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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
Cash Flow Ratio
Cash Flow Ratio = Operating Cash Flow / Current Liabilities
26
Net Working Capital Ratio
Net Working Capital Ratio = Current Assets - Current Liabilities / Total Assets Working Capital / Total Assets
27
Operating Cycle (OC)
Operating Cycle (OC) = Day Sales in Inventory (DSI) + Day Sales Outstanding in Receivables (DSO) The shorter the Operating Cycle the better.
28
Cash Cycle
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
Total Assets Turnover (TAT)
Total Assets Turnover (TAT) = Sales / Average Total Assets Measures efficiency of total assets generating sales/revenues.
30
Fixed Assets Turnover (FAT)
Fixed Assets Turnover (FAT) = Sales / Average Net Plant, Property & Equipment Measures efficiency of fixed assets in generating sales/revenues.
31
Activity Ratios measure…
Activity Ratios measure the efficiency of a company using its assets and liabilities.
32
Gross Profit Margin Percentage
Gross Profit Margin Percentage = Gross Profit / Sales
33
Operating Profit Percentage
Operating Profit Percentage = Operating Income / Sales
34
Net Profit Margin Percentage
Net Profit Margin Percentage = Net Income / Sales
35
EBITDA Margin Percentage
EBITDA Margin Percentage = EBITDA / Sales
36
Return on Assets (ROA) | DuPont Model
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
Return on Equity (ROE)
Return on Equity (ROE) = Net Income / Average Equity
38
Return on Common Equity (ROCE)
Return on Common Equity (ROCE) = | Net Income - Preferred Dividends) / (Average Equity - Average Preferred Equity
39
Financial Leverage Ratio | aka Equity Multiplier
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
Market-to-Book ratio
Market-to-Book ratio = Market Price per share / Book Value per share
41
Price-Earnings Ratio
Price-Earnings Ratio = Market Price per share / Earnings per Share (EPS)
42
Price to EBITDA Ratio
Price to EBITDA Ratio = Market Price per share / EBITDA per share
43
Book Value per share
Book Value per share = Total Shareholders’ Equity - Preferred Equity / Number of Common Shares Outstanding * Use shares at date of measurement, not weighted average
44
Basic Earnings per share
Basic Earnings per share = Net Income - Preferred Dividends / Weighted Average Common Shares Outstanding
45
Diluted Earnings per share
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
Diluted Earnings per share (DEPS)
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
Earnings Yield
Earnings Yield = Earnings per share (EPS) / Market Price per common share
48
Dividend Yield
Dividend Yield = Annual Dividends per share / Market Price per share
49
Dividend Payout Ratio
Dividend Payout Ratio = Common Dividend / Earnings Available to Common Shareholders
50
Shareholder Return
Shareholder Return = Ending Stock Price - Beginning Stock Price + Annual Dividend per share / Beginning Stock Price
51
Factors to be considered in measuring income
* Estimates * Accounting Methods * Disclosure Incentives * The Different Needs of Users
52
Revenue recognition
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
Sustainable Growth Rate
Sustainable Growth Rate = (1 - Dividends Payout Ratio) x Return on Equity
54
Accounting profit vs | Economic profit
Accounting Profit = Accounting Revenue - Accounting Costs Economic Profit = Accounting Revenue - Accounting Costs - Opportunity Costs
55
Determinants and Indicators of Earnings Quality
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
Book Value Per Share
Book Value Per Share = Stockholder’s Equity - Preferred Stock / Average Shares Outstanding
57
Market to Book Value Ratio
Market to Book Value Ratio = Current Stock Price / Book Value per Share >1 means stock is undervalued <1 means stock is overvalued
58
Revenue recognition — 3 questions
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
Solvency
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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