chapter 2 Flashcards
financial statements
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.
10-Q
required quarterly financial statement for US public companies.
10-K
US public companies are required to file an annual report to their shareholders.
Generally Accepted Accounting Principles (GAAP)
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.
auditor
a neutral third party hired to check the annual financial statements to ensure that they are reliable and prepared according to GAAP.
four required financial statements
- The balance sheet
- The income statement
- The statement of cash flows
- The statement of stockholders’ equity
they provide investors and creditors with an overview of the firm’s financial performance.
balance sheet/statement of financial position
lists the firm’s assets and liabilities and provides a firm’s financial position at a given point in time.
current assets
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
marketable securities
short-term low-risk investments that can be easily sold and converted into cash, eg. money market investments.
accounts receivable
amounts owed to the firm by customers who have purchased goods or services on credit
inventories
composed of raw materials, WIP, and finished goods.
net property, plant, and equipment
for example, real estate or machinery that produce tangible benefits for more than one year. it shows the book value of assets
long-term assets
- net property, plant, and equipment
- other long-term assets
depreciation expense
the value recorded of equipment will be reduced annually by deducting depreciation expense because it wears out or becomes obsolete.
accumulated depreciation
the total amount deducted over the life of the equipment.
book value of an asset
the value shown in financial statements. it is the acquisition cost less accumulated depreciation.
amortisation/impairment change
a decrease in the value of intangible assets. it captues the change in value.
current liabilties
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
accounts payable
amounts owed to suppliers for products or services purchased with credit.
short-term debt or notes payable, and current maturities of long-term debt
all repayments of debt that will occur within the next year.
deferred or unearned revenue
revenue that has been received for products not yet delivered.
net working capital
the difference between current assets and current liabilities and the capital available in the short term to run the business.
long-term liabilities
liabilities that extend beyond on year. main types:
1. long-term debt
2. capital leases
3. deferred taxes
long-term debt
any loan or debt obligation with a maturity of more than one year.
capital leases
long-term lease contact that obligate the firm to make regular lease payments in exchange for use on asset, eg. a building.
deferred taxes
taxes owed but not yet paid. arise when the firm’s financial income exceeds its income for tax purposes.
total liabilities
the sum of current liabilities and long-term liabilities.
stockholders’ equity/book value of equity
the difference between the firm’s assets and liabilties. it is an accounting measure of the firm’s net worth.
market capitalisation/market value of equity/’market cap’
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.
market-to-book ratio/price-to-book [P/B] ratio
variations reflect differences in fundamental firm characteristics and value added by management. successful firms exceed 1.
value stocks
firms with low market-to-book ratios
growth stocks
firms with high market-to-book ratios.
enterprise value of a firm/total enterprise value (TEV)
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.
income statement/statement of financial performance/profit and loss (P&L) statement
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.