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AEM_Prelim_2_Review_PP - Prelim Review 2 November 5 2008...

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Unformatted text preview: Prelim Review # 2 November 5, 2008 Tips! • Pay attention to give away words – Always – All – Never • There are true and false questions so key words are essential • Bring basic function calculator for about 1-2 problems • Review general information from guest speakers Income Statement Income Revenue - Cost of Goods Sold Gross Profit - General Expenses and Depreciation Operating Income - Interest - Taxes Net Profit After Taxes or Net Income *If you can’t derive right number work with multiple *If choice answers to see what works choice • Equation: Assets = Liabilities + Stockholders Equity • Liabilities • Assets – Current assets • • • • Cash Accounts Receivable Notes Receivable Inventory – Current liabilities • Accounts Payable • Notes Payable • Accrued Taxes • Accrued Salaries – Long-term liabilities • Notes payable • Bonds payable Owner’s Equity – Stock shares – Retained earnings Accounting – Fixed assets • Land • Buildings – Depreciation • • Capital equipment – Depreciation Accounting • The recording, classifying, summarizing, and interpreting of financial events and transactions to provide management and other interested parties the information they need to make good decisions • Financial Accounting (External): – Raw information from companies used by shareholders, gives a view of the company. Recorded and can be interpreted. • Managerial Accounting (Internal): – More used inside organization, tells company how can be more productive • Be able to apply these to specific tasks Ratios You Need to Know • • • • • • • • • Liquidity Ratio Inventory Turnover Ratio Return on Equity Acid Test Return on Sales Earnings per Share Current Ratio Debt to Equity Quick Ratio *Know components of each ratio as well as what the ratio is used for/means. Finance • Every step a business takes is associated with a certain expense that has to be planned • Financial difficulties can’t be predicted by just one factor • Financial Planning Process Financial • Forecast cash flow – Short-term uses – one year or less – Long-term uses – from one to ten or more years in the future Budget cash needs – Cash budget • Estimate of a firm’s projected cash inflows and outflows that the firm Estimate can use to plan for any cash shortages or surpluses during a given period; period; – Capital budget • Firms’ spending plans for major asset purchases that often require Firms’ large amounts of money; large – Operating (master) budget • Summary of a business’s proposed financial activities Control differences – Actual vs. projected flows Compare results – Modify forecasts and budgets *Know the order of the steps • • • Sources of Funds Sources Business Fund through borrowing or using retained earning When borrowing, bondholders become creditors, not stockholders • Short Term – Trade Credit – Promissory Notes – Family/Friends – Banks, etc. • Secured Loan • Unsecured Loan – Factoring – Commercial Paper • Long Term – Debt • Term-Loan • Bonds – Secured – Unsecured – Equity • Stock – Venture Capital and Private Venture Equity Equity • Retained Earnings • • Trade Credit most common Trade form of short funding form Goal of company is to Goal receive cash quick and pay out cash slowly, this maximizes amount of cash at hand hand • Commercial Paper is issued to Commercial mostly very large companies for short term funds short Break Even • Breakeven point in units – Total fixed costs / (Price – Variable cost) – (Price – Variable cost) is called contribution (Price margin margin • Breakeven point in dollars – Total fixed cost / (1 – (Variable cost / Price) ) Payback Period • Tells you the time it takes to recover your initial investment • Equation: =Initial Investment/Savings per Year or Cash Inflows * Round up to next year Net Present Value (NPV) • NPV = ∑ (I(t) – O(t)) / (1 + i)^t NPV (I(t) – – – – I(t): Annual Inflows O(t): Annual Outflows Interest rate Time Cash Inflow/(1+i)+Cash Inflow/(1+i)^2+ Cash Inflow/ (1+i)^3....-Initial Investment… If NPV is positive then good investment SWOT Analysis SWOT • Strengths – Unique or distinct advantages Unique that make your organization stand out in the crowd; stand – What makes the customers What choose your organization over the competition; the – Products or services which Products your competition cannot imitate (now and in the future). (now – INTERNAL Opportunities – Attractive choices within your Attractive marketplace: where and what; marketplace: – Emerging trends; – Potential new products and Potential capabilities. capabilities. – EXTERNAL • Weaknesses – Operations or procedures Operations in need of streamlining; in – Areas in which competitors Areas are better, how and why. are – Areas that you or your Areas organization may be avoiding; avoiding; – Market segments from Market which your organization is shut-out. shut-out. – INTERNAL Threats (EXTERNAL) Threats (EXTERNAL) – Areas in which competition Areas is forcing action that is harmful to the organization; harmful – Changes in customer Changes demand; demand; – Changes in technology. • • BCG Product Matrix - Definitions BCG • Stars – Stars are high growth businesses or products competing in markets where they Stars are relatively strong compared with the competition. Often they need heavy investment to sustain their growth. Eventually their growth will slow and, assuming they maintain their relative market share, will become cash cows. assuming Cash Cows – Cash cows are low-growth businesses or products with a relatively high market Cash share. These are mature, successful businesses with relatively little need for investment. They need to be managed for continued profit - so that they continue to generate the strong cash flows that the company needs for its Stars. to Question marks – Question marks are businesses or products with low market share but which Question operate in higher growth markets. This suggests that they have potential, but may require substantial investment in order to grow market share at the expense of more powerful competitors. Management have to think hard about "question marks" - which ones should they invest in? Which ones should they allow to fail or shrink? or Dogs – Unsurprisingly, the term "dogs" refers to businesses or products that have low Unsurprisingly, relative share in unattractive, low-growth markets. Dogs may generate enough cash to break-even, but they are rarely, if ever, worth investing in. cash • • • Types of Innovation Types • Disruptive Innovation: Technologies and products that, Disruptive while being “good enough”, offer qualitative improvements in other areas of performance; improvements – Discount stores – Internet – PDA’s • Incremental innovation – Innovation that expands on product characteristics Innovation and value propositions already in place; and • Radical innovation – Fundamental changes in product characteristics or Fundamental value propositions. value Innovation Streams: Technology Cycles over Time Technological Substitution Era of Incremental Change (2) Technological Discontinuity (2) Variation Selection Dominant Design (2) Era of Ferment (2) Technological Discontinuity (1) Era of Incremental Change (1) Variation Selection Dominant Design (1) Era of Ferment (1) Costs of Data • Acquisition cost – Cost of obtaining data that you do not have; • Processing cost – Cost of turning raw data into usable information; • Storage cost – The cost of physically or electronically archiving information for later use and retrieval; • Retrieval cost – The cost of accessing already-stored and processed information; • Communication cost – Cost of transmitting information from one place to another. Environments of the Firm Economics • International Monetary Fund – An organization of 185 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty; • World Bank – A vital source of financial and technical assistance to developing countries around the world; • World Trade Organization – The WTO deals with the rules of trade between nations at a global or near-global level. Adam Smith • Self-interested efforts result in collective benefit; • Uncoordinated markets result in optimal utilization of resources; • Private property is a more powerful incentive than public coercion. • Invisible Hand Concept – Entrepreneurs are motivated by financial rewards for their hard work Types of Competition • Perfect competition • Monopolistic competition • Oligopoly • Monopoly Types of Economies • Capitalism – An economic system in which all or most of the factors of production and distribution are privately owned and operated for profit; Socialism – A global system of social organization based on common ownership, democratic control, production for use and free access; Communism – An economic and political system in which the state makes all economic decisions and owns all the major forms of production; Mixed economies – Economic systems in which some allocation of resources is made by the market and some is made by the government. – The United States is a mixed economy • • • Major Economic Indicators • Gross Domestic Product (GDP) • Unemployment Rate • Price Indexes – Consumer Price Index(CPI) – Producer Price Index(PPI) ...
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