Financial Management and CVP Analysis Flashcards

Comprehensive vocabulary flashcards covering key definitions, roles, financial market structures, liquidity ratios, statement of cash flows, and CVP analysis concepts.

Finance

The system that includes the circulation of money, the granting of credit, the making of investments, with the provision of banking facilities, and the overall management of money and financial resources.

Financial Management (Corporate Finance)

An area of finance focusing on decisions relating to how much and what types of assets to acquire, how to raise the capital needed to purchase assets, and how to run the firm.

Capital Markets

Financial markets dealing with long-term funds (greater than $1$ year), including primary and secondary markets where stocks and bonds are issued.

Money Market

Financial markets dealing with short-term funds (less than $1$ year), such as T-Bills, time deposits, foreign exchange, commercial papers, and overnight borrowings.

Security Analysis

An investment activity involving fundamental analysis and technical analysis to determine the true values of securities.

Portfolio Theory

An investment framework dealing with selecting the best structure or combination of stocks and bonds to achieve the lowest risk.

Behavioral Finance

An area of finance where the psychology of investing is examined.

Intrinsic Value

The true value of a stock, estimated by a marginal investor who has conducted a security analysis.

Controller

A financial officer responsible for accounting and financial reporting, internal audit, cost and tax accounting, planning for control, government reporting, protection of assets, and economic appraisal.

Treasurer

A financial officer responsible for cash management, banking relationships, sources of financing, financial and investment planning, capital budgeting, risk management, investor relations, and credits and collections.

Limited Liability Company (LLC)

A hybrid business organization between a partnership and a corporation that provides limited liability to owners while being taxed like a partnership.

Corporation

An artificial being created by operation of law having the right of succession and the powers, attributes, and properties expressly authorized by law or incident to its existence.

Agency Theory

A theory addressing potential conflicts of interest between stockholders and managers, as well as between stockholders and creditors.

Stock Index

A scoreboard created by combining the share prices or market values of a specific group of companies into a single number to measure market performance.

Bull Market

A period during which stock prices rise consistently over time, typically by $20\%$ or more from a recent market low, characterized by investor optimism and economic growth.

Bear Market

A period during which stock prices decline significantly, typically by $20\%$ or more from a recent market high, characterized by investor pessimism and economic slowdown.

Operating Activities

Cash flow transactions that create revenues and expenses related to the company's core operations, generally involving current assets, current liabilities, and income statement items.

Investing Activities

Cash flow transactions involving long-term assets, such as purchasing/disposing of investments and property, plant, and equipment, or lending money and collecting loans.

Financing Activities

Cash flow transactions involving long-term liabilities and stockholders' equity, such as issuing/repaying debt, issuing stock, repurchasing shares, and paying dividends.

Working Capital

A measure of liquidity cushion calculated as $\text{Current Assets}-\text{Current Liabilities}$ .

Current Ratio

A liquidity ratio measuring a firm's ability to cover short-term debt using all current assets, calculated as $\frac{\text{Current Assets}}{\text{Current Liabilities}}$ .

Quick Ratio (Acid-Test)

A strict measure of liquidity excluding inventory and prepaids, calculated as $\frac{\text{Current Assets} - \text{Inventory} - \text{Prepaid}}{\text{Current Liabilities}}$ .

Cost-Volume-Profit (CVP) Analysis

An analytical method that estimates how changes in costs (fixed and variable), sales volume, and sales price affect a company's profit.

Variable Costs

Costs that change in total proportionally as activity or production volume changes, but remain constant per unit within the relevant range.

Fixed Costs

Costs that remain constant in total within the relevant range, regardless of changes in production volume or activity level.

Contribution Margin Per Unit

The portion of revenue from each unit sold that covers fixed costs and generates profit, calculated as $\text{Sales price per unit}-\text{Variable cost per unit}$ .

Contribution Margin Ratio

The percentage of each peso of sales remaining after deducting variable costs, calculated as $\frac{\text{Contribution margin per unit}}{\text{Sales price per unit}}$ .

Break-Even Point (BEP) in Units

The sales volume where total contribution margin equals total fixed costs, calculated as $\frac{\text{Total fixed cost}}{\text{Contribution margin per unit}}$ .

Break-Even Point (BEP) in Pesos

The total sales revenue required to cover all costs, calculated as $\frac{\text{Total fixed cost}}{\text{Contribution margin ratio}}$ .

Margin of Safety

The amount of units sold or revenue earned above the break-even volume, measuring how far sales can drop before incurring an operating loss.

Operating Leverage

The use of fixed operating costs to produce a greater percentage change in profit in response to a percentage change in sales volume.

Degree of Operating Leverage

A quantitative metric assessing operating leverage at a given sales level, calculated as $\frac{\text{Contribution Margin}}{\text{Net Income}}$ .

Selling Price Decreases

Contribution margin per unit decreases, break-even point increases and profit decreases

Selling Price Increases

Contribution margin per unit increases, break-even point decreases and profit increases.

Variable costs Decreases

Contribution margin per unit increases, break-even point decreases and profit increases

Variable costs increases

Contribution margin per unit decreases, break-even point increases and profit decreases

Fixed Costs decreases

Contribution margin per unit remains the same, break-event point decreases and profit increases

Fixed Costs Increases

Contribution margin remains, break-even point increases and profit decreases