Ch 4 Balance Sheet and Statement of Cash Flows Flashcards
the specific principles, bases, conventions, rules and practices applied by a company in preparing and presenting financial information
accounting policies
measures liquidity of receivables:
net sales/ average net accounts receivable
accounts receivable turnover
the aggregate amount of the other comprehensive income items, such as unrealized gains and losses on certain investments
accumulated other comprehensive income
measures of how effectively the company uses its assets
activity ratios
the excess of amounts paid in over the par or stated value
additional paid-in capital
increases either an asset, liability, or owners’ equity account
adjunct account
measures how efficiently assets are used to generate sales:
net sales/ average total assets
asset turnover
debt securities not classified as held-to-maturity or trading securities
available-for-sale investments
sometimes referred to as the ‘statement of financial position’, reports the assets, liabilities, and stockholders’ equity of a business enterprise at a specific date
balance sheet
measures the amount each share would receive if the company were liquidated at the amounts reported on the balance sheet:
common stockholders’ equity/ outstanding shares
book value per share
the total par or stated value of the shares issued
companies must disclose the par value per share and the authorized, issued, and outstanding share amounts for common and preferred stock
capital stock
provides information on financial flexibility; indicates a company’s ability to repay its liabilities from net cash provided by operating activities without having to liquidate the assets employed in its operations:
net cash provided by operating activities/ average total liabilities
cash debt coverage
an existing situation involving uncertainty as to possible gain or loss that will ultimately be resolved when one or more future events occur or fail to occur
contingency
on a balance sheet, reduces either an asset, liability, or owners’ equity account
contra account
measures of the degree of protection for long-term creditors and investors
coverage ratios
cash and other assets a company expects to convert into cash, sell, or consume either in one year or in the operating cycle, whichever is longer
current assets
indicates whether the company can pay off its current liabilities from its operations in a given year:
net cash provided by operating activities/ average current liabilities
current cash debt coverage
the obligations that a company reasonably expects to settle, or pay off, either through the use of current assets or the creation of other ______________
current liabilities
measures short-term debt-paying ability:
current assets/ current liabilities
current ratio
measures the percentage of total assets provided by creditors:
total liabilities/ total assets
debt to assets ratio
measures net income earned on each share of common stock:
(net income - preferred dividends) / weighted- average common shares outstanding
earnings per share
measures the “ability of an enterprise to take effective actions to alter the amounts and timing of cash flows so it can respond to unexpected needs and opportunities”
financial flexibility
cash, ownership interest, or a contractual right to receive or obligation to deliver cash or another financial instrument
financial instruments
involves liability and owners’ or stockholders’ equity items
they include:
1. obtaining resources from owners and providing them with a return on their investment
2. borrowing money from creditors and repaying the amounts borrowed
financing activities
the amount of discretionary cash flow a company has:
net cash provided by operating activities - capital expenditures - cash dividends
free cash flow
debt securities that a company intends to hold until maturity (reported as current or non current assets depending on the time left until maturity)
held-to-maturity investments
lack physical substance and are not financial instruments (patents, copyrights, franchises, goodwill, trademarks, trade names, customer lists)
intangible assets
measures liquidity of inventory:
COGS/ average inventory
inventory turnover
includes making and collecting loans and acquiring and disposing of investments (both debt and equity) and property, plant, and equipment
investing activities
describes “the amount of time that is expected to elapse until an asset is realized or otherwise converted into cash or until a liability has to be paid”
“nearness to cash” of assets and liabilities
liquidity
measures of the company’s short-term ability to pay its maturing obligations
liquidity ratios
often referred to simply as investments, normally consist of 4 types:
- investments in debt and equity securities
- investments in tangible fixed assets not currently used in operations, such as land held for speculation
- investments set aside in special funds, such as a sinking fund, pension fund, or plant expansion fund; this includes the cash surrender value of life insurance
- investments in nonconsolidated subsidiaries or affiliated companies
long-term investments
obligations that a company does not reasonably expect to settle within the normal operating cycle; expects to be paid beyond that time
long-term liabilities
involves the cash effects of transactions that enter into the determination of net income
operating activities
one of the most difficult sections to prepare and understand due to the complexity of the capital stock agreements and the various restrictions on stockholders’ equity imposed by state corporation laws, liability agreements, and boards of directors
owners’ (stockholders’) equity
measures percentage of earnings distributed in the form of per share cash dividends:
cash dividends/ net income
payout ratio
measures the ratio of the market price per share to earnings:
market price per share/ earnings per share
price-earnings ratio
measures of the degree of success or failure of a given company or division for a given period of time
profitability ratios
measures net income generated by each dollar of sales:
net income/ net sales
profit margins on sales
tangible long-lived assets used in the regular operations of the business
property, plant, and equipment
measures immediate short-term liquidity:
(cash + short-term investments + NET accounts receivable) / current liabilities
quick (acid-test) ratio
expresses the relationship among pieces of selected financial statement data, in a percentage, a rate, or a simple proportion
ratio analysis
the most common form of the balance sheet
report form
a word used to describe the appropriation of retained earnings
reserve
the corporation’s accumulated, undistributed earnings that may be divided into 2 parts:
- unappropriated: the amount usually available for dividend distribution
- restricted: the amount restricted by bond indentures or other loan agreements
retained earnings
measures overall profitability of assets:
net income/ average total assets
return on assets
measures profitability of owners’ investment:
(net income - preferred dividends) / average common stockholders’ equity
return on common stockholders’ equity
refers to the ability of a company to pay its debts as they mature
solvency
provides relevant information about the cash receipts and cash payments of an enterprise during a period
statement of cash flows
measures ability to meet interest payments as they come due:
(net income + interest expense + income tax expense) / interest expense
times interest earned
debt securities bought and held primarily for sale in the near future to generate a return
trading investments
generally, the cost of shares repurchased by the company; the amount is a reduction of stockholders’ equity
treasury stock
total current assets - total current liabilities
working capital
probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events
assets
probable future sacrifices or economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events
liabilities
residual interest in the assets of an entity that remains after deducting its liabilities
in a business enterprise, the ______ is the ownership interest
equity
assets, liabilities, stockholders’ equity
elements of a balance sheet
capital stock, additional paid-in capital, retained earnings, accumulated other comprehensive income, treasury stock
elements of owners’ equity
