Chapter 3: Working with Financial Statements Flashcards Preview

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Flashcards in Chapter 3: Working with Financial Statements Deck (42):
1

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

2

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.

3

Statement of Cash Flows

A firm's financial statement that summarizes its sources and uses of cash over a specified period of time.

4

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.

5

Common-Base Year Financial Statements -- Trend Analysis

A standardized financial statement presenting all items relative to a certain base-year amount

6

Financial ratios-->

relationships determined from a firm's financial information and used for comparison purposes.

7

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

8

Short-term solvency or liquidity ratios

Current Ratio
Quick Ratio
Cash ratio
Net working capital to total assets
Interval measure

9

Current Ratio

Current Assets/Current Liabilities

10

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

11

Cash ratio

= (cash+ cash equivalents)/ current liabilities

12

Net working capital to total assets

= net working capital/total assets

13

Interval measure

= current assets/average daily operating costs

14

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

15

Total debt ratio

= (total assets-total equity)/total assets
® Takes into account al debts of all maturities to all creditors

16

Debt/equity ratio

= total debt/total equity

17

Equity multiplier

= total assets/total equity

18

Long-term debt ratio

= long-term debt/ long term debt + equity

19

Times interest earned (TIE)

= EBIT/interest
Measures long term solvency

20

Cash coverage ratio

= (EBIT+ Depreciation)/Interest

21

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

22

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

23

Days' sales in inventory

= 365 days/inventory turnover

24

Receivables turnover

= sales/accounts receivable

How fast we collect , we can then covert it into days using the next ratio

25

Days' sales in receivables

= 365 days/receivables turnover

26

NWC turnover

= sales/NWC
® Measures how much work we get out of our working capital

27

Fixed asset turnover

= sales/net fixed assets
For every dollar we have in fixed assets we generate x amount of sales

28

Total asset turnover

= sales/total assets
® For every dollar in assets we generate x amount of sales

29

Profitability ratios

Intended to measure how efficiently the firm uses its assets and how efficiently the firm manages its operations

Profit margin
Return on assets
Return on equity

30

Profit margin

= net income/sales
Generation of profit for every dollar of sales

31

Return on assets

= net income/total assets
Measure of profit per dollar of assets

32

Return on equity

= net income/total equity
How shareholders fared during the year

33

Market value ratios

-Earnings per share (EPS)
-Price earnings ratio
-PEG Ratio
-Market to book ratio
-Enterprise value/earnings before interest, tax, depreciations, and amortization (EV/EBITDA multiple

34

-Earnings per share (EPS)

)= net income/shares outstanding

35

-Price earnings ratio

= prices per share/earnings per share
® How much the company sells that share times the earning of that share

36

-PEG Ratio

= P/E ratio/ expected future earnings growth rate*100

37

-Market to book ratio

=market value per share/book value per share
® Book value is total equity/number of shares outstanding

38

-Enterprise value/earnings before interest, tax, depreciations, and amortization (EV/EBITDA

= (Market value of equity + market value of interest bearing debt-Cash(and cash equivalents)/ EBITDA

39

Du Pont Identity-->

Popular Expression breaking ROE into three parts: Profit margin, total asset turnover, and financial leverage

40

Du Pont Identity-Tells us that ROE is affect by three things

1. Operating efficiency (measure by profit margin)
2. Asset use efficiency (measured by asset turnover
3. Financial leverage (measured by equity multiplier
Weakness in either operating or asset use efficiency shows up in a diminished return on assets, which translates to a lower ROE

41

Why Evaluate Financial Statements ?

1. Internal uses
○ Performance evaluations
○ Comparisons of divisions through performance
○ Explore the next chapter for the future
2. External uses
○ Potential creditors and investors
○ If you need a loan you may have to submit a form
○ Ratio analysis to see how competition is doing
○ Thinking about acquiring another firm.

42

Choosing a Benchmark
-How to we choose a benchmark or standard of comparison

1. Time trend analysis
○ Use of history (look on past financial statements
2. Peer Group analysis - identify firms that are similar in the sense that they compete in the same markets., have similar assets, and operate in similar ways