Study Guide: Unit 3 Flashcards
Identify the components of an income statement, balance sheet, and statement of cash flows
The income statement, or profit and loss statement (P&L), reports a company’s revenue, expenses, and net income over a period of time.
A standard company balance sheet has three parts: assets, liabilities and ownership equity.
In financial accounting, a cash flow statement (also known as statement of cash flows or funds flow statement) is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents. The cash flow statement, as the name suggests, provides a picture of how much cash is flowing in and out of the business during the fiscal year.
Major operating activities such as manufacturing products or selling a product may appear on the income statement but not on the cash flow statement, because cash has not yet changed hands
Explain how financial statements are used to make business decisions
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Explain accounting principles: accrual-based accounting and historical cost
The historical cost principle: It requires companies to account and report based on acquisition costs rather than fair market value for most assets and liabilities.
Recognize the difference between cash and non-cash items on a financial statement
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Describe the three main approaches to using ratios, including the purpose of each
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Define the types of financial ratios
Most analysts think of financial ratios as consisting of five basic types:
Profitability ratios measure the firm’s use of its assets and control of its expenses to generate an acceptable rate of return.
Liquidity ratios measure the availability of cash to pay debt.
Activity ratios, also called efficiency ratios, measure the effectiveness of a firm’s use of resources, or assets.
Debt, or leverage, ratios measure the firm’s ability to repay long-term debt.
Market ratios are concerned with shareholder audiences. They measure the cost of issuing stock and the relationship between return and the value of an investment in company’s shares.
Calculate financial ratios
o The ROE calculation (DuPont) is a very important ratio. You should be able to
solve for ROE using the single ratio and DuPont Model as depicted on your
formula sheet. You should also commit to memory, the specific titles of the
ratios inside of the DuPont model. (Net Margin, Total Asset Turnover and
Leverage Multiplier)
x
Determine the financial health of an organization by performing ratio analysis on given financial information
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Describe the process of Financial Forecasting
Forecasting is the process of making statements about events whose actual outcomes (typically) have not yet been observed.
A financial forecast is an estimate of future financial outcomes for a company or country (for futures and currency markets). Using historical internal accounting and sales data, in addition to external market and economic indicators, a financial forecast is an economist’s best guess of what will happen to a company in financial terms over a given time period—usually one year.
Explain the percent of sales forecasting method
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Describe the difference between Spontaneous and Non-Spontaneous Accounts
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Determine/calculate a firm’s sustainable growth rate
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