CHAPTER 1: FINMAN

Finance can be defined as the science and art

of managing money.
Financial services - is the area of finance
concerned with the design and delivery of advice
and financial products to individuals, businesses,
and governments.
Managerial finance concerns the duties of the
financial manager in a business.
Financial manager actively manages the
financial affairs of all types of businesses,
whether private or public, large or small, profit
seeking or not for profit.
LEGAL FORMS OF BUSINESS ORGANIZATION
Sole proprietorship A business owned by one
person and operated for his or her own profit.
Unlimited liability The condition of a sale
proprietorship (or general proprietorship), giving
creditors the right to make claims against the
owners personal assets to recover debts owed
by the business.
Partnership A business owned by two or more
people and operated for profit.
Articles of partnership the written contract
used to formally establish a business
partnership.
Corporation An entity created by law.
Stockholders The owners of a corporation,
whose ownership, or equality, takes the form of
common stock or, less frequently, preferred
stock.

Dividends - periodic distributions of cash to the

stockholders of a firm.
Board of Directors group elected by the firms
stockholders and typically responsible for
approving strategic goals and plans, selting
general policy, guiding corporate affairs, and
approving major expenditures.
President or Chief Executive Officer (CEO)
Corporate official responsible for managing the
firms day-to-day operations and carrying out
the policies established by the board of
directors.
Limited Partnership (LP) a partnership in which
one or more partners have limited liability as
long as at least one partner (the general partner)
has unlimited liability. The limited partners are
passive investors that cannot take an active role
in the firms management.
S corporation (S corp) a tax-reporting entity
that allows certain corporations with 100 fewer
stockholders to choose to be taxed as
partnerships. Its stockholders to choose to be
taxed as partnerships. Its stockholders receive
the organizational benefits of a corporation and
the tax advantages of a partnership.
Limited Liability Company (LLC) permitted in
most states, the LLC gives its owners limited
liability and taxation as a partnership. But unlike
an S corp, the LLC can own more than 80% of
another corporation, and corporations,
partnership, or non-U.S. Residents can own LLC
shares.

Limited Liability A legal provision that limits

stockholders liability for a corporations debt to
the amount they initially invested in the firm by
purchasing stock.

Limited Liability Partnership (LLP) permitted in

most states, LLP partners are liable for their own
acts of malpractice, but not for those of other
partners. The LLP is taxed as a partnership and its
frequently used by legal and accounting
professionals.

Common Stock the purest and most basic form

of corporate ownership.

Earnings per Share (EPS) the amount earned

during the period on behalf of each outstanding

share of common stock, calculated by dividing

the periods total earnings available for the
firms common stockholders by the number of
shares of common stock outstanding.
Risk the chance the actual outcomes may differ
from those expected.
Risk averse Requiring compensation to bear
risk.
Stake holders Groups such as employees,
customers, suppliers, creditors, owners and
others who have a direct economic link to the
firm.
Business ethics Standards of conduct or moral
judgement that apply to persons engaged in
commerce.
Treasurer The firms chief financial manager,
who manages the firms cash, overseas its
pension plans and manages key risk.
Controller the firms chief accountant, who is
responsible for the firms accounting activities,
such as corporate accounting, tax management,
financial accounting, and cost accounting.
Foreign exchange manager the manager
responsible for managing and monitoring the
firms exposure to loss from currency influence.
Marginal cost- benefit analysis economic
principle that states that financial decisions
should be made and actions taken only when the
added benefits exceed the added cost.
Accrual basis In preparation of financial
statements, recognizes revenue at the time of
sale and recognizes expenses when they are
incurred.
Cash basis recognizes revenue and expenses
only with the respect to actual inflows and
outflows of cash.

Corporate governance the rules, processes and

laws by which companies are operated,
controlled and regulated.
Individual investors investors who own
relatively small quantities of shares so as to meet
personal investment goals.
Institutional investors investment professional
such as banks insurance companies, mutual
funds, and pension funds that are paid to
manage the hold large quantities of securities on
behalf of others.

CHAPTER 2
Financial institution an intermediary that
channels, the savings of individuals, businesses
and governments into loans or investments.
Commercial banks institutions that provide
savers with a secure place to invest their funds
and that offer loans to individual and business
borrowers.
Investment banks institutions that assists
companies in raising capital, advise firms on
major transactions such as mergers or financial
restructurings and engage in trading and market
making activities.
Shadow banking system a group of institutions
that engage in leading activities, much like
traditional banks but do not accept deposits and
therefore are not subject to the same
regulations as traditional banks.
Financial markets forums in which suppliers of
funds and demanders of funds can transact
business directly.
Private placement The sale of a new security
directly to an investors or group of investors.
Public offering The sale of either bonds or
stocks to the general public.

Primary market - Financial market in which

securities are initially issued; the only market in
which the issuer is directly involved in the
transactions.
Secondary market financial market in which
preowned securities (those that are not new
issues) are traded.
Money market financial relationship created
between suppliers and demanders of short
terms funds.
Marketable securities short-term debt
instruments, such as us treasury bills,
commercial paper, and negotiable certificates of
deposit issued by government, business and
financial institutions, respectively.
Eurocurrency market international equivalent
of the domestic money market.
Capital market market that enables suppliers
and demanders of long term funds to make
transactions.
Bond long term debt instruments used by
business and government to raise large sums of
money generally from a diverse of group of
lenders.
Preferred stocks a special form of ownership
having a fixed periodic dividend that must be
paid prior to payment of any dividends to
common stockholders.
Broker market the securities exchanges on
which the two side of a transactions, the buyer
and seller, are brought together to trade
securities.
Securities exchange organizations that provide
the market place in which firms can raise funds
through the sale of new securities and purchases
can resell securities.
Dealer market market in w/c the buyer and
seller are not brought together directly but
instead have their orders executed by securities

dealers that make markets by offering to buy

or sell certain securities of stated prices.
Market marketers securities dealer who make
markets by offering to buy or sell certain
securities at stated prices.
Over-the-counter market market where
smaller, unlisted securities are traded.
Bid price the highest price offered to purchase
a security.
Ask price the lowest price at which a security is
offered for sale.
Eurobond market the market in which
corporations and governments typically issue
bonds denominated in dollars and sell them to
investors located outside the united states.
Foreign bond a bond that issued by a foreign
corporation or government and is denominated
in the investors home currency and sold in the
investors home market.
Efficient market a market that establishes
correct prices for the securities that firms sell
and allocates funds to their most productive
uses.
Securitization the process of pooling
mortgages or other type of loans and then selling
claims or securities against that pool in the
secondary market.
Mortgage-backed securities securities that
represent claims on the cash flows generated by
a pool of mortgages.
Federal deposit insurance corporation an
agency created by the glass-steagall act that
provides insurance for deposits at banks and
monitors banks to ensure their safety and
soundness.
Securities and exchange commissions (SEC) the
primary government agency responsible for
enforcing federal securities laws.

Marginal tax rate the rate at which additional

income is taxed.

Balance sheet summary statement of the firms

financial position at a given point in time.

Average tax rate a firms taxes divided by its

taxable income.

Current assets short-term assets, expected to

be converted into cash within 1 year or less.

Double taxation situation that occur when

after tax corporate earnings are distributed as
cash dividends to stockholders, who then must
pay personal taxes on the dividend amount.

Current liabilities short-term liabilities,

expected to paid within 1 year or less.

Capital gain the amount by w/c the scale price

of an asset exceeds the assets purchase price.

CHAPTER 3: FS ANALYSIS
Generally accepted accounting principles (GAAP)
the practice and procedure guidelines used to
prepare and maintain financial records and
reports, authorized by the financial accounting
standard board (FASB)
Financial accounting standard board (FASB) the
accounting professions rule-setting body, w/c
authorizes GAAP.
Public company accounting oversight board
(PCAOB) a not for profit corporation
established by the sarbanes- oxley act of 2002 to
protect the interest of investors.
Stockholders report annual report that
publicly owned corporations must provide to
stockholders. it summarizes and documents the
firms financial activities during the past year.
Letter to stockholders the first element of the
annual stockholders report and the primary
communication from management.
Income statement provides a financial
summary of the firms operating results during a
specified period.
Dividend per share (DPS) the amount of cash
distributed during the period on behalf of each
outstanding share of common stock.

Long term debt debt for which payment is not

due in the current year.
Paid-in capital in excess of par the amount of
proceeds in excess of the par value received
from the original sale of common stock.
Retained earnings the cumulative total of all
earnings, net of dividends, that have been
retained and reinvested in the firm since its
inception.
Statement of stockholders equity show all
equity account transactions that occurred during
a given year.
Statement of cash flow provides a summary of
the firms operating, investment, and financing
cash flows and reconciles them with changes in
its cash and marketable securities during the
period.
Notes to the financial statements explanatory
notes keyed to relevant accounts in the
statement;
Ratio analysis involves methods of calculating
and interpreting financial ratios to analyse and
monitor the firms performance.
Cross-sectional analysis comparison of the
different firms financial ratios at the same point
in time.
Benchmarking a type of cross-sectional
analysis in which the firms ratio values are
compared with those of a key competitor or with
a group of competitors that is wishes to emulate.

Time-series analysis evaluation of the firms

financial performance over time using financial
ratio analysis.

Financial leverage The magnification of risk and

return through the use of fixed-cost financing,
such as debt and preferred stock.

Liquidity a firms liability to satisfy its shortterm obligations as they come due.

Degree of indebtedness measures the amount

of debt relative to other significant balance sheet
amounts.

Current ratio a measure of liquidity calculated

by dividing the firms current assets by its current
liabilities.
= CURRENT ASSETS / CURRENT LIABILITIES
Quick acid test ratio
= CURRENT ASSETS INVENTORY / CURRENT
LIABILITIES
Activity ratio measure the speed with which
various accounts are converted into sales or
cahs, inflows or outflows.
Inventory turnover measures the activity or
liquidity of a firms inventory.
= Cost of good sold / Inventory
Average collection period the average amount
of time needed to collect accounts receivable.
= ACCOUNTS RECEIVABLE / AVERAGE SALES PER
DAY
= ACCOUNTS RECEIVABLE /ANNUAL SALES//365
Average payment period the average amount
of time needed to pay accounts payable.
= ACCOUNTS PAYABLE / AVG PURCHASES PER
DAY
=
ACCOUNTS
PURCHASES//365

PAYABLE

ANNUAL

Total assets turnover indicates the efficiency

with which the firm uses its assets to generate
sales.
= SALES / TOTAL ASSETS

Coverage ratios ratios that easures the firms

ability to pay certain fixed charges.
Debt ratio measures the proportion of total
assets financed by the firms creditors.
= TOTAL LIABILITIES / TOTAL ASSETS
Debt-to-equity ratio measures the relative
proportion of total liabilities and common stocks
equity used to finance the firms total assets.
= TOTAL LIABILITIES / COMMON STOCK EQUITY
Time interest earned ratio measures the firms
ability to make contractual interest payments;
sometimes called the interest coverage ratio.
= EARNINGS BEFORE INTEREST AND TAXES /
INTEREST
Fixed-payment coverage ratio measures the
firms ability to meet all fixed-payment
obligation.
= EARNINGS BEFORE INTEREST AND TAXES +
LEASE PAYMENTS / INTEREST + LEASE
PAYMENTS + [(PRINCIPAL PAYMENT +
PREFERRED STOCK DIVIDENDS) X [1/(1-T)]
Common-size income statement income
statement in w/c each item is expressed as a
percentage of sales.
Gross profit margin measures the percentage
of each sales dollar remaining after the firm has
paid for its goods.
= SALES COSTOF GOOD SOLD / SALES
= GROSS PROFIT / SALES

Operating profit margin measures the

percentage of each sales dollar remaining after
all costs and expenses other than interest, taxes
and preferred stock dividends are deducted.
= OPERATING PROFITS / SALES
Net profit margin the percentage of each sales
dollar remaining after all costs and expenses,
including interest, taxes, and preferred stock
dividends, have been deducted.
= EARNINGS AVAILABLE
STOCKHOLDERS / SALES

FOR

COMMON

CHAPTER 4 :
Depreciation a portion of the costs of fixed
assets charged against annual revenues over
time.
Modified accelerated cost recovery system
system used to determine the dep of assets for
tax purposes.
Recovery period the appropriate depreciable
life of a particular asset as determined by MACRS

Earnings per share

Cash flow operating activities cash flow directly

related to sale and production of the firms
products and services.

= EARNINGS AVAILABLE FOR COMMON

STOCKHOLDERS / NO. OF SHARES OF COMMON
STOCK OUTSTANDING

Cash flow from investment activities cash flow

associated with purchases and sale of both fixed
assets and equity investments in other firm.

Return on total assets measures the overall

effectiveness of management in generating
profits with its available assets

Cash flow financing activities cf that result as

from debt and equity financing transaction.

Return on equity measures the return earned

on the common stockholders investment in the
firm.

Noncash charge expense that is deducted on

the income statement but does not involve the
actual outlay of cash during the period; includes
dep, amortization, depletion.

Market ratios relate a firms market value as

measured by its current share price, to certain
accounting values.

Operating cash flow (OCF) the cash flow a firm

generates from its normal operations; calculated
as net operating profits after taxes plus dep.

Price per share measures the amount that

investors are willing to pay for each dollar of a
firms earnings; higher the p/e higher the
investors confidence.

= NOPAT + DEPRECIATION

= MARKET PRICE PER SHARE / EARNINGS PER

SHARE.

Net operating profits after taxes

Book value per share

= common stock equity / no. of shares of
common stock outstanding
Market value per share
= Market price per share of common stock / book
value per share of common stock

or
= EBIT X (1 T) + DEPRECIATION

= EBIT X (1 T)
Free cash flow (FCF) the amount of cash flow
available to investors (creditors and owners)
after the firm has met all operating needs and
paid for investments in net fixed assets and net
current assets.
FCF = OCF NET FIXED ASSET INVESTMENT , NET CURRENT ASSET INVESTMENT

NFAI = CHANGE IN NET FIXED ASSETS +

DEPRECIATION

income statement items as percentages of

projected sales.

Financial planning process planning that begins

with long term or strategic, financial plans that in
turn guide the formulation of short term or
operating, plans and budgeting.

Judgemental approach a simplified approach

for preparing the pro forma balance sheet under
which the firm estimates the values of certain
balance sheet accounts and uses its external
financing as a balancing or plug figure.

Cash budget A statement of the firms planned

inflows and outflows of cash that is used to
estimate its short-term cash requirements.
Sales forecast the prediction of the firms sales
over a given period, based on external and or
internal data; used as the key input to the short
term financial planning process.
External forecast a sales forecast based on the
relationships observed between the firms sales
and certain key external economic indicators.
Internal forecast a sales forecast based on a
build up, consensus, of sales forecasts through
the firms own sales channels.
Total cash receipts all of firms inflow of cash
during a given financial period.
Total cash disbursements all outlays of cash by
the firm during a given financial period.
Net cash flow the mathematical difference
between the firms cash receipts and its cash
disbursements in each period.
Ending cash the sum of the firms beginning
cash and it net cash flow for the period.
Excess cash balance the (excess) amount
available for investment by the firm if the
periods ending cash is greater than the desired
minimum cash balanced.
Pro forma statements projected, or forecast,
income statements and balance sheets.
Percent-of-sales method a simple method for
developing the pro forma income statement; it
forecast sales and then express the various

External financing required under the

judgemental approach for developing a pro
forma balance sheet, the amount of external
financing needed to bring the statement into
balance. It can be either a positive or a negative
value.