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cct321: Introduction to Finance > Chapter 2: Introduction to Financial Statement Analysis > Flashcards

Chapter 2: Introduction to Financial Statement Analysis Flashcards

1
Q

Generally Accepted Accounting Principles (GAAP)

A

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

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2
Q

Auditor

A

a neutral third party that corporations are required to hire to check the annual financial statements to ensure they are prepared according to GAAP, and to verify that the information is reliable

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3
Q

Balance Sheet

A
  • 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
  • in IFRS it is referred to as the Statement of Financial Position
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4
Q

Assets

A

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

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5
Q

Current Assets

A

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

ex. marketable securities, accounts receivable, inventories, and pre-paid expenses (rent and insurance)

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6
Q

Marketable Securities

A

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

ex. money market investments, like government debt that mature within a year

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7
Q

Long-term Assets

A

plant, and equipment, as well as property not used in business operations, start-up costs in connection with a new business, investments in long-term securities, and property held for sale

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8
Q

Depreciation

A
  • 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 lifespan
  • allocates the cost of a large amount overtime
  • in income statement
  • tangible
  • tax shield
  • straight line deprecation
  • declining depreciation is a rate (%) (ex. CCA rate)
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9
Q

Accumulated Depreciation

A

the cumulative depreciation of an asset up to a given point in its life; equal to last period’s accumulated depreciation plus the current period’s depreciation expense

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10
Q

Book Value

A

the acquisition cost of an asset less its accumulated depreciation

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11
Q

Goodwill

A

the difference between the price paid for a company and the book value assigned to its assets

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12
Q

Liabilities

A

a firm’s obligations to its creditors

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13
Q

Current Liabilities

A

liabilities that will be satisfied within one year

ex. accounts payable, notes payable, short-term debt, current maturities of long-term debt, salary or taxes owed, and deferred or unearned revenue

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14
Q

Short-term Debt

A

debt with a maturity of less than one year

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15
Q

Long-term Debt

A

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

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16
Q

Capital Lease

A
  • a long-term lease contract that obligates the firm to make regular lease payments in exchange for use of an asset
  • allows a firm to gain use of an asset by leasing it from the asset’s owner

ex. leasing a building to serve as its corporate headquarters

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17
Q

Future Income Tax

A

an account that shows taxes that have been recognized on the firm’s financial statements but are not yet charged according to tax law

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18
Q

Shareholders’ Equity

A
  • the difference between the firm’s assets and liabilities
  • an accounting measure of the firm’s net worth
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19
Q

Book Value of Equity

A
  • the difference between the book value of a firm’s assets and its liabilities
  • aka shareholders’ equity, it represents the net worth of a firm from an accounting perspective
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20
Q

Market Capitalization

A
  • the total market value of equity
  • equals the market price per share times the number of shares
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21
Q

Enterprise Value

A
  • the total market value of a firm’s equity and debt, less the value of its cash and marketable securities
  • measures the value of the firm’s underlying business
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22
Q

Income Statement

A
  • a list of a firm’s revenues and expenses over a period of time
  • aka statement of earnings, statement of operations, or profit and loss statement
  • net income or earnings is the “bottom” line of the income statement
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23
Q

Earnings Calculations of Income Statements

A
  • Cost of Goods Sold/Cost of Sales
  • Gross Profit
  • Operating Expenses
  • Earnings Before Interest and Taxes
  • Earnings Before Taxes and Net Income
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24
Q

Gross Profit

A

the difference between net sales revenue and the cost of goods sold

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25
Q

Operating Expenses

A

expenses from the ordinary course of running the business that are not directly related to producing the goods or services being sold

ex. administrative expenses and overhead, salaries, marketing costs, and research and development ( R&D) expense

26
Q

Amortization

A
  • a charge that captures the change in value of acquired assets
  • not an actual cash expense like depreciation
27
Q

Operating Income

A

a firm’s gross profit less its operating expenses

28
Q

Earnings Before Interest and Taxes (EBIT)

A

other sources of income or expenses that arise from activities that are not the central part of a company’s business

ex. cash flows

29
Q

Earnings Before Taxes and Net Income

A

amount deducted from interest paid on outstanding debt to compute Global’s earnings and corporate taxes to determine the firm’s net income

30
Q

Earnings Per Share (EPS)

A

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

31
Q

Stock Options

A

a form of compensation a firm gives to its employees that gives them the right to buy a certain number of shares of stock by a specific date at a specific price

32
Q

Convertible Bonds

A

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

33
Q

Dilution

A
  • an increase in the total number of shares that will divide a fixed amount of earnings
  • often occurs when stock options are exercised or convertible bonds are converted
34
Q

Diluted EPS

A

a firm’s disclosure of its potential for dilution from options it has awarded which shows the earnings per share the company would have if the stock options were exercised

35
Q

Statement of Cash Flows

A
  • an accounting statement that shows how a firm has used the cash it earned during a set period
  • net income typically does NOT equal the amount of cash the firm has earned
  • non-cash expenses
  • depreciation and amortization
  • uses of cash not on the income statement
  • investment in property, plant, and equipment
36
Q

Capital Expenditures

A

purchases of new property, plant, and equipment

37
Q

Retained Earnings

A
  • the difference between a firm’s net income and the amount it spends on dividends
  • = net Income - dividends
38
Q

Management Discussion and Analysis (MD&A)

A

a 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

39
Q

Off-balance-sheet Transactions

A

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

40
Q

Statement of Shareholders’ Equity

A

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

41
Q

Statement of Comprehensive Income

A

statement showing the total income and expenses for a period by combining net income (or profit) from the income statement with information not reported on the income statement, such as gains and losses that affect equity through reserve or other accounts

42
Q

Quick Ratio

A
  • the ratio of current assets other than inventory to current liabilities
  • = cash / current liabilities
43
Q

Accounts Receivable Days

A
  • number of days’ worth of sales accounts receivable represents
  • = accounts receivable / avg daily sales
44
Q

Accounts Payable Days

A
  • 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
  • = accounts payable / avg daily cost of sales
45
Q

Inventory Days

A

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

46
Q

Inventory Turnover

A
  • the ratio of the annual cost of sales to inventory
  • a measure of how efficiently a firm is managing its inventory
  • = annual cost of sales / inventory
47
Q

Accounts Receivable Turnover

A
  • the ratio of annual sales to accounts receivable
  • measures of how efficiently the firm is managing accounts receivable
48
Q

Accounts Payable Turnover

A
  • the ratio of annual cost of sales to accounts payable
  • measures of how quickly the firm is paying its suppliers
49
Q

Interest Coverage Ratio

A
  • an assessment by lenders of a firm’s leverage
  • common ratios consider operating income, EBIT, or EBITDA as a multiple of the firm’s interest expense
50
Q

EBITDA

A
  • a computation of a firm’s earnings before interest, taxes, depreciation, and amortization are deducted
  • = EBIT + Depreciation and Amortization (or interest coverage ratio)
51
Q

Leverage

A

the amount of debt held in a portfolio or issued by a firm

52
Q

Debt–Equity Ratio

A
  • 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
  • = total debt / total equity
53
Q

Return On Equity (ROE)

A

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

54
Q

Return On Assets (ROA)

A

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

55
Q

Sarbanes-Oxley Act (SOX)

A

a 2002 U.S. Congressional act intended to improve the accuracy of information given to both boards and to shareholders

56
Q

Statement of Cash Flows

A
  • operating activity
  • investment activity
  • financing activity
57
Q

Operating Activity

A

adjusts net income by all non-cash items related to operating activities and changes in net working capital

58
Q

Investing Activity

A
  • capital expenditures
  • buying or selling marketable securities
59
Q

Financing Activity

A
  • changes in borrowings
  • payment of dividends
  • retained earnings for the period
60
Q

Cash Flow from Assets

A
  • = CF from operating activities + CF from
    investing activities
61
Q

Profits Include…

A

non cash items:
* depreciation
* does not expense a new capital expenditure
* profits are calculated using the accrual method of accounting

cct321: Introduction to Finance (9 decks)

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