mgmt 212 exam 3

chapters 8-12 + app. C

Liability

It is an obligation of a company to transfer some economic benefit in the future.

Most liabilities require the payment of what in the future?

cash

When are current liabilities payable?

Within one year from the balance sheet date

When are long-term liabilities payable?

Usually in more than one year

Operating cycle

The length of time from spending cash to provide goods and services to a customer until collecting cash from that customer.

Notes payable

written promises to repay amounts borrowed plus interest

Line of credit

An informal agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures and prepare paperwork

Commercial paper

Borrowing from another company rather than from a bank

Accounts payable (trade accounts payable)

Amounts the company owes to suppliers of merchandise or services that it has bought on credit.

Gift card breakage

The point in time when gift cards expire or when the likelihood of redemption by customers is viewed as remote

FICA taxes

Based on the Federal Insurance Contributions Act; tax withheld from employees’ paychecks and matched by employers for Social Security and Medicare

Unemployment taxes

A tax to cover federal and state unemployment costs paid by the employer on behalf of it employees

Fringe benefits

Additional employee benefits paid for by the employer

Deferred revenus

Cash received in advance from a customer for products or services to be provided in the future

Sales tax payable

Sales tax collected from customers by the seller represents current liabilities payable to the government

Current portion of long-term debt

Debt that will be paid within one year from balance sheet

Contingencies

Uncertain situations that can result in a gain or a loss for a company

Contingent liability

An existing uncertain situation that might result in a loss

Contingent gain

An existing uncertain situation that might result in a gain

Liquidity

Having sufficient cash (or other assets convertible to cash in a relatively short time) to pay currently maturing debts

Working capital

The difference between current assets and current liabilites

Current ratio

Current Assets / Current Liabilities

measures the availability of current assets to pay current liabilities

Quick assets

includes only cash, current investments, and accounts receivable

Debt covenant

An agreement between a borrower and a lender requiring certain minimum financial measures be meet or the lender can recall the debt

Capital structure

the mixture of liabilities and stockholders’ equity in a business

Convertible

A bond feature that allows the lender (or investor) to convert each bond into a specified number of shares of common stock

Debt to equity ratio

Total liabilities / total stockholders’ equity

measures a company’s risk

Times interest earned ratio

ratio that compares interest expense with income available to pay those charges

Amortization schedule

Provides a table format detailing the cash payment each period, the portions of each cash payment that represent interest and the change in carrying value, and the balance of the carrying value

Annunity

Cash payments of equal amounts over equal time periods

Bond

A formal debt instrument issued by a company to borrow money. The issuing company (borrower) is obligated to pay back the investor (lender):

(1) a stated amount, referred to as the principal or face amount, at a specified maturity date

(2) periodic interest payments over the life of the bond

Callable

A bond feature that allows the borrower to repay the bonds before their scheduled maturity date at a specified call price

Debt financing

borrowing money from creditors (liabilities)

Default risk

The risk that a company will be unable to pay the bond’s face amount or interest payments as they become due

Discount

A bond’s issues price is below the face amount

Early extinguishment of debt

The issuer retires debt before its scheduled maturity date

Equity financing

Obtaining investment from stockholders (stockholders’ equity)

Installment payment

Includes both an amount that represents interest and an amount that represents a reduction of the outstanding balance

Lease

A contractual arrangement by which the lessor (owner) provides the lessee (user) the right to use an asset for a specified period of time

Market interest rate

An implied rate based on the price investors are willing to pay to purchase a bond in return for the right to receive the face amount at maturity and periodic interest payments over the remaining life of the bond

Premium

A bond’s issue price is above the face amount

Private placement

Sale of debt securities directly to a single investor

Return on assets

Net income / average total assets

measures the amount of net income generated for each dollar invested in assets

Secured bonds

Bonds that are supported by specific assets pledged as collateral

Serial bonds

Bonds that require payment of the principal amount of the bond over a series of maturity dates

Sinking fund

An investment fund used to set aside money to be used to pay debts as they come due

Stated interest rate

The rate specified in the bond contract used to calculate the cash payments for interest

Term bonds

Bonds that require payment of the full principal amount at a single maturity date

Unsecured bonds

Bonds that are not supported by specific assets pledged as collateral

Paid in capital

The amount of stockholders have invested in the company

Corporation

An entity that is legally separate from its owners and even pays its own income taxes

Articles of incorporation

Describes the nature of the firm’s business activities, the shares to be issued, and the composition of the initial board of directors.

Organization chart

Traces the line of authority within the corporation.

Angel investors

Wealthy individuals in the business community willing to risk investment funds on a promising business venture.

Venture capital firms

Provide additional financing, often in the millions, for a percentage ownership in the company.

Initial public offering (IPO)

The first time a corporation issues stock to the public.

Publicly held corporation

Allows investment by the general public and is regulated by the Securities and Exchange Commission.

Privately held corporation

Does not allow general public investment and typically has fewer stockholders.

Limited liability

Stockholders in a corporation can lose no more than the amount they invested in the company.

Double taxation

Corporate income is taxed once on earnings at the corporate level and again on dividends at the individual level.

S corporation

Allows a company to enjoy limited liability as a corporation, but tax treatment as a partnership.

Authorized stock

Shares available to sell, as stated in the company’s articles of incorporation.

Issued stock

Shares sold to investors; includes treasury shares.

Outstanding stock

Issued shares that currently are held by investors; does not include treasury shares.

Treasury stock

A company’s own issued stock that it has purchased.

Par value

The legal capital assigned per share of stock.

No-par value stock

Common stock that has not been assigned a par value.

Stated value

The legal capital assigned per share to no-par stock.

Additional paid-in capital

The portion of the cash proceeds from issuing stock above par value.

Preferred stock

Stock with preference over common stock in the payment of dividends and the distribution of assets.

Convertible

A bond feature that allows the lender (or investor) to convert each bond into a specified number of shares of common stock.

Redeemable

Shares can be returned to the corporation at a fixed price.

Cumulative

Preferred stock shares receive priority for future dividends if dividends are not declared in a given year.

Dividends in arrears

Unpaid dividends on cumulative preferred stock.

Retained earnings

Earnings not distributed as dividends to stockholders over the life of the company.

Accumulated deficit

A negative balance in retained earnings

Dividends

Distributions to stockholders, typically in the form of cash.

Declaration date

The date the board of directors announces the next dividend to be paid.

Record date

The date on which a company looks at its records to determine who the stockholders of the company are.

Payment date

The date of the actual distribution of dividends.

Property dividend

The distribution of a noncash asset to stockholders.

Stock dividends

Additional shares of a company’s own stock are given to stockholders.

Stock split

A large stock dividend that includes a reduction in the par or stated value per share.

Statement of stockholders’ equity

A financial statement that summarizes the changes in stockholders’ equity over time.

Dividend yield

Dividends per share divided by the stock price.

Price-earnings ratio

The stock price is divided by earnings per share so that both stock price and earnings are expressed on a per share basis.

Value stocks

Stocks that tend to have lower price-earnings ratios and are priced low in relation to current earnings

Statement of cash flows

A financial statement that measures activities involving cash receipts and cash payments over a period of time.

Operating activities

Transactions involving revenue and expense activities.

Investing activities

Transactions involving the purchase and sale of long-term assets and current investments.

Financing activities

Transactions with lenders, such as borrowing money and repaying debt, and with stockholders, such as issuing stock, paying dividends, and purchasing treasury stock.

Non-cash activities

Significant investing and financing activities that do not affect cash.

Indirect method

Begins with net income and then lists adjustments to net income in order to arrive at operating cash flows

Direct method

Adjusts the items in the income statement to directly show the cash inflows and outflows from operations, such as cash received from customers and cash paid for inventory, salaries, rent, interest, and taxes.

Cash return on assets

Net cash flows from operating activities divided by average total assets; measures the operating cash flow generated per dollar of assets.

Cash flow to sales

Net cash flows from operating activities divided by sales revenue; measures the operating cash flow generated per dollar of sales.

Vertical analysis

Expresses each item in a financial statement as a percentage of the same base amount measured in the same period.