Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Accounting > Chapter 5 > Flashcards

Chapter 5 Flashcards

1
Q

financial statement analysis

A

identifies relationships between numbers within financial statements and trends in these relationships from one period to the next; goal is to help investors, creditors, managers interpret the info in statements

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

vertical analysis

A

method that attempts to overcome variations in company size by restating financial statement information in ratio (or percentage) form

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

common-size financial statements

A

restatement of components of the income statement as percent of net sales, balance items as percent of total assets; facilitates comparisons across companies of different sizes as well as comparisons of accounts within a set of financial statements

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

horizontal analysis

A

examines changes in financial data across time; helpful in analyzing company performance and in predicting future performance

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

return on equity (ROE) definition

A

primary summary measure of company performance, measures return on the investment made by the stockholders; relates net income to the average investment by shareholders as measured by total stockholders equity from the balance sheet

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

return on equity (ROE) equation

A

net income/average stockholders equity

  • net income is from a point in time
  • average SE= adding beginning and ending stockholders equity balances divided by 2
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

return on asset (ROA) definition

A

measures the return earned on each dollar that the firm invests in asset; captures returns generated by firm’s operating and investing activities (without regard for finance details)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

return on asset (ROA) equation

A

earnings without interest expense (EWI)/average total assets

  • EWI: net income + (interest expense X (1-statutory tax rate) )
  • average total assets: add beginning and ending balances in total assets/2
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

earnings without interest expense (EWI) definition

A

measures the income generated by the firm before taking into account any of its financing costs; interest costs should be excluded

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

EWI equation

A

net income + (interest expense X (1-statutory tax rate) )

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

return on asset (ROA) equation detailed

A

net income+ (interest expense X (1-statutory tax rate) )/ (beginning total assets + ending total assets)/2

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

financial leverage

A

effect that liabilities (including debt financing) have on ROE

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

return on financial leverage (ROFL) equation

A

ROFL= ROE-ROA

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

profit margin (PM) definition

A

measures the profit, without interest expense, that is generated from each dollar of sales revenue; higher profit margin is preferable; affected by level of gross profit that the company earns on its sales which depends on product prices and cost of manufacturing; also affected by operating expenses required to support sales (wages, salaries, marketing, research and development)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

capacity cost

A

wages and salaries, marketing, research and development, depreciation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

profit margin (PM) equation

A

earnings without interest expense (EWI)/sales revenue

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

asset turnover (AT) definition

A

insights into company’s productivity and efficiency; level of sales generated by each dollar that company invests in assets; high asset ratio suggests that assets used efficiently- high ratio preferable; affected by inventory management practices, credit policies, and technology; improve by increasing level of sales for a given level of assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

asset turnover (AT) equation

A

sales revenue/average total assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

gross profit margin (GPM) definition

A

percentage of each sales dollar that is left over after product costs subtracted

20
Q

gross profit margin (GPM) equation

A

sales revenue-cost of goods sold/sales revenue

21
Q

expense to sales (ETS) defnition

A

measures percentage of each sales dollar that goes to cover a specific expense item

22
Q

expense to sales (ETS) equation

A

expense/sales revenue

23
Q

account receivable turnover (ART) definition

A

measures how many times receivables have been turned (collected) during a period

24
Q

account receivable turnover (ART) equation

A

sales revenue/average accounts receivable

25
Q

inventory turnover (INVT) definition

A

measures number of times during a period that total inventory is turned (sold); high INVT indicates that inventory managed efficiently

26
Q

inventory turnover (INVT) equation

A

cost of goods sold/average inventory

27
Q

property, plant, and equipment turnover (PPET) definition

A

measures sales revenue produced for each dollar of investment in PP&E; provides insight into asset utilization and how efficiently a company operates given its production technology

28
Q

property, plant, and equipment turnover (PPET) equation

A

sales revenue/average PP&E

29
Q

covenant

A

company has to execute on loan agreement that places various restrictions on operating activities; help safeguard debtholders in the face of increased risk

30
Q

default risk

A

debt increases it; the risk that company will be unable to repay debt when it comes due

31
Q

liquidity analysis

A

analysis of available cash

32
Q

solvency analysis

A

company’s ability to generate sufficient cash in the future

33
Q

liquidity

A

cash availability- how much cash a company has, how much it can raise on short notice

34
Q

current asset

A

assets company expects to convert to cash within the next operating cycle

35
Q

current liabilities

A

liabilities that come due within the next year

36
Q

working capital (net working capital)

A

excess of current assets over current liabilities; current assets-current liabilities

37
Q

current ratio- what does it measure, what is the equation

A

measure of liquidity

current assets/current liabilities

current ratio greater than one implies positive working capital; ignores cash inflows from future sales, looks at existing balance sheet only

38
Q

when might a current ratio less than 1 not be problematic?

A

1) cash and carry company like grocery story that has little receivables- minimize receivables/inventory and maximize payables
2) service company because not significant account receivables

39
Q

quick ratio- what does it measure, what is the equation

A

measure of liquidity

cash+short term securities+account receivable/current liabilities

focuses on quick assets, which are those converted to cash in 90 days or less; examples include cash, short term securities, prepaid assets; reflects company’s ability to meet current liabilities without liquidating inventories

40
Q

operating cash flow to current liabilities - what does it measure, what is the equation

A

measure of liquidity

OCFCL= cash from operations/average current liabilities

net amount of cash derived from operating activities; ability of company to pay debts determined by whether operations can generate enough cash to cover debt payments; higher OCFCL preferred

41
Q

cash burn rate- what does it measure, what is the equation

A

measure of liquidity

free cash flow/number of days in the period

used when a company’s free cash flow is negative; could be negative because young company or for established company that has run into financial distress

42
Q

solvency

A

ability to meet debt obligations, including periodic interest payments and repayment of principal and amount borrowed

43
Q

debt to equity- what does it measure, what is the equation

A

measure of solvency

debt to equity= total liabilities/total stockholders equity

how reliant a company is on creditor financing (fixed claim) compared with equity financing (flexible or residual claims)

44
Q

times interest earned- what does it measure, what is the equation

A

measure of solvency

times interest earned= earnings before interest expense and taxes/interest expense

operating income available to pay interest expense; management wants ratio to be high so there is little risk of default

45
Q

what are the limitations of ratio analysis

A
  1. measurability
  2. non-capitalized costs
  3. historical cost
  4. company changes
  5. conglomerate effects
  6. means to an end

Accounting (9 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions