Ch 2 - Intro to Financial Statement Analysis

Question 1

financial statements

Answer 1

Accounting reports issued by a firm quarterly and/or annually that present past performance information and a snapshot of the firm’s assets and the financing of those assets

Question 2

annual reports

Answer 2

The yearly summary of business, accompanying or including financial statements,sent by U.S.public companies to their stockholders.

Question 3

Generally Accepted Accounting Principles (GAAP)

Answer 3

A common set of rules and a standard for- mat for public companies to use when they prepare their financial reports

Question 4

auditor

Answer 4

A neutral third party,which corporations are required to hire,that checks a firm’s annual financial statements to ensure they are prepared according to GAAP,and provides evidence to sup- port the reliability of the information

Question 5

balance sheet

Answer 5

A list of a firm’s assets and liabilities that provides a snapshot of the firm’s financial position at a given point in time.

Question 6

assets

Answer 6

The cash,inventory,property,plant and equipment,and other investments a company has made

Question 7

liabilities

Answer 7

firm’s obligations to its creditors

Question 8

shareholders’ equity, stockholders’ equity

Answer 8

An accounting measure of a firm’s net worth that rep- resents the difference between the firm’s assets and its liabilities

Question 9

common stock and paid- in surplus

Answer 9

The amount that stockholders have directly invested in the firm through purchasing stock from the company

Question 10

retained earnings

Answer 10

Profits made by the firm,but retained within the firm and reinvested in assets or held as cash.

Question 11

current asset

Answer 11

Cash or assets that could be converted into cash within one year

Question 12

marketable securities

Answer 12

Short-term, low-risk investments that can be easily sold and converted to cash

Question 13

accounts receivable

Answer 13

Amounts owed to a firm by customers who have purchased goods or services on credit.

Question 14

inventories

Answer 14

A firm’s raw materials as well as its work-in-progress and finished goods.

Question 15

long-term assets

Answer 15

Assets that produce tangible benefits for more than one year

Question 16

depreciation

Answer 16

A yearly deduction a firm makes from the value of its fixed assets (other than land) over time,according to a depreciation schedule that depends on an asset’s life span.

Question 17

book value

Answer 17

The acquisition cost of an asset less its accumulated depreciation

Question 18

current liabilities

Answer 18

Liabilities that will be satisfied within one year

Question 19

accounts payable

Answer 19

The amounts owed to creditors for products or services purchased with credit

Question 20

notes payable,short- term debt

Answer 20

Loans that must be repaid in the next year

Question 21

net working capital

Answer 21

The difference between a firm’s current assets and current liabilities that rep- resents the capital avail- able in the short term to run the business.

Question 22

long-term debt

Answer 22

Any loan or debt obligation with a maturity of more than a year

Question 23

book value of equity

Answer 23

The difference between the book value of a firm’s assets and its liabilities; also called shareholders’ equity and stockholders’ equity ,it represents the net worth of a firm from an accounting perspective.

Question 24

market capitalization

Answer 24

The total market value of equity; equals the market price per share times the number of shares

Question 25

liquidation value

Answer 25

The value of a firm after its assets are sold and liabilities paid.

Question 26

market-to-book ratio (price-to-book [P/B] ratio

Answer 26

The ratio of a firm’s market (equity) capitalization to the book value of its stockholders’ equity

Question 27

value stocks

Answer 27

Firms with low market-to-book ratios

Question 28

growth stocks

Answer 28

Firms with high market-to-book ratios

Question 29

leverage

Answer 29

A measure of the extent to which a firm relies on debt as a source of financing

Question 30

debt-equity ratio

Answer 30

The ratio of a firm’s total amount of short-and long-term debt (including current maturities) to the value of its equity,which may be calculated based on market or book values

Question 31

enterprise value

Answer 31

The total market value of a firm’s equity and debt, less the value of its cash and marketable securities. It measures the value of the firm’s underlying business.

Question 32

current ratio

Answer 32

ratio of current assets to current liabilities

Question 33

quick ratio

Answer 33

The ratio of current assets other than inventory to current liabilities

Question 34

income statements

Answer 34

A list of a firm’s revenues and expenses over a period of time.

Question 35

net income or earnings

Answer 35

The last or “bottom”line of a firm’s income statement that is a measure of the firm’s income over a given period of time.

Question 36

gross profit

Answer 36

The third line of an income statement that represents the difference between a firm’s sales revenues and its costs.

Question 37

operating income

Answer 37

firm’s gross profit less its operating expenses

Question 38

EBIT

Answer 38

firm’s earnings before interest and taxes are deducted

Question 39

earnings per share (EPS)

Answer 39

firm’s net income divided by the total number of shares outstanding

Question 40

stock options

Answer 40

The right to buy a certain number of shares of stock by a spe- cific date at a specific price.

Question 41

convertible bonds

Answer 41

Corporate bonds with a provision that gives the bondholder an option to convert each bond owned into a fixed number of shares of common stock

Question 42

dilution

Answer 42

An increase in the total number of shares that will divide a fixed amount of earnings

Question 43

diluted EPS

Answer 43

The earnings per share a company would have based on the total number of shares including the effects of all stock options and convert- ible bonds.

Question 44

gross margin

Answer 44

The ratio of gross profit to revenues (sales),it reflects the ability of the company to sell a product for more than the sum of the direct costs of making it.

Question 45

operating margin

Answer 45

The ratio of operating income to revenues,it reveals how much a company has earned from each dollar of sales before deducting interest and taxes.

Question 46

net profit margin

Answer 46

The ratio of net income to revenues,it shows the frac- tion of each dollar in revenues that is available to equity holders after the firm pays its expenses, plus interest and taxes.

Question 47

accounts receivable days (average collection period or days sales out- standing)

Answer 47

An expression of a firm’s accounts receivable in terms of the number of days’ worth of sales that the accounts receivable represents.

Question 48

accounts payable days

Answer 48

An expression of a firm’s accounts payable in terms of the number of days’ worth of cost of goods sold that the accounts payable represents

Question 49

inventory days

Answer 49

An expression of a firm’s inventory in terms of the number of days’ worth or cost of goods sold that the inventory represents

Question 50

inventory turnover ratio

Answer 50

The cost of goods sold divided by either the latest cost of inventory or the average inventory over the year,it shows how efficiently companies turn their inventory into sales

Question 51

EBITDA

Answer 51

A computation of a firm’s earnings before interest,taxes,depreciation,and amortization are deducted.

Question 52

interest coverage ratio or times interest earned (TIE) ratio

Answer 52

An assessment by lenders of a firm’s leverage,it is equal to a measure of earnings divided by interest.

Question 53

return on equity (ROE)

Answer 53

The ratio of a firm’s net income to the book value of its equity.

Question 54

return on assets (ROA)

Answer 54

The ratio of net income to the total book value of the firm’s assets.

Question 55

DuPoint Identity

Answer 55

Expresses return on equity as the product of profit margin,asset turnover, and a measure of leverage.

Question 56

equity multiplier

Answer 56

measure of leverage equal to total assets divided by total equity.

Question 57

price-earnings ratio (P/E)

Answer 57

The ratio of the market value of equity to the firm’s earnings,or its share price to its earnings per share.

Question 58

PEG ratio

Answer 58

The ratio of a firm’s P/E to its expected earnings growth rate.

Question 59

statement of cash flows

Answer 59

An accounting statement that shows how a firm has used the cash it earned during a set period.

Question 60

capital expenditures

Answer 60

Purchases of new property,plant,and equipment.

Question 61

retained earnings

Answer 61

The difference between a firm’s net income and the amount it spends on dividends.

Question 62

payout ratios

Answer 62

The ratio of a firm’s dividends to its net income.

Question 63

management discussion and analysis (MD&A)

Answer 63

preface to the financial statements in which a company’s management discusses the recent year (or quarter),providing a background on the company and any significant events that may have occurred.

Question 64

off-balance sheet trans- actions

Answer 64

Transactions or arrangements that can have a material impact on a firm’s future performance yet do not appear on the balance sheet.

Question 65

statement of stockholders’ equity

Answer 65

An accounting statement that breaks down the stockholders’ equity computed on the balance sheet into the amount that came from issuing new shares versus retained earnings

Question 66

Sarbanes-Oxley Act (SOX)

Answer 66

Legislation passed by Congress in 2002, intended to improve the accuracy of financial information given to both boards and to share- holders.