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.
What is capital expenditure (CAPEX)?
Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings, or equipment.
Example sentence: Capital expenditure is essential for maintaining or expanding a company’s operations.
What is the difference between cash flow from operations and net income?
Cash flow from operations reflects cash inflows and outflows from day-to-day activities, while net income is accounting profit after expenses.
Example sentence: Cash flow from operations is a key indicator of a company’s ability to generate cash.
What is free cash flow?
Cash available for distribution to shareholders and debt holders after expenses and investments in working capital and capital assets.
Example sentence: Free cash flow can be used for dividends, share buybacks, or debt repayment.
What is a pro forma financial statement?
A projected financial statement that shows future financial results based on assumptions.
Example sentence: Pro forma financial statements are often used for budgeting and forecasting purposes.
What is the plowback ratio?
The proportion of net income retained in the company rather than paid out as dividends.
Example sentence: A high plowback ratio indicates a company reinvests earnings for growth.
What is dividend payout ratio?
Dividends divided by net income, showing the percentage of earnings distributed to shareholders.
Example sentence: A low dividend payout ratio suggests the company retains more earnings for reinvestment.
Why is liquidity important for a firm?
It ensures that a firm can meet its short-term obligations and avoid financial distress.
Example sentence: Liquidity is crucial for maintaining operational stability.
What is financial leverage?
The use of debt to amplify returns to equity shareholders.
Example sentence: Financial leverage can increase a company’s return on equity.
What is accounts payable?
Money owed by a company to its suppliers, shown as a liability on the balance sheet.
Example sentence: Accounts payable represent short-term obligations to vendors.
What is accounts receivable?
Money owed to a company by its customers, shown as an asset on the balance sheet.
Example sentence: Accounts receivable are typically collected within a specific period.
What is a cash flow statement?
A financial statement that shows the company’s cash inflows and outflows over a period of time.
Example sentence: The cash flow statement helps assess a company’s liquidity and financial health.
What is the difference between operating and non-operating expenses?
Operating expenses are incurred from core business activities, while non-operating expenses arise from secondary activities.
Example sentence: Non-operating expenses include interest and taxes.
What is the profit margin?
Net income divided by revenue, showing how much profit a company generates for every dollar of sales.
Example sentence: Profit margin is a key indicator of a company’s profitability.
What is the return on investment (ROI)?
A measure of the profitability of an investment, calculated as (Net Profit / Cost of Investment).
Example sentence: ROI helps investors assess the efficiency of their investments.
What is gross margin?
Gross profit divided by revenue, showing the percentage of revenue that exceeds the cost of goods sold.
Example sentence: Gross margin indicates how efficiently a company produces goods or services.
What is retained earnings?
The portion of net income not paid out as dividends but retained by the company to reinvest in its business.
Example sentence: Retained earnings are an important source of internal funding for growth.
What is earnings per share (EPS)?
Net income divided by the number of outstanding shares, indicating the profitability per share of stock.
Example sentence: EPS is a key metric for evaluating a company’s financial performance.
What is a balance sheet date?
The specific date at which a company’s financial position is measured and reported.
Example sentence: The balance sheet date is crucial for assessing a company’s financial health at a specific point in time.
What is accrual accounting?
An accounting method where revenues and expenses are recorded when they are earned or incurred, not when cash is exchanged.
Example sentence: Accrual accounting provides a more accurate representation of a company’s financial performance.
What is a contingent liability?
A potential liability that may occur depending on the outcome of an uncertain future event.
Example sentence: Contingent liabilities are disclosed in the notes to the financial statements.
What is a trial balance?
A bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit columns to ensure they balance.
Example sentence: The trial balance is used to detect errors in the accounting records.
What is inventory turnover?
A ratio that measures how many times a company’s inventory is sold and replaced in a given period.
Example sentence: High inventory turnover indicates efficient inventory management.
What is sheet date?
The specific date at which a company’s financial position is measured and reported.
Example sentence: The sheet date for XYZ Company is December 31, 2020.
What is accrual accounting?
An accounting method where revenues and expenses are recorded when they are earned or incurred, not when cash is exchanged.
Additional information: Accrual accounting provides a more accurate picture of a company’s financial health.
What is a contingent liability?
A potential liability that may occur depending on the outcome of an uncertain future event.
Example sentence: The lawsuit against the company is a contingent liability.
What is a trial balance?
A bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit columns to ensure they balance.
Example sentence: The accountant prepared a trial balance to check for errors in the financial records.
What is inventory turnover?
A ratio that measures how many times a company’s inventory is sold and replaced over a period.
Additional information: High inventory turnover indicates efficient sales and inventory management.
What is operating cash flow?
Cash generated from a company’s normal business operations, excluding cash from investing and financing activities.
Example sentence: The operating cash flow for the quarter was $500,000.
What is goodwill?
An intangible asset that represents the excess of purchase price over the fair value of a company’s net assets.
Additional information: Goodwill is often created through acquisitions.
What is a classified balance sheet?
A balance sheet that organizes assets and liabilities into categories such as current and non-current.
Example sentence: The classified balance sheet helps investors understand the company’s financial position.
What is the matching principle in accounting?
The matching principle states that expenses should be recorded in the same period as the revenues they help generate.
Additional information: This principle ensures accurate financial reporting.
What is deferred revenue?
Money received by a company for goods or services not yet delivered, recorded as a liability until the service is provided.
Example sentence: The company recognized deferred revenue for the prepaid service contracts.
What is a fiscal year?
A 12-month period used by a company for accounting purposes, which may or may not align with the calendar year.
Additional information: The fiscal year for many companies starts on January 1st.
