Ch 2 - Intro to Financial Statement Analysis Flashcards
financial statements
Accounting reports issued by a firm quarterly and/or annually that present past performance information and a snapshot of the firm’s assets and the financing of those assets
annual reports
The yearly summary of business, accompanying or including financial statements,sent by U.S.public companies to their stockholders.
Generally Accepted Accounting Principles (GAAP)
A common set of rules and a standard for- mat for public companies to use when they prepare their financial reports
auditor
A neutral third party,which corporations are required to hire,that checks a firm’s annual financial statements to ensure they are prepared according to GAAP,and provides evidence to sup- port the reliability of the information
balance sheet
A list of a firm’s assets and liabilities that provides a snapshot of the firm’s financial position at a given point in time.
assets
The cash,inventory,property,plant and equipment,and other investments a company has made
liabilities
firm’s obligations to its creditors
shareholders’ equity, stockholders’ equity
An accounting measure of a firm’s net worth that rep- resents the difference between the firm’s assets and its liabilities
common stock and paid- in surplus
The amount that stockholders have directly invested in the firm through purchasing stock from the company
retained earnings
Profits made by the firm,but retained within the firm and reinvested in assets or held as cash.
current asset
Cash or assets that could be converted into cash within one year
marketable securities
Short-term, low-risk investments that can be easily sold and converted to cash
accounts receivable
Amounts owed to a firm by customers who have purchased goods or services on credit.
inventories
A firm’s raw materials as well as its work-in-progress and finished goods.
long-term assets
Assets that produce tangible benefits for more than one year
depreciation
A yearly deduction a firm makes from the value of its fixed assets (other than land) over time,according to a depreciation schedule that depends on an asset’s life span.
book value
The acquisition cost of an asset less its accumulated depreciation
current liabilities
Liabilities that will be satisfied within one year
accounts payable
The amounts owed to creditors for products or services purchased with credit
notes payable,short- term debt
Loans that must be repaid in the next year
net working capital
The difference between a firm’s current assets and current liabilities that rep- resents the capital avail- able in the short term to run the business.
long-term debt
Any loan or debt obligation with a maturity of more than a year
book value of equity
The difference between the book value of a firm’s assets and its liabilities; also called shareholders’ equity and stockholders’ equity ,it represents the net worth of a firm from an accounting perspective.
market capitalization
The total market value of equity; equals the market price per share times the number of shares
liquidation value
The value of a firm after its assets are sold and liabilities paid.
market-to-book ratio (price-to-book [P/B] ratio
The ratio of a firm’s market (equity) capitalization to the book value of its stockholders’ equity
value stocks
Firms with low market-to-book ratios
growth stocks
Firms with high market-to-book ratios
leverage
A measure of the extent to which a firm relies on debt as a source of financing
debt-equity ratio
The ratio of a firm’s total amount of short-and long-term debt (including current maturities) to the value of its equity,which may be calculated based on market or book values
enterprise value
The total market value of a firm’s equity and debt, less the value of its cash and marketable securities. It measures the value of the firm’s underlying business.
current ratio
ratio of current assets to current liabilities
quick ratio
The ratio of current assets other than inventory to current liabilities
income statements
A list of a firm’s revenues and expenses over a period of time.
net income or earnings
The last or “bottom”line of a firm’s income statement that is a measure of the firm’s income over a given period of time.
gross profit
The third line of an income statement that represents the difference between a firm’s sales revenues and its costs.
operating income
firm’s gross profit less its operating expenses
EBIT
firm’s earnings before interest and taxes are deducted
earnings per share (EPS)
firm’s net income divided by the total number of shares outstanding
stock options
The right to buy a certain number of shares of stock by a spe- cific date at a specific price.
convertible bonds
Corporate bonds with a provision that gives the bondholder an option to convert each bond owned into a fixed number of shares of common stock
dilution
An increase in the total number of shares that will divide a fixed amount of earnings
diluted EPS
The earnings per share a company would have based on the total number of shares including the effects of all stock options and convert- ible bonds.
gross margin
The ratio of gross profit to revenues (sales),it reflects the ability of the company to sell a product for more than the sum of the direct costs of making it.
operating margin
The ratio of operating income to revenues,it reveals how much a company has earned from each dollar of sales before deducting interest and taxes.
net profit margin
The ratio of net income to revenues,it shows the frac- tion of each dollar in revenues that is available to equity holders after the firm pays its expenses, plus interest and taxes.
accounts receivable days (average collection period or days sales out- standing)
An expression of a firm’s accounts receivable in terms of the number of days’ worth of sales that the accounts receivable represents.
accounts payable days
An expression of a firm’s accounts payable in terms of the number of days’ worth of cost of goods sold that the accounts payable represents
inventory days
An expression of a firm’s inventory in terms of the number of days’ worth or cost of goods sold that the inventory represents
inventory turnover ratio
The cost of goods sold divided by either the latest cost of inventory or the average inventory over the year,it shows how efficiently companies turn their inventory into sales
EBITDA
A computation of a firm’s earnings before interest,taxes,depreciation,and amortization are deducted.
interest coverage ratio or times interest earned (TIE) ratio
An assessment by lenders of a firm’s leverage,it is equal to a measure of earnings divided by interest.
return on equity (ROE)
The ratio of a firm’s net income to the book value of its equity.
return on assets (ROA)
The ratio of net income to the total book value of the firm’s assets.
DuPoint Identity
Expresses return on equity as the product of profit margin,asset turnover, and a measure of leverage.
equity multiplier
measure of leverage equal to total assets divided by total equity.
price-earnings ratio (P/E)
The ratio of the market value of equity to the firm’s earnings,or its share price to its earnings per share.
PEG ratio
The ratio of a firm’s P/E to its expected earnings growth rate.
statement of cash flows
An accounting statement that shows how a firm has used the cash it earned during a set period.
capital expenditures
Purchases of new property,plant,and equipment.
retained earnings
The difference between a firm’s net income and the amount it spends on dividends.
payout ratios
The ratio of a firm’s dividends to its net income.
management discussion and analysis (MD&A)
preface to the financial statements in which a company’s management discusses the recent year (or quarter),providing a background on the company and any significant events that may have occurred.
off-balance sheet trans- actions
Transactions or arrangements that can have a material impact on a firm’s future performance yet do not appear on the balance sheet.
statement of stockholders’ equity
An accounting statement that breaks down the stockholders’ equity computed on the balance sheet into the amount that came from issuing new shares versus retained earnings
Sarbanes-Oxley Act (SOX)
Legislation passed by Congress in 2002, intended to improve the accuracy of financial information given to both boards and to share- holders.
