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Financial statements Flashcards

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1
Q

financial statements

A

firm issued accounting reports with last performance information

filed with the SEC (US securities and exchange commission)

10Q - quarterly
10K - annually

must also send an annual report with financial statements to shareholders

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2
Q

Generally accepted accounting principles (GAAP)

A

common set of rules and standard format for public companies to use when they prepare their reports

different countries have their own GAAPs

International financial reporting standards (IFRS) is an international effort to harmonise accounting standards

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3
Q

Auditor

A

Neutral 3rd party that checks a firms financial statements

in reality, auditing firms have their own interests and may be far from neutral

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4
Q

Types of financial statements

A

Balance sheets (stock)

income statement (flows)

statements of cash flows

statement of stockholders equity

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5
Q

Stock vs. Flow

A

a stock is measured at a specific time and represents a quantity existing at that point in time

a flow is measured over an interval of time

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6
Q

Balance sheet

A

snapshot in time of the firms financial position

looks at stocks

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7
Q

The balance sheet identity

A

Equity + total assets - total liabilities

assets = what the company owns 
liabilities = what the company owes
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8
Q

Assets

A

Current assets: cash or asset expected to turn into cash in the next year

Marketable securities (eg gov. debt that matures in a year)

accounts receivable (what customers owe)

inventories

other current assets: eg prepaid expenses

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9
Q

Long-term assets

A
  • Net property, plant and equipment

subject to depreciation

  • book value = acquisition cost - accumulated depreciation
  • Goodwill and intangible assets

subject to amortisation

  • other long-term assets e.g investments in long term securities
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10
Q

Liabilities

A
  • Current liabilities: due to be paid within the next year
  • accounts payable
  • short-term debt/notes payable
  • current maturities of long-term debt
  • other current liabilities (taxes and wages payable)
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11
Q

Net working capital

A

current assets - current liabilities

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12
Q

Long-term liabilities

A

long-term debt
capital leases
deferred taxes

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13
Q

Book value of equity

A

could possibly be negative and many of the firms valuable assets may not be captured on the balance sheet

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14
Q

Market value of equity (market capitalisation)

A

= market price per share x no. of shares outstanding

cannot be negative

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15
Q

Market-to-book ration (also price-to-book)

A

= market value of equity/book value of equity

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16
Q

Enterprise value

A

market value of the business

a good measure to value a firm for a potential takeover

enterprise value = market value of equity + debt - cash

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17
Q

Income statement

A

lists firms revenues and expenses over a period of time

looking at flow

all about net income which measures a firms profit after tax and interest expenses

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18
Q

Net income formula

A

= (total sales - cost of sales)

  • (selling, general, admin expenses + R&D + depreciation and amortisation)

+ (other income - other expenses)

+(interest income - interest expenses)

  • taxes

= pre-tax income - taxes

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19
Q

Gross profit formula

A

= total sales - cost of sales

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20
Q

Operating expenses

A

= selling, general, admin expenses + R&D + depreciation and amortisation

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21
Q

Operating income

A

= gross profit - operating expenses

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22
Q

Earnings before interest & taxes (EBIT)

A

= operating income + (other income - other expenses)

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23
Q

Pre-tax income

A

= EBIT + (interest income - interest expenses)

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24
Q

what can net income be used for?

A

pay dividends to the shareholders

retained in the firm (can be used for reinvestment)

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25
Q

earnings per share (EPS)

A

= net income/shares outstanding

EPS may go down due to stock options or convertible bonds

to take into account of possible dilution, we can look at diluted EPS

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26
Q

Statement of cash flows

A

net income typically doesn’t equal the amount of cash the firm has earned

net income is accounting profit, but no change of cash

27
Q

where does the difference between net income and change of cash come from?

A
  • Non-cash items

expenses that are listed in the income statement that do not involve cash payment
e.g depreciation and amortisation

  • use of cash not on the income statement

investment in property, plant and equipment
payment of the principal amount of debt

28
Q

3 sections of statement of cash flows

A

operating activity

investment activity

financing activity

29
Q

Operating activity

A

adjusts net income by all non-cash items related to operating activities and changes in net working capital

30
Q

Cash from operating activities

A

= net income

+ depreciation, amortisation and other non-cash items

  • change in accounts receivable

+ change in accounts payable

  • change in inventories
31
Q

Investment activity

A

capital expenditures

buying or selling marketable securities

32
Q

Financing activity

A
  • payment of dividends (retained earnings = net income - dividends)
  • change in borrowings (interest expenses already deducted when calculating net income
33
Q

Cash from financing activities

A

= (sales of stock - purchasing of stock)

  • dividends paid

+ increasing in borrowing

34
Q

Cash from investments activities

A

= capital expenditure

acquisitions and other investment activities

35
Q

change in cash & cash equivalents

A

= cash from operating activities

+ cash from investment activities

+ cash from financing activities

36
Q

Change in stockholders’ Equity

A

= addition to retained earnings + net sales of stock

= (net income - dividends) + (sales of stock - repurchases of stock)

37
Q

other financial statement information

A

management discussion and analysis (off-balance sheet transactions)

notes to the financial statements

38
Q

Gross Margin

A

= gross profit/sales

39
Q

operating margin

A

= operating income/sales

40
Q

EBIT margin

A

= EBIT/sales

41
Q

Net profit margin

A

= net income/total sales

42
Q

Current ratio

A

= current assets/current liabilities

43
Q

quick ratio

A

= (cash + short-term investments + accounts receivable)

/current liabilities

44
Q

cash ratio

A

= cash/ current liabilities

45
Q

accounts receivable days

A

= accounts receivable/ average daily sales

46
Q

accounts payable days

A

= accounts payable/ average daily cost of sales

47
Q

inventory days

A

= inventory/average daily cost of sales

48
Q

accounts receivable turnover

A

= annual sales/accounts receivable

49
Q

accounts payable turnover

A

= annual cost of sales/accounts payable

50
Q

inventory turnover

A

= annual cost of sales/inventory

51
Q

interest coverage ratios

A

EBIT/interest

EBITDA/interest (EBIT + depreciation and amortisation)

52
Q

debt-equity ratio

A

= total debt/total equity

53
Q

debt-to-capital ratio

A

= total debt/(total equity + total debt)

54
Q

Net debt

A

= total debt - excess cash & short-term investments

55
Q

debt-to-enterprise value ratio

A

= net debt/market value of equity + net debt

56
Q

equity multiplier

A

= total assets/book value of equity

= 1 + debt-equity ratio

57
Q

P/E ratio

A

= market capitalisation/net income

= share price/EPS

58
Q

enterprise value to EBIT

A

= market value of equity +debt - cash/EBIT

59
Q

enterprise value to sales

A

= (market value of equity + debt - cash)/sales

60
Q

enterprise value to EBITDA

A

= (market value of equity + debt - cash)/EBITDA

61
Q

return on equity

A

= net income/book value of equity

62
Q

return on assets

A

= net income + interest expense/ total assets

63
Q

return on invested capital

A

= EBIT(1 - tax rate)/book value of equity + net debt

64
Q

The DuPont identity

A

ROE = returns on equity

= (net income/sales) x (sales/total assets) x (total assets/book value of equity)

= net profit margin x asset turnover x equity multiplier

Finance (7 decks)

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