Financial Statement Analysis Flashcards
Develop skills in financial statement analysis, reporting standards, income statement, balance sheet, cash flow statement, financial analysis techniques, inventories, long-lived assets, income taxes, and non-current liabilities.
Define:
Credit migration risk
The risk that a bond issuer’s creditworthiness deteriorates leading investors to believe that the risk of default is higher.
aka downgrade risk
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Accounts payable
When a business owes its vendors for goods and services which were purchased but which have not yet been paid.
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Accounts receivable
Amounts that the company is owed for things that have been sold or returned.
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Accounts receivable turnover
Net Credit Sales / Average Accounts Receivable
Measure of how efficient the company is with its AR.
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Accrued expenses
Expenses incurred but not yet paid (at end of an accounting period), this results in a liability. (Some examples would be salaries or rent that have been incurred but not paid by the end of the period).
May also be called accrued liabilities
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Accrued interest
Interest earned but not yet paid.
(Example of an accrued expense)
This is a liability
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Accumulated depreciation
An accounting measure that represents the total depreciation expense recognized on a fixed asset (PPE) over its useful life, up to a specific point in time.
Used to offset the cost of PPE over time.
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Acquisition method
Method of accounting for a business combination- Acquirer is required to measure each identifiable asset and liability at fair value.
Was the result of an attempt by IASB and FASB to support convergence of standards for the accounting of business combinations.
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Amortized cost
The cost of an asset adjusted for amortization and impairment.
Historical (initial) cost, reduced by amortization and impairment.
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Amortization
The process of allocating the cost of intangible long-term assets with a finite useful life to seperate accounting periods.
Spreading the cost over the useul life (different accounting periods).
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Asset utilization ratios
aka efficiency ratios
Ratios which assess how effectively a company uses its assets to generate sales or revenue.
The turnover ratios
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Assets
Resources controlled or owned by an entity from which future economic benefits are expected to flow to the entity.
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Available-for-sale
Debt and equity securities which are neither classified as held-to-maturity or held-for-trading. The holder is willing to sell but not actively planning to sell. Reported at fair value on the balance sheet.
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Balance sheet
statement of financial position
Financial statement presenting current financial position for a company. This requires the disclosure of current resources the company controls (assets) and claims on those resources (liabilities and equity).
This is a snapshot of the financial position at a particular point in time.
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Book value
The net amount for an asset or liability on the balance sheet.
May also refer to the amount by which a company’s assets exceed their liabilities.
aka carrying value or carrying amount
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Carrying amount
The amount at which an asset or liability is valued according to accounting principles.
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Cash conversion cycle
The length of time for a company to convert cash invested in operations to cash received as a result of operations.
days of inventory on hand + days of sales outstanding – number of days of payables
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Cash equivalents
Very liquid short-term investments
<= 90 days until maturity
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Cash flow from operations
Cash earned from operating activities.
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Classified balance sheet
A balance sheet organized into different classficiations (categories) so as to group together the various assets and liabilities based on similar characteristics. (e.g., current and noncurrent)
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Common-size analysis
Restatement of financial statement items in terms of a common denominator or reference item in order to make comparisons more straightforward.
ex. income statement where all items expressed as % of revenue.
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Completed contract
Method of revenue recognition- company does not recognize any revenue until the contract is completed.
often used for long term construction contracts.
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Comprehensive income
=Net Income + Other Comprehensive Income (OCI)
A more comprehensive account of income earned, as it considers items which bypass the income statement (like unrealized +/- on securites available for sale, or foreign currency translation adjustments).
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Contra account
Account used to offset another account.
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Cost of goods sold
COGS
For a period: Beginning inventory - ending inventory + cost of goods acquired or produced
The cost incurred to procure the goods that were sold in the period.
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Current ratio
Current assets / current liabilities.
liquidity ratio
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Current assets
Assets expected to be consumed or converted into cash in one year or less.
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Days in receivables
Estimate of the average number of days it takes to collect on credit accounts.
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Current cost
For assets: amount it would cost to buy or produce the same or an equivalent asset today.
For liabilities: undiscounted amount that would be required to settle the obligation today.
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Current liabilities
Short-term obligations which are expected to be settled in the near future (1 year or less).
ex. accounts payable, accrued liabilities
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Day’s sales outstanding
Estimate of the average number of days it takes to collect on credit accounts.
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Days of inventory on hand
number of days in the period/inventory turnover in the period
activity ratio
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Debit
Result in an increase of asset and expense accounts or decrease in liability and owners’ equity accounts.
In double entry accouting
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Debt-to-assets ratio
Measures the percentage of total assets financed with debt.
Total debt/total assets.
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Debt-to-capital ratio
Measures the percentage of a company’s capital (debt plus equity) represented by debt.
Total debt / (Total debt + Total shareholders’ equity)
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Debt-to-equity ratio
Measures the amount of debt capital relative to equity capital.
Total debt / Total shareholders’ equity.
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Deductible temporary differences
Temporary discrepancies between the book (financial) and tax (income tax) values of certain assets and liabilities. Deductible temporary differences result in a deferred tax asset (reduction of taxable income in a future period when the balance sheet item is recovered or settled).
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Defensive interval ratio
Estimate of the number of days that an entity could meet cash needs using liquid assets.
liquidity ratio
(cash + short-term marketable investments + receivables) / daily cash expenditures
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Deferred income
aka unearned revenue or deferred revenue
Money that has been collected (recieved in advance) for goods or services that have not yet been delivered.
liability account
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Deferred tax assets
DTA
An excess amount is paid for income taxes relative to accounting profit (taxable income > accounting profit and therefore income tax payable exceeds tax expense).
Expectation is to recover the difference in future periods when tax expense exceeds income tax payable.
paid more taxes than accounting says they should
Asset
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Deferred revenue
Money that has been collected for goods or services which haven’t been delivered
(payment received in advance).
Liability
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Deferred tax liabilities
DTL
When the taxable income is less than the accounting profit and therefore income tax payable is less than tax expense. Expectation is to eliminate the liability in future periods when income tax payable exceeds tax expense.
paid less taxes than accounting says they should
Liability
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Depreciation
When the cost of long-lived tangible assets is allocated to the periods during which the assets are expected to provide economic benefits.
Spreading out the cost of periods of use
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Direct Method
for Cash Flow Statement
CFO presentation format which calculates CFO as operating cash receipts - operating cash disbursements.
Most intuitive method but requires more intensive record keeping/data, as opposed to indirect method which derives CFO using the Income Statement and changes in Balance Sheet items
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Double declining depreciation method
Accelerated depreciation method which depreciates an asset at double the straight-line rate. This rate gets applied to the declining book value of the asset at the beginning of the period.
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Double-entry accounting
Accounting system: every recorded transaction affects at least two accounts.
This keeps the accounting equation (assets = liabilities + owners’ equity) in balance.
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Equity
Residual interest in the assets after liabilities have been settled.
assets - liabilities
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Expenses
Outflows of economic resources or increases in liabilities associated with the creation of revenues.
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Fair value
The amount an asset could be exchanged, or a liability settled, between knowledgeable, willing parties.
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FIFO method
First In, First Out
Inventory method which uses the costs of the earliest items into inventory as the cost of goods sold (to match with revenue earned).
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Financial leverage
The use of fixed financing costs (debt) in attempt to magnify returns on equity.
Financial Leverage Ratio = Total Assets/Total Equity
Analysts want to consider how much financial leverage a company is using.
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Fixed charge coverage
The number of times interest and lease payments are covered by operating income.
(EBIT + lease payments) / (interest payments + lease payments)
Solvency ratio
