Financial Statements and Ratio Analysis

Explain why the income statement can also be called profit and loss statement.

The income statement can also be called the profit and loss statement because it keeps track of a company's revenues and gains as well as its expenses and losses. If you add the revenues and gains together and subtract the expenses and losses, if the number is positive the company experienced a profit. If the number is negative, the company experienced a loss, hence the Profit and Loss statement name.

Which measure of profitability is probably of greatest interest to the investing public? Why?

The return on equity profitability margin would be the greatest interest to the investing public because this margin measures the return earned on common stockholders' investments in the firm. It deals directly with the return that the investors will receive if they invest in the company.

Quick ratio

similar to current ratio but excludes inventory which is the least liquid current asset -provides a better measure of overall liquidity when an firm's inventory cannot be easily converted into cash

Liquidity

the ability of a firm to satisfy short-term obligations when due, the solvency of a firm's overall position

Financial leverage

the degree to which a company uses fixed-income securities such as debt and preferred equity. The more debt financing a company uses, the higher its financial leverage. It is the risk and return through debt and preferred stock

What would explain a firm's having a high gross profit margin and a low net profit margin?

Firms that have high gross profit margins and low net profit margins have high levels of expenses other than COGS. The high expenses more than compensate for the low cost of goods sold (i.e., high gross profit margin) which will make the earnings available to the common stockholders low. The management is performing well because the COGS are low as to make high gross profits.

Cross sectional analysis

compares the firm's ratios to other firms in its industry or to the industry average

Profitability

evaluates a firm's profit given relative sales, measures a firm's profitability upon different standpoints in time

Time series analysis

evaluates a singular firms performance overtime, uses the past and present info and data to see progress or any trends

Market

gives an inside about how investors feel about risk and return, measures the firm's market and the behavior of investors

Average collection period

helps evaluate credit and collection policies

Total asset turnover

indicate the efficiency with which the firm uses its assets to generate sales

Ratio analysis

involves methods of calculating and interpreting financial ratios to analyze and monitor the firm's performance -they decipher the story and provide clues

Activity

measures how efficiently a firm operates along a variety of dimensions, such as inventory, management, disbursements, collections. Also measures the speed of the inflows and outflows, and how efficiently a firm operates.

Current ratio

measures the ability of the firm to meet its short term obligations

Inventory turnover ratio

measures the activity or liquidity of a firm's inventory

Price to earnings

measures the amount that investors are willing to pay for each dollar of a firm's earnings

Times interest earned ratio

measures the firm's ability to make interest payments; sometimes called the interest coverage ratio

Return on total assets

measures the overall effectiveness of management in generating profits with its available assets

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

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

measures the proportion of total assets financed by the firm's creditors. (the amount of other people's money being used to generate profits)

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 common stockholder's investment in the firm

Balance sheet

presents a summary of a firm's financial position at a given point in time. It balances the firm's assets against its financing, which can be either debt or equity.

Benchmarking

process of comparing a firm's performance criteria and business process to other businesses within their market.

Income statement

provides a financial summary of a company'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. This statement not only provides insight into a company's investment, financing and operating activities, but also ties together the income statement and previous and current balance sheets.

Statement of retained earnings

reconciles the net income earned during a given year, and any cash dividend paid, with the change in retained earning between the start and the end of that year.