Corporate Finance Basics
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Questions and Answers

What is a key advantage of a corporation?

  • Perpetual existence (correct)
  • Unlimited liability for shareholders
  • Democratic control among members
  • Tax exemptions under local law

Which regulatory body is responsible for the registration of corporations?

  • Bureau of Internal Revenue (BIR)
  • Department of Trade and Industry (DTI)
  • Cooperative Development Authority (CDA)
  • Securities and Exchange Commission (SEC) (correct)

What does the balance sheet represent?

  • Cash inflows and outflows
  • Financial position at a specific point in time (correct)
  • Changes in equity during a period
  • Financial performance over time

Which of the following statements about double taxation is true?

<p>It can occur with corporate income tax (D)</p> Signup and view all the answers

What distinguishes cooperatives from other types of organizations?

<p>Member-owned structure focusing on benefits for members (C)</p> Signup and view all the answers

How many primary financial statements are traditionally required under Philippine Financial Reporting Standards?

<p>Five (D)</p> Signup and view all the answers

Which financial statement provides insight into cash flows?

<p>Statement of Cash Flows (A)</p> Signup and view all the answers

What is the key equation in the balance sheet?

<p>Assets = Liabilities + Equity (C)</p> Signup and view all the answers

What is one recommendation for addressing underperforming assets?

<p>Conduct a cost-benefit analysis (C)</p> Signup and view all the answers

Which option may NOT likely improve Return on Equity (ROE)?

<p>Introducing higher dividend payouts to shareholders (A)</p> Signup and view all the answers

What strategy is recommended for managing excess inventory?

<p>Discount excess inventory (A)</p> Signup and view all the answers

Which action is advisable to strengthen the equity position?

<p>Suspend dividend payments temporarily (D)</p> Signup and view all the answers

What principle ensures that financial transactions are reported in a stable currency?

<p>Monetary Unit Assumption (A)</p> Signup and view all the answers

Which option is a suitable approach for preparing for expansion with a low debt-to-equity ratio?

<p>Leverage financial position for expansion projects (C)</p> Signup and view all the answers

What is the primary purpose of the Statement of Cash Flows?

<p>To evaluate cash liquidity and sustainability of the business. (C)</p> Signup and view all the answers

Which principle of GAAP emphasizes the distinct separation of a business from its owners?

<p>Economic Entity Assumption (C)</p> Signup and view all the answers

What should a company consider to manage stagnant sales growth despite increased inventory levels?

<p>Implement just-in-time (JIT) inventory management (A)</p> Signup and view all the answers

Which activity is NOT included in the operating activities section of the Statement of Cash Flows?

<p>Purchase of property. (C)</p> Signup and view all the answers

Which key objective of GAAP primarily focuses on the uniformity of accounting practices?

<p>Standardize accounting practices (A)</p> Signup and view all the answers

What should a recommended investment focus on to improve returns?

<p>High-return projects or expansion opportunities (B)</p> Signup and view all the answers

What can a company do to generate additional income from unused capacity?

<p>Lease the unused capacity (C)</p> Signup and view all the answers

How does the Statement of Cash Flows help stakeholders?

<p>By identifying cash flow sources and uses. (A)</p> Signup and view all the answers

What does the Going Concern Assumption imply about a business?

<p>The business is expected to operate indefinitely (C)</p> Signup and view all the answers

What does investing activities in the Statement of Cash Flows primarily reflect?

<p>Long-term asset transactions. (C)</p> Signup and view all the answers

What is the primary basis for financial reporting standards in the Philippines?

<p>Philippine Financial Reporting Standards (PFRS) (B)</p> Signup and view all the answers

Which of the following principles ensures that expenses are recorded when incurred?

<p>Accrual Accounting (D)</p> Signup and view all the answers

What is included in financing activities on the Statement of Cash Flows?

<p>Issuance of new shares or repayment of loans. (C)</p> Signup and view all the answers

How does GAAP improve financial reporting in the Philippines?

<p>By enforcing rigorous standards for transparency (A)</p> Signup and view all the answers

Which of the following statements is true regarding Other Comprehensive Income (OCI)?

<p>OCI reflects changes in stockholders' equity from certain gains or losses. (B)</p> Signup and view all the answers

Why is tracking financial health important in the context of the Statement of Cash Flows?

<p>To assess if cash is managed sustainably. (C)</p> Signup and view all the answers

Which organization oversees the enforcement of GAAP standards in the Philippines?

<p>Financial Reporting Standards Council (FRSC) (A)</p> Signup and view all the answers

What does the Ending Balance of Stockholders’ Equity represent?

<p>Stockholders’ equity components after adjustments. (A)</p> Signup and view all the answers

What happens to retained earnings when a company incurs a net loss?

<p>Retained earnings decrease. (C)</p> Signup and view all the answers

How are retained earnings adjusted at the end of a period?

<p>By adding net income and subtracting dividends paid. (B)</p> Signup and view all the answers

Which format of the Balance Sheet arranges assets on the left and liabilities and equity on the right?

<p>Account Form (B)</p> Signup and view all the answers

Which financial statement connects the income statement to the balance sheet?

<p>Retained Earnings Statement (B)</p> Signup and view all the answers

What is the primary focus of the Statement of Financial Position?

<p>Assessment of financial health (C)</p> Signup and view all the answers

What does an income statement summarize over a specific period?

<p>Revenues and expenses (B)</p> Signup and view all the answers

Which of the following is considered an outflow of resources that contributes to generating revenues?

<p>Cost of Goods Sold (COGS) (A)</p> Signup and view all the answers

In which form are assets presented in a vertical sequence in the balance sheet?

<p>Report Form (B)</p> Signup and view all the answers

Which of the following best defines assets in a business context?

<p>Resources owned or controlled by the business expected to provide future benefits (A)</p> Signup and view all the answers

What characterizes non-current assets?

<p>Assets not expected to be consumed within one year (C)</p> Signup and view all the answers

Which of the following is considered a current liability?

<p>Accrued expenses (B)</p> Signup and view all the answers

What is included in equity in a business?

<p>Contributed capital and retained earnings (D)</p> Signup and view all the answers

How are retained earnings primarily characterized?

<p>Cumulative net income retained for reinvestment or future expenses (A)</p> Signup and view all the answers

Which of the following classifications accurately describes a short-term loan?

<p>It is a current liability. (B)</p> Signup and view all the answers

What distinguishes current assets from non-current assets?

<p>Current assets are expected to be converted to cash within one year. (C)</p> Signup and view all the answers

Which of the following is not a characteristic of non-current liabilities?

<p>Due within one year (B)</p> Signup and view all the answers

Flashcards

Economic Entity Assumption

The business is treated as separate from its owners and other entities.

Monetary Unit Assumption

Financial transactions are recorded using a stable currency, like the Philippine Peso (PHP).

Time Period Assumption

Financial reports are prepared at regular intervals, such as monthly, quarterly, or annually.

Going Concern Assumption

Businesses are assumed to continue operating indefinitely unless evidence suggests otherwise.

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Standardization

The primary goal of GAAP is to establish consistent accounting practices.

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Reliability and Comparability

GAAP ensures that financial statements are reliable and can be compared across different companies.

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Accrual Accounting

Revenue is recorded when earned, and expenses are made when incurred, regardless of cash received.

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Global Perspective

GAAP is becoming increasingly aligned with global standards, promoting consistency worldwide.

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Corporation

A business structure where ownership is divided into shares, offering limited liability to shareholders and easier access to large-scale funding.

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Cooperative

A type of business where members own and control the organization, focusing on benefits for its members.

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Financial Statements

A set of financial documents that provide a structured representation of a business's financial position, performance, and cash flows.

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Balance Sheet (Statement of Financial Position)

A financial statement that shows a company's assets, liabilities, and equity at a specific point in time.

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Income Statement (Statement of Comprehensive Income)

A financial statement that reports a company's financial performance over a specific period, detailing revenues and expenses to determine net income.

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Statement of Cash Flows

A financial statement that provides insights into cash inflows and outflows from operating, investing, and financing activities.

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Statement of Changes in Equity (or Statement of Stockholders' Equity)

A financial statement detailing changes in equity accounts like retained earnings and share capital during a reporting period.

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Notes to Financial Statements

While not a traditional statement, these provide detailed disclosures, assumptions, accounting policies, and context for the numbers presented in the primary financial statements.

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Operating Activities

Represents cash flows from the company's primary business operations. It includes cash inflows from customers and outflows for expenses like salaries and supplies.

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Investing Activities

Reflects cash flows from the purchase or sale of long-term assets, such as property, plant, and equipment.

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Financing Activities

Represents cash flows related to the company's capital structure, including issuance or repurchase of shares, borrowing, and loan repayments.

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Purpose of the Statement of Cash Flows

This statement outlines cash inflows and outflows, categorized into three activities: operating, investing, and financing.

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Evaluate Cash Liquidity

Determines if the company can generate sufficient cash to meet its obligations.

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Understand Cash Flow Sources

Identifies where cash is coming from, such as operations, investments, or financing.

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Track Financial Health

Helps investors and creditors assess how cash is managed and whether the business is sustainable.

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Financial Analysis from Balance Sheet

Reviewing a company's financial performance based on its Balance Sheet and suggesting actions to improve financial health.

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Cost-Benefit Analysis for Asset Sales

Analyzing whether selling underperforming assets would benefit the company's overall financial position.

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Automation and Upgrade Investments

Improving efficiency and profitability by investing in automated systems or upgrading outdated equipment.

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Leveraging Unused Capacity

Generating extra revenue by leasing out unused production capacity or resources.

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Reinvesting Retained Earnings

Investing retained earnings in promising projects or expanding the company's reach.

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Share Buyback Program

Reducing the number of outstanding shares by buying them back, ultimately increasing the value of each remaining share.

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Paying Higher Dividends

Distributing profits to shareholders as dividends if there are limited reinvestment opportunities.

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Inventory Management Strategies

Managing inventory levels to reduce costs and maintain optimal stock levels.

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Retained Earnings

The amount of earnings a company has retained after paying dividends and other expenses. It represents the accumulated earnings that are available for reinvestment or future distribution to shareholders.

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Net Loss

It occurs when a company's expenses exceed its revenues, resulting in a negative net income. It reduces retained earnings, reflecting a decrease in the company's accumulated profits.

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Income Statement Link to Retained Earnings

The income statement provides the foundation for the retained earnings statement, which includes all adjustments such as net income or loss and dividends paid.

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Balance Sheet

It is a financial statement snapshot of a company's financial health at a specific point in time. It shows what a company owns (assets), owes (liabilities), and the value of ownership (equity).

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Account Form Balance Sheet

This format presents assets on the left side and liabilities & equity on the right side, resembling a 'T' shape, similar to an account.

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Report Form Balance Sheet

This format showcases assets, liabilities, & equity in a vertical list, commonly used in financial statements.

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Income Statement

The Income Statement, often called the Profit and Loss Statement, summarizes a company's revenues & expenses over a specific period.

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Assets on the Balance Sheet

These are resources controlled by the company as a result of past events and from which future economic benefits are expected to flow to the company.

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What are assets?

Assets are resources owned or controlled by a business that are expected to provide future economic benefits. They can be tangible, like cash and equipment, or intangible, like patents and trademarks.

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What are liabilities?

Liabilities are obligations a company owes to external parties. These obligations require the company to transfer assets or services to settle them. Examples include loans and accounts payable.

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What is equity?

Equity represents the owners' stake in a business after deducting liabilities, essentially showing what remains after a company pays off its debts. It's comprised of capital invested by owners and retained earnings.

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What are current assets?

Current assets are expected to be converted into cash or used up within one year or the operating cycle, whichever is longer. This includes things like cash, accounts receivable, and inventory.

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What are non-current assets?

Non-current assets are not expected to be converted into cash or consumed within a year. These assets are long-term, such as land, buildings, and intangible assets like patents.

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What are current liabilities?

Current liabilities are obligations expected to be settled within one year or the operating cycle, whichever is longer. Examples include accounts payable, short-term loans, and accrued expenses.

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What are non-current liabilities?

Non-current liabilities are long-term obligations that are due beyond one year. Examples include long-term debt, deferred tax liabilities, and lease obligations.

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What is capital?

Capital is funds contributed by owners or shareholders to a business. It's like the initial investment they make. It can be in the form of common stock, preferred stock, or additional paid-in capital.

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What are retained earnings?

Retained earnings are the accumulated net income of a business that has not been distributed to shareholders as dividends. This is kept for reinvestment or to cover future expenses.

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Study Notes

Financial Analysis and Reporting Notes

  • Accounting vs. Finance: Accounting is the systematic recording, classifying, summarizing, and interpreting of financial transactions. Finance manages an organization's resources to maximize value. Accounting focuses on past performance (backward-looking), while finance is forward-looking, emphasizing forecasting and strategy.

Users of Financial Statements

  • Internal Users: Management uses financial statements for operational, tactical, and strategic decision-making. Employees use them to assess job security and potential for salary increases or bonuses.

Development of GAAP (Generally Accepted Accounting Principles)

  • Traditional Assumptions in GAAP Development: The Philippine GAAP framework is based on PFRS, aligning closely with IFRS. This framework guides financial statement preparation and presentation. It ensures transparency, consistency, and comparability with global standards. Key assumptions include economic entity, monetary unit, time period, and going concern.

Financial Accounting Concepts

  • Accrual Accounting: Revenue is recognized when earned, and expenses are recorded when incurred, regardless of cash flow.
  • Matching Principle: Expenses are recognized in the same period as the revenue they help generate.
  • Historical Cost Principle: Assets are recorded at their original purchase price.
  • Revenue Recognition Principle: Revenue is recognized when it's earned and realizable.
  • Materiality Concept: Financial information should include all items that could affect decisions by users.
  • Conservatism Principle: When in doubt, record expenses and liabilities earlier, and recognize income later, to avoid overstating assets or profits.

Presentation of Financial Statements

  • Forms of Business Enterprises: The legal structure of a business influences its operations, liabilities, taxes, and financial reporting. Key types include sole proprietorship, partnership, and corporation, each with differing characteristics and advantages/disadvantages.

Financial Statements

  • Balance Sheet: A snapshot of a business's financial position at a specific point in time.
    • Assets: Resources controlled by the business
    • Liabilities: Obligations to creditors
    • Equity: Owners' claims on the assets (Capital + Retained earnings)
  • Income Statement: Details revenues, expenses, and profits of a business over a specific period, including cost of goods sold.
  • Revenues: Income generated from operations (e.g., Sales Rev., Service Rev., Interest Income)
  • Expenses: Costs incurred to generate revenue (e.g, Salaries, Rent, Utilities, Depreciation, Interest Expense, Income Tax Expense)
  • Net Income: Profits leftover after deducting all expenses.
  • Statement of Stockholders' Equity: Shows changes in equity over a period.
    • Share Capital: Funds raised by issuing shares
    • Retained Earnings: Cumulative net income
    • Treasury Stock: Shares repurchased by the company
    • Other Comprehensive Income (OCI): Gains or losses not included in net income.

Liquidity Ratios

  • Current Ratio: Measures a company's ability to meet short-term obligations. Favorable ratios are above 1.
  • Quick Ratio (Acid-Test Ratio): A more stringent measure of liquidity, excluding inventory. Ideal ratios are above 1.
  • Inventory Turnover Ratio: Shows how quickly inventory is sold. Higher ratios indicate better management.
  • Accounts Receivable Turnover Ratio: Shows how efficiently the company collects payments. Higher ratios indicate better customer relations and collection practices.

Solvency Ratios

  • Debt-to-Equity Ratio: Measures the proportion of debt to equity, indicating the level of financial leverage. Ideal ratios are below 1, but moderate values are possible too.

Efficiency Ratios

  • Inventory Turnover Ratio: Measures how efficiently inventory is managed. Higher ratios are generally better.
  • Receivables Turnover Ratio: Shows how quickly a company collects payment from customers. High ratio shows effectiveness.

Return Ratios

  • Return on Assets (ROA): Measures how efficiently assets are used to generate profits. Higher ratios are desirable.
  • Return on Equity (ROE): Measures the profitability of equity. Higher is better.

Coverage Ratios

  • Interest Coverage Ratio: Measures the company's ability to cover interest expenses with operating income. Higher is better, suggesting strong financial health.

Statement of Cash Flows

  • Operating Activities: Cash flows from normal business operations.
  • Investing Activities: Cash flows from the purchase or sale of long-term assets.
  • Financing Activities: Cash flows related to external financing (e.g., debt, equity).
  • Cash Flow Ratios: . Operating Cash Flow to Sales Ratio: Shows efficiency of converting sales to cash. . Operating Cash Flow to Net Income Ratio: Indicates the quality of income. . Cash Flow Coverage Ratio: Indicates how well cash flows can meet obligations. . Free Cash Flow: Indicates cash accessible for payouts, debt, or investments after operating expenditures. . Cash Debt Coverage Ratio: Indicates the ability to cover liabilities. . Capital Expenditures Coverage Ratio: Explains how much of the cash flow can be used to cover capital investments. . Cash Turnover Ratio: A measure of the efficiency in generating revenue from cash.

Other Important Concepts

  • Single-Step vs. Multi-Step Income Statement: Different formatting styles for reporting revenues and expenses to calculate net income.

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Test your knowledge on key concepts of corporate finance and accounting. This quiz covers essential topics such as corporate advantages, regulatory bodies, financial statements, and taxation. Perfect for students studying business or finance.

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