Finance Quiz: Time Value of Money and Financial Statements

Balance Sheet: snapshot of company's financial position at a specific point in time
- Assets = Liabilities + Equity
Income Statement (Profit & Loss Statement): revenues and expenses over a specific period
- Revenues - Expenses = Net Income
Cash Flow Statement: inflows and outflows of cash over a specific period
- Operating, Investing, and Financing activities

Liquidity Ratios:
- Current Ratio: Current Assets / Current Liabilities
- Quick Ratio: (Current Assets - Inventory) / Current Liabilities
Profitability Ratios:
- Gross Margin: (Revenue - COGS) / Revenue
- Operating Margin: (Operating Income / Revenue)
- Return on Equity (ROE): Net Income / Shareholders' Equity
Efficiency Ratios:
- Asset Turnover: Revenue / Total Assets
- Inventory Turnover: COGS / Average Inventory

Capital Budgeting Decision Rules:
- Net Present Value (NPV) Rule: accept if NPV > 0
- Internal Rate of Return (IRR) Rule: accept if IRR > Cost of Capital
- Payback Period Rule: accept if Payback Period < Maximum Acceptable Period
Cost of Capital: the minimum rate of return required by investors

Types of Risk:
- Market Risk: changes in market conditions
- Credit Risk: borrower default
- Liquidity Risk: inability to convert assets to cash
- Operational Risk: internal failures or external events
Risk Management Strategies:
- Diversification
- Hedging
- Insurance
- Asset Liability Management

Present value (PV) represents the current value of future cash flows, considering the time value of money.
Future value (FV) is the value of present cash flows at a future date, which is calculated by considering the interest rate and time.
Net present value (NPV) is the difference between the present value and future value, which helps in evaluating investment opportunities.
The formula for NPV is NPV = Σ (CFt / (1 + r)^t), where CFt is the cash flow at time t, r is the interest rate, and t is the time period.

A balance sheet provides a snapshot of a company's financial position at a specific point in time, with the accounting equation being Assets = Liabilities + Equity.
An income statement (profit & loss statement) shows revenues and expenses over a specific period, with the goal of calculating net income through the formula Revenues - Expenses = Net Income.
A cash flow statement displays the inflows and outflows of cash over a specific period, categorizing them into operating, investing, and financing activities.

The current ratio measures a company's ability to pay its short-term debts, calculated by dividing current assets by current liabilities.
The quick ratio, also known as the acid-test ratio, assesses a company's ability to pay its short-term debts with its most liquid assets, calculated by dividing (current assets - inventory) by current liabilities.

The gross margin ratio shows the profitability of a company's products, calculated by dividing (revenue - COGS) by revenue.
The operating margin ratio indicates a company's pricing strategy and operating efficiency, calculated by dividing operating income by revenue.
The return on equity (ROE) ratio measures a company's profitability from shareholders' perspective, calculated by dividing net income by shareholders' equity.

The asset turnover ratio assesses a company's ability to generate revenue from its assets, calculated by dividing revenue by total assets.
The inventory turnover ratio measures the number of times inventory is sold and replaced during a period, calculated by dividing COGS by average inventory.

The net present value (NPV) rule is a decision-making criterion in capital budgeting, where a project is accepted if its NPV is greater than zero.
The internal rate of return (IRR) rule is another decision-making criterion, where a project is accepted if its IRR is greater than the cost of capital.
The payback period rule is based on the time it takes for a project to recover its initial investment, and a project is accepted if its payback period is less than the maximum acceptable period.

Market risk arises from changes in market conditions, such as interest rates, exchange rates, and commodity prices.
Credit risk occurs when a borrower defaults on their debt obligations.
Liquidity risk is the inability to convert assets into cash quickly enough to meet short-term obligations.
Operational risk encompasses internal failures or external events that can impact a company's operations.

Diversification involves spreading investments across different asset classes to minimize risk.
Hedging is a strategy to reduce risk by taking positions that offset potential losses.
Insurance is a risk management strategy that transfers risk to a third party.
Asset liability management is a strategy to manage risk by matching assets with liabilities.