FINA 3332 CH. 2
ratio analysis
-Provides an idea of how well the company is doing -Used to highlight weaknesses and strengths -Provides an indication of the future financial health of the firm
-liquidity -asset management -debt management -profitability -market value
-Ratios that help determine whether a company can access its cash and pay its debts that mature in less than a year are called ___________ ratios -these ratios, which help determine how efficiently a firm is using its assets to generate sales are called ______________ ratios -Ratios that help assess a company's ability to service the interest and repayment obligations on its long-term debt and the degree to which it uses borrowed versus invested financial capital are called __________________ ratios - _______________ ratios help measure a company's ability to generate income and profits based on its invested capital - __________________ ratios examine the market value of a company's share price, its profits and cash dividends, and the book value of the firm's assets and relate them to other data items to determine how the firm is perceived in the stock market.
financial statement alnalysis
-accounting numbers translated into relative values -Show relationships between financial statement accounts within firms and between firms, no matter their sizes -Helps in analysis to compare period to period or company to compan
income statement
-also called a profit and loss (P&L) statement or a revenue and expense (loss) statement—provides a summary of the company's financial performance in terms of revenues and expenses from both its operating and non-operating activities during an accounting period -determines and reports the profitability of the company -details, summarizes, and reports numerical data regarding the firm's revenues, sales, expenses, and operating or net profits (or losses) -has three important elements: (1) the "top line," or the firm's total revenues (sales), which describes the money generated by the sale of goods and services prior to the deduction of the expenses associated with producing (or rendering) them or otherwise operating the company are deducted; (2) the firm's operating and non-operating expense data, which identifies and reports the nature and magnitude of the firm's costs of goods sold, the general and administrative expenses, selling expenses, research and development expenses, noncash expenses (for example, depreciation, amortization, and depletion), and other expenses or losses that are not associated with the firm's primary line of business; and (3) the "bottom line," or net income after taxes, which reports the money left over after all of the expenses have been deducted from the firm's revenues -does not report the firm's actual cash flows, since it is based on the accrual method of accounting
balance sheet
-also called the statement of financial condition or statement of financial position, provides a point-in-time reporting of a company's assets, liabilities, and stockholders' equity on a given date -tells you how much the company owns and how much it owes - the left side (which shows the company's assets) balances, and equals, the right side (which shows the company's liabilities and the shareholders' equity) -the only financial statement that reports information on a specific date
Statement of Retained Earnings
-also known as the statement of stockholders' equity or the statement of owners' equity, describes the changes that have occurred in the firm's retained earnings account during an accounting period -provides details on how much of a firm's earnings are paid out as dividends or retained for future investment
shareholders equity
-capital stock -additional paid in capital -retained earnings
annual report
-company-generated document produced and published once each year to report on the firm's activities during the preceding year and describe management's expectations for the future -filed with the Securities and Exchange Commission (SEC) and distributed to the firm's existing and prospective shareholders, as well as other interested parties (for example, creditors, customers, suppliers, prospective employees, and so forth) -Required for all publicly traded corporations by the Securities and Exchange Commission (SEC), this report, which must be audited and published, contains the four major financial statements: statement of financial condition (balance sheet), statement of operations or profit and loss statement (income statement), statement of retained earnings, and statement of cash flows -includes management's analysis of the company's past performance, future outlook, and plans for the future -usually also contains a variety of letters (for example, the chairman's and president's letters to the shareholders), the firm's mission statement and corporate governance statement, and lots of glossy pictures of employees and facilities
annual report
-discussion of operations -letter from chairman -provides highlights, strategy, news abt the company -financial statements
straight line depreciation
-one of several methods used to allocate the cost of a tangible asset to the accounting period in which it is used and provides benefits to the firm -the most simple and most often used technique and results in a constant cost being recognized for each period over which the asset is depreciated -This method requires knowledge of the asset's purchase cost and estimates of its useful, or productive, life and its salvage, also called its scrap or residual, value -The asset's annual depreciation expense is calculated as the difference between the asset's fixed cost and its salvage value divided by the asset's useful life
Stement of Cash Flows
-used to be called the sources and uses of funds statement or the flow of funds statement, provides you with insights into the sources, uses, and magnitudes of the movement (flows) of cash into and out of the firm -classifies these inflows (cash coming into the firm) and outflows (cash going out from the firm) according to the type of business activities (operating, investing, and financing) that give rise to them
-lower of cost or market -not market value
2 items on balance sheet shown as
-property, plant, equipment -investments -notes recievable
3 cash flows investment activities
accounting profits
A firm's net income as reported on its income statement
profitability ratios
A group of ratios showing the effect of liquidity, asset management, and debt management on operating results
annual report
A report issued by a corporation to its stockholders that contains basic financial statements as well as the opinions of management about the past year's operations and the firm's future prospects
Asset management ratios
A set of ratios that measures how effectively a firm is managing its assets
market value ratios
A set of ratios that relate the firm's stock price to its earnings and book value per share
income statement
A statement summarizing the firm's revenues and expenses over an accounting period, generally one quarter or one year
statement of cash flows
A statement that reports the effects of a firm's operating, investing, and financing activities on cash flows over an accounting period
balance sheet
A statement that shows the firm's financial position—assets and liabilities and equity—at a specific point in time
book values
Amounts reported in financial statements—accounting numbers
comparative ratio analysis
An analysis based on a comparison of a firm's ratios with those of other firms in the same industry at the same point in time
liquid asset
An asset that can be easily converted into cash without significant loss of the amount originally invested
trend analysis
An evaluation of changes (trends) in a firm's financial position over a period of time, perhaps five years
accounting equation
Assets=Liabilities+Equity
b. A company with no leverage, or an unleveraged company
Aunt Dottie's Linen Inc. reported no long-term debt in its most recent balance sheet. A company with no debt on its books is referred to as: a. A company with leverage, or a leveraged company b. A company with no leverage, or an unleveraged company
operating cash flows
Cash flows associated with the firm's normal course of operations
investing activity
Clancy Co. sold property for $71,000.
non-cash expenses
Depreciation and Amortization...intangibles
b. The analysis likely includes incorrect and misleading conclusions
Dmitri works as an analyst at a credit-rating agency, and is comparing firms in the construction and engineering sector. One company in the portfolio of companies he is analyzing is a Chinese firm. This firm stands out in the ratio analysis, because the company's financial ratios are substantially lower than identical financial ratios of the other firms in the sector. Dmitri does not dissect the results of the ratio analysis and categorize/report this firm as an under-performing company. Which of the following statements about the analysis report is true? a. The ratios provide an accurate and thorough representation of the Chinese company's performance b. The analysis likely includes incorrect and misleading conclusions
common size balance sheet
Dollar amounts on the balance sheet are stated as percentages of total assets
operating activty
Eileen Co.'s total accounts payable owed to suppliers on account decreased from the previous year.
financing actvity
Hubert Inc. issued new common stock for $550,000.
high
Influenced by a firm's ability to make interest payments and pay back its debt, if all else is equal, creditors would prefer to give loans to companies with ___________ times interest earned (TIE) ratios.
cash outflow, use
International Business Services Co. spent $930,000 to purchase a controlling interest (200,000 shares) in a competitor.
a. the firm's accounts receivables can be collected and converted into cash within the time period for which credit was granted.
One of the most important assumptions behind the calculation of quick ratio is that: a. the firm's accounts receivables can be collected and converted into cash within the time period for which credit was granted. b. the firm's inventories are highly liquid and can be sold quickly with minimal loss of value to assist in the settlement of the firm's financial obligations. c. the firm's accounts receivables will be collected late (after the expiration of the credit period) or are uncollectible.
debt management ratios
Ratios that provide an indication of how much debt the firm has and whether the firm can take on more debt
liquidity ratios
Ratios that show the relationship of a firm's cash and other current assets to its current liabilities; they provide an indication of the firm's ability to meet its current obligations
Income Statement
Summarizes the revenues generated and the expenses incurred during a particular period, such as one year or a quarter or a month
window-dressing techniques
Techniques employed by firms to make their financial statements look better than they actually are
retained earnings
The amount of the firm's earnings that has been reinvested in the firm rather than paid out as dividends
stockholders' equity
The funds provided by common stockholders—common stock, paid-in capital, and retained earnings; equals total assets minus total liabilities
stockholders' equity (net worth)
The funds provided by common stockholders—common stock, paid-in capital, and retained earnings; equals total assets minus total liabilities
two balance sheets, one income statement
The statement of cash flows categorizes a firm's cash flows according to the nature of the activities that give rise to them (for example, operating, investing, and financing cash flows) and then further differentiates these activities and cash flows into whether they involve sources and uses of cash. Two methods can be used to construct a statement of cash flows: the direct method and the indirect method. Under the indirect method, data from three financial statements are used. These statements include ______________ and _____________________
Financial leverage
The use of debt financing
annual report
This document, issued once a year, provides a thorough reporting of the firm's activities during the previous year and its prospects for the future, including both quantitative and descriptive information
source, cash inflow
This month, American Sporting Goods Inc. collected $87,458 in accounts receivable.
statement of cash flows
This statement categorizes and reports the financial activities and transactions that led to a change in the firm's cash holdings over an interval of time (accounting period)
income statement
This statement is also called a profit and loss (or P&L) statement since it reports whether the business earned a profit or a loss during the period reported
balance sheet
This statement is constructed using the firm's short-term and long-term asset accounts, short-term and long-term liability accounts, and equity accounts
operating cash flows
This type of cash inflow or outflow results from the production, sale, and delivery of the firm's goods and services as well as collecting customer payments, and is reported in the statement of cash flows
Operating cash flows
Those cash flows that arise from normal operations; the difference between cash collections and cash expenses associated with the manufacture and sale of inventory
market values
Values of items—such as assets, liabilities, and equities—in the marketplace outside the firm
b. Cash
Which of the following asset classes is generally considered to be the most liquid? a. Inventories b. Cash c. Accounts receivable
a. The sum of what the initial stockholders paid when they bought company shares and the earnings that the company has retained over the years.
Which of the following best describes stockholders' equity? a. The sum of what the initial stockholders paid when they bought company shares and the earnings that the company has retained over the years. b. The difference between the paid-in capital and retained earnings.
d. Current ratio
Which of the following is not an asset management ratio? a. Total assets turnover ratio b. Fixed asset turnover ratio c. Days sales outstanding ratio d. Current ratio
b. Under economic growth conditions, firms with relatively more leverage will have higher expected returns.
Which of the following is true about financial leverage? a. Under economic growth conditions, firms with relatively low leverage will have higher expected returns. b. Under economic growth conditions, firms with relatively more leverage will have higher expected returns.
a. A higher operating profit margin than the industry average indicates either lower operating costs, higher product pricing, or both. b. If a company's operating margin increases but its profit margin decreases, it could mean that the company paid more in interest or taxes.
Which of the following statements are true about profitability ratios? Check all that apply. a. A higher operating profit margin than the industry average indicates either lower operating costs, higher product pricing, or both. b. If a company's operating margin increases but its profit margin decreases, it could mean that the company paid more in interest or taxes. c. An increase in a company's earnings means that the net profit margin is increasing. d. If a company issues new common shares but its net income does not increase, return on common equity will increase.
c. If a company's current liabilities are increasing faster than its current assets, the company's liquidity position is weakening. d. An increase in the quick ratio over time usually means that the company's liquidity position is improving. e. As compared to Gaia Group, Vallante Corporation. has less liquidity and relatively greater reliance on outside cash flow to finance its short-term obligations.
Which of the following statements are true? Check all that apply. a. Vallante Corporation. has a better ability to meet its short-term liabilities than Gaia Group b. An increase in the current ratio over time would always mean that the company's liquidity position is improving. c. If a company's current liabilities are increasing faster than its current assets, the company's liquidity position is weakening. d. An increase in the quick ratio over time usually means that the company's liquidity position is improving. e. As compared to Gaia Group, Vallante Corporation. has less liquidity and relatively greater reliance on outside cash flow to finance its short-term obligations.
a. Seasonal factors can distort data. b. Window dressing might be in effect.
Which of the following statements represent a weakness or limitation of ratio analysis? Check all that apply. a. Seasonal factors can distort data. b. Window dressing might be in effect. c. Market data is not sufficiently considered.
annual report
a yearly statement of the financial condition, progress, and expectations of an organization
current liabilities
accounts payable, current portion of debt
capital stock
amount of money investors put in at the beginning
amortization
applies to intangible assets, similar to depreciation
salvage value
at end of life, value asset worth
book value
balance sheet reflects what value?
net income
bottom line
accounts payable
bought something, pay back in __________ days
current assets
can be converted to cash within one year
Net Income+Depreciation
cash flow
net income+depreciation/amortization
cash flow=
common stock, bonds, N/P
cash inflows from financing activities
paying off bonds, repurchasing stock, payment N/P, payments dividends
cash outflows from financing activities
current assets
cash, A/R, inventory
retained earnings
company money made, how much keep after pay debts
additional paid in capital
company needed more money, investors put in more
straight line depreciation
every year pay same amount depreciation
operating expenses
expenses other than cogs
earnings per share
frequently reported at the bottom of a firm's income statement, describes the per-share allocation of the firm's earnings available to common shareholders (if the firm has preferred stock in its capital structure) or earnings after taxes (or net income) if the firm does not have preferred stock outstanding
gross profit/net sales
gross profit margin=
high cash flows
high net income=
current portion of debt
how much pay off on loan
profit/loss statement
income statement also called
long term liabilities
long term debt
revenue
money in
cash
most liquid asset
1. paid out as dividends to shareholders 2. added/subtracted retained earnings
net income can go to two places?
long term assets
not converted to cash
equity
ownership amount a company has
accounts recievable
pay in __________ days
current liabilities
pay within one year
long term assets
property, plant, equipment
accrual
recognize and expense, but don't write check until 2 weeks later
liquidity
refers to an asset's ability to be sold and converted into cash quickly with little to no decrease in selling price and with small or zero transaction costs to induce its purchase by the buyer
long term debt
remaining balance on loan
liquidate
sell everything, convert to cash
assets
something that has value, can be owned
statement of retained earnings
statement reporting the change in the firm's retained earnings as a result of the income generated and retained during the year. The balance sheet figure for retained earnings is the sum of the earnings retained for each year the firm has been in business
net sales
top line
