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

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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

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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.

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