exam 1 princ of food and agribusiness

Time Value of Money

The concept that money available today is worth more than the same amount in the future due to its potential earning capacity.

Present Value (PV)

The current worth of a future sum of money or stream of cash flows given a specified rate of return.

Future Value (FV)

The value of an investment after it has earned interest over a specified period of time.

Interest Rate

The percentage at which interest is calculated on your money or on a loan.

Nper

The total number of payment periods in an annuity.

Pmt

The payment made each period in an annuity.

Compounding

The process of earning interest on both the initial principal and the interest that has been added to it.

Discounting

The process of determining the present value of a payment or a series of payments that will be made in the future.

Loan Amount

The total amount of money borrowed.

Periodic Payment Amount

The fixed amount paid during each payment period until a loan is repaid.

i

Represents the interest rate per period.

n

Represents the number of periods over which the interest is applied.

Excel Function =PV(Rate,Nper,[Pmt],FV,[Type])

A formula used in Excel to calculate the present value of cash flows.

Type

Indicates when payments are due; a value of 0 means payments are due at the end of the period, while 1 means due at the beginning.

what are the three C’s

compare, change, common size

Four Main types of Ratio Analysis

Liquidity, profitability, activity, solvency

ROE

Return on Equity; a measure of a company's profitability that compares net income to shareholder's equity, indicating how effectively management uses equity financing to generate profits.

ROA

Return on Assets; a financial metric that indicates how profitable a company is relative to its total assets, showing how efficiently management uses assets to generate earnings.

BEP

Basic Earning Percent

GMP

Gross Margin Percentage; a financial metric that shows the percentage of revenue that exceeds the cost of goods sold, indicating how well a company is managing its production costs.

ROS

Return on Sales; a financial metric that measures the percentage of revenue that remains after all operating expenses are deducted, indicating how effectively a company converts sales into profit.

AT

Asset turnover

OEP

Operating Expense Percentage; a financial metric that represents the proportion of revenue consumed by operating expenses, indicating cost efficiency in managing business operations.

IT

inventory turnover

ART

Accounts receivable turnover

current ratio equation

current assets/current liabilities

quick ratio equation

inventory-current assets

debt-to-equity equation

debt/equity

debt ratio equation

total liability/ total assets

coverage ratio equation

operating income/ interest expense

Revenue

Income earned from business activity for a specified time period.

Revenue Time Period

Typically defined as one calendar year.

Revenue Calculation

Calculated by Price multiplied by Quantity.

Cost

An expense a business incurs to sell or attempt to sell a product or service.

Cost Time Period

Usually one calendar year, but can also be one production cycle.

Production Cycle

The time between when production is decided and when it occurs.

how is Profit calculated

Calculated as Revenue minus Cost.

Difference Between Profit and Revenue

Profit accounts for costs, whereas revenue does not.

Financial Statement Analysis

A process of evaluating a firm's financial performance using financial statements.

Three C's of Statement Analysis

Compare, Change, Common-size - key methods for analyzing financial statements.

Comparative Analysis

Involves comparing current financial data with previous periods to assess performance.

Change Analysis

Shows the changes over time in a firm's financial statements.

Common-size Analysis

Converts financial statement items into percentages for better comparison.

Ratio Analysis

A method that examines relationships between financial statement items to assess performance.

Liquidity Ratios

Measures a firm's ability to meet short-term obligations.

Current Ratio equation

Current Assets divided by Current Liabilities, indicating liquidity.

Quick Ratio equation

Current Assets minus Inventory divided by Current Liabilities, assessing immediate liquidity.

Profitability Ratios

Measures how efficiently a firm generates profits relative to its sales, assets, or equity.

Return on Equity (ROE)

Net Income divided by Owner's Equity, indicating profitability in relation to shareholders' equity.

Return on Assets (ROA)

Net Income divided by Total Assets, measuring how efficiently assets are used to generate profit.

Breakeven Analysis

Determines the sales volume needed to cover all costs, resulting in neither profit nor loss.

Fixed Costs

Costs that do not change regardless of production volume.

Variable Costs

Costs that vary directly with the level of production.

Operating Expense Percent (OEP)

Selling, General and Administrative Expenses divided by Net Sales.

Operating Income

Earnings before interest and taxes; used in various ratios for financial analysis.

GAAP

Generally Accepted Accounting Principles; standards set by the FASB for financial reporting.

FASB

Financial Accounting Standards Board; the body that develops GAAP.

Consistency

The use of the same standards or methods over time in financial reporting.

Objectivity

The quality of being unbiased and free from ulterior motives in financial reporting.

Audits

Independent reviews of a firm's annual reports for accuracy and compliance.

Accuracy

The correctness of financial information as verified by independent accountants.

Compliance

Adhering to applicable laws and regulations in financial reporting.

Understandable

Financial records should be clear and easy to comprehend.

Relevant

Financial information that is useful for evaluation purposes.

Comparable

Financial records that can be compared with similar entities.

Predictive value

The ability of information to help predict future performance.

Cash Accounting

A method where sales are recorded when cash is received, regardless of when the sale occurs.

Accrual Accounting

A method where sales are recorded when the trade occurs, regardless of when cash is received.

Balance Sheet

A financial statement that summarizes a company's assets, liabilities, and equity.

Income Statement

A financial statement that presents a company's revenues and expenses over a specific period.

Statement of Cash Flows

A financial statement that summarizes cash inflows and outflows from operating, investing, and financing activities.

Statement of cash flows

Measures increase or decrease in cash, linking accrual-based income statement to balance sheet.

Operating activities

Cash in and out resulting from operations, such as selling meals and paying employees.

Investing activities

Cash flows resulting from buying and selling property, plant, and equipment.

Financing activities

Cash flows related to raising or distributing funds to owners, such as selling stock or repaying loans.

Cash inflow

Money received by the company, including cash from customers, interest income, and dividend income.

Cash outflow

Money paid out by the company, including payments to suppliers, employees, and for operating expenses.

Future cash flows

The ability of a company to generate cash flows in the future.

External financing

Funds that a company must raise from outside sources, like loans or investors.

Net income vs cash receipts

Examines the differences between net income reported and actual cash received or paid.

Cash impacts of transactions

The effects of a company's investing and financing activities on cash flow.

Balance Sheet

A financial statement that documents a firm's assets, liabilities, and owner's equity at a specific point in time.

Assets

Economic resources owned by a firm to operate, such as cash, inventory, and property.

Liabilities

Claims on a firm's assets by outside entities, representing what the firm owes.

Owner's Equity

The claims on a firm's assets by the owners or shareholders, representing their residual interest.

Current Assets

Assets that can be converted to cash or used within the current operating period, typically within one year.

Long-term Liabilities

Obligations not due within one year, including loans and mortgages.

Current Liabilities

Obligations due within the current operating period, such as accounts payable and notes payable.

Contributed Capital

Resources provided by the owners to the business, often through direct investment.

Retained Earnings

Undistributed profits generated by a company that are reinvested in the business.

Accounting Equation

Assets = Liabilities + Owner's Equity; a fundamental equation representing the relationship between these three components.

Intangible Assets

Assets with no physical substance, including patents, trademarks, and reputations.