Chapter 2

Generally Accepted Accounting Principles, or GAAP

A common set of rules and a standard format for public companies to use when they prepare their financial reports.

EBITDA

A computation of a firms earnings before interest, taxes, depreciation , and amortization are deducted.

EBIT

A firm's earnings before interest and taxes are deducted

Operating income

A firm's gross profit less its operating expenses.

Earnings per share (EPS)

A firm's net income divided by the total number of shares outstanding.

Inventories

A firm's raw materials as well as its work-in-progress and finished goods.

Balance Sheet

A list of a firm's assets and liabilities that provides a snap shot of the firm's financial position at a given point in time.

Income Statement

A list of a firm's revenues and expenses over a period of time.

Auditor

A neutral third party, which corporations are required to hire, that checks a firm's annual financial statements to ensure they are prepared according to GAAP, and provides evidence to support the reliability of the information.

Management discussion and analysis (MD&A)

A preface to the financial statements in which a company's management discusses the recent year (or quarter), providing a background on the company and any significant events that may have occurred.

Depreciation

A yearly deduction a firm makes from the value of its fixed assets, other than land, over time. According to a depreciation schedule that depends on an asset's life span.

Financial statements

Accounting reports issued by a firm quarterly and/or annually that present past performance information and a snap-shot of the firm's assets and the financing of those assets.

Accounts Receivable

Amounts owed to a firm by customers who have purchased goods or services on credit.

Shareholder/Stockholder's equity

An accounting measure of a firm's net worth that represents the difference between the firm's assets and its liabilities.

Statement of Stockholders' Equity

An accounting statement that breaks down the stockholders' equity computed on the balance sheet into the amount that came from issuing new shares versus retained earnings.

Statement of Cash Flows

An accounting statement that shows how a firm has used the cash it earned during a set period.

Dilution

An increase in the total number of shares that will divide a fixed amount of earnings.

Long term debt

Any loan or debt obligation with a maturity of more than a year.

Growth Stocks

Firms with high market-to-book ratios.

Value Stocks

Firms with low market-to-book ratios.

Retained Earnings

Profits made by the firm, but retained within the fir,m and reinvested in assets or held as cash.

Capital Expenditures

Purchases of new property, plants, and equipment.`

Book Value of Equity

The difference between the book value of a firm's assets and its liabilities; also called shareholder's equity and stockholder's equity. It represents the net worth of a firm from an accounting perspective.

Diluted EPS

The earnings per share a company would have based on the total numbers of shares including the effects of all stock options and convertible bonds.

Net Income or earnings

The last or "bottom" line of a firm's income statement that is a measure of the firms income over a given period of time.

Payout Ratio

The ratio of a firm's dividends to its net income.

Market-to-book ratio (price-to-book [P/B] ratio)

The ratio of a firm's market, equity, capitalization to the book value of its stockholders' equity.

Stock options

The right to buy a certain number of shares of stock by a specific date at a specific price.

Gross profit

The third line of an income statement that represents the difference between a firms sales revenues and its costs.

Enterprise Value

The total market value of a firm's equity and debt, less the value of its cash and marketable securities. It measures the value of the firm's underlying business.

Market Capitalization

The total market value of equity; equals the market price per share times the number of shares.

Liquidation Value

The value of a firm after its assets are sold and liabilities are paid.

Off-Balance Sheet Transactions

Transactions or arrangements that can have a material impact on a firm's future performance yet do not appear on the balance sheet.

Liabilities

firm's obligations to its creditors.

Annual report, 10-k

the yearly summary of business, accompanying or including financial statements, sent by U.S. public companies to their shareholders.

Long-term Assets

Assets that produce tangible benefits for more than one year.

Current Assets

Cash or assets that can be converted into cash within one year

Convertible Bonds

Corporate bonds with a provision that gives the bondholder an option to convert each bond owned into a fixed number of shares of common stock.

Current liabilities

Liabilities that will be satisfied within one year.

Notes Payable, short-term debt

Loans that must be repaid in the next year.

Marketable Securities

Short-term, low-risk investments that can easily be sold and converted to cash.

Book Value

The acquisition cost of an asset less its accumulated depreciation.

Common stock and paid-in surplus

The amount that stockholders have directly invested in the firm through purchasing stock from the company.

Accounts Payable

The amounts owed to creditors for products or services purchased with credit.

Assets

The cash, inventory, property, plant, and equipment and other investments a company has made.

Net Working Capital

The difference between a firm's current assets and current liabilities that represents the capital available in the short term to run the business.