CFA Flashcards
Situations when a company receives cash in advance and actually delivers the product or service later, perhaps over a period of time
Recorded as a liability for unearned revenue
Revenue realized over time as products/services are delievered
long-term contract
Spans a number of Accounting Periods
barter transactions
(non-monetary exchanges)
Long-lived assets
are assets expected to provide economic benefits for T > 1
ex. land (property), plant, equipment, and intangible assets (assets lacking physical substance) such as trademarks
Goodwill
Acquistion which purchase price > Net Identifiable Asset (Identifiable Asset acquired less assumed liabilities)
Ordinary shares/Common shares
Owners of the comapany
Paid last in a liquidation of company
Benefits most when company does good
Complex Capital Structure
If company has financial instruments that are potentially convertible into common stock
Diluted EPS
If all dilutive financial instruments were converted
Basic EPS
Avaliable Income
/
Weighted Average Number of Common Shares Outstanding over a Period
Basic EPS =
Net Income - Preferred Dividends
/
Weighted average number of shares outstanding
Warrant
Call Option attached to Securities issued by company (ex. Bonds)
Common-size analysis of the income statement
Each Line stated as percentage of Revenue
Net profit margin/ Profit margin/ Return on sales
Net Income
/
Revenue (or sales)
Net Profit Margin measures
Income generated for each dolllar of revenue
*A higher level of net profit margin indicates higher profitability and is thus more desirable*
Gross profit =
Revenue minus Cost of Goods Sold
Gross Profit margin is calculated as
Gross Profit
/
Revenue
Operating Profit Margin calculated as
Operating Income
/
Revenue
Balance Sheet used to determine
Ability to pay near-term Operating Needs,
Meet future Debt Obligations,
Make distributions to Owners
Current Assets are generally maintained for
Operating Purchases
Items expected to be converted into cash (Trades Receivables)
Items Used Up (Office supplies, prepaid expense)
Items Sold (Inventories)
The item “trade receivables” or “accounts receivable” would indicate
that a company provides credit to its customers
Working Capital equation
Current Asset - Current Liabilities
Working Capital tells us
Ability of an entity to meet liabilities as they fall due
Trade Payables, also called Accounts Payable represents
.Unpaid amounts of company’s purchases on credit (as of BS date)
Amounts that company owes to vendor for purchase of goods and services
Deferred income/ Unearned revenue
Payment received in advance for goods/services
Recorded as a liability until good/services are delievered
Liquidity Ratios
Measuring the company’s ability to meet its short-term obligations
solvency ratios
measuring the company’s ability to meet long-term and other obligations
Current Liquidity Ratio
Current Asset
/
Current Liabilities
Quick Liquidity Ratio
(Cash + Marketable Securities + Receivables)
/
Current Liabilities
Cash Liquidity Ratio
(Cash + Marketable Securities)
/
Current Liabilities
Debt to Equity Solvency Ratio
Total Debt
/
Total Equity
