Flashcards in Financial Statements and Planning Deck (108):
Financial __________ contain the financial information necessary to evaluate the company's performance.
Financial statements cover all aspects of a company's financial situation and act as a guide to the overall state of a company's finances.
Financial statements in the US must comply with the ____ set of standards.
The GAAP, Generally Accepted Accounting Principles, is the benchmark standard to allow for easy comparison of financial statements between companies.
What does GAAP stand for?
Generally Accepted Accounting Principles
The GAAP (Generally Accepted Accounting Principles) is authorized by the ____.
The FASB, Financial Accounting Standards Board, is the accounting professions's rules setting body.
What does FASB stand for?
Financial Accounting Standards Board
The _______ statement contains a financial summary of the company's operating results for a particular period.
The income statement takes into account the company's operating results, which are the earnings minus the operating costs and taxes.
Earnings before interest and tax (EBIT) is called the operating ______.
What does EBIT stand for?
Earning before interest and tax
The operating profit is a measure of the company's _____ earning power from ongoing operations.
Net profits are earnings _____ tax.
Net means after tax and _____________ have been deducted.
The ______ sheet balances the company's assets and debt or equity.
In order to present an accurate summary of a company's financial position, assets must be weighed against liabilities.
_______ assets and liabilities are expected to be converted to cash within 12 months.
They are called current because they are soon converted to cash.
Long-term or fixed assets and liabilities are expected to stay on the company's books for more than __ months.
This is the definition of a long term or fixed asset.
The entry accounts receivable in the Balance Sheet constitutes the total monies owed to the Company from ______ sales made to Customers.
The entry '________' in the Balance Sheet indicates raw materials, partially and completed goods in the company's possession.
Even though the raw materials have not been used yet, they constitute part of the inventory of a company.
The net value of ____ assets are known as the book value.
The book value is calculated by obtaining the difference between the value of the gross fixed assets and the accumulated _________ of those fixed assets.
Stockholders ______ is a balance sheet item that refers to the book value of the company.
The entry for '______ stock' on the balance sheet represents it's par value.
This is the randomly appointed per share value used for accounting purposes.
The statement of ___________ reconciles the net profit of a company from the start to the end of the accounting period, to be retained in the company, after paying dividends.
The net profit figure is used to give an accurate picture of the earnings retained for company use.
The statement of _________ summarizes a company's operating, investment and financing cash flows over a particular period.
This relates to the production of a company's products and services and so is an integral part of the cash flows of a company.
In preparing their financial statements, US based companies must convert their foreign currency assets and liabilities into dollars using the _______ rate translation method.
This is the method determined by the FASB, standard no 52. The conversion occurs using the existing exchange rate on the fiscal year end date.
In a translated balance sheet, gains or losses from currency movements in using the current rate transalation method are accumulated in the ___ account.
The CTA, cumulative translation adjustment, account is required by the FASB standard no 52.
What does CTA stand for?
cumulative translation adjustment
_________ ratio analysis involves the application of a calculation and interpretation of those ratios in order to assess the company's performance.
This is fundamental to financial ratio analysis because the calculation by itself is meaningless without a benchmark for comparison.
Financial ratio analysis would be of interest to the company's management, creditors and ____________.
The shareholders, as owners of the company, will be interested in the company's performance.
The two types of financial ratio comparisons are _____________ and time-series analysis.
Cross-sectional analysis refers to the comparison of a company's financial ratios at the _________ in time with other companies in the industry or with industry norms.
Current data should be used for accurate results.
Evaluation of a company's performance over time is called ___________ analysis.
Time-series analysis compares current with past performance.
In cross-sectional analysis, it is important to investigate major __________ on either side of the norm because it usually indicates that there is a problem.
Major deviations are usually a warning sign that something is not right with the company.
When cross-sectional and time-analysis are used together, it is called ________ analysis.
A combined perspective mixes both types of analysis and presents a clearer picture for the analyst.
When comparing financial statements for the purpose of ratio analysis, they should be dated at the same time of year because the effects of ___________ could distort the results.
Time of year can play a crucial part in analyzing a company's data, as the type of business may be affected by the season. For example, the turnover for a manufacturer of Christmas novelty products will be dramatically different towards the end of the year, as compared with Springtime.
The four types of financial ratios are liquidity ratios, activity ratios, profitability ratios and ____ ratios.
Debt ratios are critical to measuring risk.
In order to carry out an effective financial ratio analysis, at least two of the financial statements wlll be required by the analyst. These are the _______ sheet and the income statement.
The income statement is necessary as it contains the company's operating results for the specified time period.
Financial ratio analysis should only be carried out on _______ accounts.
Audited accounts have been independently verified as representing the correct financial position of a company. Unaudited accounts carry no such warranty.
The _______ ratio expresses a company's liquidity and therefore it's ability to cover it's short-term liabilities and can be calculated by taking current assets and dividing it by current liabilities.
This term indicates the short-term nature of a company's liquidity.
Current Assets/Current Liabilties = Current Ratio
_____ Ratio = Current Assets - Inventory divided by Current Liabilities
The quick ratio is similar to the current ratio, except that the ________ is excluded from the calculation. The inventory is excluded as it is the least liquid current asset. The quick ratio will be the better analysis where the inventory cannot be easliy converted to cash.
Although net _______ capital is strictly speaking, not a financial ratio, it is useful in calculating a company's overall liquidity and is measured by working out the difference between current assets and current liabilities.
Liquidity is the company's ability to meet it's _____ term obligations as it becomes due.
__________ is a short-term measure of a company's overall financial position.
Measures of overall liquidity should be assessed in conjunction with ________ ratios, as the latter analyzes the speed with which the various assets and liabilities can be liquidated.
Activity ratios look at each asset and liability that is held to ascertain how quickly it can be _________. Therefore, even though two companies may have the same current ratio, the activity ratio may reveal that one company is more liquid than another via analysis of their accounts.
Debt ratio = Total ___________ divided by total assets
____ ratio is derived from calculating the proportion of a company's assets that are financed by creditors.
Times interest earned ratio is a measure of a company's ability to meet it's contractual _______ payments.
This ratio is calculated by dividing earnings before interest and tax by interest. A figure above 3, preferably 5, is acceptable.
Fixed payment coverage ratio measures risk, so that if a company is unable to meet it's fixed scheduled payments, then it may be forced into _________.
The ratio may indicate the likelihood of a company being forced into bankruptcy if it is unable to meet set payments to it's creditors. The lower the ratio, the greater the risk.
Inventory ________ is used to calculate the activity or liquidity of a company's inventory by dividing the cost of goods sold by the inventory.
Cost of goods sold divided by the _________ is the formula used but will only be relevant when comparing it with the industry average.
Cost of goods sold/Inventory = Inventory Turnover
The average collection period is relevant when compared with the company's ______ terms.
This is because different companies offer different credit terms and so this ratio must be compared with the number of days/months the company allows for payments to be made by Customers.
The average payment period is calculated by dividing the accounts _______ by the average purchases per day.
The efficiency with which a firm is using it's fixed assets to generate sales is called the fixed asset ________.
Fixed asset turnover is calculated by dividing ____ by net fixed assets.
The common size income statement is a method of evaluating profitability, that expresses each item as a _________ of sales.
This statement uses the same benchmark, that of sales, for comparison and hence the name common size. It allows for easy comparison between different years.
The two ratios of profitability that are commonly mentioned from a common-size report are the gross and ___ profit margin.
These two ratios give an indication of the profit margins in evaluating a company's performance.
The difference between gross and net profit margin is that the former measures profitability after the company has paid for the _____ whereas the latter also takes into account all expenses, including taxes.
____ profit margin means profitability after expenses and taxes have been accounted for.
The ______ the gross and net profit margin, the better.
A higher margin means that the company is making a bigger profit on the products and services sold. The average figure varies from industry to industry, so must be compared with the industry average.
The return on total assests (ROA) is calculated by dividing the net ____ after taxes by the total assets.
What does ROA mean?
Return on total assest
ROA measures the efficiency of a company to turnover profits with available ________.
The ROE measures the ____________ return on their investment in the company.
What does ROE stand for?
Return On Equity
How is ROE (Return On Equity) calculated?
Return On Equity (ROE) is calculated by taking net profits after taxes and dividing it by stockholders equity. The higher the ratio, the better the return for the stockholders.
___ is the portion of a company's earnings allocated to each outstanding share.
What does EPS stand for?
Earnings per share
Earnings per share (EPS)is a company's net income divided by its number of ________ shares and represents the dollar amount earned on behalf of each share outstanding. It does not equate to the amount of earnings distributed to the stockholders.
The price/earnings (P/E) ratio is calculated by taking the current ______ price of a stock and dividing by the earnings per share (EPS).
The current market price is used to get an up to date P/E ratio.
A high P/E ratio signifies that there is a high level of confidence in a company's ______ performance.
The higher ratio means the investor is prepared to pay more for each dollar earned by the company.
Single ratio analysis of a company is unreliable in determining its financial condition, so a ________ ratio analysis should be conducted.
The complete ratio analysis is a more reliable guide to a company's health as it is more thorough and detailed.
The two well-known methods of complete ratio analysis are the ______ system of analysis and the summary analysis approach.
The Dupont system is a popular method of complete ratio analysis.
The Dupont system has two steps, the first calculates the ___.
ROA (Return on total assets.)
The second step in the Dupont system utilizes the modified DuPont formula whereby the ROE (return on equity) is calculated by multiplying the return on total assets (ROA) by the ___.
The ROE measures the owners return on their investment. In the DuPont system, the ROE is obtained by multiplying the ROA by the FLM, financial _________ multiplier.
The FLM is expressed by calculating total assets divided by _________ equity. Therefore, the DuPont system can also be derived from the calculation of ROE learned earlier, which is net profits after tax divided by stockholders equity.
The purpose of using the financial leverage multiplier (FLM) is to reflect the effect of ____ on the stockholders return.
The FLM is the ratio of total assets to stockholders equity and therefore reveals the leverage effect, in other words, debt.
The advantages of using the Dupont system are that the financial position of a company can be analyzed by the net profit margin, the use of debt and the total _____ turnover.
Total asset turnover (efficiency of asset use) is important to demonstrate how a company uses its resources to generate sales and profits.
The _______ of ratio analysis system will allow the analyst to examine the four following aspects of a company's performance; liquidity, activity, profitability and debt.
______ ratios are key to dissecting the liquidity of the inventory and individual accounts within.
_________ analysis is a tool used to ascertain when a business will be able to cover all its expenses and begin to make a profit.
In order to conduct this analysis, the level of revenue must be calculated and offset against all operating costs.
What are the three types of costs that need to analyzed to conduct breakeven analysis?
Variable, semivariable and fixed costs
Some costs are neither fixed or variable but are semi-fixed and semivariable, for example sales commissions.
A company's operating breakeven point occurs when earnings before interest and tax equals ____.
In order to reach the breakeven point, the level of revenue generated must match all operating costs, thereofore that occurs when earnings before interest and tax equal to zero.
Where P=sale price per unit, Q = sales quantity in units, FC=fixed operating cost and VC=variable operating costs; the formula for calculating the breakeven point is __________
P=sale price per unit
Q = sales quantity in units
FC=fixed operating cost
VC=variable operating costs
The operating breakeven point will change if the fixed costs, price of the product or ________ costs are altered.
A change in the variable costs will impact the revenue required to cover that cost.
Where P=sale price per unit, Q = sales quantity in units, FC=_____ operating cost and VC=variable operating costs; the formula for calculating the breakeven sales point is Q = FC/(P-VC).
In order to determine the quantity of unit sales necessary to breakeven, the formula Q = FC/(P-VC) is applied.
Two well-known methods to breakeven analysis are calculating the breakeven point in terms of dollars and finding the ____ breakeven point.
The cash method is useful when noncash costs; for example, ________ , constitutes a sizeable chunk of a company's fixed operating costs. These costs are then excluded from the calculation of the breakeven point.
The breakeven in _______ analysis is useful for companies who sell a variety product.
Where a company sells various products at different prices, the traditional formula for breakeven analysis does not work very well. Therefore, a contribution margin that assesses the percentage of each sales dollar left after satisfying the variable operating costs, will meet the needs of these companies.
The three limitations to breakeven analysis are that it assumes a __________ revenue and operating costs functions, is limited to the short term and has difficulty breaking down the semivariable costs into fixed and variable components.
A company rarely faces revenue and operating costs that are constant, for example, the sales price per unit usually goes down with increased sales volume. The timeframe for the analysis is usually one year and so has limitations for long term use. Semivariable costs are difficult to break down because they are not always predictable.
Operating leverage occurs when there are ______ operating costs in a company's income stream.
What does EBIT stand for?
Earnings Before Interest and Taxes (EBIT)
Where fixed operating costs occur, it can be potentially used to magnify the changes in sales on Earnings Before Interest and Taxes (EBIT). An ________ in sales causes an increase in EBIT that is more than proportional. Conversely, a decrease in sales causes a decrease in EBIT that is more than proportional.
The degree of operating ________ (DOL) can be calculated by taking the percentage change in EBIT and dividing that by the percentage change in sales.
This is the formula for calculating DOL. Whenever DOL is more than 1, operating leverage exists.
How is DOL calculated?
Taking the percentage change in EBIT and dividing that by the percentage change in sales.
Where P=sale price per unit, Q=sales _______ in units, FC=fixed operating cost and VC=variable operating costs; the formula for calculating DOL at base level sales DOL=Q x (P-VC)/Q x (P-VC)-FC
Business risk is the risk of a company being unable to meet its _________ costs.
There is a business risk in increasing operating costs as higher ____ revenue will have to be generated.
Financial ________ takes place when there is fixed financial cost in a company's income stream.
Where fixed financial costs occur, it can be potentially used to magnify the effect of changes in Earnings Before Interest and Taxes (EBIT) on the Earnings Per Share (EPS).
The two types of fixed financial charges found on the Income Statement are interest on debt and ________ stock dividends.
This charge must be paid whether or not there is suitable EBIT to cover the cost.
The effect of financial leverage is that an increase or decrease in a company's EBIT has a higher than proportional increase or decrease effect on the ___.
Financial leverage has the effect of magnifying the effects of a change in Earnings Before Interest and Taxes (EBIT) on the Earnings Per Share (EPS).
___ = EBIT/EBIT-I-(PDx1/1-T).
Where EBIT=earnings before tax, I=Interest, PD=total _______ dividends, and T=Tax, the degree of financial leverage (DFL) can be calculated by using this formula : DFL at base level of EBIT= EBIT/EBITI-(PDx1/1-T).
Financial risk is the risk of a company being unable to cover it's financial ________, with the risk rising where there is increased financial leverage.
The risk here is the company not being able to pay its bills, for example interest payments. Increased financial leverage means the company will have to make a higher EBIT to break even.
Total _______ combines the potential uses of financial and fixed costs to magnify the effects of changes in sales on a company's EPS.
Both financial and fixed costs are used for total leverage.
Q x (P-VC)/Q x (P-VC)-FC-I-(PDx1/1-T). This is the formula for calculating ___.