Handout 7 Flashcards
(29 cards)
shows the financial position of a business on a certain date (usually the end of the
month or year).
balance sheet
also called the statement of financial position (or SFP)
balance sheet
primary functions of a balance sheet:
- Business funds
- Business value
- Business assets and claims
- Business performance
The statement of financial position shows the capital contribution of owners and outside lenders. It also presents the acquired assets of the business.
Business funds.
The statement of financial position provides a starting point for assessing a firm’s value since it lists all the assets and business claims.
Business value.
It can be helpful to look at relationships between various statements of financial position items, for example, the relationship between how much wealth is tied up in current assets and how much is owed in the short-term (current liabilities).
Business assets and claims
The effectiveness of a business in generating wealth can be assessed against the amount of investment involved.
Business performance
summarizes the revenues earned and expenses incurred by a business over an accounting period.
Income Statement
also called the profit-and-loss (P&L) statement
Income Statement
The income statement may help in providing information on:
- Wealth generation
- Profit derivative
Assessing how much wealth has been created is vital for businesses. The income statement reveals the firm’s profit for a given period. It provides a measure of the wealth created for the owners.
Wealth generation
useful measures of wealth creation.
Gross profit and operating profit
The income statement also provides information needed to gauge business performance. It reveals the level of sales revenue and the nature and amount of expenses incurred, which can help understand how profit was derived
Profit derivative.
focuses on liquidity (or balancing the cash inflows and outflows to enable firms to operate and pay their bills when they are due).
Cash Flow Statement
the inflows and outflows of cash into and out of business.
Cash flows
difference between inflows and outflows.
Net cash flows
The following are the common types of ratios:
- Return on Investments (ROI)
- Profit Margin/Return on Sales (ROS)
- Return on Assets (ROA)
- Current Ratio
- Quick Ratio (Acid-Test Ratio)
- Debt Ratio
- Stockholder’s Ratio
- Debt-Equity Ratio
- Interest Coverage Ratio
generally means the return on the owner’s equity; hence it is
sometimes referred to as return on equity (ROE).
Return on Investments (ROI)
relates income or profit after income tax to the total stockholder’s equity (preferably on the average stockholder’s equity).
ROI
the income to net sales ratio. On a basic level, a low-profit margin can be interpreted as indicating that a company’s profitability is not secure.
Profit Margin/Return on Sales (ROS)
This profitability measure shows how effectively the company has utilized its assets. In other words, it is a measure of asset utilization.
Return on Assets (ROA)
relates current assets to current liabilities and shows a firm’s immediate solvency and
liquidity.
Current Ratio
the ability of a firm to meet long-term obligations
Solvency
refers to an enterprise’s ability to pay short-term bills and debts
liquidity
