Prelim 2review session

Prelim 2review session - Prelim 2 Extra office hours 6-8pm...

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Prelim 2 Extra office hours 6-8pm no calculators Kennedy auditorium. Accounting Assets= liabilities + shareholders’ equity (we will be conceptually challenged) Accounting is not an exact science—you can’t value goodwill, etc. you cant get the exact value of a firm. Two major areas Managerial Accounting - Used for internal purposes - Reports are used to pinpoint problems in the firm. Financial Accounting - prepared for the public - Reports used by public to analyze the firm Three major types of ratios!!! Activity ratios Liquidity ratios KNOW WHICH ONES FALL UNDER WHICH CATEGORY!!!! Liquidity-how quickly a company can meet its current liabilities The difference between the current ratio and quick ratio… you don’t include inventories!!!!!!!!!! Important! Profitability – they all have net income in the numerator (it’s a benchmark to test your profitability. Know all three of them and that they correspond to profitability. Activity ratios Industry matters!!! It is important to know that the numbers are just a general rule of thumb, but it also depends on the industry. Income statement – know how to derive net income (CONCEPTUALLY CHALLENGED) know the first parts of the equation. Operating expenses include rent, utilities, salaries, etc.
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Financial Management- what do financial managers do. It proves that a company will be profitable without exhibiting too much risk. Financial planning process Cash budget- firms projected inflows and outflows over a period Capital -- major asset purchases Operating budget- master budget- everything that your firm entails Sources of Funds Trade credit 15/30 Secured loan Unsecured loan- debenture Factoring – sell of some of your accts receivable for less than their worth but it brings you quick cash Equity if you’re profitable you do not have to pay dividends to your shareholder you are not REQUIRED to pay dividends Debt is cheaper than equity because the interest is tax deductible. It’s expensive to make your firm public. It is harder to raise equity because there is more risk involved. When you give away equity, you are losing some of the ownership in your own firm. Retained earnings- profits that are reinvested in your firm. They are not the most likely bet to get cash for your company. Stocks- actual ownership Bonds- credit to credit holders Bonds are not traded on exchanges, they are traded between companies. They are not included in public tradings.
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