Finance I Chapter 3

Front 1

FIFO

Back 1

A system of writing off inventory into cost of goods sold, in which the items purchased first are written off first. Referred to as first-in, first-out inventory method.

Front 2

LIFO

Back 2

A system of writing off inventory into cost of goods sold in which the items purchased last are written off first. Referred to as last-in, first-out inventory method.

Front 3

deflation

Back 3

Actual declining prices.

Front 4

disinflation

Back 4

A leveling off or slowdown of price increases.

Front 5

disinflation

Back 5

A leveling off or slowdown of price increases.

Front 6

replacement cost

Back 6

The cost of replacing the existing asset base at current prices as opposed to original cost.

Front 7

inflation

Back 7

The phenomenon of prices increasing with the passage of time.

Front 8

trend analysis

Back 8

An analysis of performance that is made over a number of years in order to ascertain significant patterns.

Front 9

Du Pont system of analysis

Back 9

An analysis of profitability that breaks down return on assets between the profit margin and asset turnover. The second, or modified, version shows how return on assets is translated into return on equity through the amount of debt that the firm has. Actually, return on assets is divided by (1 − Debt/Assets) to arrive at return on equity.

Front 10

fixed charge coverage ratio

Back 10

Income before fixed charges and taxes divided by fixed charges. A common fixed charge in addition to interest expense is a lease expense. This ratio is considered more rigorous than the times interest earned ratio.

Front 11

times interest earned ratio

Back 11

Operating income dividend by interest expense; a measure of the safety margin a company has with respect to the interest payments it must make to creditors. A high number indicates that there is less risk of default.

Front 12

debt to total assets ratio

Back 12

Total debt divided by total assets; indicates how much of the firm is financed by debt and how much by owners' equity.

Front 13

debt utilization ratios

Back 13

A group of ratios that indicates to what extent debt is being used and the prudence with which it is being managed. Calculations include debt to total assets, times interest earned, and fixed charge coverage.

Front 14

quick ratio

Back 14

Current assets minus inventory divided by current liabilities. This ratio is sometimes called the acid test ratio and is a more stringent measure of liquidity because it eliminates inventory (the least liquid asset) from current assets.

Front 15

current ratio

Back 15

Current assets divided by current liabilities; a measure of the firm's ability to pay off its current assets.

Front 16

liquidity ratios

Back 16

A group of ratios that allows one to measure the firm's ability to pay off short-term obligations as they come due. Primary attention is directed to the current ratio and the quick ratio.

Front 17

total asset turnover ratio

Back 17

Sales divided by total assets; measures how efficiently an organization utilizes all of its assets to create one dollar of sales. It indicates whether a company is using its assets productively.

Front 18

fixed asset turnover ratio

Back 18

Sales divided by fixed assets; indicates how efficiently the company is using its fixed assets to generate one dollar of sales.

Front 19

inventory turnover ratio

Back 19

Sales divided by total inventory; indicates how many times a firm sells and replaces its inventory over the course of a year.

Front 20

average collection period

Back 20

Accounts receivable divided by average daily credit sales; calculates how many days it takes to collect the company's accounts receivable.

Front 21

receivable turnover ratio

Back 21

Sales divided by accounts receivable; indicates how many times a firm collects its accounts receivable in one year. It also indicates how quickly a firm is able to collect payments on its credit sales.

Front 22

asset utilization ratios

Back 22

A group of ratios that measures the speed at which the firm is turning over or utilizing its assets. They measure inventory turnover, fixed asset turnover, total asset turnover, and the average time it takes to collect accounts receivable.

Front 23

return on equity (ROE)

Back 23

Net income divided by owners' equity; also called return on investment (ROI). ROE shows how much income is generated by each dollar the owners have invested in the firm.

Front 24

return on assets (ROA)

Back 24

Net income divided by assets; shows how much income the firm produces for every dollar invested in assets.

Front 25

profit margin ratio

Back 25

Net income divided by sales; shows the overall percentage profit by the company on $1 of sales.

Front 26

profitability ratios

Back 26

A group of ratios that indicates the return on sales, total assets, and invested capital. Specifically, we compute the profit margin (net income to sales), return on assets, and return on equity.