Chapter 2 HW

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.

straight line depreciation

This method of allocating a tangible asset's cost over its useful life results in a constant, or equal, cost allocation over each year of the asset's productive life.

common size financial statements

This standardized financial statement can be used to compare the financial performance of companies of different sizes or industries by dividing each account on the income statement by the firm's total sales. Doing so, standardizes each account in terms of $1 of total sales earned.

Statement of Cash Flows

This statement can be created using either of two methods: the direct or the indirect methods. The indirect method requires the use of some information from the period's income statement and the comparison of the balances between two balance sheets.

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.

Statement of Retained Earnings

This statement is said to report an "accumulation of the firm's earnings" from the beginning of the firm's life (since it represents the year-to-year accumulation of the firm's profits (and losses).

Balance Sheet

This statement provides a quantitative summary of a company's assets, liabilities, and net worth as of a specific point in time (date).

Operating Cash Flow

This type of cash inflow or outflow is generated in the normal course of a firm's business activities. Examples include sales revenues, the making and collection of accounts payable and receivable, and wages and taxes payable.

Earnings per share

This value is the amount of earnings generated by the firm during an accounting period per each outstanding share of a company's common stock.

Dividends paid

Net income−(Ending Retained earnings−Beginning Retained earnings)

Shareholders' equity

Shareholders equity = Paid-in capital+Retained earnings OR Shareholders equity = Total assets−Total liabilities

Liquidity

An asset with this characteristic may be sold or converted into cash with quickly, with minimum loss of value, and with small transaction costs.

Retained earnings

reported in a company's financial statements refers to the portion of the net income that the company retains rather than distributing as dividends to stockholders