Topic 3 - Financial Statements Flashcards
What are the four primary financial statements?
Balance sheet, income statement, statement of cash flows, and statement of shareholders’ equity.
Example sentence: The company prepares these statements annually for stakeholders.
What does a balance sheet show?
A company’s financial position at a specific point in time, showing assets, liabilities, and shareholders’ equity.
Additional information: Also known as a statement of financial position.
What does an income statement show?
A company’s financial performance over a period of time, detailing revenues, expenses, and profits.
Example sentence: The income statement helps investors assess the company’s profitability.
What is the difference between current and long-term assets?
Current assets are expected to be converted into cash within a year, while long-term assets provide benefits over multiple years.
Example sentence: Examples of current assets include cash and accounts receivable.
What is the accounting equation?
Assets = Liabilities + Shareholders’ Equity.
Example sentence: The accounting equation must always balance.
What is working capital?
The difference between a firm’s current assets and current liabilities.
Example sentence: Positive working capital indicates a company’s ability to cover short-term obligations.
What does the statement of cash flows show?
How changes in the balance sheet and income affect cash, divided into operating, investing, and financing activities.
Example sentence: The statement of cash flows helps investors understand the sources and uses of cash.
What is EBIT?
Earnings before interest and taxes; a measure of a company’s profitability.
Example sentence: EBIT is used to assess a company’s operational performance.
What is depreciation?
The allocation of the cost of a long-term asset over its useful life.
Example sentence: Depreciation is a non-cash expense that reduces a company’s taxable income.
What is the difference between gross profit and net profit?
Gross profit is revenue minus the cost of goods sold, while net profit is gross profit minus all expenses, taxes, and interest.
Example sentence: Gross profit is a key indicator of a company’s core profitability.
What is a liquidity ratio?
A ratio that measures a company’s ability to pay its short-term obligations.
Example sentence: The current ratio and quick ratio are common liquidity ratios.
What is the current ratio?
Current assets divided by current liabilities, indicating a company’s short-term liquidity.
Example sentence: A current ratio of 2.0 means the company has twice as many current assets as liabilities.
What is the quick ratio?
(Current assets - Inventory) / Current liabilities, measuring liquidity without relying on inventory.
Example sentence: The quick ratio provides a more stringent measure of liquidity than the current ratio.
What is a solvency ratio?
A measure of a company’s ability to meet its long-term obligations.
Example sentence: The debt-to-equity ratio is a common solvency ratio.
What is leverage?
The use of borrowed funds to increase the potential return on equity.
Example sentence: Leverage can amplify both gains and losses for shareholders.
What is the debt-to-equity ratio?
Total debt divided by shareholders’ equity, indicating financial leverage.
Example sentence: A high debt-to-equity ratio may indicate higher financial risk.
What is ROE (Return on Equity)?
Net income divided by shareholders’ equity, showing how efficiently a company uses shareholders’ capital.
Example sentence: ROE is a key metric for evaluating a company’s profitability.
What is ROA (Return on Assets)?
Net income divided by total assets, showing how efficiently a company uses its assets.
Example sentence: ROA measures a company’s ability to generate profits from its assets.
What is the purpose of financial ratio analysis?
To evaluate the financial health and performance of a company.
Example sentence: Financial ratio analysis helps identify strengths and weaknesses in a company’s operations.
What is financial forecasting?
The process of predicting a company’s future financial performance based on historical data and assumptions.
Example sentence: Financial forecasting is crucial for strategic planning and decision-making.
What is the sustainable growth rate?
The rate at which a company can grow without needing to raise additional external financing.
Example sentence: Sustainable growth rate depends on internal sources of funding.
What is the DuPont Identity?
A formula that breaks down ROE into three components: profit margin, asset turnover, and financial leverage.
Example sentence: The DuPont Identity helps analyze the drivers of a company’s return on equity.