The Income Statement and Balance Sheet Flashcards
Professionally managed investment capital that typically buys entire firms at a time
Private Equity
One of the three main financial statements that covers a period of time. Starts with sales, takes out expenses, and ends with net income
Income Statements
One of the three financial statements. It is a snapshot of the firm’s assets, liabilities, and equity at any point in time
Balance Sheet
Non-cash accounting accounts representing money either owed or due, typically in the short term
Accruals
A current liability that represents any money the firm owes suppliers and other firms
Accounts Payable
Typically the firm does not pay this on accounts payable
Interest
One of the three financial statements that includes cash flow from operations, investing, and financing
Statement of Cash Flows
The income statement shows the
Results of operations over time
Think of the income statement as a ___________ for a period
Video Camera Tracking Performance
The balance sheet offers a snapshot of the
Firm’s assets and financing at a particular point in time
The Statement of Cash Flows tracks all ______ in and out of the firm
Cash
The business function responsible for creating the historical financial statements
Accounting
Backward looking and risk free
Accounting
Forward looking and involves massive uncertainty
Finance
Analyzing the past is merely a
springboard to understanding the future
Accounting system based on recording accounts based on historical prices and the matching principle
Accrual Accounting
Accrual accounting principle to match revenues and expenses in the same period
Matching Principle
Accrual Accounting and this are used interchangeably
Generally Accepted Accounting Principles (GAAP)
Typically last line of the income statement
Net Income aka Earnings
An informal metric based on cash in and out of the firm
Cash-based income
Based on the government’s definition of income, this is the amount of income the government will tax
Income for Tax Purposes
The income is calculated using accrual accounting (GAAP).
Accounting Income
The best metric for understanding the operations of the firm
Accounting Income
The most complicated metric for firm operations
Accounting Income
Revenue-expenses =
Net Income
The use of accrual accounting means that every line item on the income statement requires
Management to make judgements about what is reported
Accrual Accounting permits firms to time the recognition of sales based on certain rules
Revenue Recognition
Represents the directs costs (directs materials and direct labor) associated with production and suffers from the same recognition predicament as revenue
Cost of Goods Sold
Subtracting Cost of Goods Sold from revenue gives the company’s
Gross Profit
Typically the third line of the income statement which equals sales-COGS
Gross Profit
The expenses on an income statement that fit between gross profit and EBIT
Operating Expenses
Operating Expenses often include
Office expense
Administrative expense
Depreciation expense
Research and Development expense
A non-cash expense used to approximate the decrease in value of an asset
Depreciation
EBIT stands for
Earnings Before Interest and Taxes
Subtracting operating expenses from gross profit yields
EBIT (Operating Profit)
Amount owed to creditors that appears on the income statement between EBIT and earnings before taxes
Interest Expense
Typically the second to the last line of the income statement right before net income, and represents income taxes paid by the firm
Tax Expense
Subtracting both interest and taxes from EBIT leaves us with
Net Income
Assets=
Liabilities + Owners Equity
Equity=
Assets-Liabilities
The sum of all equity accounts, most commonly common stock, APIC, and retained earnings
Owner’s Equity (OE)
All assets must be
financed
Accrual accounting principle to recorded assets, liabilities, and equity at historical levels
Historical Cost Principle
The total amount of depreciation claimed against the fixed assets of the firm
Accumulated Deprecitation
Assets that are expected to be liquidated within a year
Current Assets
Current assets are listed in the order of
Liquidity
Very liquid current asset on the balance sheet such as money markets, t-bills, etc.
Marketable Securities
A type of current asset which represents any money owed to the firm for services rendered
Accounts Receivable
A current asset that is typically viewed as the least-liquid current asset
Inventories
This includes raw materials, work-in-process, and finished goods
Inventories
Assets on the balance sheet with a lifespan greater than a year
Fixed Assets
PP&E
Property, Plant, & Equipment
The original cost of all non-current assets held for use by the firm
Gross PP&E
Gross PP&E is offset by
Accumulated Depreciation
An income statement item whereby the firm claims the expense of using up fixed assets
Depreciation Expense
The accounting value recorded on the balance sheet
Book Value
Liabilities on the balance sheet with a short life span (typically less than a year)
Current Liabilities
A current liability that represents money borrowed for the short term, typically under 5 years
Notes Payable
Money owed to suppliers as a result of purchases made on credit
Accounts Payable
Involves an explicit interest-bearing arrangement with the lender
Notes Payable
Represent expenses incurred but not yet paid
Accruals
Wages that the company owes to employees, but has not paid yet
Accrued Wages
Include debt obligations with maturity longer than one year
Long Term Liabilities
A type of equity on the balance sheet which represents equity sold to common share holders at par value
Common Stock
These are the last in line to receive their money back in the event of bankruptcy
Common Stockholders
An equity item on the balance sheet representing the proceeds minus the par value of stock
Additional Paid in Capital
Price at which stock is initially sold
Process
Par value of stock is usually
$1 per share
Money plowed back into the company from prior earnings
Retained Earnings
There are only 2 things a company can do with net income:
Pay it out as dividends to shareholders
Retain it within the firm
Net Income =
Dividends + Change in RE
New RE =
Old RE + Change in RE
New RE =
Old RE + Net Income - Dividends
