Chapter 3 Flashcards
Form 10-K
an annual report required by the Securities and Exchange Commission (SEC) that provides such information as the firm’s history, audited financial statements, management’s analysis of the company’s performance, and executive compensation.
Income Statement (Profit and Loss Statement)
A basic accounting statement that measures the results of a firm’s operations over a specified period, commonly 1 year. The bottom line of the income statement, net profits (net income), shows the profit or loss for the period that is available for a company’s owners (shareholders).
Cost of Goods Sold
the cost of producing or acquiring a product or service to be sold in the ordinary course of business.
Gross Profit
sales or revenue minus the cost of goods sold.
Operating Expenses
marketing and selling expenses, general and administrative expenses, and depreciation expense.
Operating Income (Earnings Before Interest and Taxes [EBIT]) (Operating Profits)
Sales less the cost of goods sold less operating expenses.
Earnings Before Taxes (EBT) (Taxable Income)
operating income minus interest expense.
Net Income (Net profit, or earnings available to common stockholders)
the earnings available to the firm’s common and preferred stockholders.
Earnings Per Share
net income on a per share basis.
Dividends per share
the amount of dividends a firm pays for each share outstanding.
Common-sized Income Statement
an income statement in which a firm’s expenses and profits are expressed as a percentage of its sales.
Profit Margins
financial ratios (sometimes simply referred to as margins) that reflect the level of the firm's profits relative to its sales. Examples include the gross profit margin (gross profit divided by sales), operating profit margin (operating income divided by sales), and the net profit margin (net income divided by sales).
Gross Profit Margin
gross profit divided by the net sales. It is a ratio denoting the gross profit earned by the firm as a percentage of its net sales.
Operating Profit Margin
operating income divided by sales. This ratio serves as an overall measure of the company’s operating effectiveness.
Net Profit Margin
net income divided by sales. A ratio that measures the net income of a firm as a percent of sales.
Fixed Costs
costs that remain constant, regardless of any change in a firm’s activity.
Variable Costs
costs that change in proportion to changes in a firm’s activity.
Semivariable costs
costs composed of a mixture of fixed and variable components.
Dividend-payout Ratio
Percentage of earnings paid out in dividends to the shareholders.
Balance Sheet
a statement that shows a firm’s assets, liabilities, and shareholder equity at a given point in time. It is a snapshot of the firm’s financial position on a particular date.
Accounting Book Value
the value of an asset as shown on a firm’s balance sheet. It represents the depreciated historical cost of the asset rather than its current market value or replacement cost.
Liquidity
the ability to convert an asset into cash quickly without a significant loss of its value.
Current Assets (Gross Working Capital)
current assets consist primarily of cash, marketable securities, accounts receivable, inventories, and other current assets.
Cash
cash on hand, demand deposits, and short-term marketable securities that can quickly be converted into cash.
Every firm must have cash to conduct its business operations.
A reservoir of cash is needed because of the unequal flow of funds into (Cash receipts) and out of (cash expenditures) of the business.
Accounts Receivable
money owed by customers who purchased goods or services from the firm on credit.
Inventories
raw materials, work in progress, and finished goods held by the firm for eventual sale.
Other current assets
other short-term assets that will benefit future time periods, such as prepaid expenses.
Fixed Assets (Property, plant, and equipment)
assets such as equipment, buildings, and land.
depreciation expense
a noncash expense to allocate the cost of depreciable assets, such as plant and equipment, over the life of the asset. (shown on the income statement).
Accumulated Depreciation
the sum of all depreciation taken over the entire life of a depreciable asset. (shown on the balance sheet).
Gross Fixed Assets
the original cost of a firm’s fixed assets.
Net Fixed Assets
gross fixed assets minus the accumulated depreciation taken over the life of the assets.
Debt
liabilities consisting of such sources as credit extended by suppliers or a loan from a bank.
Equity
stockholders’ investment in the firm and the cumulative profits retained in the business up to the date of the balance sheet.
Current Debt (Short-term Liabilities)
debt due to be paid within 12 months.
Accounts Payable (Trade Credit)
Credit provided by suppliers when a firm purchases inventory on credit.
Accrued Expenses
expenses that have been incurred but not yet paid in cash.
Accrued expenses are short-term liabilities.
Short-term Notes (debt)
amounts borrowed from lenders, mostly financial institutions such as banks, where the loan is to be repaid within 12 months.
Long-term Debt
loans from banks or other sources that lend money for longer than 12 months.
Mortgage
a loan to finance real estate where the lender has first claim on the property in the event the borrower is unable to repay the loan.
Preferred Stockholders
stockholders who have claims on the firm’s income and assets after creditors, but before common stockholders.
Common Stockholders
Investors who own the firm’s common stock. Common stockholders are the residual owners of the firm.
Common Stock
shares that represent ownership in a corporation.
Par value
the arbitrary value a firm puts on each share of stock prior to its being offered for sale.
Paid-in Capital
the amount a company receives above par value from selling stock to investors.
Treasury Stock
the firm’s stock that has been issued and then repurchased by the firm.
Retained Earnings
cumulative profits refined in a business up to the date of the balance sheet.
Common-sized Balance Sheet
a balance sheet in which a firm’s assets and sources of debt and equity are expressed as a percentage of its total assets.
Debt Ratio
a firm’s total liabilities divided by its total assets. It is a ratio that measures the extent to which a firm has been financed with debt.
Net Working Capital
the difference between a firm’s current assets and its current liabilities. When the term working capital is used, it is frequently intended to mean net working capital.
Accrual Basis Accounting
a method of accounting whereby revenue is recorded when it is earned, whether or not the revenue has been received in cash. Likewise, expenses are recorded when they are incurred, even if the money has not actually been paid out.
Cash Basis Accounting
a method of accounting whereby revenue is recorded when physical cash is actually received. Likewise, expenses are recorded when physical cash is paid out.
Statement of Cash Flows
a statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities.
Free Cash Flows
the amount of cash available from operations after the firm pays for the investments it has made in operating working capital and fixed assets. This cash is available to distribute the firm’s creditors and owners.
Financing Cash Flows
the amount of cash received from or distributed to the firm’s investors, usually in the form of interest, dividends, issuance of debt, or issuance of repurchase of stocks.
Sources of Cash
Decrease in an Asset
-Example: selling inventories or collecting receivables provides cash.
Increase in Liability or Equity
-Example: borrowing funds or selling stock provides the firm with cash.
Uses of Cash
Increase in an Asset
-Example: investing in fixed assets or buying more inventories uses cash.
Decrease in a Liability or Equity
-Example: paying off a loan or buying back stock uses cash.
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FIGURE 3-4 STUFF
PAGE 69 CASH FLOW ACTIVITY 1: CASH FLOWS FFROM DAY TO DAY OPERATIONS
ADD HERE
CASH FLOW ACTIVITY 2
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CASH FLOW ACTIVITY 3
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Generally Accepted Accounting Principles (GAAP)
rule-based set of accounting principles, standards, and procedures that companies use to compile their financial statements. These principles are issued by the Financial Accounting Standards Board.
International Financial Reporting Standards (IFRS)
a principle-based set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements. The principles are issued by the international Accounting Standards Board.
Taxable Income
gross income from all sources, except for allowable exclusions, less any tax-deductible expenses.
Capital Gains
gains from selling any asset that is not part of the ordinary operations.
Marginal Tax Rate
the tax rate that would be applied to the next dollar of income.
Average Tax Rate
the tax rate on average that a company pays on its total taxable income.
An income statement reports a firm’s cumulative revenues and expenses from the inception of the firm through the income statement date.
True or False
False
Common-sized income statements are used to compare companies that have the same amount of revenues.
True or False
False
Net profit margin is equal to the gross profit margin times the operating profit margin.
True or False
False
The more debt a company uses to finance its assets, the lower will be its operating income due to higher interest expense.
True or False
False
Common-sized balance sheets show each account as a percentage of total sales to help analysts in comparing companies of difference sizes.
True or False
False
Intangible assets such as copyrights and goodwill are not included on the balance sheet because they are impossible to value objectively.
True or False
False
On an accrual basis income statement, revenues equal cash receipts and expenses equal cash expenditures.
True or False
False
A company with negative net income will also have negative operating cash flow.
True or False
False
In order to be conservative, accrual accounting requires that expenses be recorded when incurred, but revenues are recorded only after the cash has been received.
True or False
False
It is possible for two companies to have the same financial performance, but their financial statements can be different, depending on how and when the managers choose to report certain transactions.
True or False
True
Generally Accepted Accounting Principles (GAAP). GAAP is a set of principle-based accounting standards established by the Financial Accounting Standards Board (FASB).
True or False
False
The A corporation has an operating profit margin of 20%, operating expenses of $500,000, and financing costs of $15,000. Therefore
A) the corporation’s gross profit margin is less than 20%.
B) the corporation’s net profit margin is greater than 20%.
C) the corporation’s gross profit margin is greater than 20%.
D) the corporation’s gross profit margin is equal to 20% because gross profit is not affected by operating expenses or financing costs.
C) the corporation’s gross profit margin is greater than 20%.
Rogue Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Rogue's gross profit is equal to A) $770,000. B) $1,070,000. C) $1,100,000. D) $1,500,000.
D) $1,500,000.
Rogue Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Rogue's operating income is equal to A) $770,000. B) $1,070,000. C) $1,100,000. D) $1,500,000.
C) $1,100,000.
Rogue Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Rogue's net profit margin is equal to A) 25.67%. B) 35.67%. C) 36.67%. D) 50.00%.
A) 25.67%.
Rogue Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000; Rogue's operating profit margin is equal to A) 25.67% B) 35.67% C) 36.67% D) 50.00%
C) 36.67%
The two principal sources of financing for corporations are A) debt and accounts payable. B) debt and equity. C) common equity and preferred equity. D) cash and common equity.
B) debt and equity.
Universal Financial, Inc. has total current assets of $1,200,000; long-term debt of $600,000; total current liabilities of $500,000; and long-term assets of $800,000. How much is the firm's net working capital? A) $1,000,000 B) $900,000 C) $600,000 D) $700,000
D) $700,000
Siskiyou, Inc. has total current assets of $1,200,000; total current liabilities of $500,000; and long-term assets of $800,000. How much is the firm's Total Liabilities & Equity? A) $2,500,000 B) $1,300,000 C) $2,000,000 D) $1,800,000
C) $2,000,000
What information does a firm’s statement of cash flows provide to the viewing public?
A) a report of investments made and their cost for a specific period of time
B) a report documenting a firm’s cash inflows and cash outflows from operating, financing, and investing activities for a defined period of time
C) a report of revenues and expenses for a defined period of time
D) an itemization of all of a firm’s assets, liabilities, and equity for a defined period of time
B) a report documenting a firm’s cash inflows and cash outflows from operating, financing, and investing activities for a defined period of time
Which of the following best describes cash flow from financing activities?
A) Interest income, plus dividend income, minus taxes
B) Interest expense, minus dividends paid
C) Interest paid, plus dividends paid, plus increase (or minus decrease) in stock, plus increase (or minus decrease) in debt
D) Increase (or minus decrease) in stock, plus increase (or minus decrease) in debt, minus interest paid, minus dividends paid.
D) Increase (or minus decrease) in stock, plus increase (or minus decrease) in debt, minus interest paid, minus dividends paid.
The income statement for Simpson, Inc. indicates that tax expense was $30,000. The balance sheet indicates that taxes payable for the same year increased by $5,000. What amount did Simpson, Inc. actually pay in taxes during this year?
A) $15,000
B) $20,000
C) $25,000
D) Cannot be determined without the cash balance
C) $25,000
