Chapter 3: Working with Financial Statements Flashcards
Sources of Cash
a firm’s activities that generate cash
○ A decrease in an asset account or an increase in a liability (or equity) account is a source
Uses of cash
a firm’s activities in which cash is spent.
○ An increase in an asset account or a decrease in a liability or equity account is a use.
Statement of Cash Flows
A firm’s financial statement that summarizes its sources and uses of cash over a specified period of time.
Common-size statements
§ A standardized financial statement presenting all items in percentage terms. Statement of financial position is shown as a percentage of assets and income statements as a percentage of sales
§ Tells use what happens to each dollar in sales
Can be used for statement of cash flow with each item being expressed as a percentage of total sources or total uses. The results an then be interpreted as the percentage of total sources of cash supplied or as the percentage of total uses of cash for a particular item.
Common-Base Year Financial Statements – Trend Analysis
A standardized financial statement presenting all items relative to a certain base-year amount
Financial ratios–>
relationships determined from a firm’s financial information and used for comparison purposes.
Financial ratio’s are grouped in the following categories
Short-term solvency or liquidity ratios
Long-term solvency or financial leverage rations
Asset management or turnover ratios
Profitability ratios
Market value ratios
Short-term solvency or liquidity ratios
Current Ratio Quick Ratio Cash ratio Net working capital to total assets Interval measure
Current Ratio
Current Assets/Current Liabilities
Quick Ratio
= current assets-inventory/Current liabilities
® Inventory is not very liquid (most often the least liquid), means short-term trouble (over produced or overbought
Cash ratio
= (cash+ cash equivalents)/ current liabilities
Net working capital to total assets
= net working capital/total assets
Interval measure
= current assets/average daily operating costs
Long-term solvency or financial leverage rations
-Intended to address the form’s long-run ability to meet its obligations (financial leverage)
Total debt ratio Debt/equity ratio Equity multiplier Long-term debt ratio Times interest earned (TIE) Cash coverage ratio
Total debt ratio
= (total assets-total equity)/total assets
® Takes into account al debts of all maturities to all creditors
Debt/equity ratio
= total debt/total equity
Equity multiplier
= total assets/total equity
Long-term debt ratio
= long-term debt/ long term debt + equity
Times interest earned (TIE)
= EBIT/interest
Measures long term solvency
Cash coverage ratio
= (EBIT+ Depreciation)/Interest
Asset management or turnover ratios
Intended to describe how efficiently or intensively a firm uses its assets to generate sales
Inventory turnover Days' sales in inventory Receivables turnover Days' sales in receivables NWC turnover Fixed asset turnover Total asset turnover
Inventory turnover
= cost of goods sold/inventory
® If we know how many times inventory was turned over we can use the next formula to see how long it took us to turn it over
Days’ sales in inventory
= 365 days/inventory turnover
Receivables turnover
= sales/accounts receivable
How fast we collect , we can then covert it into days using the next ratio
