Chapter 14

book value per share of common stock

Common stockholders' equity divided by the number of shares of common stock outstanding. The recorded amount for each share of common stock outstanding.

trading on equity

Earning more income on borrowed money than the related interest expense, thereby increasing the earnings for the owners of the business, also called leverage

Return on Equity

net income minus preferred dividends, divided by average common stockholders' equity. It is a measure of profitability; also called rate of return on common stockholders' equity

rate of return on total assets

net income plus interest expense divided by average total assets. this ratio measures a company's success in using its assets to earn income for the persons who finance the business. Also called return on assets

Return on Assets

net income plus interest expense, divided by average total assets. this ratio measures a company's success in using its assets to earn income for the people who finance the business; also called rate of return on total assets

inventory turnover

ratio of cost of goods sold to average inventor. it indicates how rapidly inventory is sold

return on sales

ratio of net income to net sales. it is a measure of profitability; also called rate of return on net sales

price/earning (P/E) ratio

ratio of the market price of a hare of common stock to the company's earnings per share. It measures the value that the stock market places on $1 of a company's earnings

horizontal analysis

the comparison of financial statement line items between accounting periods. Changes are shown in gross dollar amounts and as percentages

gross profit percentage

the fraction of each dollar of sales revenue that is gross profit, or markup over the cost of the merchandise

operating income percentage

the percentage of each sales dollar that becomes income from the company's primary business operations before considering interest and income taxes

Earnings per Share

Amount of a company's net income for each share of it outstanding common stock

Accounts Receivable Turnover

Measures a company's ability to collect cash from credit customers. To compute accounts receivable turnover, divide net credit sales by average net accounts receivable.

Rate of Return on Common Stockholders' Equity

Net income minus preferred dividends, divided by average common stockholders' equity. A measure of profitability. Also called return on equity.

Days' Sales in Receivables

Ratio of average net accounts receivable to one day's sales. It indicates how many days' sales remain in Accounts Receivable awaiting collection

Divided Yield

Ratio of dividends per share share of stock to the stock's market value that the company returns to stockholders annually as dividends

interest-coverage ratio

Ratio of income from operations to interest expense. It measures the number of times that operating income can cover interest expense; also called the times interest earned ratio.

times-interest-earned ratio

Ratio of income from operations to interest expense. Measures the number of times that operating income can cover interest expense. Also called the interest-coverage ratio.

Rate of Return on Net Sales

Ratio of net income to net sales. It is a measure of profitability; also called return on sales

Quick Ratio

Ratio of the sum of cash plus short-term investments plus net current receivables to total current liabilities. It tells whether the entity can pay all its current liabilities of they come due immediately; also called the acid-test ratio

Acid-Test Ratio

Ratio of the sum of cash plus short-term investments plus net current receivables to total current liabilities. Tells whether the entity can pay all its current liabilities if they come due immediately. Also called the quick ratio.

Debt Ratio

Ratio of total liabilities to total assets. It shows the proportion of a company's assets that is financed with debt

Benchmarking

The practice of comparing a company with other companies or industry averages

common-size statement

a financial statement that reports only percentages (no dollar amounts)

trend percentages

a form of horizontal analysis over a longer span of time in which percentages are computed by selected by selecting a base year as 100% and expressing amounts for the following years as a percentage of the base amount

vertical analysis

analysis that shows the relative size of each financial statement line item as a percentage of a base figure. The base figure is usually total sales (for the income statement) or total assets (for the balance sheet)

current ratio

current assets divided by current liabilities. it measures the ability to pay current liabilities with current assets

working capital

current assets minus current liabilities: measures a business's ability to meet its short-term obligation with its current assets

leverage

earning more income on borrowed money than the related interest expense, thereby increasing the earnings for the owners of the business; also called trading on equity

ratio analysis

evaluating the relationship between various amounts in the financial statements