Accounting Statements and Cash Flow Flashcards
The ingredients of a Financial Planning Model:
- Sales forecast (look at the past to look into the future)
- Pro Forma Statement (based on hypothetical situations, also forecasting)
This forecasting will help determine… - Asset Requirements
- Financial Requirements
- Plug (variables)
Based on… - Economic Assumptions
Sales forecast:
all financial plans require a sales forecast , and it feeds into your pro forma statements (they are linked/interdependent)
An Accountant’s snapshot of the firm’s accounting position at a particular date: _ _ _
The accounting definition:
Assets = _______ + __________
An Accountant’s snapshot of the firm’s accounting position at a particular date: Statement of Financial Position
The accounting definition:
Assets = Liabilities + Shareholders’ Equity
When analyzing a SFP, the financial manager should be aware of three concerns: (L DVE VVC)
When analyzing a SFP, the financial manager should be aware of three concerns:
- Liquidity
- Debt versus equity
- Value versus cost
Liquidity refers to the ease and speed with which _____ can be ______ to ______.
Liquidity refers to the ease and speed with which assets can be converted to cash.
Current assets are ____ liquid than long-term assets.
Current assets are more liquid than long-term assets.
The _____ liquid a firm’s assets, the _____ likely it will experience problems meeting short-term obligations.
The more liquid a firm’s assets, the less likely it will experience problems meeting short-term obligations.
Liquid assets frequently have _____ rates of return than long-term assets.
Liquid assets frequently have lower rates of return than long-term assets.
Liabilities are obligations of the firm that require a _______ of cash within a stipulated ______ _____.
Liabilities are obligations of the firm that require a payout of cash within a stipulated time period.
Generally, when a firm borrows it gives the ________ first claim on the firm’s cash flow.
Generally, when a firm borrows it gives the bondholders first claim on the firm’s cash flow.
Shareholders’ equity is the ______ difference between _____ and _______.
Shareholders’ equity is the residual difference between assets and liabilities.
The accounting value of a firm’s assets is frequently referred to as the ______ value or ______ value.
The accounting value of a firm’s assets is frequently referred to as the carrying value or book value.
Market value is a completely different concept. It is the ____ at which willing buyers and sellers _____ the assets.
Market value is a completely different concept. It is the price at which willing buyers and sellers trade the assets.
Whenever we speak of the value of the firm, we will normally mean its market value.
The statement of comprehensive income (SCI) measures _________ over a
specific period of time.
The statement of comprehensive income (SCI) measures performance over a
specific period of time.
The accounting definition of “income” is given by:
_________ – _______ = INCOME
The accounting definition of “income” is given by:
REVENUE – EXPENSES = INCOME
SCI: The operations section reports the firm’s _____ and ______ from _____ operations
SCI: The operations section reports the firm’s revenues and expenses from principal operations
SCI: The _________ section includes other income and all financing costs, including interest expense.
SCI: The non-operating section includes other income and all financing costs, including interest expense.
SCI: Usually a ______ section reports the amount of taxes estimated on income.
SCI: Usually a separate section reports the amount of taxes estimated on income.
SCI: ___ _____ is the “bottom line.”
SCI: Net income is the “bottom line.”
There are three things to keep in mind when analyzing the statement of comprehensive income:
There are three things to keep in mind when analyzing the statement of comprehensive income:
- The accounting standards used – i.e. IFRS
- Non-Cash Items
- Time and Costs
IFRS have been developed to provide information for a _____ audience not necessarily concerned with ____ flow.
IFRS have been developed to provide information for a broad audience not necessarily concerned with cash flow.
IFRS: The ______ basis of accounting is used.
IFRS: The accrual basis of accounting is used.
IFRS: Revenues are recognized when _____ and the earnings process is ______ even though cash flows may not have been received.
IFRS: Revenues are recognized when earned and the earnings process is complete even though cash flows may not have been received.
IFRS: Expenses incurred to earn the revenue are recognized at ____ ____ time the related revenue is reported even though no cash may have been paid.
IFRS: Expenses incurred to earn the revenue are recognized at the same time the related revenue is reported even though no cash may have been paid.
Non-cash items are expenses that do not affect cash flow _____.
Non-cash items are expenses that do not affect cash flow directly. (e.g., depreciation, deferred taxes)
________ is the most common for non-cash items. No firm ever writes a cheque for “depreciation.”
Depreciation is the most common for non-cash items. No firm ever writes a cheque for “depreciation.”
Another non-cash item is _____ taxes, which do not represent a cash flow.
Another non-cash item is deferred taxes, which do not represent a cash flow.
In the short term, certain costs related to equipment, resources, and commitments of the firm are _____; other costs are variable based on ________ levels such
as inputs for labour and raw materials.
In the short term, certain costs related to equipment, resources, and commitments of the firm are fixed; other costs are variable based on production levels such
as inputs for labour and raw materials.
In the long run, all costs are _______.
In the long run, all costs are variable.
Financial accountants do not distinguish between variable costs and fixed costs.
Instead, accounting distinguishes _____ costs from ____ costs .
Financial accountants do not distinguish between variable costs and fixed costs.
Instead, accounting distinguishes product costs (production costs) from period costs (time period costs).
Net Working Capital = _____ – ______
Net Working Capital = Current Assets – Current Liabilities
NWC is ______ when current assets are greater than current liabilities.
NWC is positive when current assets are greater than current liabilities.
A firm can invest in NWC. This is represented by the ____ in NWC and is equal to:
NWC (2018) – NWC (2017) = _____ in NWC in 2018
A firm can invest in NWC. This is represented by the change in NWC and is equal to:
NWC (2018) – NWC (2017) = Change in NWC in 2018
The change in NWC is usually ______ in a growing firm.
The change in NWC is usually positive in a growing firm.
In finance, the most important item that can be extracted from financial statements is the actual ____ ____ of the firm.
In finance, the most important item that can be extracted from financial statements is the actual cash flow of the firm.
In finance, the value of the firm depends on its ability to generate financial ___ ____.
In finance, the value of the firm depends on its ability to generate financial cash flow.
Just as the value of firm’s assets is always equal to the value of liabilities plus equity, the cash received from the firm’s assets must equal the cash flows to the firm’s bondholders (creditors) and shareholders:
CF() = CF() + CF(_)
Just as the value of firm’s assets is always equal to the value of liabilities plus equity, the cash received from the firm’s assets must equal the cash flows to the firm’s bondholders (creditors) and shareholders:
CF(A) = CF(B) + CF(S)
EBIT =
Earnings before interest and taxes (EBIT)
Cash flow from ______ measures cash generated before investment in capital requirements and net working capital.
Cash flow from operations measures cash generated before investment in capital requirements and net working capital.
Net income is based on accruals and deferrals and is not ____ _____.
Net income is based on accruals and deferrals and is not cash flow.
Free cash flows represents cash flow from ____. It is calculated as cash flow from _____ less _____ in capital expenditures and NWC.
Free cash flows represents cash flow from assets. It is calculated as cash flow from operations less investments in capital expenditures and NWC.
A financial manager should be able to determine ___ ____ from a firm’s financial statements.
A financial manager should be able to determine cash flow from a firm’s financial statements.
Net income is ____ cash flows.
Net income is not cash flows.
Cash flow generated by a firm is used to pay ______ and ______.
Cash flow generated by a firm is used to pay bondholders and shareholders.
You should keep in mind:
– Measures of profitability do not take ___ or ____ of cash flows into account.
You should keep in mind:
– Measures of profitability do not take risk or timing of cash flows into account.
Financial ratios provide information about five areas of financial performance:
- Short-term _____
- _____
- Financial ____
- P_____
- ____ value
Financial ratios provide information about five areas of financial performance:
- Short-term solvency
- Activity
- Financial leverage
- Profitability
- Market value
Measure the firm’s ability to meet recurring financial obligations:
Current ratio = Total ______ ÷ Total _____
A _____ current ratio usually indicates greater liquidity.
Measure the firm’s ability to meet recurring financial obligations:
Current ratio = Total current assets ÷ Total current liabilities
A higher current ratio usually indicates greater liquidity.
Quick ratio determines firm’s ability to pay current ______ without relying on the _____ of inventories.
Quick ratio = Quick _____ ÷ Total ____
Quick ratio determines firm’s ability to pay current liabilities without relying on the sale of inventories.
Quick ratio = Quick assets ÷ Total current liabilities
Quick assets = ____ – _____
Quick assets = Current assets – Inventories
Cash ratio examines the firm’s ability to pay _____ liabilities in the ____ term (i.e., from cash only).
Cash Ratio = ____ ÷ ______
Cash ratio examines the firm’s ability to pay current liabilities in the short term (i.e., from cash only).
Cash Ratio = Cash ÷ Current liabilities
TAT measures how effectively the firm’s assets are being ______.
Total asset turnover = _____ ÷ _______
TAT measures how effectively the firm’s assets are being managed.
Total asset turnover = Total operating revenues ÷ Average total assets
If the total asset turnover ratio is ____, the firm is presumably using its assets effectively in generating sales.
If the total asset turnover ratio is high, the firm is presumably using its assets effectively in generating sales.
Ex. Retail and wholesale trade firms tend to have high TAT ratios compared to
manufacturing firms.
Which two ratios provide information on the success of the firm in managing its investment in accounts receivable?
- Receivables turnover
- Average collection period
- The actual values of these ratios reflect the firm’s credit policy.
Receivables turnover = _____ ÷ ______
Receivables turnover = Total operating revenues ÷ Average receivables
Average collection period = ______ ÷ ______
Average collection period = Days in period (i.e.365) ÷ Receivables turnover
Which two ratios measure how quickly inventory is produced and sold?
- Inventory turnover
- Days in inventory
*Method of inventory valuation can materially affect the computed inventory ratios.
Inventory turnover = ___ ÷ ____
Inventory turnover = Cost of goods sold ÷ Average inventory
Days in inventory = _____ ÷ _____
Days in inventory = Days in period (i.e.365) ÷ Inventory turnover
What ratios measure the extent to which a firm relies on debt financing?
- Debt ratio
- Debt-equity ratio
- Equity Multiplier
- Interest Coverage
- Cash Coverage
- Payable Turnover
- Average Payment Period
Interest coverage ratio is directly connected to the firm’s ability to ___ _____.
Interest coverage ratio is directly connected to the firm’s ability to pay interest.
Drawback: EBIT is not really a measure of cash
Debt ratio = ____ ÷ ____
Debt ratio = Total debt ÷ Total assets
Debt-equity ratio = ____ ÷ _____
Debt-equity ratio = Total debt ÷ Total equity
Equity multiplier = _____ ÷ _____
Equity multiplier = Total assets ÷ Total equity
Interest coverage = ______ ÷ _____
Interest coverage = EBIT ÷ Interest expense
Cash coverage = (_____ + _____) ÷ ______
Cash coverage = (EBIT + Depreciation and Amortization) ÷ Interest expense
Cash coverage ratio examines the firm’s ability to pay interest using cash flow from ______
– adding back non-cash items to EBIT approximates the cash flow from _____.
Cash coverage ratio examines the firm’s ability to pay interest using cash flow from operations
– adding back non-cash items to EBIT approximates the cash flow from operations.
Payable Turnover = ____ ÷
_____
Payable Turnover = COGS ÷
Average Accounts Payable
Average Payment Period = _____ ÷ _____
Average Payment Period = Days in Period (365) ÷ Payable Turnover
Payable turnover ratio and average payment period ratio examine how ____ it takes a company to pay its _____.
Payable turnover ratio and average payment period ratio examine how long it takes a company to pay its suppliers.
Net profit margin = _____ ÷ _____
Net profit margin = Net income ÷ Total operating revenue
Profit margins reflect the firm’s ability to produce a product or service at a ____ cost or to sell it at a ____ price.
Profit margins reflect the firm’s ability to produce a product or service at a low cost or to sell it at a high price.
Retail firms and service firms tend to have __ and ___ profit ratios, respectively.
Retail firms and service firms tend to have low and high profit ratios, respectively.
Profitability Ratio:
- Net profit margin
- EBITDA margin
- Net return on assets
- Gross return on assets
- Return on assets
- Return on equity
- Payout Ratio
- Retention Ratio
EBITDA margin = _____ ÷ _____
A ____ margin is desirable.
EBITDA margin = EBITDA ÷
Total operating revenue
This ratio looks more to “cash flows” than net income.
A higher margin is desirable.
EBITDA is essentially __ ____ (or earnings) with _____, ____, ____, and _____ added back.
EBITDA is essentially net income (or earnings) with interest, taxes, depreciation, and amortization added back
Net return on assets = _____ ÷ _____
Net return on assets = Net income ÷ Average total assets
Gross return on assets = _____ ÷ _____
Gross return on assets = EBIT ÷ Average total assets
Net (or gross) return on assets measures managerial _____ and how effectively assets are being used to ______ income.
Net (or gross) return on assets measures managerial performance and how effectively assets are being used to generate income.
DuPont system of financial control:
Return on assets = _____ x _____
DuPont system of financial control:
Return on assets = Profit margin x Asset turnover
Firms tend to face a trade-off between turnover and margin.
Return on equity (ROE) = _____ ÷ _____
Return on equity = Net income Average ÷ shareholders equity
ROE = _____ x _____ x _____
ROE = Profit margin X Asset turnover X Equity multiplier
The difference between ROA and ROE is due to financial _____.
The difference between ROA and ROE is due to financial leverage.
Payout ratio = _____ ÷ _____
Payout ratio = Cash dividends ÷ Net income
Retention ratio = _____ ÷ _____
Retention ratio = Annual retained earnings ÷ Net Income
Payout ratio measures the amount paid as ______; and retention ratio is the _____ – how much is retained by the company for reinvestment.
Payout ratio measures the amount paid as dividends; and retention ratio is the remainder – how much is retained by the company for reinvestment.
Sustainable Growth Rate = _____ ÷ _____
Sustainable Growth Rate = ROE ÷ Retention ratio
SGR measures the ______ growth rate that the company can sustain with no _____ financing, while maintaining a _____ debt to equity ratio
SGR measures the maximum growth rate that the company can sustain with no external financing, while maintaining a constant debt to equity ratio
Market Value Ratios:
- Enterprise Value Multiple
- Price-Earnings ratio
- Dividend yield
- Market-to-Book ratio
Enterprise Value (EV) = _____ + _____ – _____
Enterprise Value (EV) = Market capitalization + MV of interest bearing debt – Cash
Enterprise Value Multiple = _____ ÷ _____
Enterprise Value Multiple = Enterprise Value ÷ EBITDA
Enterprise value is the value of the ___ ____.
Enterprise value is the value of the total firm.
EV multiple is used to compare with other ______ and is not affected by capital structure, taxes or capital spending.
EV multiple is used to compare with other companies and is not affected by capital structure, taxes or capital spending.
Price - Earnings ratio (PE) = ______/share ÷ ______ /share
Price - Earnings ratio = Market price/share ÷ Current annual earnings /share
P/E ratio shows how much investors are willing to pay for $_ of earnings per share.
P/E ratio shows how much investors are willing to pay for $1 of earnings per share.
PE reflects investors’ views of the ____ potential of different sectors.
PE reflects investors’ views of the growth potential of different sectors.
Dividend yield = ____/share ÷ ____/share
Dividend yield = Dividend/share ÷ Market price/share
Like P/E ratios, dividend yields are related to the market’s perception of future _____ prospects for firms.
Like P/E ratios, dividend yields are related to the market’s perception of future growth prospects for firms.
Market-to-Book (M/B) ratio = _____/share ÷ _____/share
Market-to-Book ratio = Market price/share ÷ Book value/share
M/B ratio compares the _____ value of the firm’s investments to their ____.
M/B ratio compares the market value of the firm’s investments to their cost.
M/B value < _ might indicate that the firm has not been successful in creating value for its shareholders.
M/B value < 1 might indicate that the firm has not been successful in creating value for its shareholders.
Statement of Cash Flows helps explain the change in accounting cash.
- _____ activities
- _____ activities
- _____ activities
Statement of Cash Flows helps explain the change in accounting cash.
- operating activities
- investing activities
- financing activities
