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84 Cards in this Set
- Front
- Back
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What does GAAP stand for?
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Generally accepted accounting principles
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What is it called when accountants record revenues at the point of sale and costs when they are incurred, not necessarily when a firm receives or pays out cash?
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Accrual based approach
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What approach focuses on current and prospective inflows and outflows of cash? The manager must also convert relevent accounting and tax information into cash inflows and outflows.
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Cash Flow approach
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Who developed the GAAP rules?
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The FASB - Financial accounting standards board
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What does FASB stand for?
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Financial accounting standards board
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Who is the FASB?
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The FASB is a nonvovernmental professional standards body that examines controversial accounting topics and issues standards that almost have the force of law, at least in terms of their impact on accounting practices
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Sarbanes Oxley Act of 2002 created the PCAOB - what is it?
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Public Company Accounting Oversight Board
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The SEC mandates all non-US companies do THIS to be listed on American Exchanges. What is it?
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Report results using GAAP.
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The SEC requires four key financial statements - what are they?
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balance sheet, income statement, statement of retained earnings and the statements of cash flows.
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What report is a "snapshot" views of the company's financial position at a specific point in time?
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Balance Sheet
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In the "account form," how are the assets and liabilities listed?
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Assest on the left, liabilities on the right.
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In the "report form," how are the assets and liabilities listed?
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Assets are listed first, then liabilities and then owner's equity.
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Regardless of the form used, how are assets and liabilities listed on a balance sheet?
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Assets and Liabilites are listed in order of liquidity or the length of time it takes to convert accounts into cash in the normal course of business.
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What are very liquid short term investments which financial analysts view as a form of "near cash?"
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Marketable securities
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What is the amount customers owe the firm from sales made on credit?
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Accounts receivable
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The original cost of all real property, structures and long lived equipment owned by the firm
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Gross property, plant and equip.
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What is the cumulative expense recorded for the depreciation of fixed assets since their purchase?
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accumulated depreciation
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What would you consider patents, trademarks, copyrights, etc..
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Intangible assets
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What are "outstanding short-term loans, typically from commercial bank?"
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Notes Payable
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What are "costs incurred by the firm that have not yet been paid? Examples include taxes owed to the government and wages due employees."
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Accrued expenses
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Accounts payable are ofted called THIS because they tend to change directly with changes in sales
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Spontaneous Liabilities
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What is a "long term liability that reflects the difference between the taxes that firms actually pay and the tax liabilities they report on their public financial statements?"
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Deferred Taxes Entry
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THIS form of ownership has preference over common stock when the firm distributes income and assets
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Preferred Stock
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What are the cumulative totals of earnings that the firm has invested since its inception?
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Retained Earnings
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THIS is the value of common shares that the firm currently holds in reserve
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Treasury stock
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THIS is the amount by which sales revenue exceeds the cost of goods sold.
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Gross Profit
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THIS represents the profit earned from the sale of products, although this amount does not include financial and tax costs.
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Operating Profit
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THIS is the proverbial "bottom line."
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Net Income
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When it comes to taxes, financial decision makers would focus on THIS RATE, the rate applicable to the next dollar of earnings.
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Marginal tax rate.
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THIS is net income net of preferred stock dividends
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Earnings available for common stockholders
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Dividing earnings available for common stockholders by the # of shares of common stock outstanding will yied you:
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EPS - Earnings per share
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THIS is the actual EPS for the past 12 months and they're sometimes shown on the income statement
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Trailing EPS - an estimate of future earnings is often called LEADING EPS
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DPS?
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Dividend per share
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THIS reconciles the net income earned during a given year, and any cash dividends paid, with the change in retained earnings between the start and end of that year.
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The Statement of retained earnings.
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What is the fraction of current earnings available for common stockholders paid out as dividends?
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Divident payout ratio
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THESE can be very useful for financial managers and analysts. THESE provide detailed infomation on accounting policies, calculations, and transactions underlying entries in the financial statements.
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Notes to the financial statements.
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Although financial managers are interested in the infomation in the firm's accrual based financial statements, their primary focus is on THIS
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Cash Flows.
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A firms total cash flows can be broken up into 3 parts. What are they?
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1) Operating Flows, 2) Investment flows, 3) Financing flows.
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What are operating cash flows?
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Cash inflows our outflows directly related to the productiong and sale of products and services.
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What are Inventment flows?
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Cash flows associated with the purchase or sale of fixed assets and business equity
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What are financing flows?
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Flows results from debt and equity financing transactions. taking on new debt results in INFLOW, paying off debt results in OUTFLOW
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WHAT is the amount of cash flow available to investors?
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Free Cash Flow
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What is the firm's earnings before interest and after taxes?
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NOPAT - Net Operating profits after taxes.
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NOPAT EQUATION
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NOPAT = EBIT x (1-T) EBIT earnings before interest and taxes, T = Corporate tax rate.
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What is the firm's amount of cash flow generated by the firm's operation?
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OCF - Operating Cash Flow OCF=NOPAT+Depreciation
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Would a $1,000 increase in accounts payable be an inflow or outflow of cash?
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Inflow
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A 2,500 increase in inventory would be an inflow or outflow of cash?
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Outflow
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A decrease in an asset (such as inventory) is an inflow/outflow? Why?
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Inflow of cash. Cash that has been tied up in the asset is released.
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An increase in inventory is and inflow/outflow? Why?
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Outflow of cash because additional inventory ties up more of the firm's cash.
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Can a firm have a NET LOSS (Negative NoPAT) and still have positive Operating Cash Flow (OCF?)
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Yes, this can occur when depreciation and other non-cash charges during the period are greater than the net loss.
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Increase in any asset I/O?
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Outflow
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Decrease in any liability I/O?
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Outflow
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Net loss I/O?
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Outflow
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Dividend Paid I/O?
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Outflow
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Repurchase of retirement of stock I/O?
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Outflow
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Dcrease in any asset I/O?
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Inflow
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Increase in any liability I/O?
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Inflow
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Net income (profit after tax) I/O?
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Inflow
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Depreciation and other noncash charges I/O?
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Inflow
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Sale of common or preferred stock I/O?
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Inflow
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Accountants construct the statement of cash flows using these three reports - what are they?
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Income statement for the given year along with the beginning and end of year balance sheet.
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Defined as current assets minus current liabilities. It is a measure of the firm's overall liquidity; higher values reflect greater solvency and vice versa.
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Net Working Capital
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The firm's creditor are primarily interested in ratios that measure the firm's short term liquidity so it can...
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Have the ability to make interest and principal payments.
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Why do prospective shareholders focus on ratios that measure the firm's current and future levels of risk and return?
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Because these two dimensions directly affect share price.
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Why do analysts compare the financial ratios in the current year with previous year's ratios?
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They hope to identify trends that help them evaluate the firm's prospects. Second, analysts compare the ratios of one company with those of another "benchmark" firm in the same industry.
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This ratio measures the firm's ability to satisfy its short term obligations as they come due
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liquidity ratios
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Current ratio is...
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Current assets / current liabilities
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What is an acceptable liquidity ratio? What factors weigh on the "Acceptable" range?
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The more predictable the firm's cash flows, the lower the accetpable current ratio.
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Quick (Acid Test) Ratio is the same as current ratio, with one difference - what is it?
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Inventory is excluded. 1) many types of inventory cannot be easily sold because they're partially completed. 2)Inventory is usually sold on credit and so it becomes an account receivable before being converted into cash.
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What is the Quick Ratio?
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QR = Current Assets - Inventory / current liabilities.
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What ratio measures the speed with which the firm converts various accounts into sales or cash?
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Activity ratio.
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What is the inventory ratio and what does it measure?
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Inventory Turnover = cost of goods sold / inventory. Measures how quickly a firm sells its goods.
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How do you convert the inventory ratio into the average age of inventory?
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Divide the inventory turnover ratio by 365.
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Why is the average collection period a useful stat?
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It evaluates credit and collection policies.
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What is the average daily sales ratio?
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Annual sales / 365
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What is the average collection period
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accounts receivable / average daily sales
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How do you compute the daily purchases?
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Annual purchases / 365
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How do you compute the average payment period and what is used for?
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Accounts payable / average daily purchases. Firms use the average payment period to evaluate their payment performance.
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How do you compute the fixed asset turnover and what is it used for?
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Fixed asset turnover = sales / net fixed assets. Fixed Asset Turnover measures the efficiency with which a firm uses its fixed assets.
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What is the total asset turnover and what is it used for?
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Total asset turnover = sales / total assets. The Total asset turnover ration indicates the efficiency with which a firm uses all its assets to generate sales. Like the fixed asset turnover ratio, total asset turnover indicates how many dollars of sales a firm generates per dollar of asset investment.
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What do debt ratios measure?
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Debt ratios measure the extent to which a firm uses money from creditors rather than stockholders to finance its operations. Because creditor's claims must be satisfied before firms can distribute earnings to stockholders, current and prospective investors pay close attention to the debt on the balance sheet. Lenders share these concerns.
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There are two kinds of debt ratios, what are they?
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Balance sheet - measures of outstanding debt relative to other sources of financing.
Coverage ratios - focuses more on income statement measures of the firm's ability to generate sufficient cash flow to make schedule interest and principal payments. |
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What is the debt ratio and what is it used for?
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Debt ratio = total liabilities / total assets. The debt ratio measures the proportion of total assets financed by the firm's creditors.
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What is the assets to equity ratio?
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A/E ratio = total assets / common stock equity.
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