Midterm Flashcards
Financial Statements
Reports of a company’s financial performance. The three basic types of statements included in an annual report are: the Income Statement, the Balance Sheet, and the Cash Flow Statement. These statements provide different financial perspectives on a company’s performance.
Income Statement
A financial statement that shows a company’s Revenue, Expenses and Net Income. The layout is: Revenue - Expenses = Net Income (or Net Profit). It closes out to Retained Earnings after the end of the year.
Balance Sheet
A means of summarizing a company’s financial position at a specific point in time. The Balance Sheet equation is: Assets = Liabilities + Owners’ Equity.
Assets
Liabilities + Owners’ Equity. The economic resources of a company. Assets are listed on the Balance Sheet and commonly include cash, accounts receivable, notes receivable, inventories, land, buildings, machinery, equipment, and other investments.
Cash Flow Statement
Shows a company’s sources and uses of cash as well as the net change in cash for a company in a given period. It’s categories are cash from (1) operating activities, (2) investing activities and (3) financing activities. It shows the flow of cash in, through, and out of the company.
Revenue
The amount recognized on the sale of a product or service. (aka Sales)
Cost of Goods Sold
Cost of Goods Sold or (COGS). Expenses that are tied to the sale of each unit, primarily direct labor and materials costs. See Variable Costs
Variable Costs
Expenses that are tied to the sale of each unit, primarily direct labor and materials costs (aka Cost of Goods Sold)
Net Earnings
Net Earnings (See Net Income)
Net Income
Net income (or Loss).The income (or loss) of an organization after deducting the expenses, including interest and taxes, incurred in earning that income. It is usually the last amount on the Income Statement.
Net Profit
Net Profit. (See Net Income or Net Earnings)
Liabilities
Liabilities include Accounts Payable, Current Debt and Notes Payable (shown on the right side of the Balance Sheet). Represents how much of company assets were paid for by bankers, bond holders, or other creditors.
Equity
Comprised mainly of Common Stock and Retained Earnings (shown on the right side of the Balance Sheet). Represents how much of company assets were paid for by owners or shareholders. On a balance sheet, equity is referred to as shareholders’ equity or owner’s equity.
Owner’s Equity
Owner’s equity.See equity.
Emergency Loan
A loan automatically given in the simulation when a company runs out of cash. In the real world, emergency loans do not exist. When you run out of cash, you have a “Liquidity Crisis,” “Chapter 11,” or “Bankruptcy” on your hands.
Shareholder’s Equity
Shareholders’ equity.See equity.
Retained Earnings
An accumulation of annual net income left after payments of dividends reported on a company’s balance sheet. Basis computation is: Previous year’s Retained Earnings + Net Profit – Dividends = Ending Retained Earnings.
Placement
The process of making the product accessible in a way which is convenient for consumers. (driven by the Sales Budget in the simulation)
Productivity
A measure of your workforce output
Promotion
Promotion (aka Promo Budget) The process of creating product awareness before customers shop (driven by the Promo Budget in the simulation)
Sales Budget
The sales budget drives accessibility, which governs everything during and after the sale.
Sales
Sales. Dollar amount given in exchange for product (aka Revenue, Top Line)
Accounts Payable
Accounts payable (A/P).Money owed by the company to suppliers, vendors or creditors.
Accounts Receivable
Accounts receivable (A/R).Money owed to the company for goods or services sold. A sale has occurred, but the company has not received the cash yet.
Accrual-basis Accounting
An accounting method whereby income and expenses are booked when they are incurred, regardless of when they are actually received or paid. Revenues are recognized during the period in which the sales activity occurred; expenses are recognized in the same period as their associated revenues.
Cash-basis Accounting
An accounting process that records transactions when cash actually changes hands. This practice is less conservative than accrual accounting when it comes to expense recognition, but sometimes more conservative when it comes to revenue recognition.
Contribution Margin
Sales less variable costs (aka Gross Profit)
Contribution Margin Percentage
Contribution Margin divided by Sales (aka Gross Margin Percentage)
Cumulative Profits
The sum of all company profits over multiple periods.
Current Ratio
Current Assets ÷ Current Liabilities. This is a prime measure of how solvent a company is. It’s so popular with lenders that it’s sometimes called the banker’s ratio. Generally speaking, the higher the ratio, the better financial condition a company is in.
Dividend
A payment (usually occurring quarterly) to the stockholders of a company, as a return on their investment. Dividends reduce retained earnings and are NOT an expense on the income statement.
EBIT
Earnings Before Interest and Taxes (EBIT).See operating profit.
EPS
Earnings per share (EPS).One of the most commonly watched indicators of a company’s financial performance, it equals net income divided by the number of shares outstanding. When EPS falls, it usually takes the stock’s price down with it.
EBITDA
Earnings Before Interest, Taxes, Depreciation and Amortization
Financial Structure
Your company’s relationship between Debt and Equity (or how your company pays for its assets). See Leverage.
Fixed Assets
Tangible Assets that are difficult to convert to cash—for example, buildings, and equipment. Sometimes called plant assets or PP&E for property, plant and equipment..
Forecasting
The art and science of predicting demand such that you supply adequate products to satisfy demand and yet not accumulate excess inventory.
GAAP
Generally accepted accounting principles (GAAP).The rules and conventions that accountants follow in recording and summarizing transactions and preparing financial statements.
Gross Margin
Gross Margin. Percentage See Contribution Margin Percentage
Gross Profit
Gross profit.See Contribution Margin (revenue - costs of goods sold).
Inventory
The supplies of the company that are or will become its product. Examples include raw materials, work-in-progress, the merchandise in a shop, and the finished goods in a warehouse.
Leverage
Total Assets ÷ Total Equity. Leverage provides insights into a company’s Financial Structure. It is a measure of risk for investors and creditors. Investors tend to like high leverage, while creditors tend to like low leverage. For the simulation the ideal range for leverage is greater than 1.8 and less than 2.8.
Net Margin
Contribution Margin (Revenue - COGS) less Period Costs (aka Fixed Costs). In other words: revenue - variable costs - fixed costs = Net Margin
Period Costs
Costs that are not tied directly to the cost of producing a unit. Examples include administration, salespeople, managers, and depreciation. These costs are also known as fixed costs.
ROA
Return on Assets: Net Income ÷ Total Assets.Expressed as a percentage, ROA is a quantitative description of how well a company has invested in its assets. To calculate it, divide the net income for a given time period by the total assets. The larger the ROA, the better a company is performing.
ROE
Return on Equity: Net Income ÷ Total Equity. This measure shows the return on the portion of the company’s financing that is provided by owners. It answers the question, “How profitable have management’s efforts been?”. To calculate ROE, divide the total income by total owners’ equity.
ROS
Return on sales: Net Income ÷ Total Sales.Also known as profit margin, ROS is a way to measure a company’s operational efficiency—how its sales translate into profit.
Working Capital
Current Assets minus Current Liabilities
Book Value & Book Value per Share
This term can be used in various ways. In the simulation, Book Value sometimes refers to Book Value per Share, which is Total Equity divided by number of shares outstanding. Sometimes Book Value is stated as Total Equity. Furthermore, the book value of an assets is the value at which an asset is carried on a balance sheet (historical cost less accumulated depreciation)
Capital Expenditure
Capital expenditure or capital investment.The payment required to acquire or improve a capital asset (Fixed Asset).
Cumulative Free Cash Flow
The sum of all the Free Cash Flows since you took over management of the company
Days of Working Capital
Working Capital divided by daily sales: (Current Assets - Current Liabilities) ÷ (Sales / 365) or may be presented as (Current Assets - Current Liabilities) X 365 ÷ Sales.
Depreciation Expense
The decrease in value of a Fixed or Tangible Assets over time or use. (CapSim uses 15 year straight-line depreciation with no salvage value.) It is calculated as: (Cost - Salvage Value) ÷ Life
Dividend Yield
Dividend per share ÷ Stock Price
Free Cash Flow
Cash Flow from Operations – Capital Expenditures
Investment in PP&E
Investment in PP&E.Dollars spent on property, plant, and equipment. Sometimes called capital investment or capital expenditures.
Market Capitalization
Current stock price × number of shares outstanding
Price-Earnings Ratio
Price Earnings Ratio (P/E) Current stock price ÷ EPS
PP&E
Property, plant, and equipment (PP&E).A line item on a balance sheet that lists the book value of a business’s land, buildings, machinery, equipment, and natural resources that are used for the purpose of producing products or providing services.
Working Capital
A measure of a business’s ability to pay its financial obligations, working capital equals the difference between a company’s current assets (easily sellable goods, cash, and bank deposits) and its current liabilities (debt due in less than a year, interest payments, etc.). Shortages of working capital are often relieved by short-term loans. It is calculated as current assets - current liabilities.
