Week 2 + 3 Flashcards
What does a balance sheet show?
A snapshot view of the company, showing what the company is worth at a specific moment in time
What is the most common form of the balance sheet?
Assets - liabilities = Capital + retained earnings + Sales - cost
What is double entry accounting?
When you make a change to one side, you should change the other. (Balance)
What can a balance sheet help determine?
Whether the firm can meet its financial obligations
How much money has already been invested in the company
Whether the company is overly indebted
What kind of assets has the company purchased with its financing
What can a profit and loss acocount help determine?
A review of income and expenditure over the last year
Gross sales income
Cost of sales (wages, material costs etc.)
What is the main differences between PL sheets and balance sheets?
Profit and loss looks back in time whereas balance sheets are a snapshot in time.
What is a cash flow statement?
It shows where money comes from and how it is spent.
Cash flow is the difference between inflows and outflows (i.e. the difference between cash receipts from the business operations and the total cash outlays incurred in carrying out these operations)
What are financial ratios used for?
Analysing the performance of a business using more than one set of accounts. Convenient way to summarise large quantities of data and compare performances across firms.
Helps you ask the right questions, rarely answer them
What does liquidity ratio measure?
how easily the firm can lay its hands on cash (short term)
What does efficiency/turnover ratio measure?
how productively the firm is using its assets
What does profitability ratio measure?
the firms return on its investments
What does leverage ratio measure?
how heavily the company is in debt
What do shareholders return ratios show?
return on shareholders equity
With regards to liquidity ratios: describe a current ratio.
Current assets/Current Liabilities
Should be at least 1.5 and not over 3, unless the business is saving resources to launch specific investments or payments in the near future
With regards to liquidity ratios: describe a quick ratio (acid test).
Current assets-Inventory/current liabilities
Measures immediate resources of a company against current liabilities.
With regards to liquidity ratios: describe a cash ratio
Monitors the company’s most liquid assets. A low cash ratio may not matter if the firm can borrow on short notice
With regards to liquidity ratios: describe net working capital
Roughly measures the company’s potential reservoir of cash
What are some of the shareholder return ratios?
Return on equity = net profit / shareholder
Price/ earnings ratio = market value per share/ return on equity
Dividend per share = dividends/ shareholder equity
Payout ratio = Dividends/ net profit
Dividend yield = dividends per share/ market value share
What are three different types of manipulation?
Earnings - Share prices decline when earnings drop.
Cash flow manipulation - manipulating the perception of a companies ability to generate cash flow from its operations
Key metrics manipulation - manipulating non GAAP metrics
How can earnings manipulation be done?
Recording revenue too soon Recording non-existent revenue Income boosts using unsustainable activities Shifting expenses earlier or later Hiding expenses and losses Shifting income
What are warning signs of cash flow manipulation?
Recording bogus CFFO from a normal bank borrowing
Disclosures about selling receivables
Inflating CFFO by faking sale of recievables
What are warning signs of key metrics manipulation?
Changing the definition of a key metric
Highlighting a misleading metric as a surrogate doe revenue
Divergence of trend between SSS and revenue
