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Finance > Chapter 2 > Flashcards

Chapter 2 Flashcards

(64 cards)

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1
Q

GAAP and IFRS

A

Common set of rules and standard format for public companies to use when they prepare their reports

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2
Q

Financial statements

A

Accounting reports with past performance information that a firm issues periodically
- 10K –> annual
- 10Q –> quarterly

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3
Q

Auditors

A

Third party meant to check the reports of a company to ensure that they are aligned with GAAP

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4
Q

Balance sheet

A

Statement of financial position
Lists assets and liabilities at a given point in time

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5
Q

Assets

A

Cash, inventory, plant and equipment

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6
Q

Current assets

A

Assets or cash that can be converted into cash in 1 year

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7
Q

Long term assets

A

Net property, plant and equipment that can’t be sold within 1 year

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8
Q

Book value of an asset

A

Acquisition cost - accumulated depreciation

Value shown in the firm’s financial statements

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9
Q

Amortisation

A

If the value of the company declines, it may reduce the amount listed on the balance sheet

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10
Q

Intangible assets

A

Include brand names, trademarks, patents

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11
Q

Liabilities

A

Show the firm’s obligations to creditors

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12
Q

Current liabilities

A

Liabilities that will be satisfied (paid) within 1 year

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13
Q

Long term liabilities

A

Liabilities that extend beyond one year

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14
Q

Net working capital

A

Current assets - Current liabilities

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15
Q

Book value of equity

A

Total assets - total liabilities

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16
Q

Shareholder’s equity

A

Or book value of equity

Assets - liabilities

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17
Q

Market value of equity

A

Shares outstanding x Market price per share

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18
Q

Market to book ratio

A

Price to book

= Market value of equity / Book value of equity

  • For most successful firms: exceeds 1
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19
Q

Shares outstanding

A

Total number of a company’s shares that are currently owned by investors

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20
Q

Enterprise value

A

Market value of equity + debt - cash

Assesses the value of the underlying business assets, separate from any debt and cash

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21
Q

Market to book ratio meaning

A

Ratio is bigger than 1 –> market assigns a high value to the company

Ratio is less than 1 –> market has lost confidence in then ability of the company’s assets to generate future profits

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22
Q

Income statement

A

Statement of financial performance

Lists revenues and expenses over a period of time

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23
Q

Gross profit

A

Sales revenue - cost of sales (COGS)

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24
Q

Operating income

A

Gross profit - operating expenses

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25
Operating expenses
Include Selling General and administrative expenses R&D Depreciation and amortisation
26
EBIT
Income that comes from activities which aren't central
27
EBIT margin
EBIT / sales
28
Pretax and net income
EBIT - interest expense
29
Net income
Pretax income - taxes Represents the total earnings of the firm's equity holders
30
Earnings per share
Net income / Shares outstanding
31
Statement of cash flows
Determine how much cash the firm has generate and how that cash has been allocated, during a set period
32
Operating activities
Adjust net income for all cash expenses 1. Start with net income related to the firm’s operating activities 2. Add back depreciation and amortization expenses and other non cash items 3. Adjust the following --> Deduct increase in accounts receivable and vice versa --> Add increase in accounts payable and vice versa --> Deduct increase in inventory --> Deduct any increase in any other current asset
33
Investment activities
Lists the cash used for investment 1. Subtract capital expenditure 2. Subtract other investment/jasset purchase that the firm has made 3. Add all other long term investing activities (acquisitions…)
34
Financing activities
Flow of cash between the firm and the investors 1. Account for dividends payment (subtract it) from which we calculate 2. Dividend payments are cash outflows 3. If the firm sells share (+) or buys back (-) it must be recorded
35
Retained earnings
Net income - dividends
36
Capital expenditure
Purchases of new property, plant and equipment - expense
37
Statement of Stakeholder's equity
Retained earnings + net sales of stock = Net income - Dividends + Sales of stock - Repurchases of stock
38
MD&A
Provides background information about what has happened in the recent year
39
Gross profit margin
Ability to sell a product for more than the cost of producing it Gross profit / sales
40
Operating margin
How much a company earns before interest and taxes from each dollar of sales Operating income / sales
41
Net profit margin
The fraction of each dollar in revenues that is available to equity holders after the firm pays interest and taxes Net income / sales
42
Current ratio
Sufficient working capital to meet short term needs? Current assets / Current liabilities
43
Quick ratio
Current ratio neglecting inventory that may not be that liquid Quick assets / Current liabilities
44
Cash ratio
Cash / Current liabilities
45
Accounts receivable days
Accounts receivable / average daily sales
46
Accounts payable days
Accounts payable / average daily cost of sales
47
Inventory days
Inventory / average daily cost of sales
48
Inventory turnover
Annual cost of sales / inventory
49
Accounts receivable turnover
Annual sales / accounts receivable
50
Accounts payable turnover
Annual cost of sales / accounts payable
51
The higher the turnover
The fewer days The more efficient use of working capital
52
EBIT / Interest
Ratio of 5 is very good Under 1.5 very bad
53
EBITDA
EBIT + Depreciation + Amortisation
54
Market debt equity ratio
Total debt / total market equity
55
Debt to capital ratio
Total debt / total equity + total debt
56
Net debt
Total debt - cash + short term investments
57
Debt to enterprise value ratio
Net debt / Market value of equity + net debt = Net debt / enterprise value
58
Book value equity multiplier
Total assets / book value of equity
59
Market value equity multiplier
Enterprise value / market value of equity
60
P/E
Market capitalisation / Net income = Share price / EPS
61
Return on invested capital
EBIT ( 1 - tax rate) / book value of equity + net debt
62
Dupont identity
Expresses the ROE in terms of the firm's profitability, asset efficiency and leverage (Net income / sales) x (Sales / Total assets) x (Total assets / book value of equity) = net profit market x asset turnover x equity multiplier
63
Sarbanes Oxley Act 2002
Consequence of WorldCom and Enron accounting scandals Legislation with intention of having higher accuracy of information given to board and shareholders - Incentivizing independence in the auditing process - Increasing penalties for providing false information - Forcing companies to validate their internal financial control process
64
Dodd Franck Act 2010
In response to the 2008 crisis - Exemption of firms with less than $75 million from SOX section 404 (which requires public companies’ annual reports to include the company’s own assessment of internal control over financial reporting) - Relaxes requisite for medium companies

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