ch.2 Analyzing Financial statements and ratios

Interest coverage ratio

A measure of a firm's ability to pay the interest on its debt. Sometimes called the times interest earned ratio (formula, pg 64)

Debt ratio

A measure of an organization's leverage, sometimes referred to as the debt-to-assets ratio (formula, pg. 64)

Total asset turnover ratio

A measure of how efficiently a company is usualizing its assets to make money (formula pg.62)

Inventory turnover ratio

A measure of how often a company sells and replaces its inventory over a specified period of time, typically a year

Net profit margin ratio

A measure of the effectiveness and efficiency of a company's operations (formula, page.65)

Return on equity ratio

A measure of the rate of return a company's owners or shareholders are receiving on their investment (formula, pg.66)

Price to earnings ratio (P/E) ratio

An estimate of how much money investors will pay for each dollar of a company's earnings, Used widely to measure corporate performance and value (formula,pg 67)

Owner's equity

An estimate of the ownership value of a company. Also called shareholder's equity or stockholder's equity

Market value

An estimate of the value of a company According to the stock market ( formula pg.66)

Credits

An increase to a liability Or equity account, entered on the right hand side of a ledger

Debits

An increase to an asset or expense account, entered on the left hand side of a ledger

Cost of goods sold (COGS)/ Cost of sales

Those costs that are directly attributable to the production of goods or products, including raw materials and labor costs. ​

Fiscal year

A 12-month period over which a company budgets its money

Current ratio

A formula that measures a company's ability to meet its current liabilities with its current assets (see formula pg.60)

Quick Ratio/Acid test Ratio #23

A measure of a company's ability to meet its current liabilities with its current assets, not including inventory (see formula pg.61)

Double-entry bookkeeping

A method of recording financial transactions where each transaction is entered or recorded twice, once on the debit side of the accounting records and once on the credit side

Statement of cash flows

A report that tracks cash in and cash out of an organization and provides data as to whether a company has sufficient cash on hand to meet its debts and obligations.

The balance sheet

A snapshot of the financial condition of an organization at a specific point in time

Generally accepted accounting principles (GAAP)

A standard set of guidelines and procedures for financial reporting

Income statement

A statement of a company's income over a specified period of time, Typically issued on an annual or quarterly basis. Also called a statement of earnings or profit and loss statement

Earnings before interest and taxes (EBIT)

A useful measure of income or profit (formula, pg.64)

Accrual basis accounting

An accounting method that recognizes income when it is earned and expenses when they are incurred, rather than when the money is exchanged

Cash basis accounting

An accounting method that recognizes transactions when money is either received or paid out

Expenses

Funds flowing out of an organization as costs of doing business

Contingent liabilities

Debts that may or may not occur

Leverage

How a company chooses to finance its operation with debt versus equity. A company that relies extensively on borrowing money is considered to be heavily leveraged. Such a company faces greater risk of financial problems than one not so reliant on debt

Accounts receivable

Money owed by a company's customers

Revenues

Income generated from business activities, such as the sale of goods or services.

Long term liabilities

Liabilities due after one year

Current liabilities

Liabilities due within one year

Liquidity

The ease and speed with which an asset can be converted to cash

Liabilities

The financial obligations or debts owed by an organization to others

T-accounts

The method accountants have historically used to track revenues and expenses and to create accounts to be entered on balance sheets and income statements

Assets

When a company owns, including items such as cash, inventory, and accounts receivable.