Introduction to Financial Management and Statement Analysis

These flashcards cover introductory concepts of financial management, financial statement types, analysis techniques, ratios, and cash flow reporting methods based on the provided prelim reviewer notes.

Finance

The lifeblood of business organizations; described as the art and science of managing money.

Business Finance (Wheeler)

Business activity which concerns the acquisition and conversion of capital funds in meeting financial needs and overall objectives of a business enterprise.

Business Finance (Guthumann and Dougall)

Activity concerned with planning, raising, controlling, administering of the funds used in the business.

Corporate Finance

Field concerned with budgeting, financial forecasting, cash management, credit administration, investment analysis, and fund procurement; also deals with the financial problems of corporate enterprises according to the Encyclopedia of Sciences.

Private Finance

A type of finance that deals with the activities of the different legal forms of business organizations.

Public Finance

A type of finance concerned with the revenue and disbursements of the Government.

Financial Management

Mainly concerned with effective funds management in the business which entails investing, financing, and dividend decisions.

Profit Maximization

The traditional approach to financial management where the ultimate aim is to increase profitability or cash per share maximization; it ignores the time value of money and risk.

Wealth Maximization

The modern approach to financial management, also known as value maximization or net present worth maximization, which considers both the time and risk of the business concern.

Econometrics

The application of a large number of mathematical and statistical tools and techniques to financial management.

Forecasting Financial Requirements

The primary function of the finance manager, responsible for estimating the financial requirement of the business concern.

Managerial Compensation Incentives

Incentives designed to match a manager's compensation with the company's performance, often through rewards for targets and company stocks.

Shareholder Intervention

The power of shareholders to oust management who do not act in the best interest of the shareholders.

Threat of (Hostile) Takeover

A motivation for managers where the acquiring firm fires the existing managers or they lose power.

Income Statement

Also called the profit and loss account, it determines the entire operational performance like total revenue generated and expenses incurred for an accounting year.

Statement of Financial Position

Also called the Balance Sheet, it reflects the financial position of the firm at the end of the financial year, covering total assets, liabilities, and capital.

Statement of Changes in Owner’s Equity

Also called the Statement of Retained Earnings, it provides information about the position of owner's equity and how retained earnings are employed.

Statement of Cash Flows

An official document providing a summary of operating, investing, and financing activities and how they help understand changes in financial position from one period to another.

Intra-comparability

The process of comparing the previous year's result with the current year within the same company.

Inter-comparability (Benchmarking)

The process of comparing the company's results with that of a competitor.

Horizontal Analysis

Also called dynamic analysis, where the current year's figures are compared with a base year (considered as $100\%$) to see how financial information changed over several years.

Vertical Analysis

Also called static analysis or common-size analysis, where financial statements measure the quantities relationship of various items on a particular period, such as restating all items as a percentage of sales ($100\%$).

Trend Analysis

Comparing several years (up to $10$ years) to build prediction models and identify problem areas through abnormal changes; if using index numbers, it is called index analysis.

Liquidity Ratio

Short-term ratios that express the relationship between current assets and current liabilities to meet current obligations.

Activity Ratio

Also called turnover ratios, these measure the efficiency of putting assets to work during a particular period.

Solvency Ratio

Also called leverage ratios, these measure long-term obligations and the financial risk resulting from the choice of debt or equity financing.

DuPont Analysis

A technique of dissecting a single ratio into two or more related ratios to decompose a return into components like total asset turnover, financial leverage, and net profit margin.

Operating Cycle

The length of time from when a company makes an investment in goods and services to the time it collects cash from accounts receivable.

Net Operating Cycle

The length of time of the operating cycle considering that the company makes some of its purchases on credit.

Margin

A profitability ratio representing the portion of revenues that is a profit.

Return

A profitability ratio that compares a profit with the investment necessary to generate the profit.

Price-to-Earnings Ratio (P/E)

The ratio of the price per share of equity to the earnings per share ($P/E = \frac{\text{Price per share}}{\text{EPS}}$).

Cash Equivalents

Includes treasury and commercial bills and short-term liquid investments such as time deposits convertible into cash within $3$ months from acquisition.

Operating Activities

Cash flow category generally involving transactions that determine net income, such as sales of goods, interest on loans granted, and payments to suppliers/employees.

Investing Activities

Cash flow category showing the impact of buying and selling fixed assets (property, plant, equipment) and debt or equity securities of other entities.

Financing Activities

Cash flow category showing the impact of transactions with shareholders and borrowing/repaying transactions with lenders.

Indirect Method

A reporting method for the Statement of Cash Flows that converts net income from an accrual basis to a cash basis through adjustments for non-cash transactions.

Current Cash Debt Coverage Ratio

A measurement of liquidity using cash from operations to settle obligations; a favorable ratio is $1.9:1$.

Cash Debt Coverage Ratio

Measures the solvency of the business; a favorable ratio is $0.90:1$.

Free Cash Flow

Measures the ability of cash from operating activities to fund expansion (acquisition of properties) and payment of dividends.

Additional Funds Needed (AFN)

The difference between forecasted assets and forecasted liabilities and equity, financed from external sources.

Financing Feedbacks

The effects on the income statement and balance sheet of actions taken to finance the forecasted increase in assets, such as additional interest expense or dividends.