Chapter 3: Financial Statements & Ratio Analysis Flashcards
Balance Sheet
Summer statement of the firm’s financial position at a given point in time.
Current Assets
Short-Term Assets, expected to be converted into cash within 1 year.
Current Liabilities
Short-Term liabilities, expected to be paid off within 1 year or less.
Long-Term Debt
Debt for which payment is not due in the current year.
Paid-In Capital In Excess of Par
The amount of proceeds in excess of the par value received from the original stock.
Retained Earnings
The cumulative total of all earnings, net of dividends, that have been retained and reinvested in the firm since its inception.
Statement of Stockholders Equity
Shows all equity account transactions that occurred during a given year.
Statement of Retained Earnings
Reconciles the net income earned during a given year, with that change in retained earnings between the start and the end of that year.
Notes to the Financial Statements
Explanatory notes keyed to relevant accounts in the statements; they provide detailed info on the accounting policies, and transactions underlying entries in the financial statement.
Dividend Per Share (DPS)
The dollar amount of cash distributed during the period on behalf of each outstanding share of common stock.
Review the contents of the stockholders’ report and the procedures for consolidating international financial statements.
The annual stockholders’ report, which publicly owned corporations must provide to stockholders, documents the firm’s financial activities of the past year. It includes the letter to stockholders and various subjective and factual information. It also contains four key financial statements: the income statement, the balance sheet, the statement of stockholders’ equity (or its abbreviated form, the statement of retained earnings), and the statement of cash flows. Notes describing the technical aspects of the financial statements follow. Financial statements of companies that have operations whose cash flows are denominated in one or more foreign currencies must be translated into dollars in accordance with FASB Standard No. 52.
Understand who uses financial ratios and how.
Ratio analysis enables stockholders, lenders, and the firm’s managers to evaluate the firm’s financial performance. It can be performed on a cross-sectional or a time-series basis. Benchmarking is a popular type of cross-sectional analysis. Users of ratios should understand the cautions that apply to their use.
Use ratios to analyze a firm’s liquidity and activity.
Liquidity, or the ability of the firm to pay its bills as they come due, can be measured by the current ratio and the quick (acid-test) ratio. Activity ratios measure the speed with which accounts are converted into sales or cash—inflows or outflows. The activity of inventory can be measured by its turnover, that of accounts receivable by the average collection period and that of accounts payable by the average payment period. Total asset turnover measures the efficiency with which the firm uses its assets to generate sales.
Discuss the relationship between debt and financial leverage and the ratios used to analyze a firm’s debt.
The more debt a firm uses, the greater its financial leverage, which magnifies both risk and return. A common measure of indebtedness is the debt ratio. The ability to pay fixed charges can be measured by times interest earned and fixed-payment coverage ratios.
Use ratios to analyze a firm’s profitability and its market value.
The common-size income statement, which shows all items as a percentage of sales, can be used to determine gross profit margin, operating profit margin, and net profit margin. Other measures of profitability include earnings per share, return on total assets, and return on common equity. Market ratios include the price/earnings ratio and the market/book ratio.
