Intro to Financial Statements Analysis

Question 1

Balance sheet

Answer 1

lists the firm’s assets and liabilities providing a snapshot of the firm’s financial position at a given point of time

Question 2

Assets

Answer 2

list the cash, inventory, PP&E and other investments the company has made. Assets show how the firm uses its capital

Assets = liabilities + stockholders equity

Question 3

Current assets

Answer 3

cash or assets that could be converted into cash within a year

Question 4

Accounts receivable

Answer 4

amounts owed to a firm by customers who have purchased goods or services on credit. Listed as an asset

Question 5

Inventory

Answer 5

raw materials as well as work in progress and finished goods

Question 6

Long term assets

Answer 6

Includes real estate or machinery that produce tangible benefits for more than a year

Question 7

Accumulated depreciation

Answer 7

total amount deducted over the life of an asset

Question 8

Book value

Answer 8

acquisition cost – accumulated depreciation

Question 9

Goodwill

Answer 9

miscellaneous category (long term asset) for intangible assets that are harder to parse out individually or measured directly (i.e. customer loyalty, brand reputation)

Question 10

Intangible assets

Answer 10

Long term assets that are non-physical, but identifiable (i.e. computer software, copyrights, patents, licensing agreements, website domain names)

Question 11

Liabilities

Answer 11

show the firm’s obligations to creditors. debt

Question 12

Current liabilities

Answer 12

satisfied within one year

Question 13

Accounts payable

Answer 13

amounts owed to suppliers for products and services purchased with credit. Listed as a liability

Question 14

Capital leases

Answer 14

long term lease contracts that obligate the firm to make regular payments in exchange for the use of an asset

Question 15

Net working capital

Answer 15

difference between current assets and current liabilities. It’s the capital available in the short term to run a business

Question 16

Stockholder’s equity

Answer 16

difference between the firm’s assets and liabilities. Accounting measure of the firm’s net worth. Also called the book value of equity

Question 17

Market capitilization

Answer 17

also called the market value of equity. It is the total dollar market value of a company’s outstanding shares of stock.

MC = current stock price x # of outstanding stock shares

Question 18

Enterprise value

Answer 18

also called the total enterprise value (TEV) is the value of the underlying business assets free of debt and separate from cash and marketable securities

. EV = MC + debt - cash

Question 19

Income statement

Answer 19

lists the firm’s revenues and expenses over a period of time. It shows the flow of revenues and expenses generated by the assets and liabilities on the BS

Question 20

Net income

Answer 20

also called the firm’s earnings, measure of a firm’s profitability during the period. It’s the total earnings of the firm’s equity holders. It does not correspond to cash earned

Question 21

Stock options

Answer 21

the right to buy a certain number of shares by a specific date at a specific price

Question 22

Operating expenses

Answer 22

(SG&A). include depreciation and amortization (not an actual cash expense)

Question 23

EBIT

Answer 23

income after adjusting for other sources of income or expense (i.e. a firm’s financial investments and other activities that are not the central part of a company’s business)

Question 24

Convertible bonds

Answer 24

a form of debt that is converted into shares

Question 25

Statement of cash flows

Answer 25

utilizes the info from the IS and BS to determine how much cash the firm has generated, and how that cash has been allocated during a set period

Question 26

Capital expenditures

Answer 26

Capex. purchases of new PP&E

Question 27

Retained earnings

Answer 27

net income - dividends

Question 28

Operating income

Answer 28

gross profit - operating expenses

Question 29

Gross profit

Answer 29

revenue - COGS

Question 30

Gross margin

Answer 30

reflects a firm’s ability to sell a product for more than the cost of producing it

Question 31

Operating margin

Answer 31

reveals how much a company earns before interest and taxes from each dollar of sales

Question 32

Net profit margin

Answer 32

shows the fraction of each dollar in revenues that is available to equity holders after the firm pays interest and taxes

Question 33

Current ratio

Answer 33

used to assess whether a firm has sufficient working capital to meet short term needs

= current assets/current liabilities

Question 34

Leverage

Answer 34

extent to which a firm relies on debt as a source of financing

Question 35

Price-earnings ratio (P/E)

Answer 35

the value of equity to the firm’s earnings. Measures whether a stock is over or under valued (based on the idea that stock should be proportional to the level of earnings it can generate for its shareholders)