Lesson 3 Flashcards
The practice and procedure guidelines used to prepare and maintain financial records and reports authorized by the Financial Accounting Standards Board (FASB)
Generally accepted accounting principles (GAAP)
The accounting profession’s rule setting body, which authorizes generally accepted accounting principles (GAAP)
Financial Accounting Standards Board (FASB)
A not-for-profit corporation established by Sarbanes-Oxley act of 2002 to protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports.
Public Company Accounting Oversight Board (PCAOB)
Annual report that publicly owned corporations must provide to stockholders; it summarizes and documents the firm’s financial activities during the past year.
Stockholders’ Report
Typically, the first element of the annual stockholders’ report and the primary communication from management.
Letter to Stockholders
Provides a financial summary of the firm’s operating results during a specified period.
Income statement
The amount of cash distributed during the period and behalf of each outstanding share of common stock
Dividends per share (DPS)
Summary statement of the firm’s financial position at a given point in time.
Balance sheet
Short term assets expected to be converted into cash within one year or less.
Current assets
Short term liabilities, expected to be paid within one year or less.
Current liabilities
Debt for which payment is not do in the current year.
Long-term debt
The amount of proceeds more than the par value received from the original sale of common stock.
Paid-in capital in excess of par
Gives us a snapshot of the business assets liabilities and equity of a point and time.
Balance sheet
Capital
Equity
Ownership of business.
Assets
Outside debts
Liabilities
Inner/ inside debts
Owner’s Equity
Statement of financial position
Balance sheet
The cumulative total of all earnings, net of dividends, that have been retained and reinvested in the film since its inception. (Amount ng natirang profit ng company matapos bayaran lahat ng utang nito.)
Retained earnings
Shows all equity account transactions that occurred during a given year.
Statement of stockholders equity/
Statement of changes in stockholders equity
Provides a summary of the firm’s operating, investment, and financing cash flows and reconciles them with changes in its cash and marketable securities during the period.
Statement of cash flows
Provide detailed information on the accounting policies, procedures, calculations, and transactions underlying entries in the financial statements.
Prepared at the end of all reports.
A special report contains details and or disclosures about the informations and the balance sheet.
Notes to financial statements
Five accounts
Assets, liabilities, equity, revenue, expenses
This involves methods of calculating and interpreting financial ratios to analyze and monitor the firm’s performance.
Ratio analysis
Two basic inputs to ratio analysis
Firm’s Income Statement and Balance Sheet
Comparison of different firm’s financial ratios at the same point in time involves comparing the firm’s ratios with those of other firms in its industry or with industry averages
Cross-sectional analysis
A type of cross-sectional analysis in which the theorems ratio values are compared with those of 80 competitor or with a group of competitors that it wishes to emulate.
Benchmarking
Evaluation of the firm’s financial performance over time using financial ratio analysis.
A sequence of data that records a variable and a specific equally spaced frequency recorded over time.
Time-series analysis
The most informative approach to ratio analysis which combines cross-sectional and time-series analysis. A combined view that makes it possible to assess the trend in the behavior of the ratio in relation to the trend for the industry.
Combines analysis
(T/F)
Ratios that reveal large deviations from the norm merely indicate the possibility of a problem. Additional analysis is typically needed to determine whether there is a problem and isolate the causes of the problem.
T
(T/F)
A single ratio does not generally provide sufficient information from which to judge the overall performance of the firm. However if an analysis is concerned only with certain specific aspects of a firm’s financial position one ratio may suffice.
F
“one or two” ratio may suffice.
The ratios being compared should be calculated using financial statements dated at different point in time during the year. If they are not, the effects of seasonality may produce erroneous conclusions and decisions.
They shouldn’t be consistent.
F
Financial statements dated at the same point in time during the year. They should be consistent.
Financial data being compared should have been developed in the same way.
T
Results can be distorted by inflation so they will have different intrinsic value which can cause the book values of inventory and depreciable assets greatly from the replacement values.
T
Five categories of financial ratios
Liquidity ratio
Activity ratio
Debt ratios
Profitability ratios
Market ratios
It is a firm’s ability to satisfy its short-term obligations as they come due.
Liquidity
It measures how well a business can cover a short-term debt obligation using different assets . The ability of a firm to pay short-term liabilities.
Can be found in the balance sheet
Liquidity ratio
The most liquid asset
Cash
(T/F)
Financial ratio analysis begins with financial statements.
T
A measure of liquidity calculated by dividing the firm’s current assets by its current liabilities.
Current assets / Current liabilities = ?
Current ratio
A measure of liquidity calculated by dividing the firm’s current assets minus inventory by its current liabilities.
(Current assets - Inventory) / Current liabilities = ?
Quick (Acid-test) ratio
Measure the speed with which various accounts are converted into sales or cash for inflows or outflows.
Gaano kahusay gamitin ng company iyong assets nila para maka generate ng revenue or income
Activity ratio
Measures the activity or liquidity of a firm’s inventory
Cost of goods sold / Inventory = ?
Inventory turnover
Average number of days sales in inventory.
How many days naka display sa inventory bago ma ibenta.
No. of days per year / Inventory turnover= ?
Average age of inventory
The average amount of time needed to collect accounts receivable.
= Account receivable / average sales per day
= Accounts receivable / (annual sales / 365 or 360)
Average collection period
The average amount of time needed to pay accounts payable
Average payment period
Indicates the efficiency with which the firm uses its assets to generate sales.
Sales / total assets= ?
Total asset turnover
Average days in a year
360 days
General rule in decimals
2
Measures the extent of a company’s leveraged assets that are financed by debt.
To know what portion of your assets are funded by liabilities or debts.
Measures the proportion of total assets financed by the firm’s creditors.
Total liabilities / total assets = ?
Debt ratio
Total liabilities / common stock equity
Debt-to-equity ratio
Measures the firm’s ability to make contractual interest payments sometimes called the interest coverage ratio.
Earnings before interest and taxes / interest = ?
Times interest earned ratio
Measures the firm’s ability to meet all fixed payment obligations.
Fixed payment coverage ratio
Measures how efficiently a business generate a profit (revenue, asset, equity, and capital employed).
Profitability ratios
Measures the percentage of each sales dollar remaining after the firm has paid for its goods.
Gross profit margin = (Sales - COGS) /Sales = Gross profits / Sales
Tells us how much big profit a business is able to generate from its revenue earned.
Answers the question; Are we generating profits?
Profitability ratios
Measures the percentage of each sales dollar remaining after all costs and expenses other than interest taxes and preferred stock dividends are deducted. The “pure profits” earned on each sales dollar
Operating profits / sales = ??
Operating profit margin
Measures the percentage of each sales dollar remaining after all costs and expenses including interests, taxes, and preferred stock dividends, have been deducted
Earnings available for common stockholders / Sales
Net profit margin
Earnings available for common stockholders / number of shares of common stock outstanding = ??
Earnings per share
Measures the overall effectiveness of the management in generating profits with its available assets also called the Return on Investment (ROI)
Earnings available for common stockholders / Total assets = ?
Return on total assets (ROA)
Earnings available for common stockholders / common stock equity
Return on equity (ROE)
Relate the firm’s market value as measured by its current share price to certain accounting values. These ratios give insight into how investors in the marketplace believe that the firm is doing in terms of risk and return.
Market ratios
Market price per share of common stock / Earnings per share
Price / earnings (P/E) ratio
Provides an assessment of how investors view the firm’s performance
Market price per share of common stock / book value per share of common stock = ?
Market/book (M/B) ratio
Common stock equity / number of shares of common stock outstanding
Book value per share of common stock
Two popular approaches to a complete ratio analysis.
Summarizing old ratios and the Dupont system of analysis.
(T/F)
The summary analysis approach tends to view all aspects of the firm’s financial activities to isolate key areas of responsibility.
T
(T/F)
The Dupont system acts as a search technique aimed at finding the key areas responsible for the firm’s financial condition.
T
