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chapter 2 Flashcards

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1
Q

what are financial statements?

A

firm issued accounting reports with past performance information that a firm issues periodically, usually quarterly and annually

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2
Q

what are the 5 financial statements that the international financial reporting standards required every Canadian public company to produce?

A

a balance sheet (or statement of financial position)

statement of comprehensive income (includes income statement)

statement of cash flows

statement of changes in equity

notes including accounting policies

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3
Q

does the statement of comprehensive income include the income statement?

A

yes

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4
Q

what are the notes including accounting polices in a disclosure of financial information?

A

they are notes including how they got the numbers that they did in the statements

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5
Q

what is a balance sheet?

A

a concise picture of financial position (assets, liabilities and owner/shareholder/stockholder equity) on a specific date

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6
Q

what is another term for a balance sheet?

A

statement of financial position

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7
Q

what does a balance sheet capture?

A

captures a snapshot at a point in time that captures what the firm has (assets), what it owes (liabilities) and what belongs to the owners (equity)

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8
Q

what is the balance sheet identity?

A

assets= liabilities + shareholders equity

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9
Q

why must assets equal liabilities plus shareholders equity?

A

because that is how a company is funding its assets

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10
Q

what are the 2 kinds of assets?

A

current assets
longterm assets

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11
Q

what are current assets?

A

assets that could be converted to cash within one year

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12
Q

what are 4 examples of current assets?

A

cash
marketable securities
accounts receivable
inventories

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13
Q

what is a security?

A

a financial claim that can be traded

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14
Q

what are long-term assets?

A

assets that produce tangible benefits for more than one year

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15
Q

what are some examples of long term assets?

A

net property (recored at book value)
plant (recored at book value)
equipment (recored at book value)
goodwill

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16
Q

what are the 2 kinds of liabilities?

A

current liabilities
long term liabilities

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17
Q

what are current liabilities?

A

liabilities that will be satisfied (payed) within one year

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18
Q

what are 3 examples of current liabilities?

A

accounts payable
short-term debt
current portion of long-term debt

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19
Q

what is net working capital?

A

the difference between current assets and current liabilities, this is the capital available in the short term to run the business

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20
Q

what are long-term liabilities?

A

liabilities that extend beyond one year

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21
Q

what are 3 examples of long-term liabilities?

A

longterm debt
capital leases
future income tax

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22
Q

what are total liabilities?

A

the sum of current liabilities and long-term liabilities

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23
Q

what is shareholders equity or book of value equity?

A

the difference between the firms assets and liabilities

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24
Q

what is important to know when looking at a companies balance sheet?

A

many of the firms valuable assets are not captures on the balance sheet, such as the firms reputation, the expertise of its employees or the quality of its management, the book value of equity does not provide an accurate value of the firms equity

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25
Q

what is market capitalization?

A

the market price per share times the number of share outstanding

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26
Q

what are the number of shares outstanding?

A

the total number of shares that have been issued

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27
Q

does the firms book value of equity equal the firms market value or market capitalization?

A

no

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28
Q

what is the income statement?

A

lists the firms revenues and expenses and conveys a concise picture of profitability (net income or net loss) for a period of time, such as a month, quarter or a year

29
Q

what does revenue include?

A

income generated through sales of the firms products or services and other income not related to the ordinary

30
Q

what does expenses include?

A

cost of sales (or cost of goods sold), administrative expenses, income tax expense, and interest expense

31
Q

what is the basic income equation?

A

revenue - expense= net income

32
Q

what is earnings per share (EPS)?

A

the earnings per share, often calculated by dividing net income by the number of shares outstanding

33
Q

what is the primary objective of cash flows/ cash flow statements?

A

to reconcile the change in cash from the begging of the period to the end of the period

34
Q

what does the income statement reflect?

A

revenues when earned

35
Q

what does the cash flow statement reflect?

A

when cash is actually collected

36
Q

what are the 3 kind of categories on the statement of cash flow?

A

operating activities (how the business makes money)

investing activities (how the business makes money in the future)

financing activities (how the business gets money to operate)

37
Q

why is the statement of cash flow important?

A

because it is important to know the current about of cash the company has so they can meet their liabilities on time

38
Q

what insight does the cash flow statement provide?

A

into the sources and uses of funds, which allows us to recognize potential problems

39
Q

from the perspective of an investor attempting to value a firm, what financial statement can give the most important information?

A

cash flow statement

40
Q

how do you get operating activity on a statement of cash flow?

A

start by taking the firms net income from the income statement, and adjusting it by all non-cash items related to operating activity, such as depreciation. adjustments are also made for net working capital changes arising from changes to accounts receivable, accounts payable or inventory

41
Q

how do you get investment activity on a statement of cash flow?

A

cash from investing activities including the purchase or sale of long-term assets, purchase of property, plant and equipment

42
Q

what are capital expenditures?

A

the purchase of property, plant and equipment

43
Q

how do you get financing activity on a statement of cash flow?

A

cash from financing activities included any cash flows to and from shareholders and lender. this can be in the form of cash received from issuing stock or bonds, cash paid in dividends to shareholders, cash spend on share buybacks and interest payments to lenders

44
Q

what is one of the most important questions that you should ask about a firm as a lender, investor or as a decision maker within the firm?

A

how financially healthy is the firm, this will determine if the company will make money or be able to pay back debt

45
Q

what is a good way to start to to analyze how health a firm Is?

A

ratio analysis, it provides a snapshot of the firms performance

46
Q

what are the 3 profitability ratios?

A

gross margin
operating margin
net profit margin

47
Q

why do we use ratios?

A

because it is easiest to compare companies to companies or a companies year after year performance with ratios

48
Q

what are the 3 operating returns?

A

return on equity (ROE)
return on assets (ROA)
return on invested capital (ROIC)

49
Q

what is the book value of equity?

A

how much money has been invested in to a company

50
Q

what is EBIT?

A

earnings before interest and taxes

51
Q

what is net debt?

A

total debt (short term + long term debt) - cash

52
Q

when comparing operating ratios between companies what is important to keep in mind?

A

these companies need to be within the same industry

53
Q

what are the 4 activity ratios?

A

accounts receivable days (how long it takes to get payed from clients)

accounts payable days (how long it takes to pay clients)

inventory days (how many days inventory sits)

inventory turnover (how often a company replaces its inventory)

54
Q

is it good for profitability ratios and operating ratios to be high?

A

yes, the higher the better

55
Q

what is good for activity ratios?

A

depends on context and trends over time, year after year, month after month. normally depends on what industry averages are

56
Q

what is stock holder equity?

A

the same as book value of equity

57
Q

what is stock value of equity?

A

same as market cap

58
Q

what is market cap?

A

how much the all of the total issued shares are, price per share times number of shares

59
Q

what are 3 liquidity ratios?

A

current ratio (what debts can they pay in a year)

quick ratio (what debts can they pay in a month)

cash ratio (what debts they could pay right now)

60
Q

what are the 4 debt ratios?

A

debt to equity ratio

debt to assets ratio

interest coverage ratio (the companies ability to make interest payments)

debt to enterprise value ratio

61
Q

how do you calculate enterprise value?

A

market cap + net debt

62
Q

what are the 3 valuation ratios?

A

price-earnings ratio (how much you will earn per share of ownership)

enterprise value / EBIT
enterprise value / EBITDA

63
Q

what is EBITDA?

A

earnings before interest, taxes, depreciation and amortization

64
Q

what are valuation ratios used for?

A

to find the value of a company

65
Q

what are common size analysis?

A

when all information on the balance sheet and income statement as a percentage of assets or as a percentage of sales, they allow for easy comparisons between firms

66
Q

why do we calculate all these ratios?

A

they can give us insights in to a firms profitability, ability to pay back debt or pay dividends, and whether a firm is improving or getting worse

67
Q

what is the most useful ways to use ratios?

A

compare a firms ratios over time or to other firms in the same industry

68
Q

what are the notes to financial statements?

A

this is where the firm discloses important details about how numbers were calculated and what assumptions were made in doing those calculations

corporate finance (10 decks)

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