Fin Reviewer - 1
Fin Reviewer - 1
TRUE 11.The Securities and Exchange Commission (SEC) requires partnership to submit Articles of Partnership.
TRUE 12.The agency theory is known to pose a potential conflict of interest between the stockholders and the
managers
FALSE 13.A corporation has an initial life of 60 years and renewable for another 60 years.
TRUE 14.Social responsibility has to be mandatory rather than voluntary to ensure that a burden of additional cost on
social responsibility will be distributed uniformly among businesses.
TRUE 15. A company may employ threats of a takeover or shutdown to force the manage to act competently in
accordance with the interest of stockholders. However, it seems that it is more likely a punishment to the
stockholders and not to the manager.
BUSINESS ETHICS - A company's attitude and conduct toward its employees, customers, community, and
stockholders.
CORPORATE GOVERNANCE - The way top managers operate and interface with stockholders.
MARKET VALUE - The stock value based on the perceived but possibly incorrect information as seen by the marginal
investor.
SARBANES - OXLEY ACT - A law passed by Congress that requires the CEO and CFO to certify that the firm's
financial statements are accurate.
FINANCIAL MANAGEMENT - Focuses on decisions relating to how much and what types of assets to acquire, how
to raise the capital needed to buy assets, and how to run the firm so as to maximize its
value.
INVESTMENT - It relates to decisions concerning stocks and bonds and includes activities such as security analysis,
portfolio theory, and market analysis.
CAPITAL MARKETS - Markets for securities which have a life of more than one year.
INVESTMENT DECISION - The decision to purchase a new plant or property for an expansion program of the
company.
STOCK INTRINSIC VALUE - The estimate of the stock's true value as calculated by a competent analyst.
KENNETH LAY - He was the CEO and Chairman of Enron from 1985 to 2002.
DIVIDEND POLICY - It is the process of determining how much money should be declared as dividends to be given to
the stockholders.
INTRINSIC VALUE - refers to estimated true value of a stock. It differs from person to person
MARKET VALUE - is the estimate resulting from a security analysis by a marginal investors
➢ A stock is considered as overvalued when the actual market price is higher than the intrinsic value and
undervalued when the actual market price is lower than the intrinsic value
Arguments raised about profit maximization not being the main objectives in financial managements :
1. A change in profit is also a change in risk
2. It fails to determine the timing of benefits
➢ Higher cash inflows in the early years would mean better benefits to a company because of its possibility
of generating income from other potential sources
3. Measurements of accounting profits can be inaccurate
Advantage
1. Ease of formation
2. Control over operations
3. No sharing of profits
4. Simplicity
5. No taxation
Disadvantages
1. Limited Life
2. Unlimited life
3. Difficulty in raising capital
4. Limitation of Skills
2. Partnership -
Chapter 2
FINANCIAL STATEMENTS - objective is to provide useful information about the financial position, result of the
operation and cash flow of a company for the decision making of a wide range of users
COMPONENTS OF FS
1. BALANCE SHEET - statement that shows financial position of the company at a particular time. Compose of
assets, liabilities and stockholders equity.
2. INCOME STATEMENT - a formal statement that shows the result of the operation in a certain period of time .
Represents the companies generated revenue.
3. STATEMENT OF STOCKHOLDERS EQUITY - a required basic statements that shows the movement of the
components of equity :
❖ Issuance of Stock - the common or preferred stock issued during the year
❖ Retained Earning - the accumulated income or loss of the company covering the past year of operations
❖ Declaration of cash dividends - dividends declared for the year that deduction from retained earning
❖ Distribution of stock dividends - disclose that stock dividend rate and the amount of stock dividend
distributed to stockholders
❖ Purchase and sale of treasury stock - it includes a companies stock originally issued but were bought
back and not retired
❖ Accumulated other comprehensive income - includes the unrealized gains and losses on available for
sale investment and foreign currency translation adjustment
❖ Correction of Error - list the errors in the past that are corrected
4. STATEMENTS OF CASH FLOW - a financial statements that shows the company's cash receipts and cash
payments during specific period of time
5. ACCOUNTING POLICIES AND NOTES TO FINANCIAL POSITION - the guides used in the preparation
of financial statements . The detailed information that does not appear in the
financial statements is also appear in this part
FREE CASH FLOW - the available cash produced by a company from its operating activities after considering the
capital expenditures
- A good indicator of how efficient a company is in generating cash
MARKET VALUE ADDED - a performance indicator that shows the difference between the market value of the equity
and the total amount of Capital supplied by investments
ECONOMIC VALUE ADDED - measure of a company performance based on the difference between the net operating
profit and the total invested capital
- an important indicator of how profitable a company project are
FINANCIAL STATEMENT ANALYSIS - an evaluation of the past and current performance of a company and its
forecast in the future
TOOLS AND TECHNIQUES IN FINANCIAL ANALYSIS
1. HORIZONTAL ANALYSIS - used to evaluate the trend in the accounts over the year
a. Comparative Statements - financial data of a company for two specific year are compared to show the
increase or decrease in the account balances
b. Trend Ratio - present financial ratio of a company is compared with its past and expected future ratios to
determine
2. VERTICAL ANALYSIS - uses a significant item in the FS as a base value, and all other items in FS are
compared
a. Common - size statement - each account in the FS is expressed by dividing them to a common base
account
b. Financial Ratios - five groups
1. LIQUIDITY RATIO - determines the company ability to meet its maturing short term obligation
2. ACTIVITY OR ASSET MANAGEMENT RATION - used to determine how quickly various
accounts are converted into sales or cash
3. LEVERAGE RATION - determines the company ability to meet its long term obligation
4. PROFITABILITY RATIO - shows the profitability of the operations of a company
5. MARKET VALUE RATIO - relates the companies stock price to its earnings
LIQUIDITY RATION
1. WORKING CAPITAL -
2. CURRENT RATIO - computed by dividing CA to CL. This ratio is frequently used measure of liquidity .
It asses the ability of the company to meet its current liabilities paid by its current assets
3. QUICK RATIO - it reflects the company ability to pay its short-term obligation
4. CASH POSITION RATIO -
PROFITABILITY RATIO
1. GROSS PROFIT MARGIN - measures of the company manufacturing and distributing efficiency during the
production process
2. PROFIT MARGIN - another measurement of the management efficiency.
3. RETURN ON TOTAL ASSETS -
4. RETURN ON EQUITY
5. EQUITY MULTIPLIER
DIVIDEND RATIO
1. DIVIDEND YIELD
2. DIVIDEND PAYOUT RATIO