BUS 105 Chapter 15

True Financial statements are the formal reports of a business's financial transactions that accountants prepare periodically. They represent what has happened in the past and provide management, as well as various outsiders such as creditors and investors, with a perspective of what is going to happen in the future.

CFO A financial manager is sometimes referred to as a chief financial officer (CFO). A financial manager oversees the financial operations of a company. Generally, a financial manager assumes accounting responsibilities for the company. A financial manager is responsible for planning and managing the company's financial resources.

1.25 The debt to equity ratio measures how much debt a company has relative to its assets by comparing a company's total liabilities to its total owners' (or shareholders') equity. Debt to equity ratio is calculated as Total Liabilities / Total Owners' Equity.

Credit As a business develops and establishes a good relationship with a bank, the business owners may seek to open a line of credit. You can think of a business line of credit like credit on hand, which a manager can access at any time up to an amount agreed upon between the bank and the company. The funds can be withdrawn all at once or in multiple withdrawals during the stated period.

Greater than Cash flow gaps occur when cash outflows are greater than cash inflows. Cash flow budgets help financial managers determine whether the business needs to seek outside sources of funds beyond sales to manage anticipated cash shortages.

tax accounting Paying taxes is an important part of running a business. Federal, state, and local governments require individuals and organizations to file tax returns annually. Tax accounting involves preparing taxes and giving advice on tax strategies.

cash Liquidity is the speed at which assets can be turned into cash.

two It can be risky to take on too much debt, so lenders consider how much debt a company has relative to the amount of equity (or assets) a company owns before they issue a loan. A common leverage ratio is for a company to have at least twice the amount of equity as it has debt.

actual After the budget is developed, it must be compared periodically to the actual performance of the company. It is very important that management compare actual performance regularly to the budget. This generally occurs every month. Without such a comparison, it is hard to determine whether the company is actually performing as expected.

financing Financing activities shows the cash exchanged between the firm and its owners (or shareholders) and creditors, including dividend payments and debt service.

equity Funds for equity financing are generated by the owners of the company rather than an outside lender. These funds might come from the company's own savings or partial sale of ownership in the company in the form of stock.

gross profit Gross profit tells a company how much money the company makes just from its products and how efficiently management controls costs in the production process.

True In 2002, Congress passed the Sarbanes-Oxley Act. It was created to protect investors from corporate accounting fraud. The act established the Public Company Accounting Oversight Board, which is responsible for overseeing financial audits of public companies.

Financial Accounting Standard Board Accountants in the United States follow a set of generally acceptable accounting principles (GAAP) that are standard accounting rules defined by the Financial Accounting Standard Board (FASB), an independent organization.

False In most companies, the finance department is comprised of two divisions: accounting and financial management. The financial manager assumes the accounting responsibility for a company.

true Accounting is not only for organizations that strive to make money; government institutions and not-for-profit companies use accounting as well. Government and not-for-profit accounting refers to the accounting required for organizations that are not focused on generating a profit, such as legislative bodies and charities. Governmental and not-for-profit organizations need financial management expertise.

true Most companies use debt to finance operations, which increases the company's leverage. Leverage is the amount of debt used to finance a firm's assets with the intent that the rate of return on the assets is greater than the cost of the debt.

false Financing activities shows the cash exchanged between the firm and its owners (or shareholders) and creditors, including dividend payments and debt service. It is the operating activities section that shows cash used or provided by the core business of the company.

managerial Managerial accounting is responsible for tracking sales and the costs of producing the sales (production, marketing, and distribution). By doing so, it helps determine how efficiently a company is run. Moreover, managerial accountants help determine which business activities are most and least profitable. Based on their analysis, management is better equipped to make decisions about whether to continue with, expand, or eliminate certain business activities.

both an art and a science While accounting involves a great deal of precision, there are also some degrees of interpretation in the process of accounting. This makes accounting both an art and a science.

false The biggest disadvantage of equity financing is the dilution of ownership.

manage production Information on a statement of cash flows is useful to creditors who are interested in determining a company's short-term health, particularly in its ability to pay its bills. In addition, it signals to investors that the business is generating enough money to buy new inventory and to make investments in the business. Accounting personnel, potential employees, or contractors may be interested in cash flow information to determine whether a company will be able to afford salary and other labor obligations.

false Current liabilities are obligations to be paid within one year or less. Long-term liabilities include debts and obligations that are owed by the company that are due more than one year from the current date such as mortgage loans for the purchase of land or buildings, long-term leases on equipment or buildings, and bonds issued for large projects.

$1.25 The portion of a company's profit allocated to the stockholders on a per-share basis is determined by calculating earnings per share. The general formula for earnings per share is calculated as net income / outstanding shares.

accounting Accounting involves tracking a business's income and expenses through a process of recording financial transactions. The transactions are then summarized into key financial reports that are further used to evaluate the business's current and expected financial status.

venture Venture capital is an investment in the form of money that includes a substantial amount of risk for investors. Because of the high level of risk, the group of outside investors, called venture capitalists, command an active role in a company's management decisions. Venture capitalists seek their return in the form of equity, or ownership, in a company. They anticipate a large return on their investment when the company is sold or goes public. Venture capitalists are willing to wait longer than other investors, lenders, or shareholders for returns on their investments, but they expect higher than normal results.

liabilities Liabilities are all debts and obligations owed by the business to outside creditors, suppliers, or other vendors.

liquidity Although many investors focus on a company's profitability as an indicator of strength, a company's liquidity-how quickly an asset can be turned into cash-is often a better indicator. After all, companies go bankrupt when they cannot pay their bills, not because they are unprofitable.

current Current assets are those assets that can be turned into cash within a year. Examples of current assets include cash, accounts receivable, inventory, and short-term investments such as money market accounts.

statement of cash flows On a statement of cash flows, the bottom number, or change in cash and cash equivalents, reflects the overall change in the company's cash position. If it is positive, it means that the company had an overall positive cash flow. If it is negative, the company paid out more cash than it took in. On a balance sheet, the first line item under current assets is cash and cash equivalents. The difference between cash and cash equivalent figures between periods is the same value that appears at the bottom of the cash flow statement for the same period.

operating An operating (master) budget includes all the operating costs for an entire organization, including inventory, sales, purchases, manufacturing, marketing, and operating expenses. The operating budget maps out the projected number of units to be sold and estimated income for the coming year, in addition to all anticipated costs of operating the business to manufacture and sell the estimated level of business.

2.00 The current ratio is a measurement used to determine the extent to which a company can meet its current financial obligations. Current ratio is calculated as Current Assets / Current Liabilities.

true Revenue is the amount of money generated by a business by either selling goods or performing services.

true The easiest way to think of owners' equity is what is left over after a business has accounted for all its assets and taken away all that it owes.

the current and future state of the economy In developing forecasts, the financial manager takes many factors into consideration, including the company's current and future plans, the economy's current and future state of affairs, and the competition's current and anticipated actions. In addition, the financial manager must anticipate the impact such factors will have on the company's financial situation.

cost of goods sold Cost of goods sold (COGS) is a separate item on an income statement. COGS are the variable expenses a company incurs to manufacture and sell a product, including the price of raw materials used in creating the good along with the labor costs used to produce and sell the items.

accounting The process of bookkeeping centers on the fundamental concept that what a company owns (assets) must equal what it owes to its creditors (liabilities) plus what it owes to its owners (owners' equity). This balance is the fundamental accounting equation: assets = liabilities + owners' equity.

within a year or less Short-term liabilities, also known as current liabilities, are obligations a company is responsible for paying within a year or less and are listed first on the balance sheet. They consist of accounts payable, accrued expenses, and short-term financing.

false Double entry bookkeeping assures that the accounts are kept in balance. For every transaction that affects an asset, an equal transaction must also affect a liability or owners' equity.

financial accounting Financial accounting is an area of accounting that produces financial documents to aid decision makers outside an organization in making decisions regarding investments and credibility. Such information is generally found in key documents like quarterly statements or annual reports-documents produced once a year that present the current financial state of a company and future expectations.

financial Without good financial controls and planning, a company will not be able to respond to unexpected challenges or planned expansion. Financial management involves the strategic planning and budgeting of short- and long-term funds for current and future needs. Tracking past financial transactions, controlling current revenues and expenses, and planning for future financial needs of the company are the foundation of financial management.

true This takes monies that are owed to a company by clients or suppliers and turns them to cash that a company can then use almost immediately.

both checking and savings Checking and savings accounts are a form of demand deposit, funds that can be withdrawn (or demanded) at any time without prior notice.

corporate accounting Corporate accounting is the part of an organization's finance department that is responsible for gathering and assembling data required for key financial statements. Corporate accounting has two separate functions: managerial accounting and financial accounting.

Balance_Sheet A balance sheet shows what the company owns and what it has borrowed (owes) at a fixed point in time and shows the net worth of the business.

false Current assets are those assets that can be turned into cash within a year. An example is accounts receivable. Fixed assets are assets that have more long-term use, such as real estate, buildings, machinery, and equipment.

ratio Ratio analysis is a comparison of numbers and therefore is used to compare current data to data from previous years, competitors' data, or industry averages. Ratios eliminate the effect of size, so you can reasonably compare a large company's performance to a smaller company's performance.

receivable Factoring is the process of selling accounts receivable for cash. A finance company pays a business money in exchange for a business's accounts receivable, and the finance company will keep the money that is owed on those accounts as it is received. The finance company pays the value of the accounts receivable to the company selling them, less a fee.

describing the history of double entry bookkeeping Financial management involves the strategic planning and budgeting of short- and long-term funds for current and future needs. Tracking past financial transactions, controlling current revenues and expenses, and planning for future financial needs of the company are the foundation of financial management. Double entry bookkeeping recognizes that for every transaction that affects an asset, an equal transaction must also affect either a liability or owners' equity.

false Short-term financing is any type of financing that is repaid within a year or less. It is used to finance day-to-day operations, such as payroll, inventory purchases, and overhead (utilities, rent, leases).

double entry To maintain the balance of assets and liabilities plus owner's equity, accountants use a recording system called double entry bookkeeping. Double entry bookkeeping recognizes that for every transaction that affects an asset, an equal transaction must also affect either a liability or owners' equity.

false Financing with bonds allows a company to use money from investors to create or obtain business assets without diluting ownership. The biggest disadvantage of equity financing is the dilution of ownership.

the company is fulfilling its plans If the actual numbers generated by the company closely match the budget, this shows the company is fulfilling its plans. On the other hand, if the actual numbers differ greatly from those projected by the budget, this indicates that corrective actions must be taken.

short-term Short-term financing is any type of financing that is repaid within a year or less. It is used to finance day-to-day operations such as payroll, inventory purchases, and overhead (utilities, rent, leases).

true Double entry bookkeeping assures that the accounts are kept in balance. For every transaction that affects an asset, an equal transaction must also affect a liability or owners' equity.

commercial paper Those companies who have a high-quality debt rating can issue commercial paper. When a company has a high-quality debt rating, it means it is looked upon favorably by lenders as being a company that has a good or excellent likelihood of paying off its debt. Commercial paper is an unsecured short-term debt instrument of $100,000 or more, typically issued by a corporation to bridge a cash flow gap created by large accounts receivable, inventory, or payroll. Commercial paper comes due in 270 days or less and is not required to go through the same registration process as other longer-term debt and equity instruments.

Income_Statement An income statement shows how much money is coming into a company and how much money a company is spending over a period. It shows how well a company has done in terms of profit and loss.

false Assets are the things a company owns, which include cash, investments, buildings, furniture, and equipment. Liabilities are the amounts that a company owes to creditors.

are less than If a company has negative working capital (its current assets are less than its current liabilities), that means it is currently unable to offset its short-term liabilities with its current assets. When a company's current liabilities surpass its current assets, many financial difficulties incur, bankruptcy being the most severe.

true To remain competitive, businesses must make large strategic investments such as buying or building a new factory or investing in more advanced machinery or technology. At the same time, they also must ensure that they can pay their monthly bills. Financial management involves setting up and monitoring controls to make certain the plans and budgets are monitored sufficiently so that the business can reach its financial goals.