Financial Module Study Sheet

General: The form will be similar to previous quizzes but instead of True False, you will have to pick between 2 or 3 answers for most questions. Familiarity with terms and concepts covered in class should enable you to do well. You don’t need to memorize things but should be familiar with them or at least how to access the information quickly. It is open book as usual.

Skills Include Understanding:

Balance Sheet: you should know the meanings of major terms we have discussed and concepts such as: capital expenses versus expenses which can be deducted on an income statement; the ordering of assets from more liquid to less; the idea of property, plant and equipment less depreciation; the idea that depreciation when taken comes from the asset being depreciated on the balance sheet and moved to the income statement; the concept of retained earnings (the meaning of negative and positive) and how they come from the net income on the income statement and get transferred at the end of the year to the balance sheet; how to calculate stockholders equity; concept of amortization (see handout) what liabilities are composed of; the concept of receivables and payables and where they belong and their interrelationship. Dividends are not an expense shown on an income statement but rather become a distribution which comes from assets on the balance sheet.

Income and Expense Statement (aka Profit and Loss Statement) you need to understand all the major categories and their relationships on the statement, to the balance sheet and to the cash flow projection. In other words, what composes operating income or EBITDA; how you calculate net income, where depreciation and amortization comes from and its relationship to cash flow, ie. adding it back in to the extent it’s taken. Gross Margin, operating income and expenses.

Cash Flow Projection (what will be the sources and uses of cash in the future-amount and measure of plan): the idea that cash flow is different from the calculation of net income in that non cash items of depreciation and amortization are added back in. A cash flow statement includes cash expenditures for items which are capitalized. A company needs to know its cash needs in a week, month and year (cash budget forecasts future). How cash flow can be impacted by reduction or increase of receivables or payables. You should also understand that cash flow and its availability relate to the ability to make capital expenditures. In other words, what can you afford to do, pay for something or do you need to borrow money to pay for it. Is it better to outsource or pay for it yourself.

Break Even Analysis: why it is important to use; how it is calculated.

Short Term Planning Focuses on the company’s current assets and liabilities:

Short term debt and short term liabilities ( what should be financed from this type of debt versus long term debt-ie. debt of longer than 1 year) Usually, the amount of long term debt available will determine how much short term debt is required. Long term debt is often less expensive than short term debt but not always. One has to be aware of costs in the marketplace.

Sources of short term funds include:

Operations, Bank lending:

Secured and unsecured Loans; Selling Receivables (factoring); Borrowing against inventory

Cash is needed to: Take advantage of trade discounts; Take advantage of business opportunities; Maintain good credit standing; Maintain balances to offset cost of funds; Cover seasonal variances; Keep short term costs at a minimum by limiting borrowing

Long Term Planning Focuses on Future Product Development and Sales Objectives i [ii]

A. Looking at 1) best case, 2) normal growth case and 3) retrenchment case, managers look at some of the following items to determine if future cash flow will provide a sufficient return on their investment. Managers need to determine what can be done with internal resources (internal growth) and what requires external funds (debt or equity).

B. Most managers will try to finance all fixed assets and some current assets with equity and long term debtii[iii] In essence, match long term fixed assets with long term debt where at all possible.

Use of different Ratios: We discussed in class, return on assets and return on equity. You should be familiar with those and understand how to calculate them. You should also be familiar with the idea of p/e’s and how they are calculated.

1. Balance sheet ratios: Debt- Equity Ratio; Current ratio (current assets/current liabilities) 2. Operating Ratios or Profitability ratios: Return on Assets (ROA) –calculate using net income/total assets; ROE (Return on Equity) Earnings for shareholders/ equity 3. Income and Expense to Balance Sheet or Efficiency Ratios (Sales to assets; Inventory turnover (cost of goods sold/average inventory) 4. Market Value Ratios: PE ratio (Stock price/earnings per share); Dividend Yield (dividend per share/stock price)

 Sources of Long term financing: 1. Installments on purchases of equipment (multi year payments) 2. Long term leasing of equipment ( ie. airplanes) 3. Mortgages against real estate 4. Commercial Bank Loans 5. Insurance Company Loans, Pension Funds Loans 6. Local and State Development Corporations 7. Small Business Loans

 Equity Financing-Sale of stock to:

1. Friends, relatives, shareholders; equity investors; venture capitalists; investors’ institutions

 Advantages of raising equity also called equity sales:

1. NO requirement of payback

2. No fixed interest or amortization costs

3. Ratio of equity in a company can attract and even lower bank cost of funds

4. Possibility of sale of a portion at a higher rate than for the entire company

5. Good for the long term growth prospects of a company

6. Increasing stock price when public can be used to attract workers

 Disadvantages

1. Loss of Control

2. Sometimes, pure debt is less costly and less dilutive in the long run

Financial Terms: Stocks; stock split; margin accounts; options: calls and puts; bonds and bond terms, ie. maturity, face value; coupon or interest rate ( Go to www.investopedia.com if need be); basis points.

Bonds: Terminology; also, understand in general their relationship to changing interest rates and how they are priced to market and how that might affect value if not held to maturity. i ii