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Finance Test 1 - Amin
Key Terms
21
Finance
Undergraduate 3
10/01/2012

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Term
Capital Budgeting
Definition
The process of making and managing expenditures on long-lived assets.
Term
Capital Structure
Definition
Represents the proportions of the firm's financing from current liabilities, long-term debt, and equity.
Term
Net Working Capital
Definition
Current Assets minus Current Liabilities. Associated with short term management of cash flow.
Term
Sole Proprietorship
Definition
Business owned by one person. Cheapest to from, no corporate income tax, unlimited liability (no difference between personal and business assets), life limited by the life of the sole proprietor, equity money limited to proprietor's personal wealth.
Term
General Partnership
Definition
All partners agree to provide some fraction of the work and cash to share profits and losses. Unlimited liability for all debts. Terminated when general partner dies or withdraws. Difficult to raise large amounts of cash (limited by ability and desire to raise cash), Taxed as personal income, Majority vote needed on important matters.
Term
Limited Partnership
Definition
Limit the liability of some partners to amount of cash each has contributed to the partnership. One partner must be general partner and Limited partners cannot participate in management. May sell their interest in the business.
Term
Corporation
Definition
Distinct legal entity, considered a citizen in state of incorporation, enter contracts, sue, etc.
Ownership can be easily transferred, has unlimited life, liability limited to amount invested.
Term
Articles of Corporation
Definition
1. Name of corporation.
2. Intended life of the coporation (could be forever)
3. Business Purpose
4. Number of Authorized Shares to issue, with a statement of limitations
5. Nature of rights granted to shareholder
6. Number of members of the initial board of directors.
Term
The goal of Financial Management
Definition
Goal is to maximize the current value per share of the existing stock.
Term
Agency Relationship
Definition
Relationship between stockholders and management.

Principal: You
Agent: The person selling your car
Term
Agency Problem
Definition
Conflict between the agent and principal. Driven by incorrect incentives.
Term
Agency Cost
Definition
Costs of the conflict of interest between stockholders and management.

Indirect: Lost opportunity.

Direct:
1. Corporate expenditure that benefits management but costs the stockholders. (luxurious corporate jet)

2. Expenses arise from the need to monitor managements actions. (Paying outside auditors)
Term
Stakeholder
Definition
Someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm.
Term
Securities Act of 1933
Definition
Requires a corporation to file a registration statement with the SEC that must be made available to every buyer of a new security.
Term
Securities Exchange Act of 1934
Definition
Extends the disclosure requirements of the 1933 Act to securities trading in markets after they have been issued. Deals with issue of insider trading.
Term
Balance Sheet
Definition
Accountant's snapshot of the firm's accounting value on a particular date (firms stands still).

Assets = Liabilities + Stockholders Equity
Term
Income statement
Definition
Measures performance over specific period of time

Revenue - Expenses = Income
Term
Noncash Items
Definition
Expenses against revenues, but do not affect cash flow. Depreciation and Deferred Taxes
Term
Deferred Taxes
Definition
Result from difference between accounting income and true taxable income. Not a cash outflow. On balance sheet as deferred tax liability.
Term
Short run
Definition
Period of time in which certain equipment, resources, and firm commitments are fixed. But long enough to vary output by using more labor and raw material.
Term
Long Run
Definition
All costs are variable.

Product Costs v. Period Costs
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