Lecture Wise Questions of ACC501 By Virtualians.pk

Lecture No.23

Zero Growth Stocks? Zero Growth Stocks are referred to those stocks in which companies are provided fixed or constant amount of dividend to their stockholders. In zero growth stocks dividend of each period is equal.

D = D1 = D2 = D3 ………

Zero Growth Stocks can be viewed as an ordinary perpetuity having equal amount of dividend

received. Zero growth stock is also known as as no growth stock.

What is the Bid price of stock and ask price of stock?

Ask price of a stock represents the price on which the stock is bought in stock market. Bid price represents the price on which the stock is sold in the stock market. Generally, ask price is higher than bid price in the market.

what is coupon and yield and what is difference in between them?

Coupon rate is the annual rate of interest on the bond’s face value that a bond’s issuer promises to pay to the bondholder and when issuer pays it to the bondholder, it is termed as coupon payment. For example, if XYZ company issues a bond of Rs.1,000 and promises to pay 10% coupon annually. This 10% rate will be termed as the coupon rate and when XYZ Company paid Rs. 100 annually, this amount will be called coupon payment.

Yields associated to bonds can be of two type’s i.e. current yield and yield to maturity (YTM).

Current Yield is a return that indicates the amount of current income a bond provides relative to its market price.

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Yield to maturity (YTM) is the rate of return expected on a bond if it is held until the maturity date. Yield to maturity expressed as an annual rate.

By the book, stock yield is the simple ratio of annual dividends divided by the share price. If a stock can be expected to pay out $1 in dividends over the next year and is currently trading for $50, its dividend yield is 2%. A stock paying out $1 in dividends currently trading for $25 sports a 4% yield. Yield can be calculated based on dividends paid over the past year or dividend expectations for the next.

Lecture No.24

Shareholder Rights? Shareholders' rights means rights to take part in different operations and functions of the company. Some of the rights of shareholders are given below:

· Right to elect directors and managers, who carry the objectives of the company

· Right to take part in Annual General Meetings

· Right to Receive proportionately in dividends paid

· Right to vote for the important matters of the company; one share one vote

· Right to be considered at the time of issuance of new shares.

· Right to receive net assets at the time of liquidation.

These are some of the rights a shareholder of a company may enjoy. You are advised to consult Lesson # 24 for detailed elaboration of shareholders' rights.

NPV (Net Present Value)

NPV (Net Present Value) is a technique that is used to evaluate a particular investment. A financial manager decides on the basis of NPV whether investment should be made in a

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particular project or not.

Formula:

NPV = Present value of future cash flows – Initial Investment

Formula for calculating the present value of future cash flow depends upon the nature of cash flows received; If equal cash flows are expected to be received at the end or beginning of each interval for a specific period of time then we can use a formula of ordinary annuity or annuity due. In case, unequal cash flows are expected to be received after specific intervals then it is treated as mixed stream and the present value of each cash flow is calculated by using present value formula.

PVn = [CF1 / (1 + i)] + [CF2 / (1 + i)2] + [CF3 / (1 + i)3] + . . . . + CFn / (1 + i)n

Lecture No.25

What is the difference between Corporate Financing and Financial Management?

Corporate Finance and Financial Management are two different subjects in there nature of functioning. Financial management is a process that ensures the operating data is correct, complete and recorded in accordance with regulatory guidelines, corporate policies and industry practices. Corporate finance is a business function that helps a company's top management evaluate operating data and determine liquidity needs.

Financial Management includes planning, directing and controlling of the financial activities of business organization. It may be sole proprietor, partnership and a company. On the other hand, Corporate Finance deals with activities specifically related to the corporations/companies. It includes certain corporate financial techniques including capital budgeting, capital structure and dividend policies.

What is staggering? Staggering represents a technique used for electing directors when a small number of directors (or a part of board of directors) is up for election at a particular time. For example, if there are three directors out of the whole board of directors are up for election at a particular time then this

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technique of staggering may be used. This particular method actually contrasts the system in which all board members go up for re-election annually.

Difference between dealer and broker?

Brokers are agents who take part as an intermediary to complete the securities transaction. They try to make an agreement of those who willing to buy securities and who want to sell securities.

Dealers are the persons who purchase the securities and sell to others

What is the difference between preffered and common stocks?

Preffered and common stocks are different in two key aspects. First, preferred stockholders have a greater claim to a company's assets and earnings. This is true during the good times when the company has excess cash and decides to distribute money in the form of dividends to its investors. In these instances when distributions are made, preferred stockholders must be paid before common stockholders. However, this claim is most important during times of insolvency when common stockholders are last in line for the company's assets. This means that when the company must liquidate and pay all creditors and bondholders, common stockholders will not receive any money until after the preferred shareholders are paid out.

Second, the dividends of preferred stocks are different from and generally greater than those of common stock. When you buy a preferred stock, you will have an idea of when to expect a dividend because they are paid at regular intervals. This is not necessarily the case for common stock, as the company's board of directors will decide whether or not to pay out a dividend. Because of this characteristic, preferred stock typically don't fluctuate as often as a company's common stock and can sometimes be classified as a fixed income security. Adding to this fixed-income personality is the fact that the dividends are typically guaranteed, meaning that if the company does miss one, it will be required to pay it before any future dividends are paid on either stock. Lecture No.26

how to calculate the pay back rules with example

For project A, you can see that initial investment is $100 and the cash flows from the

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project are as follows:

First year $ 30

Second year $ 40

Third year $ 50

Fourth year $ 60

So, it can be observed that company is recovering $70 in two years i.e. $30 in first year and $40 in second year. Now, the company needs only $30 more in order to recover its initial cost and this amount will be recovered from the cash inflow of third year. Now you have the following data to be used in formula:

Years before recovery = 2

Uncovered Cost = $30

Cash Flow from which the cost is to be covered = $50

By putting these values into the following formula, you can have the exact figure for payback period:

Payback Period = Years before recovery + (Uncovered Cost / Cash Flow from which the cost is to be covered) The concepts of present value and future value

The present value is the current value of future cash flows discounted at a certain discount rate or rate of interest whereas future value is the worth of any present

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investment in some future time if it is invested at a certain interest rate.

Present value involves the technique of discounting while future value involves the technique of compounding. Internal Rate of Return

Internal Rate of Return (IRR) is considered as one of the techniques of Capital Budgeting, which is used for the evaluation of proposed investment projects.

Lecture No.27

AAR (Average Accounting Return)

AAR (Average Accounting Return) is a measure of accounting profit relative to book value.

We can calculate AAR through following formula:

AAR = Average Net Income \ Average Book Value

Internal Rate of Return (IRR) Method in Capital Budgeting Decisions:

1. Define and explain the internal rate of return (IRR).2. Evaluate the acceptability of an investment project using the internal rate of return

(IRR) method.3. What are the advantages and disadvantages of internal rate of return?

Definition and Explanation:

The internal rate of return (IRR) is the rate of return promised by an investment project over its useful life. It is some time referred to simply as yield on project. The internal rate of return is computed by finding the discount rate that equates the present value of a project's cash out flow with the present value of its cash inflow In other words, the internal rate of return is that discount rate that will cause the net present value of a project to be equal to zero. Example:

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A school is considering the purchase of a large tractor-pull dawn mower. At present, the lawn is moved using a small hand pushed gas mower. The large tractor-pulled mower will cost $ 16,950 and will have a useful life of 10 years. It will have only a negligible scrap value, which can be ignored. The tractor-pulled mower will do the job much more quickly than the old mower and would result in a labor savings of $ 3,000 per year. To compute the internal rate of return promised by the new mower, we must find the discount rate that will cause the new present value of the project to be zero. How do we do this? The simplest and most direct approach when the net cash inflow is the same every year is to divide the investment in the project by the expected net annual cash inflow. This computation will yield a factor from which the internal rate of return can be determined. The formula or equation is as follows: [Factor of internal rate of return = Investment required / Net annual cash inflow] (1) The factor derived from formula (1) is then located in the present value tables to see what rate of return it represents. Using formula (1) and the data for school's proposed project, we get: Investment required / Net annual cash inflow = $16,950 / $3,000 = 5.650

Lecture No.28

Conventional and non- Conventional cash flow

Conventional cash flow is a series of inflow and outflow of cash over time and there is only one change in the cash flow direction. A conventional cash flow normally has an initial outlay or outflow, followed by a number of inflows over a period of time. For example, Rs.100,000 is the initial cost of a project and this project will provide us annual cash inflow of Rs.10,000. Here you can see that there is a no change in the cash flow direction i.e. initial investment and then cash inflows.

Non-conventional cash flow is a series of inflow and outflow of cash over time and there is more than one changes in the cash flow direction. This contrasts with a conventional cash flow, where there is only one change in cash flow direction. For example, Rs.100,000 is the initial cost of a project and this project will provide us annual cash inflow of Rs.10,000 but after the 1st year of the project we need more Rs.50,000. Here you can see that there is a change in the cash flow direction i.e. initial investment and then cash inflows and then a cash outflow.

what is Net Present Value?

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The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project.

NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield. what is Internal rate of Return?

The discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the project. As such, IRR can be used to rank several prospective projects a firm is considering. Assuming all other factors are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first.

IRR is sometimes referred to as "economic rate of return (ERR)." what is Profitablity Index?

An index that attempts to identify the relationship between the costs and benefits of a proposed project through the use of a ratio calculated as:

what is Averege Accounting Return?

The amount of profit, or return, that an individual can expect based on an investment made. Accounting rate of return divides the average profit by the initial investment in order to get the ratio or return that can be expected. This allows an investor or business owner to easily compare the profit potential for projects, products and investments.

what is Capital Budgeting techniques:?

A variety of measures have evolved over time to analyze capital budgeting requests. The better methods use time value of money concepts. Older methods, like the payback period, have the

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deficiency of not using time value techniques and will eventually fall by the wayside and be replaced in companies by the newer, superior methods of evaluation. Few important techniques are: Payback Period Net Present Value Internal Rate of Return Lecture No.29

Difference between sunk cost and opportunity cost? Sunk cost is a cost that has already been incurred and cannot be recovered and this cost will not be relevant for the future. For example, expenses incurred on the feasibility of a project are sunk cost even if we opt to do that project or not.

Opportunity cost is the benefit of the alternative project that you have forgone to pursue a project. For example, if there are two projects; project A and project B and you have to opt one of them. If you chose to go for project A, the benefits from the project B will be considered as opportunity cost for you.

What is Net Working Capital?

A measure of both a company's efficiency and its short-term financial health. The working capital is calculated as:

The working capital ratio (Current Assets/Current Liabilities) indicates whether a company has enough short term assets to cover its short term debt. Anything below 1 indicates negative W/C (working capital). While anything over 2 means that the company is not investing excess assets. Most believe that a ratio between 1.2 and 2.0 is sufficient.

Also known as "net working capital". Incremental Cash Flow:

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The additional operating cash flow that an organization receives from taking on a new project. A positive incremental cash flow means that the company's cash flow will increase with the acceptance of the project.

What is Financing Cost?

The total expenses associated with securing financing for a project or business arrangement. Financing costs may include interest payments, financing fees charged by intermediary financial institutions, and the fees or salaries of any personnel required to complete the financing process.

Definition of 'Opportunity Cost'

1. The cost of an alternative that must be forgone in order to pursue a certain action. Put anotherway, the benefits you could have received by taking an alternative action.

2. The difference in return between a chosen investment and one that is necessarily passed up.Say you invest in a stock and it returns a paltry 2% over the year. In placing your money in the stock, you gave up the opportunity of another investment - say, a risk-free government bond yielding 6%. In this situation, your opportunity costs are 4% (6% - 2%).

Definition of 'Working Capital'

A measure of both a company's efficiency and its short-term financial health. The working capital is calculated as:

The working capital ratio (Current Assets/Current Liabilities) indicates whether a company has

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enough short term assets to cover its short term debt. Anything below 1 indicates negative W/C (working capital). While anything over 2 means that the company is not investing excess assets. Most believe that a ratio between 1.2 and 2.0 is sufficient.

Also known as "net working capital". Lecture No. 30

what is Pro Forma Financial Statement? Pro-forma financial statement is prepared in advance to plan for future transactions or to estimate the future financial result of a project. Pro-forma statement also helps the organization to summarize the future operations. To prepare these statements, we need estimates of quantities including, unit sales, selling price per unit, variable cost per unit and total fixed cost. how to calculate the profitability index ? Profitability index can be defined as benefit cost ratio. To calculate the profitability index, present values of future cash flows are divided by the initial investment of the project.

The formula of profitability index is as follows:

PI = Present value of future cash flows Initial investment of the project

For example, if a project cost Rs.200,000 and the present value of its future cash flows is Rs.220,000, then the profitability index would be:

PI = Rs.220,000 Rs.200,000

PI = 1.10 Definition of 'Cost Of Funds'

The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one of the most important input costs for a financial institution, since a lower cost will generate better returns when the funds are deployed in the form of short-term and long-term loans to borrowers. The spread between the cost of funds and the interest rate charged to borrowers represents one of the main sources of profit for most financial institutions.

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Lecture No.31

what is projected Performa statement?

Projected or estimated financial statement that attempts to present a reasonably accurate idea of what a firm's

financial situation would be if the present trends continue or certain assumptions hold true. Pro forma

statements are used routinely in preparing 'what if' scenarios, formulating business plans, estimating cash

requirements, or when submitting financing proposals. Also called projected statement.

Lecture No.32

Definition of 'Return'

The gain or loss of a security in a particular period. The return consists of the income and the capital gains relative on an investment. It is usually quoted as a percentage

Definition of 'Earned Income'

Income derived from active participation in a trade or business, including wages, salary, tips, commissions and bonuses. This is the opposite of unearned income.

Definition of 'Capital Gain'

1. An increase in the value of a capital asset (investment or real estate) that gives it a higherworth than the purchase price. The gain is not realized until the asset is sold. A capital gain may be short term (one year or less) or long term (more than one year) and must be claimed on income taxes. A capital loss is incurred when there is a decrease in the capital asset value compared to an asset's purchase price.

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2. Profit that results when the price of a security held by a mutual fund rises above its purchaseprice and the security is sold (realized gain). If the security continues to be held, the gain is unrealized. A capital loss would occur when the opposite takes place.

what is Dollar return?:

The return on a portfolio during any evaluation period that include the change in the market value of a portfolio.

Dollar return = cash received + change in dollar value of asset Percentage return:

Percentage return is calculate as follows

Percentage return = Dividend yield + Capital gain yield

Where Dividend yield is equal to

Dividend yield = Dividend / Beginning price

And Capital gain yield is equal to

Capital gain yield = (Ending – Beginning price) / Beginning price Lecture No.33 Definition of 'Variability'

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The extent to which data points in a statistical distribution or data set diverge from the average or mean value. Variability also refers to the extent to which these data points differ from each other. There are four commonly used measures of variability: range, mean, variance and standard deviation.

Definition of 'Variance'

A measurement of the spread between numbers in a data set. The variance measures how far each number in the set is from the mean. Variance is calculated by taking the differences between each number in the set and the mean, squaring the differences (to make them positive) and dividing the sum of the squares by the number of values in the set.

Definition of 'Standard Deviation'

1. A measure of the dispersion of a set of data from its mean. The more spread apart the data, thehigher the deviation. Standard deviation is calculated as the square root of variance.

2. In finance, standard deviation is applied to the annual rate of return of an investment tomeasure the investment's volatility. Standard deviation is also known as historical volatility and is used by investors as a gauge for the amount of expected volatility.

Definition of 'Expected Return'

The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, if one invested in a stock that had a 50% chance of producing a 10% profit and a 50% chance of producing a 5% loss, the expected return would be 2.5% (0.5 * 0.1 + 0.5 * -0.05). It is important to note, however, that the expected return is usually based on historical data and is not guaranteed.

Lecture No.34

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Definition of 'Cost Of Capital'

The cost of funds used for financing a business. Cost of capital depends on the mode of financing used – it refers to the cost of equity if the business is financed solely through equity, or to the cost of debt if it is financed solely through debt. Many companies use a combination of debt and equity to finance their businesses, and for such companies, their overall cost of capital is derived from a weighted average of all capital sources, widely known as the weighted average cost of capital (WACC). Since the cost of capital represents a hurdle rate that a company must overcome before it can generate value, it is extensively used in the capital budgeting process to determine whether the company should proceed with a project.

Definition of 'Weighted Average Cost Of Capital - WACC'

A calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation. All else equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk.

The WACC equation is the cost of each capital component multiplied by its proportional weight and then summing:

Where: Re = cost of equity Rd = cost of debt E = market value of the firm's equity D = market value of the firm's debt V = E + D E/V = percentage of financing that is equity

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D/V = percentage of financing that is debt Tc = corporate tax rate

Businesses often discount cash flows at WACC to determine the Net Present Value (NPV) of a project, using the formula:

NPV = Present Value (PV) of the Cash Flows discounted at WACC.

Lecture No.35

Definition of 'Portfolio'

A grouping of financial assets such as stocks, bonds and cash equivalents, as well as their mutual, exchange-traded and closed-fund counterparts. Portfolios are held directly by investors and/or managed by financial professionals.

Lecture No.36

Weighted Average Cost of Capital

A company has different sources of finance, namely common stock, retained earnings, preferred stock and debt. Weighted average cost of capital (WACC) is the average after tax cost of all the sources. It is calculated by multiplying the cost of each source of finance by the relevant weight and summing the products up.

Formula

For a company which has two sources of finance, namely equity and debt, WACC is calculated using the following formula:

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Cost of equity is calculated using different models for example dividend growth model and capital asset pricing model.

Cost of debt is based on the yield to maturity of the relevant instruments. If no yield to maturity can be calculated we can base the estimate on the instrument's current yield, etc.

The weights are based on the target market values of the relevant components. But if no market values are available we base the weights on book values.

Example

Company λ has a 1 million shares of common stock currently trading at $30 per share. Current risk free rate is 4%, market risk premium is 8% and the company has a beta of 1.2.

It also has 50,000 bonds with of $1,000 par paying 10% coupon annually maturing in 20 years currently trading at $950.

The tax rate is 30%. Calculate the weighted average cost of capital.

Solution: First we need to calculate the weights of debt and equity. Market Value of Equity = 1,000,000 × $30 = $30,000,000 Market Value of Debt = 50,000 × $950 = $47,500,000 Total Market Value of Debt and Equity = $77,500,000 Weight of Equity = $30,000,000 / $77,500,000 = 38.71% Weight of Debt = $47,500,000 / $77,500,000 = 61.29% Weight of Debt can be calculated as 100% minus cost of equity = 100% − 38.71% = 61.29%

Second step in our solution is to calculate the cost of equity. With the given data we can use capital asset pricing model (CAPM) to calculate cost of equity as follows:

Cost of Equity = Risk Free Eate + Beta × Market Risk Premium = 4% + 1.2 × 8% = 13.6%

We also, need to find the cost of debt. Cost of debt is equal to the yield to maturity of the bonds. With the given data, we can find that yield to maturity is 10.61%.

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After tax cost of debt is hence 10.61% × ( 1 − 30% ) = 7.427%

And finally, WACC = 38.71% × 13.6% + 61.29% × 7.427% = 9.8166%

Uses of WACC

Weighted average cost of capital is used in discounting cash flows for calculation of NPV and other valuations for investment analysis.

WACC represents the average risk faced by the organization. It would require an upward adjustment if it has to be used to calculate NPV of project which are more risk than the company's average projects and a downward adjustment in case of less risky

projects. Lecture No .37

Definition of 'Capital Structure'

A mix of a company's long-term debt, specific short-term debt, common equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds.

Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common stock, preferred stock or retained earnings. Short-term debt such as working capital requirements is also considered to be part of the capital structure.

LectureNo.38

Definition of 'Modigliani-Miller Theorem - M&M'

A financial theory stating that the market value of a firm is determined by its earning power and the risk of its underlying assets, and is independent of the way it chooses to finance its investments or distribute dividends. Remember, a firm can choose between three methods of financing: issuing shares, borrowing or spending profits (as opposed to dispersing them to

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shareholders in dividends). The theorem gets much more complicated, but the basic idea is that, under certain assumptions, it makes no difference whether a firm finances itself with debt or equity.

Lecture No.39 Bankruptcy Costs

M&M II might make it sound as if it is always a good thing when a company increases its proportion of debt relative to equity, but that's not the case. Additional debt is good only up to a certain point because of bankruptcy costs.

Bankruptcy costs can significantly affect a company's cost of capital. When a company invests in debt, the company is required to service that debt by making required interest payments. Interest payments alter a company's earnings as well as cash flow.

For each company there is an optimal capital structure, including a percentage of debt and equity, and a balance between the tax benefits of the debt and the equity. As a company continues to increase its debt over the amount stated by the optimal capital structure, the cost to finance the debt becomes higher as the debt is now riskier to the lender.

The risk of bankruptcy increases with the increased debt load. Since the cost of debt becomes higher, the WACC is thus affected. With the addition of debt, the WACC will at first fall as the benefits are realized, but once the optimal capital structure is reached and then surpassed, the increased debt load will then cause the WACC to increase

Lecture No.40 Expressed as an indicator (days) of management performance efficiency, the operating cycle is a "twin" of the .cash conversion cycle. While the parts are the same - receivables,inventoryand payables - in the operating cycle, they are analyzed from the perspective of how well the

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company is managing these critical operational capital assets, as opposed to their impact on cash.

Formula:

Components:

DIO is computed by: 1. Dividing the cost of sales (income statement) by 365 to get a cost of sales per day figure;2. Calculating the average inventory figure by adding the year's beginning (previous yearend

amount) and ending inventory figure (both are in the balance sheet) and dividing by 2 toobtain an average amount of inventory for any given year; and

3. Dividing the average inventory figure by the cost of sales per day figure.For Zimmer Holdings' FY 2005 (in $ millions), its DIO would be computed with these figures:

(1) cost of sales per day 739.4 ÷ 365 = 2.0

(2) average inventory 2005

536.0 + 583.7 = 1,119.7 ÷ 2 = 559.9

(3) days inventory outstanding

559.9 ÷ 2.0 = 279.9

DSO is computed by: 1. Dividing net sales (income statement) by 365 to get net sales per day figure;2. Calculating the average accounts receivable figure by adding the year's beginning

(previous yearend amount) and ending accounts receivable amount (both figures are in thebalance sheet) and dividing by 2 to obtain an average amount of accounts receivable forany given year; and

3. Dividing the average accounts receivable figure by the net sales per day figure.For Zimmer Holdings' FY 2005 (in $ millions), its DSO would be computed with these figures:

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(1) net sales per day

3,286.1 ÷ 365 = 9.0

(2) average accounts receivable

524.8 + 524.2 = 1,049 ÷ 2 = 524.5

(3) days sales outstanding 524.5 ÷ 9.0 = 58.3

DPOis computed by: Dividing the cost of sales (income statement) by 365 to get a cost of sales per day figure; Calculating the average accounts payable figure by adding the year's beginning (previous

yearend amount) and ending accounts payable amount (both figures are in the balancesheet), and dividing by 2 to get an average accounts payable amount for any given year;and

Dividing the average accounts payable figure by the cost of sales per day figure.For Zimmer Holdings' FY 2005 (in $ millions), its DPO would be computed with these figures:

(1) cost of sales per day 739.4 ÷ 365 =2.0

(2) average accounts payable 131.6 + 123.6

Lecture No.41

Definition of 'Short Term'

1. In general, holding an asset for short period of time.

2. In accounting, an asset expected to be converted into cash in the next year, or a liabilitycoming due in the next year. Also known as current assets and liabilities.

3. For investing, a security that matures in one year or less.

Definition of 'Corporate Finance'

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1) The financial activities related to running a corporation.

2) A division or department that oversees the financial activities of a company. Corporatefinance is primarily concerned with maximizing shareholder value through long-term and short-term financial planning and the implementation of various strategies. Everything from capital investment decisions to investment banking falls under the domain of corporate finance.

4. For taxes, a holding period of less that one year.

Lecture No.42

Dfinition of 'Short-Term Debt'

An account shown in the current liabilities portion of a company's balance sheet. This account is comprised of any debt incurred by a company that is due within one year. The debt in this account is usually made up of short-term bank loans taken out by a company.

Lecture No.43 Definition of 'Cash Management'

The corporate process of collecting, managing and (short-term) investing cash. A key component of ensuring a company's financial stability and solvency. Frequently corporate treasurers or a business manager is responsible for overall cash management.

Successful cash management involves not only avoiding insolvency (and therefore bankruptcy), but also reducing days in account receivables (AR), increasing collection rates, selecting appropriate short-term investment vehicles, and increasing days cash on hand all in order to improve a company's overall financial profitability.

Lecture No.44 Definition of 'Accounts Receivable - AR'

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Money owed by customers (individuals or corporations) to another entity in exchange for goods or services that have been delivered or used, but not yet paid for. Receivables usually come in the form of operating lines of credit and are usually due within a relatively short time period, ranging from a few days to a year.

On a public company's balance sheet, accounts receivable is often recorded as an asset because this represents a legal obligation for the customer to remit cash for its short-term debts .

Definition of 'Credit'

1. A contractual agreement in which a borrower receives something of value now and agrees torepay the lender at some date in the future, generally with interest. The term also refers to the borrowing capacity of an individual or company.

2. An accounting entry that either decreases assets or increases liabilities and equity on thecompany's balance sheet. On the company's income statement, a debit will reduce net income, while a credit will increase net income.

Lecture No.45

Definition of 'Inventory Management'

The overseeing and controlling of the ordering, storage and use of components that a company will use in the production of the items it will sell as well as the overseeing and controlling of quantities of finished products for sale. A business's inventory is one of its major assets and represents an investment that is tied up until the item is sold or used in the production of an item that is sold. It also costs money to store, track and insure inventory. Inventories that are mismanaged can create significant financial problems for a business, whether the mismanagement results in an inventory glut or an inventory shortage.

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