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A Cash Budget is designed to cover a period of more than one year.
A Cash Budget is designed to cover a period of more than one year.
False
The Cash Forecast is used to estimate the firm's long-term financial requirements.
The Cash Forecast is used to estimate the firm's long-term financial requirements.
False
Internal Forecasts rely solely on external economic indicators.
Internal Forecasts rely solely on external economic indicators.
False
Financial instruments can only be real documents and cannot be virtual.
Financial instruments can only be real documents and cannot be virtual.
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Equity-Based Financial Instruments represent ownership of an asset.
Equity-Based Financial Instruments represent ownership of an asset.
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Financial instruments are categorized based on their asset class, which includes Debt-Based and Equity-Based.
Financial instruments are categorized based on their asset class, which includes Debt-Based and Equity-Based.
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Common Stock and Preferred Shares are types of Debt-Based Financial Instruments.
Common Stock and Preferred Shares are types of Debt-Based Financial Instruments.
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ETFs and mutual funds are exclusively debt-based instruments.
ETFs and mutual funds are exclusively debt-based instruments.
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Derivatives include financial instruments such as futures and options.
Derivatives include financial instruments such as futures and options.
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Short-term debt-based financial instruments last for more than one year.
Short-term debt-based financial instruments last for more than one year.
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Treasury bills and commercial paper are examples of long-term debt securities.
Treasury bills and commercial paper are examples of long-term debt securities.
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Money market investments are characterized by safety and high returns.
Money market investments are characterized by safety and high returns.
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Cash instruments are influenced by market conditions.
Cash instruments are influenced by market conditions.
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Checks are categorized as derivative instruments.
Checks are categorized as derivative instruments.
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Investors can participate in the money market by purchasing money market mutual funds.
Investors can participate in the money market by purchasing money market mutual funds.
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Certificates of deposit (CDs) are considered equity-based instruments.
Certificates of deposit (CDs) are considered equity-based instruments.
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Operating cash flows are directly related to the acquisition of fixed assets.
Operating cash flows are directly related to the acquisition of fixed assets.
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Depreciation is the allocation of the cost of intangible assets over time.
Depreciation is the allocation of the cost of intangible assets over time.
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The three categories of a firm's cash flows are operating, investing, and financing cash flows.
The three categories of a firm's cash flows are operating, investing, and financing cash flows.
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Financing cash flows include cash inflows from the sale of stock and cash outflows to pay dividends.
Financing cash flows include cash inflows from the sale of stock and cash outflows to pay dividends.
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A decrease in any liability results in an inflow of cash.
A decrease in any liability results in an inflow of cash.
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The Statement of Cash Flows reflects the performance of the firm by connecting the beginning and ending balance sheets.
The Statement of Cash Flows reflects the performance of the firm by connecting the beginning and ending balance sheets.
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Amortization and depletion both relate to the write-off of tangible assets.
Amortization and depletion both relate to the write-off of tangible assets.
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Free cash flow is primarily used for long-term managerial decision-making.
Free cash flow is primarily used for long-term managerial decision-making.
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The Firm's Operating Cash Flow (OCF) is calculated by subtracting depreciation from Net Operating Profit After Tax (NOPAT).
The Firm's Operating Cash Flow (OCF) is calculated by subtracting depreciation from Net Operating Profit After Tax (NOPAT).
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Free Cash Flow (FCF) is the cash flow remaining after meeting operating needs and paying for investments in fixed and current assets.
Free Cash Flow (FCF) is the cash flow remaining after meeting operating needs and paying for investments in fixed and current assets.
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Net Operating Profit After Tax (NOPAT) is equal to Earnings Before Interest and Taxes (EBIT) multiplied by the tax rate.
Net Operating Profit After Tax (NOPAT) is equal to Earnings Before Interest and Taxes (EBIT) multiplied by the tax rate.
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The financial planning process begins with short-term financial plans that guide long-term strategies.
The financial planning process begins with short-term financial plans that guide long-term strategies.
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Cash planning involves the preparation of the firm's cash budget.
Cash planning involves the preparation of the firm's cash budget.
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Net Fixed Assets in Investments (NFAI) can be calculated as the change in net fixed assets plus depreciation.
Net Fixed Assets in Investments (NFAI) can be calculated as the change in net fixed assets plus depreciation.
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Free Cash Flow (FCF) is calculated by subtracting Total Assets from Operating Cash Flow (OCF).
Free Cash Flow (FCF) is calculated by subtracting Total Assets from Operating Cash Flow (OCF).
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Money market investments typically have lower returns than inflation.
Money market investments typically have lower returns than inflation.
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One of the key inputs for short-term financial plans is the sales forecast.
One of the key inputs for short-term financial plans is the sales forecast.
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Capital markets are solely focused on short-term debt instruments.
Capital markets are solely focused on short-term debt instruments.
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Money market mutual funds only cater to large corporations.
Money market mutual funds only cater to large corporations.
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The capital markets include both the stock market and bond markets.
The capital markets include both the stock market and bond markets.
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Individuals cannot invest directly in capital markets.
Individuals cannot invest directly in capital markets.
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Suppliers in capital markets include only banks and financial institutions.
Suppliers in capital markets include only banks and financial institutions.
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The primary market refers to the trade of previously issued financial securities.
The primary market refers to the trade of previously issued financial securities.
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Small companies often invest excess cash through money market accounts.
Small companies often invest excess cash through money market accounts.
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Study Notes
Cash Flow Analysis
- Cash flow is the primary element in financial valuation models.
- An accounting perspective summarizes cash flow in a statement of cash flow.
- A financial perspective focuses on operating cash flow (used in managerial decisions) and free cash flow (monitored by market participants).
- Depreciation is the portion of fixed asset costs allocated over time against annual revenues. Methods like Modified Accelerated Cost Recovery System (MACRS) are used for tax purposes.
- Amortization is the write-off of intangible assets.
- Depletion is the write-off of natural resources.
Statement of Cash Flows
- Summarizes a firm's cash flow over a specific period.
- Three categories of firm cash flows:
- Operating cash flows: relate to sales and production.
- Investment cash flows: relate to buying/selling fixed assets and investments in other firms.
- Financing cash flows: relate to debt/equity financing, stock sales/repurchases, and dividends.
Inflow and Outflow of Cash
- Inflows (sources): decreases in assets, increases in liabilities, net profits after taxes, and non-cash charges, stock sales.
- Outflows (uses): increases in assets, decreases in liabilities, net losses, dividends, and stock repurchases.
Interpreting Statement of Cash Flows
- Connects balance sheets at the beginning and end of a period, considering firm performance.
- Net increase/decrease in cash - difference in cash and marketable securities from the start to the end of the year.
- Operating cash flow (OCF) is the cash generated from normal operations (production and sale).
- OCF = NOPAT + Depreciation; NOPAT = EBIT x (1-T) where EBIT= earnings before interest and taxes, T=tax rate.
- Free Cash Flow (FCF) – cash available to investors after costs and investments.
- Formula: FCF = OCF - Change in Net Fixed Assets - Change in Net Current Assets
Financial Planning Process
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Long-term (strategic) plans guide short-term (operational) plans and budgets.
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Two key aspects:
- Cash planning (cash budget preparation).
- Profit planning (pro-forma statements preparation).
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Short-term financial plans specify short-term actions and their anticipated impact.
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Key inputs: sales forecast, operating data, etc.
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Key outputs: operating budgets, cash budget, pro-forma financial statements.
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Cash budget estimates planned cash inflows and outflows to predict short-term cash needs.
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Cash budget is designed for a one-year period, divided into shorter time intervals to reflect seasonality or uncertainty.
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Sales forecast predicts sales, based on internal (firm's sales data) or external (economic indicators) factors.
Financial Instruments
- Financial instruments are tradable assets.
- Two primary categories:
- Equity instruments represent ownership. Common and preferred stocks, ETFs, and mutual funds.
- Debt instruments represent loans. Short-term debt (e.g., Treasury bills, commercial paper), bank deposits, and CDs.
- Cash instruments (e.g., securities) are easily transferable, value influenced by markets
- Derivative instruments (future, options, and swaps) are contracts whose value is derived from another asset.
Money Market
- Short-term debt investment market (e.g., overnight reserves, commercial paper).
- Money market mutual funds, Treasury Bills, and bank accounts are instruments often for short-term cash needs (e.g., by large corporations, small firms or individuals.)
- Lower returns relative to other investments, high safety.
Capital Markets
- Markets for long-term debt and equity instruments.
- Two market classifications: primary and secondary markets.
- Suppliers (e.g. banks, institutions) provide capital; users (e.g., businesses) seek capital.
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Description
This quiz covers the key concepts related to financial instruments, including categories such as equity-based and debt-based instruments. Test your understanding of cash budgets, forecasting, and the role of derivatives in finance. Assess your knowledge on the characteristics and examples of different financial instruments.
