FIN 310 - Chapter 3

Cross-sectional analysis

Comparison of different firm's financial ratios at the same point in time; involves the comparing the firm's rations with those of other firms in its industry or with industry averages.

Long-term debt

Debt for which payment is not due in the current year.

Liquidity

A firm's ability to satisfy its short-term obligations as they come due.

Current Ratio

A measure of liquidity calculated by dividing the firm's current assets by its current liabilities

Quick (acid-test) ratio

A measure of liquidity calculated by dividing the firm's current assets minus inventory by its current liabilities.

Public Company Accounting Oversight Board (PCAOB)

A not-for-profit corporation established by the Sarbanes-Oxley Act of 2002 to protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports.

Benchmarking

A type of cross-sectional analysis in which the firm's ratio values are compared with those of a key competitor or with a group of competitors that it wishes to emulate.

Average age of inventory

Average number of days' sales in inventory

Financial Accounting Standards Board (FASB) Standard No.52

Mandates that U.S.-based companies translate their foreign-curreny-denominated assets and liabilites into U.S. dollars, for consolidation with the parent company's financial statements. This process is done by using the current rate (translation) method.

Activity ratios

Measure the speed with which various accounts are converted into sales or cash, or inflows or outflows.

Inventory turnover

Measures the activity, or liquidity of a firm's inventory.

Degree of indebtness

Measures the amount of debt relative to other significant balance sheet amounts

Price/earnings (P/E) ratio

Measures the amount that investors are willing to pay for each dollar of a firm's earnings; the higher the P/E ratio, the greater the investor confidence.

Times interest earned ratio

Measures the firm's ability to make contractual interest payments; sometimes called the interest coverage ratio.

Fixed-payment coverage ratio

Measures the firm's ability to meet all fixed-payment obligations.

Return on total assets (ROA)

Measures the overall effectiveness of management in generating profits with its available assets, also called the return on investment. (ROI)

Operating profit margin

Measures the percentage of each sales dollar remaining after all costs and expenses other than interest, taxes, and preferred stock dividends are deducted, the "pure profits" earned on each sales dollar.

Net profit margin

Measures the percentage of each sales dollar remaining after all costs and expenses, including interest, taxes, and preferred stock dividends have been deducted.

Gross profit margin

Measures the percentage of each sales dollar remaining after the firm has paid for its goods.

Debt ratio

Measures the proportion of total assets financed by the firm's creditors

Debt-to-equity ratio

Measures the relative proportion of total liabilities and common stock equity used to finance the firm's total assets

Return on equity

Measures the return earned on the common stockholder's investment in the firm

DuPont formula

Multiples the firm's net profit margin by its total asset turnover to calculate the firm's return on total assets (ROA)

Coverage ratios

Ratios that measure the firm's ability to pay certain fixed charges.

Statement of Retained Earnings

Reconciles the net income earned during a given year, and all cash dividends paid, with the change in retained earnings between the start and the end of that year. An abbreviated form of the statement of retained earnings.

Market Ratios

Relate a firm's market value, as measures by its current share price, to certain accounting values.

Modified DuPont formula

Relates the firm's return on total assets (ROA) to its return on equity (ROE) using the financial leverage multiplier (FLM)

Current assets

Short-term assets, expected to be converted to cash within a year or less

Current liabilities

Short-term liabilities, expected to be paid within a year or less.

Statement of Stockholder's Equity

Shows all equity account transactions that occurred during a given year.

Balance Sheet

Summary statement of the firm's financial position at a given point in time.

DuPont system of analysis

System used to dissect the firm's financial statements and to assess its financial condition.

Current rate (transaction) method

Technique used by U.S.-based foreign-currency-denominated assets and liabilities into U.S. dollars, for consolidation with the parent company's financial statements, using the year-end (current) exchange rate.

Ability to service debts

The ability of a firm to make the payments required on a scheduled basis over the life of a debt.

Financial Accounting Standards Board (FASB)

The accounting profession's rule-setting body, which authorizes generally accepted accounting principles (GAAP)

Paid-in capital in excess of par

The amount of proceeds in excess of the par value received from the original sale of common stock.

Average collection period

The average amount of time needed to collect accounts receivable

Average payment period

The average amount of time needed to pay accounts payable

Retained Earnings

The cumulative total of all earnings, net of dividends, that have been retained and reinvested in the firm since its inception.

Letter to stockholders

Typically, the first element of the annual stockholder's report and the primary communication from management.

Common-size income statement

An income statement in which each item is expressed as a percentage of sales.

Stockholder's report

Annual report that publicly owned corporations must provide to stockholders, it summarizes and documents the firm's financial activities during the past year.

Time-series analysis

Evaluation of the firm's financial performance over time using financial ratio analysis

Notes to the financial statements

Explanatory notes keyed to relevant accounts in the statements; they provide detailed information on the accounting policies, procedures, calculations, and transactions underlying entries in the financial statements.

Total asset turnover

Indicates the efficiency with which the firm uses its asses to generate sales.

Ratio analysis

Involves methods of calculating and interpreting financial ratios to analyze and monitor the firm's performance.

Income Statement

Provides a financial summary of the firm's operating results during a specific period.

Statement of Cash Flows

Provides a summary of the firm's operating, investment, and financing cash flows and reconciles them with changes in its cash and marketable securities during the period.

Market/book (M/B) ratio

Provides an assessment of how investors view the firm's performance, firms expected to earn high returns relative to their risk typically sell of higher M/B multiples.

Dividend per share (DPS)

The dollar amount of cash distributed during the period on behalf of each outstanding share of common stock.

Financial leverage

The magnification of risk and return through the use of fixed-cost financing, such as debt and preferred stock.

Generally Accepted Accounting Principles (GAAP)

The practice and procedure guidelines used to prepare and maintain financial records and reports; authorized by the Financial Accounting Standards Board (FASB)

Financial leverage multiples (FLM)

The ratio of a firm's total assets to its common stock equity