fin 2603 final prep 2023 with 100% correct questions and answers

capital market a market place where companies and government can raise long term funds, a market where money is lent for periods longer than 1 year cost-benefit principle sound financial decision making requires that an analysis of the total cost and the total benefits be conducted - as far as possible, the benefit should be greater than the cost of any decision Financial institution an organisation that acts as a channel between savers and borrowers of funds (Two main types of financial institutions are banks that pay interest on deposits from the interest earned on the loans, and insurance companies and mutual funds that collect funds by selling their policies or shares to the public and provide returns in the form of periodic benefits and profit payouts.) financial manager uses financial statements to make capital-budgeting decisions, capital structure decisions and working-capital decisions in order to create wealth for the organisation's shareholders Money markets the financial markets for short-term borrowing and lending; provide short-term liquidity with securities such as treasury bills, commercial paper and bankers' acceptances Profitability the firm's ability to generate revenues that will exceed total costs by using the firm's assets for productive purposes; may be achieved by marketing products or services to maintain a sufficient profit margin with the support of promotions at competitive prices directed to appropriate target markets through appropriate distribution channels Spread the difference between the rate charged and the rate paid (Financial institutions need to invest or lend out their available funds at a rate that exceeds the rate they are paying to their depositors Solvency the extent to which a firm's assets exceed its liabilities; differs from liquidity in that liquidity pertains to the settlement of short-term liabilities, while solvency pertains to the excess of total assets over total liabilities Time value of money a concept used to evaluate any financial decision involving differences in the timing of cash inflows and outflows; a matter of interest that may be earned if money is available today and invested, or of opportunity cost if an amount will only be received at some future date - an amount of money today is worth more than it will be at some point in the future Accounts payable an account due for payment that, in contrast to a note payable, does not involve the issuing of a formal written promise to the creditor (the two types of liabilities are shown separately in the balance sheet) Auditor's report a statement that the auditors have audited the annual financial statements and that these statements fairly represent the financial position of the firm at the financial year-end date, as well as the results of the firm's operations for the year under review and its cash flow information Balance sheet part of the financial statements of a firm; indicates the firm's financial position at a specific point in time, that is, what the assets of the firm are worth (at book value) and how they were financed by means of equity and debt financing Cash flow statement part of the financial statements of a f rm; indicates what cash flows were generated from operating activities, from financing activities and from investment activities Current assets those assets that change with the transactions that take place as business is conducted - inventory (stock), accounts receivable (debtors) and cash deposited or on hand (In a trading business, inventory would be merchandise for resale; a manufacturing f rm would hold an inventory of raw material, work-in-process and furnished goods.) Director's report an overview of the firm and its state of affairs for the benefit of the users of the financial statements; deals with the firm's nature of business (including the mission statement, the influence of the state of the economy, and prevailing conditions in the industry), profit or loss, and state of affairs; contains information on additional financing raised, any major changes in the nature of the firm's fixed assets, and dividends declared and/or paid Fixed assets (non-current assets) assets that will be retained for a longer period than the accounting period of the business, which is usually a year; include land and buildings, plant and equipment, and motor vehicles GAAP generally accepted accounting practices Income statement part of the financial statements of a firm; measures the financial performance during a certain period; that is, whether a profit or a loss was recorded; also referred to as the earnings statement of operations, and prof t and loss statement Liabilities debts, which can generally be divided into two basic categories: long-term debt in the form of loans with a maturity exceeding one year; and current liabilities, which are debts with a maturity of less than a year Owners' equity the resources invested by the owners; equal to the total assets minus the liabilities Activity ratios measure the speed at which various accounts are converted into sales or cash inflows or outflows Average collection period (ACP) a useful means for evaluating credit and collection policies; determined by dividing the average daily credit sales into the accounts receivable balance Average payment period the period that lapses between buying the products and actual payment when firms buy inventory on credit from producers or suppliers; determined by dividing the average daily credit purchases into the accounts payable balance Benchmarking a type of cross-sectional analysis in which the firm's ratio values are compared to those of a key competitor or group of competitors, which the firm wishes to evaluate Current ratio one of the most commonly cited financial ratios (used to measure liquidity) expressed as current assets divided by current liabilities Debt-equity ratio an indicator of the relationship between the long-term funds provided by creditors and those provided by the firm's owners; commonly used to measure the degree of financial leverage of the firm; defined as long-term debt divided by shareholders' equity, times 100 over 1 Debt ratio measurement of the proportion of total assets provided by the firm's creditors - the higher this ratio, the greater the amount of other people's money being used in the attempt to generate profits; the formula for calculation is total liabilities divided by total assets, times 100 over 1 Dividend per share (DPS) share earnings calculated as dividends for ordinary shareholders, divided by number of ordinary shares issued Dividend yield calculated as dividends per share, divided by current market price, times 100 over 1; the earnings per share is not all paid out to shareholders, but rather the dividends per share is the actual cash flow shareholders receive Earnings per share (EPS) measurement of the return earned on behalf of each ordinary share issued; monitored by investment analysts and portfolio managers; calculated as earnings after tax less preference dividends, divided by the number of ordinary shares issued Earnings yield: an indicator of the current income-producing power per ordinary share at the current market price Gross profit margin the indicator of the contribution from the firm's core business towards covering the firm's operating expenses Industry comparative analysis the comparison of the financial ratios of different firms in the same industry at the same point in time Inventory turnover a measurement of cost of goods sold divided by average inventory; average inventory is beginning inventory plus ending inventory, divided by 2 (The activity, or liquidity, of a firm's inventory is commonly measured by its turnover) Liquidity ratio measurement of a firm's ability to satisfy its short-term obligations as they become due Net profit margin the measurement of the percentage of each sale rand remaining after all expenses, including taxes, have been deducted; a commonly cited measure of the firm's success with respect to earning on sales Net working capital the amount by which a firm's current assets exceed its current liabilities; can be positive or negative Price earnings ratio (PE) current market price per ordinary share, divided by earnings per share (the opposite of the earnings yield); investors can multiply the P/E by the EPS to find a rough approximation of the value of an ordinary share Profitability ratios measures of profitability relating the returns of the firm to its sales, its assets or its equity, to enable the analyst to evaluate the effectiveness and efficiency of the firm's management and employees in generating profit by means of sales, the productive use of assets and the productive use of the capital of the owners - typical measures are gross prof t margin, net prof t margin, return on investment (ROI), and return on equity (ROE) or return on net assets (RONA) Quick (acid-test) ratio used to measure liquidity, it is similar to the current ratio except that it excludes inventory (as the least liquid current asset) from current assets; calculated as current assets less inventory, divided by current liabilities