WGU C708 Principles of Finance

The revenues and the expected incurred to generate those revenues must be reported together; a fundamental component of accrual-based accounting. - Matching Principle Items that appear on the financial statement are listed at the cost when purchased. - Historical Cost Principle Cash or assets that will be converted into cash within the next year. - Current Assets Property, Plant, and Equipment (PP&E). These are on the books at their historical cost. This does not include accumulated depreciation (do not consider accumulated depreciation when calculating cash flows). - Gross Fixed Assets The more liquid the asset, the more quickly it can be turned into cash; measures how quickly an asset can be turned into cash without taking a large discount in value. - Liquidity Short-term, high-quality securities such as Treasury Bills and certificates of deposit (CDs). - Marketable Securities A balance/reserve account that decreases the balance of an Accounts Receivable (AR) account if there is doubt that all payments will be made to the firm to an amount that they expect to collect. - Contra-Asset Account Includes raw material, work-in-progress, and finished goods. They are the least liquid. - Inventories Assumes that the last inventory items purchased by the company are the first ones sold to customers. - Last In, First Out (LIFO) Assumes that the first units purchased are the first sold. - First In, First Out (FIFO) The original purchase price. - Historical Cost Historical Cost - Accumulated Depreciation - Book Value Obligations that require cash in the next year to pay. - Fixed Liabilities The borrowing of interest-bearing money from a financial institution that the firm will owe back. - Notes Payable (NP) Obligations that have been uncured but not paid, such as employee wages or utilities. - Accruals A debt obligation with a maturity longer than one year, such as rent, office staff, and administration costs. - Long-Term Debt Accounts that are generated when the firm issues stock. - Common Stock and Additional Paid-In Capital Net Income - Dividends. Money generated from the operations of the company that have been reinvested in the existing assets of the firm. - Retained Earnings (RE) the owner's stake in the business. This includes what is from the owner's pocket, from stocks sold, and Retained Earnings. - Owner's Equity Shows the revenues and expenses associated with a company's operations for a given period of time. - Income Statement How much it cost to make what was sold. Includes direct materials and direct labor. - Cost of Goods Sold (COGS) Costs that are not directly tied to production, such as rent, office staff, and administrative costs. - Operating Expenses Depreciation and Amortization...intangibles - Non-Cash Expenses Spent cash. - If assets go up, it is because you borrowed cash. - If your liabilities go up, it is because you All current assets except cash. - Operational Assets All current liabilities except notes payable. - Operational Liabilities Shows where the firm's cash is coming from and where it is going; the most honest of the financial statements. - Cash Flow Statement Change in cash for the year - CFO + CFI + CFF Used in comparing company performance, as it allows us to scale for size. Used because A) it is standard, B) it is flexible, C) it helps us look at the right places in order for us to better understand performance, and D) it helps us by evaluating whether the firm is achieving its goals to maximize shareholder wealth. - Ratio Analysis When management chooses to enrich itself at the expense of shareholders. - Principle-Agent Problem Allows you to calculate the highest return possible utilizing several variables; measures management's effectiveness - Dupont Equation/Dupont ROE Net Operating Profit After Taxes. It is equivalent to EBIT except do not subtract taxes. - NOPAT All interest-bearing debt (such as Notes Payable and Long-Term Debt) plus Owner's Equity. - Costly Capital