Chapter 10 Flashcards
Sustainable income
Most likely level of income to be obtained in the future
How does sustainable income differ from net income
By the amount of unusual revenues, expenses, gains and losses included in the current years income
What are the two parts of reporting discontinued operations on an income statement
- income/loss from operations net of tax
2. gain/loss on disposal of the component net of tax
Comprehensive income
Net income and other comprehensive income items (unrealized gains/losses)
Trading securities
Unrealized gains and losses are reported in the other expenses and losses section of income statement
Available for sale securities
Unrealized gains and losses are reported as other comprehensive income in stockholders equity
A high quality of earnings provides…
Full and transparent information that will no confuse or mislead users
Pro forma income
Income that excludes items the company thinks are unusual or non-recurring
3 types of comparisons
Intracompany, intercompany, industry average
Horizontal analysis, aka…
Trend analysis
Vertical analysis, aka…
Common size analysis
Liquidity ratios
Measure short term ability of the company to pay its maturing obligations and meet unexpected needs for cash
Profitability ratios
Measure the income of operating success of a company for a given time period
Solvency ratios
Measure the ability of the company to survive over a long period of time
Current ratio
Tells us how many dollars of assets for every dollar of liabilities
Accounts receivable turnover
Measures how many times on average the company collects receivables during the period
Average collection period
Assess effectiveness of a company’s credit and collection policies
Inventory turnover
Faster = less cash tied up in inventory
Debt to assets ratio
Tells us how good the company can withstand losses without impairing interested of its creditors
Times interest earned
Tells us company’s ability to meet interest payments when due
Free cash flow
Amount of excess cash generated after investing in capital expenditures and paying dividends
Return on common stockholders equity
Shows how many dollars of net income the company earned for each dollar invested by owners
Return on assets
Measures the overall profitability of assets in terms of the income earned on each dollar invested in assets
Profit margin
Measures the percentage of each dollar of sales that results in net income
Asset turnover
How efficiently a company uses assets to generate sales
Gross profit rate
A company’s ability to maintain an adequate selling price above its cost of goods sold
Price earning ratio
Reflects investors assessments of a company’s future earnings
Payout ratio
Measures the percent of earnings distributed in the form of cash dividends
