Ch 3- Class Notes Flashcards
Uses of cash
-buying
-increase in asset, decrease in cash
-decrease in liability or equity account
Sources of cash
-selling
-decreasing in asset but increas ein cash
-increase in liability or equity
SOCF:
operating actiivtiy
net income and changes in most current accounts
Investment Activity
changes in fixed assets
Financing Acitivity
changes in notes payable, long term debt and equity accounts, and dividedns
Regarding current liability
-if you let it buuild up for a little bit of time?
-if you let it build up for a looooooooooooooooon time?
its good for cash! so you have cash and socf is looking good
its really bad for your company
Is interest deducted form operating or financing sections in socf?
generally deducted from operating activities section
How to get socf elements from sofp
break down the elements present into operating, investing, and financing activitiy section
Common-size statement value of invenetory
Inventory/Assets (Current + fixed)
What do Asset Managemnt or turnover ratios tell you
if you are working your assets better
5 types of ratios
- short term solvency/liquidity
- long term solvency/ financial leverage
- asset management or turnover ratios
- profitability raitos
- market value ratios
short term solvency/liquidity ratios
DO YOU HAVE ENOUGH MONEY TO PAY THE BILLS?
1. current ratio= ca/cl
2. quick ratio= (Ca-inventory)/CL
-do we have enough current assets to pay our liabilities if we take inventory out
3. Cash ratio= cash/CL
basicallly you determine how many dollrs of current asset you have to current liability
Long term solvency ratios
Total debt Ratios= TA-TE/TA
-how much is financed with debt
Debt/Equity= TD/TE
Equity Multiplier
Times Interest Earned= ebit/interest
-how much money is covering in in comparison to the interest we have to pay? (higher? then we can pay interest multiple times over!! 15.5= 15.5 times over)
Cash Coverage= (ebit+ depreciaiton)/interest
What is a good amount of TImes Interest Earned
5x OR HIGHER to be investment grade
Cash Coverage- what amount should it be to be good
Asset MANAGEMENT ratios
Inventory Turnover= cogs/inventory
days sales in inventory= 365 days/Inventory turnover
-how often does the asset stay in inventory
recieveables turnover= sales/ account recievable
days’ sales in recievables/ 365 recievabales turnover
NWC turnover= Sales/NWC
Fixed Asset Turnover= Sales/Net Fixed Assets
Total Asset Turnover= Sales/Total Assets
What is a good total asset turnover
Dependant on industry!!!
What are good profitability ratios
Profit Margin= Net Income/Sales
ROA= net income/total assets
ROE= Net income/Total Equity
DuPont Identity
Return on equity= equity mulitplier * profit margin * total asset turnover
why do businesses use debt ?
if you use debt then you increase the equity going to shareholders
what is the equity multiplier
- always 1 or bigger
- total assets/equity
FUNDAMENTAL FIRM ANALYSIS!!!
how can we increase return on equity?? can you make net income bigger or equity smaller
LIFO
last in first out (usually the most expensive product gets sold first)
results in higher cost of goods sold
FIFO
the oldest IS OSLD FIRST, HIGHER INVENTORY, LOWER cogs
