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29 Cards in this Set
- Front
- Back
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What is Financial Management? |
A process that provides entrepreneurs with relevant financial information in an easy-to-read format on timely basis. It shows how a business is doing, and why they are performing that way. |
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What is a Balance Sheet? What does it show? |
It is a snapshot of a business's financial position; estimating its worth on a given date. It is built up of Assets = Liabilities + Owner's Equity |
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What is the difference between current assets, fixed assets and long-term liabilities? |
Current assets: cash or other items that are to be converted into cash within the first year (cash, inventory, prepaid expenses)
Fixed assets: items acquired for long-term use (land, building)
Liabilities: creditors claims against a company's assets; debts that must be paid in 1 year (accounts payable, accrued taxes payable)
Long-term liabilities: liabilities due after one year (mortgage, notes payable)
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What is an Income Statement? |
A financial statement that represents a moving picture of a business, comparing its expenses against its revenue over a period of time to show its net income (or loss) |
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How do you measure Gross Profit margin? |
Gross Profit / Net sales Revenue = GPM |
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What is a Cash Flow statement, and what does it show? |
Show the changes in a company's working capital form the beginning of the year by listing both sources of funding and the uses of those funds. Depreciation included. |
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How do you measure Cash Requirement? |
Cash expenses / Average inventory turnover |
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Measure Average Inventory Turnover: |
Cost of goods sold / Average inventory level |
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What is a Ratio Analysis? |
Method of expressing the relationship between any two accounting elements that allows business owners to analyse their companies' financial performances |
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Liquidity Ratios |
These ratios will be able to tell if a business will meet its short-term financial obligations; warns for cash flow problems |
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Current ratio (CR) What does it measure? |
Current assets / current liabilities = CR Measures solvency by indicating its ability to pay liabilities out of current assets |
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Quick ratio (QR) What does it measure? |
Quick assets / current liabilities = QR Measure of a firm's liquidity; the extent to which its most liquid assets cover its current liabilities
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Leverage Ratios |
These ratios measure the financing supplied by a firm's owner's against that supplied by its creditors; they show the extent of a company's debt |
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Debt ratio (DR) What does it measure? |
Total debt (liabilities) / total assets = DR The percentage of total assets financed by a company's creditors compared to its owners |
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Debt-to-net worth ratio (DTNWR) What does it measure?
How to measure Tangible Net-worth |
Total debt (liabilities) / tangible net worth =DTNWR Measures how highly leveraged a company is
Tangible net-worth = capital + capital stock + earned surplus + retained earnings - goodwill |
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Time interest earned ratio (TIER) What does it measure?
How to measure EBIT |
Earning before interest and taxes EBIT / Total interest expenses = TIER Measures a small firms ability to make interest payments on its debt
EBIT = net income + interest espense |
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Operating Ratios |
Help an entrepreneur evaluate a small company's overall performance and indicate how effectively the business employs its resources |
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Average-Inventory-Turnover Ratio What does it measure? |
AITR = cost of goods sold / average inventory
Average inventory = (inventory at the beginning of the accounting period + value at the end) / 2 |
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Receivables Turnover Ratio What does it measure? |
Credit Sales / Accounts receivable Measures the number of days it takes to collect accounts recievable |
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Average-collection-period Ratio What does it measure? |
Days in accounting period / receivable turnover ratio
This should be no more than 40 days! |
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Annual savings What does it measure? |
(Credit sales x Annual interest rate x number of days average collection period is lowered by) / 365 |
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Payable turnover Ratio What does it measure?
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Purchases / Accounts payable Measure the number of days it takes a company to pay its accounts payable
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Average-payable-period Ratio |
Days in accounting period / Payable turnover ratio
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Total-assets-turnover Ratio What does it measure? |
Net sales / Net total Assets measures a company's ability to generate sales in relation to its asset base. It describes how productively the firm employs its assets to produce sales revenue |
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Profitability Ratios |
Indicate how effectively a company is being managed and offers information about its bottom line. |
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What is a Break-even point? |
It is the level of operation (sales dollars or production quantity) at which a company neither earns a profit not incurs a loss.
Sales revenue = expenses, at this point |
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What is the difference between fixed expenses and variable expenses? Use an example. |
Fixed expenses: expenses that do not vary with changes in the volume of sales or production (rent, insurance)
Variable expenses: expenses that do vary with changes in sales volume (raw material costs, hourly wages) |
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What are the limitations to a break-even analysis? |
It is too simple to use as a financial screenings device because it ignores the importance of cash flows.
The accuracy depends on the accuracy of the revenue and expense estimates.
Assumptions pertaining to break-even analysis may not be realistic for some businesses
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What are the assumptions of a break-even analysis? |
Fixed expenses remain constant fro all levels of sales volumes
Variable expenses change in direct proportion to sales volume
Changes in sales volume have no effect on unit sales price |
