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### 74 Cards in this Set

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 The direct method separates operating activities into ______ and ______ payments. cash receipts and cash payments. The way to compare companies is to use _________. standard measures Current ratio, inventory turnover, and return on equity are all _________. finanical ratios The way to compare companies is to use _________. standard measures Financial ratios help investors to compare companies that ____________. operate in different industries Managers use financial ratios to _______. help make decisions Investors and creditors use finanical stmt analysis to (1)_____ and (2)_____. (1)predict the amount of expected returns, and (2)assess the risks associated with those returns. The tools and techniques the business community uses in evaluating financial stmt information can be divided into what three broad categories? horizontal analysis, vertical analysis, and ratio analysis. The study of percentage changes in in comparative stmts is called _______. horizontal analysis Other Income is relatively unimportant because it is ________, ________, and ________. (a)outside the company's main operations (b)the dollar amts are small in comparison to revenues, and (c)other income may not repeat from year to year. Trend percentages are a form of __________. horizontal analysis ________ show the direction a business is heading. Treads Trend percentages use a base year whose amts are set equal to ______. The amts of each following year are expressed as ______________________. 100%. a percentage of the base amt. What type of analysis highlights changes in an item over time? Horizontal _________ analysis of a financial stmt reveals the relationship of each stmt item to a specified base, which is the 100% figure. Vertical For an income stmt, _________ is usually the base. revenues (or net sales) A common-size income stmt rpts each item as a percentage of the _________. net sales (revenues) amount. Net sales is the ________ for reporting amts. common size In the balance sheet, the common size is ____________. total assets. The practice of comparing a company to a standard set by other companies, with a view toward improvement. Benchmarking The practice of systematically comparing your company with a leader. Benchmarking List three reasons to use benchmark ratios. (1)to set goals and action programs (2)to monitor performance (3)to share the results with others How can current and future stakeholders objectively compare a company's condition against a key competitor? By benchmarking data. Total current assets divided by total current liabilities. Measures the ability to pay current liabilities from current assets. Current Ratio Current assets consist of... cash, short-term investments, net receivables, inventory, and prepaid expenses. Current liabilities include... accounts payable, short-term notes payable, unearned revenues, and all types of accrued liabilities. The __________ measures the company's ability to pay current liabilities with current assets. current ratio In general, a higher current ratio indicates a ____________. stronger financial position What is an acceptable current ratio? The answer depends on the nature of the business. The norm for companies in most industries is between 1.40 and 1.70. A current ratio of 2.0 is considered very strong. Ratio of the sum of cash plus short-term investments plus net current receivables to current liabilities. Acid-Test Ratio Tells whether an entity could pay all its current liabilities if they came due immediately. Acid-Test Ratio The Acid-Test Ratio is also called _______. the Quick Ratio _____ and ______ are not included in the Acid-Test Ratio b/c a business cannot convert these assets to cash immediately to pay current liabilities. Inventory and prepaid expenses What is an acceptable current ratio? The answer depends on the nature of the business. The norm for companies in most industries is between 1.40 and 1.70. A current ratio of 2.0 is considered very strong. To compute the acid-test ratio, we add..., and divided by ________. cash, short-term investments, and net current receivables (accounts and notes receivable, net of allowances) and divide by total current liabilities. An acid-test ratio of ____ to ____ is safe in most industries. 0.90 to 1.00 What would be the most likely reason for the difference between a strong current ratio and a weak acid-test ratio? It would appear that the company is having trouble selling its inventory. The level of inventory must be relatively high, and the inventory is propping up the current ratio. The rate of inventory turnover may be low. The operating cycle of a merchandiser: cash to inventory to receivables and back to cash. __________ is a measure of the number of times a company sells its average level of inventory during a year. Inventory turnover To evaluate a company's inventory turnover, we must compare the _____ over ______. ratio over time ________ measures a company's ability to collect cash from customers. Accounts receivable turnover To compute the accounts receivable turnover, we divide ______ by _______. net credit sales by average net accounts receivable. The _____________ ratio tells us how many days' sales remain in Accounts Receivable. days'-sales-in-receivables Two measures of a business's ability to pay both short-term and long-term liabilities are the _____ ratio and the ________ ratio. debt ratio and the times-interest-earned ratio. The ratio of total liabilities to total assets -- called the ____ -- tells us the proportion of the company's assets financed with _____. debt-ratio. debt. If the debt ratio is ___, then debt has been used to finance all the assets. 1 A debt ratio of 0.50 means that the company has financed half it assets with ____ and half with ______. debt. owners' equity. The higher the debt ratio, the higher the strain of paying ________________. interest each year and the principle amount at maturity. The debt ratio measures the effect of debt on the company's ____________. financial position (balance sheet) The debt ratio says nothing about the company's ability to pay ___________. interest expense Analyst use the __________ to relate income to interest expense. times-interest-earned ratio The times-interest-earned ratio measures ___________. the number of times that operating income can cover interest expense. The times-interest-earned ratio is aka _________. interest-coverage ratio A high times-interest-earned ratio indicates _____________. ease in paying interest expense Perhaps the most widely used measure of profitability is ___________. rate of return on common stockholders' equity This ratio shows the relationship between net income and common stockholders' investment in the company -- how much income is earned for every \$1 invested by the common shareholders. Rate of return on common stockholders' equity / return on stockholders' equity/ return on equity (ROE) Shareholders have invested in the company's stock, and ________ is their return. net income Earning more income on borrowed money than the related expense, thereby increasing the earnings for the owners of the business. Also called ________. Trading on the equity. Also called leverage. It is critical that a company's return on _____ exceed its return on ______. equity / assets If return on assets exceeds return on equity, that means the company's ______ are getting a better return than the company's ______ are getting. If this continues, the _______ will stop financing the company. lenders / stockholders. If return on assets exceeds return on equity, that means the company's ______ are getting a better return than the company's ______ are getting. If this continues, the _______ will stop financing the company. lenders / stockholders. stockholders Perhaps the most quoted of all financial statistics. Earnings Per Share of Common Stock. The only ratio that must appear on the face of the income stmt. Earnings Per Share of Common Stock (EPS) ______ is the amt of of income earned for each share of the company's outstanding common stock. Earnings Per Share of Common Stock (EPS) The _________ relates the market price of a share of common stock to the company's earnings per share. price/earnings (P/E) ratio Combines accounting income and finance to measure whether the company's operations have increases stockholder wealth. Economic Value Added (EVA) A weighted average of the returns demanded by a company's stockholders and lenders. Cost of Capital The amount that stockholders and lenders charge a company for the use of their money. Capital Charge The idea behind EVA is that the returns to the company's stockholders (net income) and to its creditors (interest expense) should exceed the company's ___________. capital charge A capital market in which market prices reflect the impact of all information available to the public. Efficient Capital Market Market efficiency means that ___________________________. managers cannot fool the market with accounting gimmicks. In an efficent market, the search for "underpriced" stock is fruitless unless the investor has __________. private information. But it is illegal to invest on the basis of inside information. A quantitative expression of a plan that helps managers coordinate and implement the plan. Budget ________ means choosing goals and deciding how to acheive them. Planning