Chapter 1 Flashcards
Cash Vs Accrual Accounting
Cash accounting recognizes both revenue and expenses later than accrual
Income Statement
document detailing company’s revenue and expenses for the year
Gross Sales
All invoices of merchandise recorded that year. These are billed sales not collected sales
Returns
Merchandise returned for credit
Net Sales
Gross sales minus Returns
Cost of Goods Sold
The accounting value of inventory sold
Gross Margin
Net Sales minus Cost of Goods Sold
Operating Expenses
items such as administrative salaries, rent, advertising, and depreciation (a non-cash expense)
Operating Margin
Gross Margin minus Operating Expenses
Non-Operating Income
Income that does not come from normal business of the company. Ex= income from investments the company owns
Total Income
The total of the two sources of income
Bond Interest Expense
paid after all operating expenses are covered, so it is listed on the income statement as a “non-operating” expense
Net Income before Tax
Total Income minus Bond Interest Expense
Taxes
Amounts owed to federal, state, and local governments
Net Income after Tax
net profit after deducting all applicable taxes
From an Income Statement, we can determine a company’s profitability. The ratios to measure “profitability” are:
- Operating Margin of Profit Ratio
- Net Profit Ratio
Operating Margin of Profit ratio
Operating Profit/Net Sales
Net Profit Ratio
Net Income after Tax/Net Sales
Earnings Per Common Share
Earnings Available for Common/Common Shares Outstanding
Divedend Payout Ratio
Common Dividends Paid/Earning for Common
Mature Companies have __ Dividend Payout Ratios.
High
Growth Companies have __ Dividend Payout Ratios.
Low
Balance Sheet
snapshot of all the company’s assets and liabilities at one point in time
Also called, the statement of financial condition!
Balance Sheet Formula
Assets - Liabilities= Net Worth
OR
Assets= Liabilities + Net Worth
The Assets side of a balance sheet are arranged in order of __.
Liquidity!
Assets that are quickly convertible to cash are listed 1st. Going down the sheet, assets become less and less liquid.
The Liabilities side of a balance sheet are arranged in order of __.
Liquidity!
The liabilities that must be paid prompty are listed first
The “current” section of the balance sheet is used to evaulate the __.
“liquidity” of a company. This section determines if the company has enough current funds to meet its bills as well as access funds for other business purposes.
An item is “current” if it comes due within ____.
One year
Current Assets consist of:
Cash and Marketable Securities
Accounts Receivable
Inventory
Cash and Marketable Securities =
Highly liquid - marketable securities can be turned into cash in 3 business days or less.
Accounts Receivable
(to be recieved) Money to be received in the future due to the sale of goods or services, money owed to your business.
It is normal to have payment terms of 10-30 days on invoices. Therefore if recievables are well managed, they should not represent more than ~ 30 days worth of sales.
Accounts recievable are considered highly liquid bc they can be turned into cash quickly by selling them to a __.
“factor”
Factors extend credit to companies using recievables as collateral.
Inventory =
Goods that have not been sold.
Inventories should not be too large relative to sales. Of the current assets, inventories are the LEAST liquid. They can be difficult to dispose of at full value.
Current Liabilities =
Accounts Payable
Wages Payable
Taxes Payable
Interest Payable
All of the bills coming due within one year.
Accounts Payable
(to be paid) Money your business owes suppliers.
Amounts owed to trade creditors of the company.
Wages Payable
Monies owed to employees at the date of the balance sheet. These are wages that have accured between payroll check dates.
Taxes Payable
Amounts owed to federal, state, and city governments which have not been paid.
Interest Payable
Accured amounts payable to note and bondholders between interest payment dates.
Net working Capital=
Current Assets - Current Liabilities
The excess of current assets over liabilities. The extra left over after paying all bills.
Ratios that are used to measure liquidity include:
Current Ratio, Quick Ratio
Current Ratio =
Current Assets/Current Liabilities
$4,000/$2,000= 2 : 1
ABC Corporation has 2 times the current assets it needs to pay its Current Liabilites.
Quick Ratio
(Current Assets-Those not easily turned into cash)/ Current Liabilites
Includes inventory, bc its not quickly convertible to cash
Also called “Acid Test”
($4,000-$1,000)/$2,000 = 1.5 : 1
ABC Corporation has 1.5 times the assets quickly convertible to cash that it needs to pay off its bills. If this ratio is less than 1, it may have problems meeting its current bills.
When calculating Quick Ratio, if a company has any other current assets that cannot be quickly converted into cash, they would be deducted from Current Assets as well. An Example=
Ex= Prepaid Expenses. Prepaid rent or insurance. These payments are made in advance of use, are booked as an asset, and then they are expensed as they are “used up”. This is a current asset that almost never converts to cash.
The sources of long term capital for a company are _____.
Long Term Liabilities and Stockholder’s Equity
Items that are included in the capitalization of a company are:
Long Term Debt
Preferred Stock
Common Stock
Long Term Debt
“funded debt”, it is a source of long term funding for the company. For balance sheet purposes, this is debt that must be repaid in more than ONE year.
Preferred Stock
Preferred stock is a type of stock that has characteristics of both stocks and bonds. Like bonds, preferred shares make cash payouts, often at a higher yield than bonds, while offering higher dividend returns and less risk than common stock.
Common Stock
Common stock is a form of corporate equity ownership, a type of security.
Shares entitling their holder to dividends that vary in amount.
Consists of
-Common at Par
-Capital in Excess
-Retained Earnings
Common at Par
means “at face value”, full payment received without obligation for additional charges or premiums.
Capital in Excess of Par
(Ask about this ex. in long term capitalizaiton section)
the amount of money that investors pay for a company’s stock above its par value.
“CEP”
Retained Earnings
(Ask about this ex. in long term capitalizaiton section)
The retained earnings of a corporation is the accumulated net income of the corporation that is retained by the corporation at a particular point of time, such as at the end of the reporting period.
Debt/Equity Ratio =
Long Term Debt/ Total Stockholders’ Equity
Note: Stockholders’ Equity includes both Common Equoty and Preferred Stock
Claim Priority in liquidation
In a corporate liquidaton the priority of claim to assets is:
- Securred Bondholders
- Unsecured Bondholders
- Preferred Stockholders
- Common Stockholders
A fundamental Analsyst can get a company’s financial statements by examining the corporations filings w/ the SEC. These docs are made available to the public. The major financial statement filings are:
10K - Corporate Annual Audited Financial Statements=
Company’s audited year end financial statements, filed w/ SEC. Filed 60-90 days after year end. Larger companies (over $700 million public float) filing within 60 days and smaller companies filing within 90.
10Q- Corporate Quarterly Unadudited Financial Statements=
Company’s quarterly unaduited statements. Filed w/ SEC either 40 days (larger companies) or 45 days (smaller companies, after quarter end.
Footnotes
- significant accounting policies
- upcoming scheduled debt payments
- open contractural commitments, including derivates
- open unused credit lines
- future lease payments
-future pension payments
-estimated legal payments - deferred tax payments
- details of discontinued operations charges
Net Operating Profit =
Operating Profit - bond interest expense & taxes
Techincal analysts
select investments based on chart movements, trading volumes, advance-decline ratios, etc.
Fundamental analyst
select investments based on fundamentals such as earnings trends, balance sheet strength (liquidity ratios), management, etc.
When looking at the Price/Book ratio of a company, which statements are TRUE
- The numerator on the equation is based on market value
- The denominator in the equation is based on accounting value
To calculate a company’s Debt/Equity Ratio, the needed information is found on the
B- Statement of financial condition (aka balance sheet)
Inventory is an example of a ___ asset
illiquid. Its not liquid bc it would be very hard to get the full inventory stock at its full cash value
