Chapter 2

Question 1

Financial Statements

Answer 1

Accounting reports issued by a firm periodically that present past performance information and a snapshot of the firm’s assets and the financing of those assets

Question 2

Annual report

Answer 2

The yearly summary of business, accompanying or including financial statements, sent by U.S. public companies tot heir stockholders

Question 3

Generally Accepted Accounting Principle (GAAP)

Answer 3

common set of rules and a standard format for public companies to use when they prepare their reports. This standardization also makes it easier to compare the financial results of different firms.

Question 4

Auditor

Answer 4

A neutral third party, which corporations are required to hire, that checks a firm’s annual financial statements to ensure they are prepared according to GAAP, and provides evidence to support the reliability of the information

Question 5

Balance sheet

Answer 5

lists the firm’s assets and liabilities (Assets on the left side, liabilities on the right side)

Question 6

Assets

Answer 6

Firm’s cash, inventory, property, pant and equipment, and any other investments the company has made

Question 7

Liabilities

Answer 7

shows the firm’s obligations to its creditors

Question 8

Stockholders’ equity

Answer 8

the difference between the firm’s assets and liabilities, is an accounting measure of the firm’s net worth

Question 9

Common stock and paid-in surplus

Answer 9

the amount that stockholders have directly invested in the firm through purchasing stock from the company

Question 10

Retained earnings

Answer 10

profits made by the firm, but retained within the firm and reinvested in assets or held as cash

Question 11

The Balance sheet identity

Answer 11

Assets = Liabilities + Stockholder’s Equity

Question 12

Current assets

Answer 12

either cash or assets that could be converted into cash within one year

Question 13

Marketable securities

Answer 13

which are short-term, low-risk investments that can be easily sold and converted to cash (such as money market investments, like government debt, that mature within a year)

Question 14

Accounts Receivable

Answer 14

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

Question 15

Inventories

Answer 15

composed of raw materials as well as work-in-progress and finished goods

Question 16

Long-term Assets

Answer 16

Assets that produce tangible benefits for more than one year

Question 17

Depreciation

Answer 17

A yearly deduction a firm makes from the value of it fixed assets (other than land) over time, according to a depreciation schedule that depends on an asset’s life

Question 18

Book Value

Answer 18

The acquisition cost of an asset less its accumulated depreciation

Question 19

Current Liabilities

Answer 19

Liabilities that will be satisfied within one year

Question 20

Accounts payable

Answer 20

The amounts owed to creditors for products or services purchased with credit

Question 21

Notes payable, short term debt

Answer 21

Loans that must be repaid in the next year

Question 22

Net working capital

Answer 22

The difference between a firm’s current assets and current liabilities that represents the capital available in the short term to run the business

Question 23

Long-term debt

Answer 23

Any loan or debt obligation with a maturity of more than a year

Question 24

Book value of equity

Answer 24

The difference between the book value of a firms assets and its liabilities, also called shareholders’ equity and stockholders’ equity, it represents the net worth of a firm from an accounting perspective

Question 25

Market Capitalization

Answer 25

The total market value of equity; equals the market price per share times the number of shares

Question 26

Liquidation value

Answer 26

the value of a firm after its assets are sold and liabilities

Question 27

Market-to-book ratio

Answer 27

Which is the ratio of a firm’s market capitalization to the book value of stockholders equity

Question 28

Market-to-book ratio

Answer 28

Market value of equity/book value of equity

Question 29

Value stocks

Answer 29

Firms with low market-to-book ratios

Question 30

Growth stocks

Answer 30

Firm with high market-to-book ratios

Question 31

Leverage

Answer 31

A measure of the extent to which a firm relies on debt as a source of financing

Question 32

Debt-Equity ratio

Answer 32

The ratio of a firm’s total amount of short and long term debt (including current maturities) to the value of its equity, which may be calculated based on market or book values

Question 33

Enterprise value

Answer 33

Enterprise Value = Market Valeu of Equity + Debt - Cash

Question 34

Current ratio

Answer 34

The ratio of current assets to current liabilities

Question 35

Quick ratio

Answer 35

The ratio of current assets other than inventory to current liabilities

Question 36

Income Statement

Answer 36

firm’s revendes and expenses over a period of time

Question 37

Net income

Answer 37

which is a measure of its profitability during the period

Question 38

Gross profit

Answer 38

The third line of an income statement that represents the difference between a firm’s sales revenue and its costs

Question 39

Operating Income

Answer 39

A firm’s gross profit less its operating expenses

Question 40

EBIT

Answer 40

A firm’s earnings before interest and taxes are deducted

Question 41

Earnings per share (EPS)

Answer 41

A firms net income divided by the total number of shares outstanding

Question 42

Stock options

Answer 42

The right to buy a certain number of shares of stock by a specific date at a specific price

Question 43

Convertible bonds

Answer 43

Corporate bonds with a provision that gives the bondholder an option to convert each owned into a fixed number of shares of common stock

Question 44

Dilution

Answer 44

An increase in the total number of shares that will divide a fixed amount of earnings