chapter 2 Flashcards

1
Q

financial statements

A

accounting reports with past performance information that a firm issues periodically. they’re useful tools for investors, financial analysts, and other interested outside parties to obtain information about a corporation and for managers for corporate financial decisions.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

10-Q

A

required quarterly financial statement for US public companies.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

10-K

A

US public companies are required to file an annual report to their shareholders.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Generally Accepted Accounting Principles (GAAP)

A

provide a common set of rules and a standard format for public companies to use when they prepare their reports. it makes it easier to compare financial results.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

auditor

A

a neutral third party hired to check the annual financial statements to ensure that they are reliable and prepared according to GAAP.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

four required financial statements

A
  1. The balance sheet
  2. The income statement
  3. The statement of cash flows
  4. The statement of stockholders’ equity
    they provide investors and creditors with an overview of the firm’s financial performance.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

balance sheet/statement of financial position

A

lists the firm’s assets and liabilities and provides a firm’s financial position at a given point in time.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

current assets

A

either cash or assets that could be converted into cash within one year. includes:
1. cash and other marketable securities
2. accounts receivable
3. inventories
4. other current assets, a catch-all category incl. prepaid expenses

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

marketable securities

A

short-term low-risk investments that can be easily sold and converted into cash, eg. money market investments.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

accounts receivable

A

amounts owed to the firm by customers who have purchased goods or services on credit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

inventories

A

composed of raw materials, WIP, and finished goods.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

net property, plant, and equipment

A

for example, real estate or machinery that produce tangible benefits for more than one year. it shows the book value of assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

long-term assets

A
  1. net property, plant, and equipment
  2. other long-term assets
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

depreciation expense

A

the value recorded of equipment will be reduced annually by deducting depreciation expense because it wears out or becomes obsolete.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

accumulated depreciation

A

the total amount deducted over the life of the equipment.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

book value of an asset

A

the value shown in financial statements. it is the acquisition cost less accumulated depreciation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

amortisation/impairment change

A

a decrease in the value of intangible assets. it captues the change in value.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

current liabilties

A

liabilities that will be satisfied within one year. include:
1. accounts payable
2. short-term debt or notes payable, and current maturities of long-term debt
3. items owed but not yet paid, and deferred or unearned revenue

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

accounts payable

A

amounts owed to suppliers for products or services purchased with credit.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

short-term debt or notes payable, and current maturities of long-term debt

A

all repayments of debt that will occur within the next year.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

deferred or unearned revenue

A

revenue that has been received for products not yet delivered.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

net working capital

A

the difference between current assets and current liabilities and the capital available in the short term to run the business.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

long-term liabilities

A

liabilities that extend beyond on year. main types:
1. long-term debt
2. capital leases
3. deferred taxes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

long-term debt

A

any loan or debt obligation with a maturity of more than one year.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

capital leases

A

long-term lease contact that obligate the firm to make regular lease payments in exchange for use on asset, eg. a building.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

deferred taxes

A

taxes owed but not yet paid. arise when the firm’s financial income exceeds its income for tax purposes.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

total liabilities

A

the sum of current liabilities and long-term liabilities.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

stockholders’ equity/book value of equity

A

the difference between the firm’s assets and liabilties. it is an accounting measure of the firm’s net worth.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

market capitalisation/market value of equity/’market cap’

A

the value that remains after the firm has paid its debt. it depends on what investors expect those assets to produce rather than historical cost. it includes future prospects of the firm.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

market-to-book ratio/price-to-book [P/B] ratio

A

variations reflect differences in fundamental firm characteristics and value added by management. successful firms exceed 1.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

value stocks

A

firms with low market-to-book ratios

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

growth stocks

A

firms with high market-to-book ratios.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

enterprise value of a firm/total enterprise value (TEV)

A

assesses the value of the underlying business assets, unencumbered by debt and separated from any cash and marketable securities. it is the market value of operating assets.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

income statement/statement of financial performance/profit and loss (P&L) statement

A

lists the revenues and expenses over a period of time. it shows the flow of revenues and expenses generated by those assets and liabilties in a period.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

net income/earnings

A

measures a firm’s profitability during a period. the total earnings of the firm’s equity holders. it is the ‘bottom’ line of the income statement.

36
Q

gross profit

A

the difference between sales revenues and costs.

37
Q

operating income

A

the firm’s gross profit net of operating expenses

38
Q

other income

A

income/expenses arising from activities that are not central part of the business, eg. income from investments.

39
Q

stock options

A

give the holder the right to buy a certain number of shares by a specific date at a specific price. the company issues new stock and number of outstanding shares grows.

40
Q

convertible bonds

A

a form of debt that can be converted to shares. also increases the number of outstanding shares and therefore leads to dilution.

41
Q

diluted EPS

A

discloses the potential for dilution and represents earnings per share for the company as though in-the-money stock options or other stock-based compensation had been exercises or dilutive convertible debt had been converted.

42
Q

statement of cash flow

A

utilises the information from the income statement and balance sheet to determine how much cash was generated and how it was allocated during a period.

43
Q

operating expenses

A

expenses from the ordinary course of running the business that are not directly related to producing the goods or services being sold.

44
Q

operating activities

A

starts with net income from income statement and adjusts by adding back non-cash entries, (eg. depreciation expense) related to operating activities.

45
Q

investment activities

A

lists the cash used for investment.

46
Q

financing activities

A

shows the cash flow between firm and its investors.

47
Q

capital expenditures

A

purchases of new property, plant, and equipment. They do not immediately appear on the income statement, but as depreciation expenses.

48
Q

retained earnings

A

the difference between a firm’s net income and the amount it spends on dividends.

49
Q

statement of stockholders’ equity

A

breaks down the stockholders’ equity computed on the balance sheet into the amount that came from issuing shares (par value plus paid-in capital) versus retained earnings. The book value of stockholders’ equity is not a useful assessment of value for financial purposes, so the statement of stockholders’ equity is used infrequently.

50
Q

management discussion and analysis (MD&A)

A

a preface to the financial statements in which the company’s management discusses the recent year, providing a background on the company and any significant events that may have occurred. They may also discuss the coming year, goals, projects, and future plans. They should also discuss risks that the firm faces or issues that may affect liquidity and resources. It should also disclose off-balance sheet transactions.

50
Q

off-balance sheet transactions

A

transactions or arrangements that can have a material impact on the firm’s future performance yet do not appear on the balance sheet.

50
Q

notes to the financial statements

A

provide further details on the information in the statements. It is important to fully interpret the statements.

51
Q

gross margin

A

reflects the firm’s ability to sell a product for more than the cost of producing it.

52
Q

operating margin

A

reveals how much a company earns before interest and taxes from each dollar of sales.

53
Q

net profit margin

A

shows the fraction of each dollar in revenues that is available to equity holders after the firm pays interest and taxes. However, differences can also result from differences in leverage, which determines the amount of interest expense and differences in accounting assumptions.

54
Q

quick ratio

A

more stringent test of the firm’s liquidity and compares only cash and “near cash” assets, eg. short-term investments and accounts receivable to current liabilities.
A higher current or quick ratio implies less risk of the firm experiencing cash shortfall in the near future. Inventory is excluded because it may not be that liquid.

55
Q

cash ratio

A

most stringent liquidity ratio and is used to gauge a firm’s cash position.

56
Q

accounts receivable days

A

the number of days’ worth of sales accounts receivable represents. It is used to evaluate the speed at which a company turns sales into cash.

57
Q

turnover ratios

A

computed by expressing annual revenues or costs as a multiple of the corresponding working capital account, eg. Inventory turnover.

58
Q

working capital ratios

A

combined information in the income statement and balance sheet can be used to gauge how efficiently the firm is utilising net working capital.

59
Q

interest coverage ratio

A

Lenders often assess a firm’s ability to meet its interest obligations by comparing its earnings with its interest expenses by using an interest coverage ratio.

60
Q

leverage

A

the extent to which the firm relies on debt as a source of financing. Leverage increases the risk to the firm’s equity holders, but they may also hold cash reserves to reduce risk.

61
Q

debt-equity ratio

A

used to assess leverage. book values or market values are used, but book debt-equity is not really useful since it can be negative.

62
Q

debt-to-capital ratio

A

can also be calculated using book values or market values.

63
Q

equity multiplier

A

captures the amplification of the firm’s accounting returns that result from leverage.

64
Q

market value multiplier

A

indicates the amplification of shareholders’ financial risk that results from leverage.

65
Q

valuation ratios

A

used to gauge the market value of the firm.

66
Q

price-earnings ratio (P/E)

A

used to assess whether a stock is over- or under-valued based on the idea that the value of a stock should be proportional to the level of earnings it can generate for its shareholders. either on a total basis or on a per-share basis. If it is 25, investors are willing to pay 25 times the firm’s earnings to purchase a share.

67
Q

operating returns

A

evaluate a firm’s return on investment by comparing its income to its investment.

68
Q

return on equity (ROE)

A

provides a measure of the return the firm has earned on past investments. High ROE may indicate that the firm can find investment opportunities that are very profitable.

69
Q

return on assets (ROA)

A

less sensitive to leverage than ROE, but it is sensitive to working capital.

70
Q

return on invested capital (ROIC)

A

measures the after-tax profit generated by the business itself, excluding any interest expenses or income, and compares it to the capital raised from equity and debt holders that has already been deployed (ie. not held as cash). This is the most useful measure.

71
Q

the DuPont Identity

A

expresses the ROE in terms of the firm’s profitability, asset efficiency, and leverage.

72
Q

net profit margin

A

measures overall profitability.

73
Q

asset turnover

A

measures how efficiently the firm is utilising its assets to generate sales.

74
Q

equity multiplier

A

indicates the value of assets held per dollar of shareholder equity. The greater the firm’s reliance on debt financing, the higher the equity multiplier.

75
Q

Sarbanes-Oxley Act (SOX)

A

overall intent is to improve the accuracy of information given to boards and shareholders. it was established after accounting scandals.

76
Q

Dodd-Frank Act

A

exempts firms with less than $75 million in publicly held shares from the SOX Section 404 requirements. Also, an individual who provides information about a possible violation gets 10 to 30% of the penalty or recovery.

77
Q

efficiency ratios

A

‘How efficient are the firm’s operations?’

78
Q

profitability ratios

A

‘How profitable is the firm?’

79
Q

leverage ratios

A

‘Can the firm repay its debt?’

80
Q

value ratio

A

‘How much value has the firm created?’

81
Q

carry trade strategy

A

borrowing in low interest rate currency and investing in high interest rate currency. this is not an arbitrage strategy because of exchange rate risk.

82
Q

short squeeze

A

a rapid increase in price of a stock owing primarily to an excess of short positions in a stock. it occurs when short sellers of stock move to cover their positions (buy back the stock they borrowed), purchasing large volumes of stock relative to the market volume.

83
Q

free cash flows

A

includes operating and investment cash flows, but not financing cash flows. this is the separation principle.

84
Q

financing cash flows

A

interest paid on loans or cash flows due to loans and equity.