Oxley act of 2002 |
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What do the securities act of 1933 and the securities exchange act of 1934 dictate? |
They dictate what companies have to declare when they go public |
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What did the Sarbanes-Oxley act of 2002 do? |
Increased reporting requirements and responsibilities of corporate directors (director has to declare the selling of stock, insider trading) |
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Who would receive payments last if a corporation were to close? |
Shareholders |
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What are 2 reasons accounting profit does not adequately account for cash flow? |
Depreciation and sales on account are non cash financial activity |
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How is a current liability defined? |
Debt that must be repaid within 12 months |