Financial Management Test #1

Capital Budgeting - correct answer the process of planning and managing a firm's long-term investments Capital Structure - correct answer the mixture of debt and equity maintained by a firm Working Capital - correct answer a firm's short-term assets and liabilities; accounts included are accounts payable, accounts receivable and inventory (cash or credit) Sole Proprietorship - correct answer a business owned by a single individual partnership - correct answer a business formed by two or more individuals or entities corporation - correct answer a business created as a distinct legal entity composed of one or more individuals or entities agency problem - correct answer the possibility of conflict of interest between stockholders and management of a firm stakeholder - correct answer someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm balance sheet - correct answer financial statement showing a firms accounting value on a particular date net working capital - correct answer current assets less current liabilities generally accepted accounting principles (GAAP) - correct answer the common set of standards and procedures by which audited financial statements are prepared income statement - correct answer financial statement summarizing a firms performance over a period of time noncash items - correct answer expenses charged against revenues that do not directly affect cash flow [such as depreciation] average tax rate - correct answer total taxes paid divided by total taxable income marginal tax rate - correct answer amount of tax payable on the next dollar earned cash flow from assets - correct answer the total cash flow to creditors and cash flow to stockholders, consisting of the following: operating cash flow, capital spending and change in net working capital operating cash flow - correct answer cash generated from a firm's normal business activities free cash flow - correct answer another name for cash flow from assets cash flow to creditors - correct answer a firms interest payments to creditors less net new borrowing cash flow to stockholders - correct answer dividends paid out by a firm less net new equity raised sources of cash - correct answer a firms activities that generate cash uses of cash - correct answer a firms activities in which cash is spent [applications of cash] statement of cash flows - correct answer a firms financial statement that summarizes its sources and uses of cash over a specified period common-size statement - correct answer a standardized financial statement presenting all items in percentage terms. balance sheet items are shown as a percentage of assets and income statement items as a percentage of sales. common-base year statement - correct answer a standardized financial statement presenting all items relative to a certain base year amount financial ratios - correct answer relationships determined from a firm's financial information and used for comparison purposes DuPont identity - correct answer popular expression breaking Return On Equity into 3 parts: operating efficiency, asset use efficiency, and financial leverage Standard Industrial Classification (SIC) code - correct answer a US government code used to classify a firm by its type of business operations planning horizon - correct answer the long-range time period on which the financial planning process focuses (usually the next 2-5 years) aggregation - correct answer the process by which smaller investment proposals of each of a firms operational units are added up and treated as one big project percentage of sales approach - correct answer a financial planning method in which accounts are varied depending on a firms predicted sales level dividend payout ratio - correct answer the amount of cash paid out to a shareholder divided by net income