Accounting 201Chapter 12 Key Words Flashcards
Acid-test ratio
Cash, current investments, and accounts receivable divided by current liabilities; measures the availability of liquid current assets to pay current liabilities.
Aggressive accounting practices
Practices that result in reporting higher income, higher assets, and lower liabilities.
Asset turnover
Sales revenue divided by average total assets; measures the sales revenue generated per dollar of assets.
Average collection period
Approximate number of days the average accounts receivable balance is outstanding. It equals 365 divided by the receivables turnover ratio.
Average days in inventory
Approximate number of days the average inventory is held. It equals 365 days divided by the inventory turnover ratio.
Conservative accounting practices
Practices that result in reporting lower income, lower assets, and higher liabilities.
Current ratio
Current assets divided by current liabilities; measures the availability of current assets to pay current liabilities.
Debt to equity ratio
Total liabilities divided by total stockholders’ equity; measures a company’s risk. Total liabilities divided by stockholders’ equity; measures a company’s solvency risk.
Discontinued operation
The sale or disposal of a significant component of a company’s operations.
Extraordinary item
An event that is (1) unusual in nature and (2) infrequent in occurrence.
Gross profit ratio
Gross profit divided by net sales; measures the amount by which the sale price of inventory exceeds its cost per dollar of sales.
Horizontal analysis
Analyzes trends in financial statement data for a single company over time.
Inventory turnover ratio
Cost of goods sold divided by average inventory; the number of times the firm sells its average inventory balance during a reporting period.
Liquidity
Having sufficient cash (or other assets convertible to cash in a relatively short time) to pay currently maturing debts. Refers to a company’s ability to pay its current liabilities.
Price-earnings (PE) ratio
Compares a company’s share price with its earnings per share.The stock price divided by earnings per share so that both stock price and earnings are expressed on a per share basis.
Profit margin
Net income divided by net sales; indicates the earnings per dollar of sales.
Profitability ratios
Measure the earnings or operating effectiveness of a company.
Quality of earnings
Refers to the ability of reported earnings to reflect the company’s true earnings, as well as the usefulness of reported earnings to predict future earnings.
Receivables turnover ratio
Net credit sales divided by average accounts receivable; the number of times during a year that the average accounts receivable balance is collected (“turns over”).
Return on assets
Net income divided by average total assets; measures the income generated per dollar of assets.
Return on equity
Net income divided by average stockholders’ equity; measures the income generated per dollar of equity.
Solvency
Refers to a company’s ability to pay its long-term liabilities.
Times interest earned ratio
Ratio that compares interest expense with income available to pay those charges.
Value stocks
Stocks that tend to have lower price earnings ratios and are priced low in relation to current earnings. Stocks that have lower share prices in relationship to their fundamental ratios and therefore trade at lower (bargain) PE ratios.
Vertical analysis
Expresses each item in a financial statement as a percentage of the same base amount.
