Financial Statement Analysis Flashcards
Define financial statements
Firm-issued accounting reports with past performance information.
Explain what a 10-Q and a 10-K?
Form 10-Q is a quarterly report for finances and 10-K is an annual report
What firms have to release their financial statements and to who?
Public firms must file their financial statements with the relevant regulatory body, public firms don’t. Annual reports must be sent to shareholders too
Why does a firm hire an auditor
To ensure the accuracy of their financial statements
What statements does an annual report consist of?
Statement of financial position
Income statement
Statement of cashflow
Define a statement of financial position
Balance sheet - shows firms accounting value on a particular date - snapshot
Balance sheet equation
Assets= Liabilities + Shareholders Equity
What does residual claim mean
Shareholders get any value thats left of assets after creditors and liabilities have been paid. Last claim.
Define a current asset
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
Define a non current asset and describe the types
Have a longer life of over 1 year - can be tangible or intangible. can also have financial assets too
Define a current liability
Current liabilities are things company owes to be paid within a year ex: accounts/trades payables, short-term debt, maturities, accrual items
Define a non current liabilities
Things a company owes long term ex: capital leases, deffered taxes, long-term debt
Define market value
Value based on prices or market variations. Financial managers care about this value
Define book value
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
Define IAS
International Accounting Standards are set of standards and procedures by which audited financial statements are prepared in Europe and other countries
What is the formula for net income
Revenues - Expenses = Income
What does IAS say about revenues and expenses on the income statement
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
What are non cash items
Expenses charged against revenue not directly affecting cash flow. Income differs from cashflow and we see that here ex: Depreciation
What is the cashflow statement formula
Cash flow from assets = cash flow to creditors and equity investors
What are the two methods of doing a cash flow statement and explain them
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
What is total cash flow made up of
Operating activities, investing activites, financing activities
What is one of the largest cash outflows
corporate taxes
What is average tax rate
% of income that pays taxes
tax bill/taxable income
What is marginal tax rate
Tax you would pay if you earned one more unit of currency
What do liquidity ratios assess?
Short term solvency - ability to pay bills
What do financial leverage ratios assess?
Long term solvency
What do market value ratios assess?
Comparing book value to market value
What do turnover ratios assess?
Efficiency of asset use to generate sales
Define an aspirant group
Group of top firms in an industry
Whats significant about the market and book value of current assets/liabilities
The market and book value stay very similar however their value does change rapidly because they are current
What does an increasing current ratio mean?
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
What does EBIT stand for
Earnings before interest and tax
Why is cash coverage ratio better than times interest earned ratio
Superior because you need cash to pay interest
Explain what leverage ratios measure
Extent to which firm uses debt rather than equity finance indicates ability to meet it’s long term obligations ex: interest payments
Explain what financial leverage ratios measure
Use of debt in capital structure. more debt means higher gearing and risk. Too little is too conservative
What effect does debt have on shareholders
Debt increases return to shareholders in good times, debt decreases return in bad times
What does inventory turnover measure?
how fast firm sells goods
What does receivables turnover measure?
how fast firms collect from their sales
What does payables turnover measure?
How long does it take firm to pay suppliers
What does total asset turnover measure?
how efficiently firm is using assets to support sales
What does NWC turnover measure?
How efficiently firm uses NWC to support sales
What does PPE turnover measure?
How efficiently fixed assets are used to support sales
What does the profit margin ratio measure?
% of sales that is left after all expenses are paid by the business
What does the return on assets ratio measure?
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
What does the return on equity ratio measure?
Shows how much profit firm generates with money shareholders invested. Useful for comparisons with competition. It measures performance
Why is Price sales ratio good in place of P/E ratio in certain circumstances
If EPS is negative then P/E ratio will not work
Whats a value firm and whats a growth firm
Value firm - low M to B ratio
Growth firm - High M to B ratio
Whats the difference between the M to B ratio and Tobins Q?
Tobins Q focuses on what the firm is worth today not what is was worth historically
What is the ROE affected by?
Operating efficiency
asset use efficency
Financial leverage
