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CMA Part 2 > Sec A - Financial Statement Analysis > Flashcards

Sec A - Financial Statement Analysis Flashcards

1
Q

Current Assets include…

A

Current Assets
(C-M-A-P-I-O)

Cash 
Marketable Securities 
Accounts Receivable 
Prepaid Expenses 
Inventory 
Other Current Assets
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2
Q

Current Liabilities include…

A

Current Liabilities
(A-S-A-P)

Accounts payable
Other Short Term Debt
Accrued Expenses
Current Portion of Long-Term Debt

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3
Q

Quick Assets include…

A

Quick Assets
(C-M-A)

Cash
Marketable Securities
Accounts Receivable

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4
Q

Current Ratio

A

Current Ratio =

Current Assets /
Current Liabilities

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5
Q

Quick (Acid-Test) Ratio

A

Quick (Acid-Test) Ratio =

Quick Assets /
Current Liabilities

  • Only liquid assets:

Cash + Marketable Securities + Accts Receivable

More conservative than current ratio

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6
Q

Changes in Liquidity Ratios

A

Current Assets ⬆️:

Current Ratio ⬆️
Quick Ratio ⬆️
Cash Ratio ⬆️
Cash Flow ⬇️ ‼️
Net Working Capital Ratio ⬆️

Current Liabilities ⬆️:

Current Ratio ⬇️
Quick Ratio ⬇️
Cash Ratio ⬇️
Cash Flow ⬇️
Net Working Capital Ratio ⬇️
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7
Q

How do we define liquidity?

A

Liquidity is the ability of a company to pay short term applications as the fall due

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8
Q

Degree of Operating Leverage (DOL)

A

Degree of Operating Leverage (DOL) =

Contribution Margin (CM) /
Operating Income (EBIT)

for multiple periods:

% change in Operating Income (EBIT) /
% change in Sales (Revenue)

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9
Q

Degree of Financial Leverage (DFL)

A

Degree of Financial Leverage (DFL) =

Operating Income (EBIT) / 
Earnings Before Taxes (EBT)

multiple periods:

% change in Net Income /
% change in Operating Income (EBIT)

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10
Q

Debt to Equity Ratio (DER)

A

Debt to Equity Ratio (DER) =

Total Debt /
Equity

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11
Q

Interest Coverage Ratio (ICR)

A

Interest Coverage Ratio (ICR) =

Earnings Before Interest & Taxes (EBIT) /
Interest Expense

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12
Q

Financial Leverage Ratio (FLR)

A

Financial Leverage Ratio (FLR) =

Assets /
Equity

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13
Q

Long-Term Debt to Equity Ratio

A

Long-Term Debt to Equity Ratio =

Long-Term Debt /
Equity

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14
Q

Debt to Total Assets Ratio (DTAR)

A

Debt to Total Assets Ratio (DTAR) =

Total Debt /
Total Assets

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15
Q

Fixed Charge Coverage Ratio (FCCR)

A

Fixed Charge Coverage Ratio (FCCR) =

Earnings before Fixed Charges & Taxes /
Fixed Charges

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16
Q

Interest Coverage Ratio (ICR)

A

Interest Coverage Ratio (ICR) =

Earnings Before Interest & Taxes (EBIT) /
Interest Expense

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17
Q

Cash Flow to Fixed Charges (CFFCR)

A

Cash Flow to Fixed Charges =

Cash flow from operations
+ Fixed Charges
+ Tax Payments /
Fixed Charges

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18
Q

Accounts Receivable Turnover (ARTO)

A

Accounts Receivable Turnover (ARTO) =

Credit Sales /
Average Gross Accounts Receivable

High ARTO indicates collection efficiency

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19
Q

Inventory Turnover (ITO)

A

Inventory Turnover (ITO) =

Cost of Goods Sold /
Average Inventory

High ITO indicates sales efficiency

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20
Q

Accounts Payable Turnover (APTO)

A

Accounts Payable Turnover (APTO) =

Credit Purchases /
Average Accounts Payable

High APTO indicates good short-term liquidity

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21
Q

Days Sales Outstanding in Receivables (DSO)

A

Days Sales Outstanding in Receivables (DSO) =

365 /
Average Receivable Turnover (ARTO)

or

365 x Average Accounts Receivable /
Credit Sales

Low DSO indicates collection efficiency

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22
Q

Day Sales in Inventory (DSI)

A

Day Sales in Inventory (DSI) =

365 /
Inventory

or

365 x Average Inventory /
Cost of Goods Sold

Low DSI indicates sales efficiency

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23
Q

Day Purchases in Accounts Payable (DPAP)

A

Day Purchases in Accounts Payable (DPAP) =

365 /
Accounts Payable Turnover (APTO)

or

365 x Average Accounts Payable /
Purchases on Account

Low DPAP indicates good short-term liquidity

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24
Q

Cash Ratio

A

Cash Ratio =

Cash + Marketable Securities /
Current Liabilities

Most conservative liquidity ratio

25
Q

Cash Flow Ratio

A

Cash Flow Ratio =

Operating Cash Flow /
Current Liabilities

26
Q

Net Working Capital Ratio

A

Net Working Capital Ratio =

Current Assets - Current Liabilities /
Total Assets

Working Capital /
Total Assets

27
Q

Operating Cycle (OC)

A

Operating Cycle (OC) =

Day Sales in Inventory (DSI) +
Day Sales Outstanding in Receivables (DSO)

The shorter the Operating Cycle the better.

28
Q

Cash Cycle

A

Cash Cycle =

Day Sales in Inventory (DSI) +
Day Sales Outstanding in Receivables (DSO) -
Day Purchases in Accounts Payable (DPAP)

or

Operating Cycle -
Day Purchases in Accounts Payable (DPAP)

The shorter the Cash Cycle the better.

29
Q

Total Assets Turnover (TAT)

A

Total Assets Turnover (TAT) =

Sales /
Average Total Assets

Measures efficiency of total assets generating sales/revenues.

30
Q

Fixed Assets Turnover (FAT)

A

Fixed Assets Turnover (FAT) =

Sales /
Average Net Plant, Property & Equipment

Measures efficiency of fixed assets in generating sales/revenues.

31
Q

Activity Ratios measure…

A

Activity Ratios measure the efficiency of a company using its assets and liabilities.

32
Q

Gross Profit Margin Percentage

A

Gross Profit Margin Percentage =

Gross Profit /
Sales

33
Q

Operating Profit Percentage

A

Operating Profit Percentage =

Operating Income /
Sales

34
Q

Net Profit Margin Percentage

A

Net Profit Margin Percentage =

Net Income /
Sales

35
Q

EBITDA Margin Percentage

A

EBITDA Margin Percentage =

EBITDA /
Sales

36
Q

Return on Assets (ROA)

DuPont Model

A

Return on Assets (ROA) =

Net Income /
Average Total Assets

DuPont Model:

ROA = Net Income x Sales
—————— ————————
Sales Average Assets
^ ^
| |
Profit Total Assets
Margin Turnover

37
Q

Return on Equity (ROE)

A

Return on Equity (ROE) =

Net Income /
Average Equity

38
Q

Return on Common Equity (ROCE)

A

Return on Common Equity (ROCE) =

Net Income - Preferred Dividends) /
(Average Equity - Average Preferred Equity

39
Q

Financial Leverage Ratio

aka Equity Multiplier

A

Financial Leverage Ratio =

ROE / ROA

In general a low equity multiplier indicates the organization is using more equity than debt to finance the purchase of assets

40
Q

Market-to-Book ratio

A

Market-to-Book ratio =

Market Price per share /
Book Value per share

41
Q

Price-Earnings Ratio

A

Price-Earnings Ratio =

Market Price per share /
Earnings per Share (EPS)

42
Q

Price to EBITDA Ratio

A

Price to EBITDA Ratio =

Market Price per share /
EBITDA per share

43
Q

Book Value per share

A

Book Value per share =

Total Shareholders’ Equity - Preferred Equity /
Number of Common Shares Outstanding

  • Use shares at date of measurement, not weighted average
44
Q

Basic Earnings per share

A

Basic Earnings per share =

Net Income - Preferred Dividends /
Weighted Average Common Shares Outstanding

45
Q

Diluted Earnings per share

A

Diluted Earnings per share =

Net Income - Preferred Dividends /
Diluted Weighted Average Common Shares Outstanding

Step 1 — Options and warrants first
Step 2 — Effect of convertible bonds and convertible preferred shared
Step 3 — Calculate DEPS by adding most dilutive to least dilutive EPS impact

46
Q

Diluted Earnings per share (DEPS)

A

Diluted Earnings per share (DEPS)

STEP 1:
Assume options are exercised, proceeds used to repurchase company stock.

Proceeds from exercise of option =
# of shares issued x options price / average price = # of repurchased shares

Number of shares issued from exercise of option
less: number of repurchased shares
= Dilutive effect in shares

STEP 2:
Impact of Convertible Bonds on EPS =
Interest x (1 - Tax Rate) /
Shares to be issued if bonds were converted

Impact of Convertible Preferred Shares on EPS =
Preferred dividends earned (cumulative) or declared (noncumulative) /
Shares to be issued if preferred shares were converted

STEP 3
Calculate DEPS by adding the most dilutive to the least dilutive EPS impact

47
Q

Earnings Yield

A

Earnings Yield =

Earnings per share (EPS) /
Market Price per common share

48
Q

Dividend Yield

A

Dividend Yield =

Annual Dividends per share /
Market Price per share

49
Q

Dividend Payout Ratio

A

Dividend Payout Ratio =

Common Dividend /
Earnings Available to Common Shareholders

50
Q

Shareholder Return

A

Shareholder Return =

Ending Stock Price - Beginning Stock Price + Annual Dividend per share /
Beginning Stock Price

51
Q

Factors to be considered in measuring income

A
  • Estimates
  • Accounting Methods
  • Disclosure Incentives
  • The Different Needs of Users
52
Q

Revenue recognition

A

Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services

Five steps to recognize revenue from a contract:

1) Identify the contract with a customer
2) Identify the performance obligations/promises in the contract
3) Determine the transaction price
4) Allocate the transaction price to the performance obligations in the contract
5) Recognize revenue when (or as) the reporting organization satisfies a performance obligation

53
Q

Sustainable Growth Rate

A

Sustainable Growth Rate =

(1 - Dividends Payout Ratio) x
Return on Equity

54
Q

Accounting profit vs

Economic profit

A

Accounting Profit =
Accounting Revenue -
Accounting Costs

Economic Profit =
Accounting Revenue -
Accounting Costs -
Opportunity Costs

55
Q

Determinants and Indicators of Earnings Quality

A

Determinants and Indicators of Earnings Quality

  1. The business environment in which the company operates.
  2. Compliance with GAAP.
  3. The judgment and reputation of the company’s management.
56
Q

Book Value Per Share

A

Book Value Per Share =

Stockholder’s Equity -
Preferred Stock /
Average Shares Outstanding

57
Q

Market to Book Value Ratio

A

Market to Book Value Ratio =

Current Stock Price /
Book Value per Share

> 1 means stock is undervalued
<1 means stock is overvalued

58
Q

Revenue recognition — 3 questions

A
  1. Has the risk passed to the buyer?
  2. Has the seller completed the seller’s portion of the contract?
  3. Can collectibility be reasonably estimated?
59
Q

Solvency

A

Solvency is the ability of a firm to pay long-term debt within the due date.

CMA Part 2 (6 decks)

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