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Questions and Answers
Which financing method involves borrowing money from lenders and not giving up ownership?
What does 'Suppliers Credit' refer to?
What is the method of raising capital by selling company stock to investors in exchange for ownership interests in the company?
What are personal funds advanced by a stockholder to a company called?
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What is the annual interest when the terms are 2/10 (2% discount if paid within 10 days) with the due date of 60 days?
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What is a characteristic of credit cards mentioned in the text?
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What do credit cooperatives provide to their members?
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Which source of short-term financing is most available according to the text?
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What is a risk associated with borrowing regardless of the source of funds?
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What is the cost (interest) comparison of informal lending sources like 5/6?
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What do internally generated funds refer to based on the text?
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Which option describes the characteristic of equity investors?
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What characteristic applies to lending companies according to the text?
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What type of investment involves an investor loaning money to an entity which borrows the funds?
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What is the primary purpose of financial statement analysis?
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What does profitability refer to in the context of businesses?
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Which financial ratio should be of interest to stock market investors?
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What can happen to a business if it does not pay its obligations on time?
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Who can use financial statement analysis for investment and credit decisions?
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What is the most important goal of businesses according to the text?
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What does Return on Equity (ROE) measure?
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How is Gross Profit Margin computed?
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What does the Acid-Test Ratio or Quick Asset Ratio measure?
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What is the formula for computing Current Ratio?
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What does Operating Profit Margin measure?
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What is considered when computing Net Profit Margin?
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What do Liquidity ratios measure?
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What can be done to improve Gross Profit Margin?
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What does Return on Assets (ROA) measure?
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Which ratio refers to the company’s ability to satisfy its short-term obligations as they come due?
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What is the primary purpose of budgeting according to the text?
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Which budget element outlines the income-generating activities of a firm?
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What comprises the master budget of a company?
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What does the operational budget reflect?
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What is the general structure of a complete set of budgets called?
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What is the purpose of the master budget in a company?
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What is the purpose of a financial budget?
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What is the first step in preparing the budget according to the text?
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What does the production budget calculate?
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How does the sales budget influence other components of the master budget?
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What is the main purpose of the operating budget?
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What does the cash budget outline?
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What is the projection described by the sales budget?
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What does the production budget calculate?
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What is the essential component of the master budget according to the text?
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What does a more accurate sales forecast lead to according to the text?
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Study Notes
Financing Methods
- Borrowing money from lenders without giving up ownership is known as debt financing.
- Suppliers Credit refers to the credit extended by suppliers to a business for the purchase of goods or services.
- Selling company stock to investors in exchange for ownership interests is a method of raising capital called equity financing.
Short-Term Financing
- Personal funds advanced by a stockholder to a company are called loans from shareholders.
- The annual interest rate for 2/10 (2% discount if paid within 10 days) with a due date of 60 days is 36% (2% / 10 * 365).
Credit Cards and Cooperatives
- A characteristic of credit cards is that they offer a short-term loan with a fee.
- Credit cooperatives provide their members with loans at a lower interest rate.
Short-Term Financing Sources
- The most available source of short-term financing is a bank overdraft.
Risks and Costs
- A risk associated with borrowing regardless of the source of funds is the risk of default.
- The cost (interest) comparison of informal lending sources like 5/6 is very high.
Internally Generated Funds and Equity Investors
- Internally generated funds refer to profits reinvested in the business.
- Equity investors are owners who share the risk and profit of the business.
Lending Companies and Debt Investments
- Lending companies have a fixed return on their investment.
- Debt investments involve an investor loaning money to an entity that borrows the funds.
Financial Statement Analysis
- The primary purpose of financial statement analysis is to assess a company's financial performance.
- Profitability refers to a company's ability to generate earnings.
- The financial ratio of interest to stock market investors is the Earnings Per Share (EPS).
Financial Ratios and Return on Equity
- If a business does not pay its obligations on time, it may face bankruptcy.
- Financial statement analysis can be used by investors, creditors, and other stakeholders for investment and credit decisions.
- The most important goal of businesses is to maximize shareholder value.
- Return on Equity (ROE) measures a company's net income as a percentage of shareholder equity.
- Gross Profit Margin is computed by dividing gross profit by sales.
- The Acid-Test Ratio or Quick Asset Ratio measures a company's ability to pay its short-term liabilities.
- The formula for computing Current Ratio is current assets divided by current liabilities.
- Operating Profit Margin measures a company's profitability from its operations.
- Net Profit Margin considers both operating and non-operating income.
Liquidity Ratios and Budgeting
- Liquidity ratios measure a company's ability to pay its short-term obligations.
- Improving Gross Profit Margin can be achieved by increasing sales, reducing cost of goods sold, or a combination of both.
- Return on Assets (ROA) measures a company's net income as a percentage of its total assets.
- The Current Ratio measures a company's ability to satisfy its short-term obligations as they come due.
- The primary purpose of budgeting is to plan and control financial resources.
- The master budget of a company comprises the operational budget, financial budget, and cash budget.
- The operational budget reflects the income-generating activities of a firm.
- The sales budget outlines the projected sales of a company.
- The cash budget outlines the projected cash inflows and outflows of a company.
- The first step in preparing the budget is to prepare a sales forecast.
- The production budget calculates the quantity of goods or services to be produced.
- The sales budget influences other components of the master budget, such as the production budget and cash budget.
- The main purpose of the operating budget is to plan and control the operational activities of a firm.
- A more accurate sales forecast leads to a more accurate budget and better decision-making.
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Description
Test your knowledge of sources and uses of short-term and long-term funds financing, debt financing, equity financing, and the effects of stretching payables. Explore concepts such as suppliers credit and the methods of raising capital by selling company stock to investors.
