Finance Lecture 2 Flashcards
What are the 4 categories in an annual report?
balance sheet
income statement
statement of retained earnings
statement of cash flows
What is a balance sheet?
it provides a SNAPSHOT of a firm’s financial position at one point of time
What is an income statement?
it summarizes a firm’s revenue and expenses over a given period of time
what is a statement of retained earnings?
shows how much of the firm’s earnings were retained, rather than paid out as dividends
what is a statement of cash flows?
it reports the impact of a firm’s activities on cash flows over a given period of tine
what is the difference between book values and market values?
book values are determined by GAAP
market values are determined by current trading values in the market
what is the formula for enterprise value?
enterprise value = market value of equity + debt - cash
what is enterprise value?
the enterprise value of a firm assesses the value of the underlying business assets( however financed), and separate from the value of any-non operating cash ( excess cash) and marketable securities that the firm may have
what are outstanding capital stock?
shares held by outsiders
what are Treasury stocks?
shares bought back & held by company
what are the 3 major categories in the statement of cash flows
Operating activities - includes net income and changes in most current accounts ( AP AR Inc)
Investment activities - includes changes in fixed assets
Financing activities - includes changes in notes payable, long term debt and equity account as well as dividends
what does operating working capital mean and consist of?
operating working capital is working capital stemming from our operating policies AND removed from our financing decisions
accounts receivable
inventory
accounts payable
what is operating working capital?
OWC is working capital string from operating policies and removed from financing decisions
what are the 2 types of current liabilities? which one are we interested in?
name examples from both type of current liabilities!
1) Interest Bearing Liabilities ( financing activities)
- Short Term Loans ( less than 1 year)
- Notes Payables
2) Non interest bearing Liabilities ( operating activities)
- accounts payables
What are the 5 Major Categories of Ratio
i) Liquidity ratios
ii) Long-Term Solvency (Financial Leverage) Ratios
iii) Asset Management
iv) Profitability Ratios
v) Market value ratios
What is Liquidity Ratio?
Liquidity ratios measure the firm’s ability to pay bills in the short run,
It indicates a firm’s ability to meet its maturing short-term obligations
What is Long-Term Solvency? What is another term for it?
Financial Leverage
It relates to the extent that a firm relies on debt financing rather than equity.
The more debt a firm has, the more likely it is the firm will become unable to fulfil its contractual obligations.
What is Asset Management Ratios? What is another term for it?
What are the 3 sub- activities under Asset Management Ratio?
Activity Ratios
i) Inventory Ratios measure how quickly inventory is produced and sold
ii) Receivable ratios provide information on the success of the firm in managing its collection from credit customers
iii) Fixed asset and total asset turnover ratios show how effective the firm is in using its assets to generate sales.
What is Profitability Ratios?
Measures the firm’s return on its investments
What is current ratio?
Current ratio is current assets/ current liabilities
The current ratio is a liquidity ratio that measures a company’s ability to pay short-term and long-term obligations
What is Quick Ratio
(Current Asset - Inventory) / Current Liabilities
The quick ratio is a measure of how well a company can meet its short-term financial liabilities.
What is total debt ratio?
Total Debt/Total Assets
What is fixed asset and total asset turnover ratios?
It shows how effective the firm is in using its assets to generate sales.
What is the Dupoint Equation?
ROE = Profit Margin x Total Asset Turnover X Equity Multiplier
What is the formula for Profit margin?
Net Income/ Sales
What is the formula for Total Asset Turnover?
Sales / Total Assets
What is the formula for equity multiplier?
Total Assets/ Total equity OR 1 + Debt/Equity ratio
