FIN ch 2

diluted EPS

firm's disclosure of its potential for dilution from options it has awarded which shows the earnings per share the company would have if the stock options were exercised

EBIT

firm's earnings before interest and taxes are deducted

liabilities

firm's obligations to its creditors

inventories

firm's raw materials as well as its work-in-progress and finished goods

financial statements

firm-issued (usually quarterly and annually) accounting reports with past performance information

growth stocks

firms with high market-to-book ratios

value stocks

firms with low market-to-book ratios

stock options

form of compensation a firm gives to its employees that gives them the right to buy a certain number of shares of stock at a specific date at a specific price

convertible bonds

form of debt that can be converted to shares

dilution

increase in the total number of shares that will divide a fixed amount of earnings; often occurs when stock options are exercised or convertible bonds are converted

management discussion and analysis

preface to financial statements in which a company's management discusses the recent year (or quarter), providing a background on the company and any significant events that may have occurred.

capital expenditures

purchases of new property, plant, and equipment

market-to-book ratio (price-to-book [PB] ratio)

ratio of a firm's market (equity) capitalization to the book value of its stockholders' equity

off-balance transactions

transactions or arrangements that can have a material impact on a firm's future performance yet do not appear on the balance sheet

liquidation value

value that would be left if assets were sold and liabilities paid

depreciation

yearly deduction a firm makes from the value of its fixed assets (other than land) over time according to a depreciation schedule that depends on an asset's life span

annual report

yearly summary of business sent by U.S. public companies to their shareholders that accompanies or includes the financial statement

price-earnings ratio (P/E)

(market capitalization/net income) = (share price/ earnings per share) ratio of the market value of equity to the firm's earnings, or its share price to its earnings per share

retained earnings

(net income - dividends) difference between a firm's net income and the amount it spends on dividends

inventory days

(inventory/average daily cost of sales) firm's inventory in terms of the number of days' worth of cost of goods sold that the inventory represents

EBIT margin

(EBIT/Sales) ratio of EBIT to sales

enterprise value

(Market value of equity + Debt - Cash) total market value of a firm's equity and debt, less the value of its cash and marketable securities. It measures the value of the firm's underlying business.

asset turnover

(Sales/Total Assets) ratio of sales to assets, measure of how efficiently the firm is utilizing its assets to generate sales

gross profit

(Total Sales-Cost of Sales) third line of an income statement that represents the difference between a firm's sales revenues and its costs

accounts payable days

(accounts payable /average daily cost of sales) expression of a firm's accounts payable in terms of the number of days' worth of cost of goods sold that the accounts payable represents

accounts receivable days

(accounts receivable/average daily sales) expression of a firm's accounts receivable in terms of the number of days' worth of sales that the accounts receivable represents

quick ratio

(current assets excluding inventory/current liabilities) ratio of current assets other than inventory to current liabilities

net working capital

(current assets-current liabilities) difference between a firm's current assets and current liabilities that represents the capital available in the short-term to run the business

gross margin

(gross profit/sales) ratio of gross profit to revenues

return on equity (ROE)

(net income/book value of equity) ratio of a firm's net income to the book value of its equity

DuPont Identity

(net income/sales) X (sales/total assets) X (total assets/book value of equity) expression of the ROE in terms of the firm's profitability, asset efficiency, and leverage

net profit margin

(net income/sales) ratio of net income to revenues, it shows the fraction of each dollar in revenues that is available to equity holders after the firm pays interest and taxes

return on assets (ROA)

(net income/total assets) ratio of net income to the total book value of the firm's assets

operating margin

(operating income/sales) ratio of operating income to revenues, it reveals how much a company has earned from each dollar of sales before interest and taxes are deducted

equity multiplier

(total assets/book value of equity) measure of leverage that indicates the value of assets held per dollar of shareholder equity

leverage

(total debt/total equity) amount of debt held in a portfolio or issued by a firm

debt-equity ratio

(total debt/total equity) ratio of a firm's total amount of short and long-term debt (including current maturities) to the value of its equity, which may be calculated based on market or book values

Sarbanes-Oxley Act

A 2002 Congressional Act intended to improve the accuracy of information given to both boards and to shareholders

10-K

The annual form that U.S. companies use to file their financial statements with the U.S. Securities and Exchange Commission (SEC).

10-Q

The quarterly reporting form that U.S. companies use to file their financial statements with the U.S. Securities and Exchange Commission (SEC).

stockholders' equity

accounting measure of a firm's net worth that represents the difference between the firm's assets and its liabilities

statement of stockholders' equity

accounting statement that breaks down the stockholders' equity computed on the balance sheet into the amount that came from issuing new shares versus retained earnings

statement of cash flows

accounting statement that shows how a firm has used the cash it earned during a set period

book value

acquisition cost of an asset less its accumulated depreciation

accounts receivable

amounts owed to a firm by customers who have purchased goods or services on credit

accounts payable

amounts owed to creditors for products or services purchased with credit

interest coverage ratio

an assessment by lender's of a firm's leverage. Common ratios consider operating income, EBIT, or EBITDA as a multiple of the firm's interest expenses

long-term debt

any loan or debt obligation with a maturity of more than a year

deferred taxes

asset or liability that results from the difference between a firm's tax expenses as reported for accounting purposes, and the actual amount paid to the taxing authority

impairment charge

captures the change in value of the acquired assets; is not an actual cash expense

current assets

cash or assets that could be converted into cash within one year (marketable securities, accounts receivable, inventories, and pre-paid expenses such as rent and insurance

assets

cash, inventory, property, plant and equipment, and other investments a company has made

amortization

charge that captures the change in the value of acquired assets, is not an actual cash expense

GAAP

common set of rules and a standard format for public companies to use when they prepare their financial reports

EBITDA

computation of a firm's earnings before interest, taxes, depreciation, and amortization are deducted

current ratio

current assets/current liabilities

short-term debt

debt with a maturity of less than one-year

book value of equity

difference between the book value of a firm's assets and its liabilities; also called stockholders' equity, it represents the net worth of a firm from an accounting perspective

goodwill

difference between the price paid for a company and the book value assigned to its assets

net income or earnings

last or "bottom line" of a firm's income statement that is a measure of the firm's income over a given period of time

long-term liabilities

liabilities that extend beyond one year

current liabilities

liabilities that will be satisfied within one year (accounts payable, notes payable, short-term debt, current maturities of long-term debt, salary or taxes owed, and deferred or unearned revenue

balance sheet

list of a firm's assets and liabilities that provides a snapshot of the firm's financial position at a given point in time

income statement

list of firm's revenues and expenses over a period of time

statement of financial position

list of the firm's assets and liabilities that provides a snapshot of the firm's financial position at a given point in time

capital leases

long-term lease contracts that obligate the firm to make regular lease payments in exchange for use of an asset.

earnings per share

net income/shares outstanding firm's net income divided by the total number of shares outstanding

long-term assets

net property, plant, and equipment, as well as property not used in business operations, start-up costs in connection with a new business, investments in long-term securities, and property held for sale

auditor

neutral third party that corporations are required to hire that checks that annual financial statements to ensure they are prepared according to GAAP, and to verify that the information is reliable

intangible assets

non-physical assets, such as intellectual property, brand names, trademarks, and goodwill. _______ assets appear on the balance sheet as the difference between the price paid for an acquisition and the book value assigned to its tangible assets

marketable securities

short-term, low-risk investments that can be easily sold and converted to cash (such as money market investments, like government debt, that mature within a year).

statement of financial performance

statement showing the firm's revenues and expenses over a period of time

market capitalization

total market value of equity; equals the market price per share times the number of shares

operating income

total sales - cost of sale = gross profit - selling, general, and administrative expenses - research and development - depreciation and amortization = operating income firm's gross profit less its operating expenses