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FIN20040 - Foundations of Finance > Financial Statement Analysis > Flashcards

Financial Statement Analysis Flashcards

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1
Q

Define financial statements

A

Firm-issued accounting reports with past performance information.

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2
Q

Explain what a 10-Q and a 10-K?

A

Form 10-Q is a quarterly report for finances and 10-K is an annual report

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3
Q

What firms have to release their financial statements and to who?

A

Public firms must file their financial statements with the relevant regulatory body, public firms don’t. Annual reports must be sent to shareholders too

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4
Q

Why does a firm hire an auditor

A

To ensure the accuracy of their financial statements

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5
Q

What statements does an annual report consist of?

A

Statement of financial position
Income statement
Statement of cashflow

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6
Q

Define a statement of financial position

A

Balance sheet - shows firms accounting value on a particular date - snapshot

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7
Q

Balance sheet equation

A

Assets= Liabilities + Shareholders Equity

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8
Q

What does residual claim mean

A

Shareholders get any value thats left of assets after creditors and liabilities have been paid. Last claim.

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9
Q

Define a current asset

A

Cash or things owned expected to be turned into cash in next year ex: marketable securities, accounts/trade receivables (debtors), inventory or pre paid expenses

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10
Q

Define a non current asset and describe the types

A

Have a longer life of over 1 year - can be tangible or intangible. can also have financial assets too

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11
Q

Define a current liability

A

Current liabilities are things company owes to be paid within a year ex: accounts/trades payables, short-term debt, maturities, accrual items

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12
Q

Define a non current liabilities

A

Things a company owes long term ex: capital leases, deffered taxes, long-term debt

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13
Q

Define market value

A

Value based on prices or market variations. Financial managers care about this value

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14
Q

Define book value

A

In accounts this value is used, It can be defined using the historical cost model or revaluation model. Historical - being based on price originally paid for the business. Revaluation is the fair value amount, what it would cost today

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15
Q

Define IAS

A

International Accounting Standards are set of standards and procedures by which audited financial statements are prepared in Europe and other countries

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16
Q

What is the formula for net income

A

Revenues - Expenses = Income

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17
Q

What does IAS say about revenues and expenses on the income statement

A

Recognition or realisation principle for revenues - they are recognised at the time of sale
Expenses are done on the matching principle - corresponding expenses to incomes recorded are shown

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18
Q

What are non cash items

A

Expenses charged against revenue not directly affecting cash flow. Income differs from cashflow and we see that here ex: Depreciation

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19
Q

What is the cashflow statement formula

A

Cash flow from assets = cash flow to creditors and equity investors

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20
Q

What are the two methods of doing a cash flow statement and explain them

A

Direct method - actual cash outflows and inflows are presented
Indirect method - Company profit or loss and extracting non-cash items which incurred . Both arrive at the same operating cashflow

21
Q

What is total cash flow made up of

A

Operating activities, investing activites, financing activities

22
Q

What is one of the largest cash outflows

A

corporate taxes

23
Q

What is average tax rate

A

% of income that pays taxes

tax bill/taxable income

24
Q

What is marginal tax rate

A

Tax you would pay if you earned one more unit of currency

25
Q

What do liquidity ratios assess?

A

Short term solvency - ability to pay bills

26
Q

What do financial leverage ratios assess?

A

Long term solvency

27
Q

What do market value ratios assess?

A

Comparing book value to market value

28
Q

What do turnover ratios assess?

A

Efficiency of asset use to generate sales

29
Q

Define an aspirant group

A

Group of top firms in an industry

30
Q

Whats significant about the market and book value of current assets/liabilities

A

The market and book value stay very similar however their value does change rapidly because they are current

31
Q

What does an increasing current ratio mean?

A

More liquidity meaning firm will have ability to make payments too much liquidity is not always a good thing. If firms current ratio is much higher than competitor it indicates management is too conservative

32
Q

What does EBIT stand for

A

Earnings before interest and tax

33
Q

Why is cash coverage ratio better than times interest earned ratio

A

Superior because you need cash to pay interest

34
Q

Explain what leverage ratios measure

A

Extent to which firm uses debt rather than equity finance indicates ability to meet it’s long term obligations ex: interest payments

35
Q

Explain what financial leverage ratios measure

A

Use of debt in capital structure. more debt means higher gearing and risk. Too little is too conservative

36
Q

What effect does debt have on shareholders

A

Debt increases return to shareholders in good times, debt decreases return in bad times

37
Q

What does inventory turnover measure?

A

how fast firm sells goods

38
Q

What does receivables turnover measure?

A

how fast firms collect from their sales

39
Q

What does payables turnover measure?

A

How long does it take firm to pay suppliers

40
Q

What does total asset turnover measure?

A

how efficiently firm is using assets to support sales

41
Q

What does NWC turnover measure?

A

How efficiently firm uses NWC to support sales

42
Q

What does PPE turnover measure?

A

How efficiently fixed assets are used to support sales

43
Q

What does the profit margin ratio measure?

A

% of sales that is left after all expenses are paid by the business

44
Q

What does the return on assets ratio measure?

A

Efficient management is at using its assets to generate earnings. Higher = better as earning more with less investment. Measures profit per unit cash of assets

45
Q

What does the return on equity ratio measure?

A

Shows how much profit firm generates with money shareholders invested. Useful for comparisons with competition. It measures performance

46
Q

Why is Price sales ratio good in place of P/E ratio in certain circumstances

A

If EPS is negative then P/E ratio will not work

47
Q

Whats a value firm and whats a growth firm

A

Value firm - low M to B ratio

Growth firm - High M to B ratio

48
Q

Whats the difference between the M to B ratio and Tobins Q?

A

Tobins Q focuses on what the firm is worth today not what is was worth historically

49
Q

What is the ROE affected by?

A

Operating efficiency
asset use efficency
Financial leverage

FIN20040 - Foundations of Finance (9 decks)

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