Topic 3 - Financial Statements Flashcards

1
Q

What are the four primary financial statements?

A

Balance sheet, income statement, statement of cash flows, and statement of shareholders’ equity.

Example sentence: The company prepares these statements annually for stakeholders.

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2
Q

What does a balance sheet show?

A

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.

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3
Q

What does an income statement show?

A

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.

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4
Q

What is the difference between current and long-term assets?

A

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.

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5
Q

What is the accounting equation?

A

Assets = Liabilities + Shareholders’ Equity.

Example sentence: The accounting equation must always balance.

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6
Q

What is working capital?

A

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.

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7
Q

What does the statement of cash flows show?

A

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.

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8
Q

What is EBIT?

A

Earnings before interest and taxes; a measure of a company’s profitability.

Example sentence: EBIT is used to assess a company’s operational performance.

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9
Q

What is depreciation?

A

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.

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10
Q

What is the difference between gross profit and net profit?

A

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.

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11
Q

What is a liquidity ratio?

A

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.

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12
Q

What is the current ratio?

A

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.

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13
Q

What is the quick ratio?

A

(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.

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14
Q

What is a solvency ratio?

A

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.

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15
Q

What is leverage?

A

The use of borrowed funds to increase the potential return on equity.

Example sentence: Leverage can amplify both gains and losses for shareholders.

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16
Q

What is the debt-to-equity ratio?

A

Total debt divided by shareholders’ equity, indicating financial leverage.

Example sentence: A high debt-to-equity ratio may indicate higher financial risk.

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17
Q

What is ROE (Return on Equity)?

A

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.

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18
Q

What is ROA (Return on Assets)?

A

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.

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19
Q

What is the purpose of financial ratio analysis?

A

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.

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20
Q

What is financial forecasting?

A

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.

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21
Q

What is the sustainable growth rate?

A

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.

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22
Q

What is the DuPont Identity?

A

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.

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23
Q

What is capital expenditure (CAPEX)?

A

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.

24
Q

What is the difference between cash flow from operations and net income?

A

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.

25
Q

What is free cash flow?

A

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.

26
Q

What is a pro forma financial statement?

A

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.

27
Q

What is the plowback ratio?

A

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.

28
Q

What is dividend payout ratio?

A

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.

29
Q

Why is liquidity important for a firm?

A

It ensures that a firm can meet its short-term obligations and avoid financial distress.

Example sentence: Liquidity is crucial for maintaining operational stability.

30
Q

What is financial leverage?

A

The use of debt to amplify returns to equity shareholders.

Example sentence: Financial leverage can increase a company’s return on equity.

31
Q

What is accounts payable?

A

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.

32
Q

What is accounts receivable?

A

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.

33
Q

What is a cash flow statement?

A

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.

34
Q

What is the difference between operating and non-operating expenses?

A

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.

35
Q

What is the profit margin?

A

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.

36
Q

What is the return on investment (ROI)?

A

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.

37
Q

What is gross margin?

A

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.

38
Q

What is retained earnings?

A

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.

39
Q

What is earnings per share (EPS)?

A

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.

40
Q

What is a balance sheet date?

A

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.

41
Q

What is accrual accounting?

A

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.

42
Q

What is a contingent liability?

A

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.

43
Q

What is a trial balance?

A

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.

44
Q

What is inventory turnover?

A

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.

45
Q

What is sheet date?

A

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.

46
Q

What is accrual accounting?

A

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.

47
Q

What is a contingent liability?

A

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.

48
Q

What is a trial balance?

A

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.

49
Q

What is inventory turnover?

A

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.

50
Q

What is operating cash flow?

A

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.

51
Q

What is goodwill?

A

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.

52
Q

What is a classified balance sheet?

A

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.

53
Q

What is the matching principle in accounting?

A

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.

54
Q

What is deferred revenue?

A

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.

55
Q

What is a fiscal year?

A

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.