Financial Statements & Ratio Analysis

Question 1

Annual Report

Answer 1

issued annually by a firm to its shareholders, which
contains the management’s analysis of the firm’s past operations and future prospects

Question 2

Basic Financial Statements

Answer 2

1. Balance Sheet
2. Income Statement
3. Statement of Retained Earnings
4. Statement of Cash Flows

Question 3

Balance Sheet

Answer 3

• provides a snapshot of a firm’s financial position
  at one point in time
• Shows what assets the firm owns and who has claims on those assets as of a given date

Question 4

Income Statement

Answer 4

summarizes a firm’s revenues and expenses over a given period of time; also known as Profit and Loss (P&L) Statement

Question 5

Statement of Retained Earnings

Answer 5

shows how much of the firm’s earnings were retained, rather than paid out as dividends

Question 6

Statement of Cash Flows

Answer 6

reports the impact of a firm’s activities on cash flows over a given period of time

Question 7

Accounting Book Value

Answer 7

value of an asset as shown in the balance sheet; it represents the historical cost of the asset rather than current market value or replacement cost

Question 8

Balance Sheet Equation

Answer 8

Total Assets = Total Liabilities + Total Shareholder’s Equity

Question 9

Current Assets

Answer 9

• Cash
• Accounts Receivables (A/R)
• Inventories
• Other Current Assets

Question 10

Gross Working Capital

Answer 10

aka Current Assets

Question 11

Cash

Answer 11

refers to Cash on hand, demand deposits, short-term marketable securities that can be quickly converted into cash

Question 12

Accounts Receivables (A/R)

Answer 12

money owed by customers who purchased goods & services on credit

Question 13

Inventories

Answer 13

raw materials, work in progress, and finished goods held for eventual sale

Question 14

Other Current Assets

Answer 14

items such as prepaid expenses

Question 15

Long-term Fixed Assets

Answer 15

• Net Property, Plant, and Equipment
• Other Long-Term Assets (Land, Long-Term Investments, Intangible Assets – like Patents, Copyrights, Trademarks, Goodwill)

Question 16

Depreciation Expense

Answer 16

a non-cash expense (found in Income Statement) to
allocate the cost of depreciable assets, such as machinery and equipment, over the asset’s expected useful life

Question 17

Accumulated Depreciation

Answer 17

sum of all depreciation taken over the entire life of a depreciable asset (found in Balance Sheet)

Question 18

Gross Fixed Assets

Answer 18

reflect the original cost of fixed assets

Question 19

Net Fixed Assets

Answer 19

Gross Fixed Assets minus Accumulated Depreciation taken over life of the assets

Question 20

Fixed Assets

Answer 20

• Will be used over a number of years
• Purchase cost of fixed assets are booked as assets and are not considered expenses in Income Statement

Question 21

Current Liabilities

Answer 21

• Accounts Payables (A/P)
• Accrued Expenses
• Short-Term Debt (Notes Payable
• Other Current Liabilities

Question 22

Current Liabilities (Short-Term Debt)

Answer 22

borrowed money that must be repaid within 12 months

Question 23

A/P or Trade Credit

Answer 23

the credit suppliers have extended when materials or inventories were purchased and will be paid within 30, 60, and 90 days

Question 24

Accrued Expenses

Answer 24

unpaid short-term liabilities incurred during the firm’s operations

Question 25

Short-Term Notes

Answer 25

borrowings from banks or other FIs that are due and payable within 12 months

Question 26

Long-term Liabilities

Answer 26

• Long-Term Loans
• Corporate Bonds
• Mortgages

Question 27

Liabilities (Debt)

Answer 27

money that was borrowed and must be repaid at a predetermined date

Question 28

Long-Term Liabilities (L/T Debt)

Answer 28

borrowed money from banks or other financial institutions that must be repaid longer than 12 months

Question 29

Corporate Bonds

Answer 29

borrowings of the firm through issuance of its own
securities with medium to long-term maturities

Question 30

Mortgages

Answer 30

loan to finance real estate where the lender has first
claim on the property in the event the borrower is unable to repay the loan

Question 31

Shareholders’ Equity

Answer 31

includes both preferred and common shareholders’ investment in the firm

Question 32

Preferred Stockholders

Answer 32

stockholders that have claims on the firm’s income
and assets after creditors, but before common stockholders; Receives dividends that are fixed in amount

Question 33

Common Stockholders

Answer 33

investors who own the firm’s common stocks; also
known as residual owners of the firm

Question 34

Common Stocks

Answer 34

the amount the firm receives after selling the stocks, which represent ownership in a corporation

Question 35

Par Value

Answer 35

the arbitrary value a firm puts on each share of stock prior to its being offered for sale

Question 36

Additional Paid-In Capital

Answer 36

the amount the firm receives from selling stock to
investors above par value

Question 37

Treasury Stock

Answer 37

firm’s stock that has been issued and the repurchased by the firm

Question 38

Retained Earnings

Answer 38

cumulative profits retained in business up to the date of the balance sheet

Question 39

Income Statement

Answer 39

• Shows the firm’s sales and costs over a given time period
• Equation : Sales – Expenses = Profits
• Known also as Profit & Loss (P&L) Statement; indicates the amount of profits generated by a firm, which is calculated on an accrual basis

Question 40

Accrual Basis Accounting

Answer 40

method of accounting whereby revenue is recorded when it is earned, whether or not the revenue has been received in cash. Likewise, expenses are recorded when they are incurred, even if the money has not actually been paid out

Question 41

Cost of Goods Sold

Answer 41

the cost of producing or acquiring a product
or service to be sold in the ordinary course of business