Financial Mgmt Chapter 2

Front 1

Accrual-based approach

Back 1

Revenues are recorded at the point of sale and costs when they are incurred, not necessarily when a firm receives or pays out cash.

Front 2

Cash flow approach

Back 2

Used by financial professionals to focus attention on current and prospective inflows and outflows of cash.

Front 3

Deferred taxes

Back 3

Reflect the discrepancy between the taxes that firms actually pay and the tax liabilities they report on their public financial statements.

Front 4

Long-term debt

Back 4

Debt that matures more than one year in the future.

Front 5

Preferred stock

Back 5

A form of ownership that has preference over common stock with regard to the distribution of income and assets.

Front 6

Common stock

Back 6

The most basic form of corporate ownership.

Front 7

Par value (common stock)

Back 7

An arbitrary value assigned to common stock on a firm's balance sheet.

Front 8

Paid-in capital in excess of par

Back 8

The number of shares of common stock outstanding times the original selling price of the shares, net of the par value.

Front 9

Retained earnings

Back 9

The cumulative total of the earnings that a firm has reinvested since its inception.

Front 10

Treasury stock

Back 10

Common shares that were issued and later reacquired by the firm through share repurchase programs and are therefore being held in reserve by the firm.

Front 11

Common-size income statement

Back 11

An income statement in which all entries are expressed as a percentage of sales.

Front 12

Earnings available for common stockholders

Back 12

Net income net of preferred stock dividends.

Front 13

Earnings per share (EPS)

Back 13

Earnings available for common stockholders divided by the number of shares of common stock outstanding.

Front 14

Dividend per share (DPS)

Back 14

The portion of the earnings per share paid to stockholders.

Front 15

Operating flows

Back 15

Cash inflows and outflows directly related to the production and sale of a firm's products or services.

Front 16

Investment flows

Back 16

Cash flows associated with the purchase or sale of both fixed assets and business equity.

Front 17

Financing flows

Back 17

Result from debt and equity financing transactions.

Front 18

Free cash flow (FCF)

Back 18

The net amount of cash flow remaining after the firm has met all operating needs and paid for investments, both long-term (fixed) and short-term (current). Represents the cash amount that a firm could distribute to investors after meeting all its other obligations.

Front 19

Operating cash flow (OCF)

Back 19

The amount of cash flow generated by a firm from its operations. Mathematically, earnings before interest and taxes (EBIT) minus taxes plus depreciation.

Front 20

Noncash charges

Back 20

Expenses, such as depreciation, amortization, and depletion allowances, that appear on the income statement but do not involve an actual outlay of cash.

Front 21

Ratio analysis

Back 21

Calculating and interpreting financial ratios to assess a firm's performance and status.

Front 22

Liquidity ratios

Back 22

Measure a firm's ability to satisfy its short-term obligations as they come due.

Front 23

Current ratio

Back 23

A measure of a firm's ability to meet its short-term obligations, defined as current assets divided by current liabilities.

Front 24

Net working capital

Back 24

A measure of a firm's liquidity calculated by subtracting current liabilities from current assets.

Front 25

Quick (acid-test) ratio

Back 25

A measure of a firm's liquidity that is similar to the current ratio except that it excludes inventory, which is usually the least-liquid current asset.

Front 26

Activity ratio

Back 26

A measure of the speed with which a firm converts various accounts into sales or cash.

Front 27

Inventory turnover

Back 27

A measure of how quickly a firm sells its goods.

Front 28

Average age of inventory

Back 28

A measure of inventory turnover, calculated by dividing the turnover figure into 365.

Front 29

Average collection period

Back 29

The average amount of time that elapses from a sale on credit until the payment becomes usable funds for a firm. Calculated by dividing accounts receivable by average sales per day. Also called the average age of accounts receivable.

Front 30

Average payment period

Back 30

The average length of time it takes a firm to pay its suppliers. Calculated by dividing the firm's accounts payable balance by its average daily purchases.

Front 31

Fixed asset turnover

Back 31

A measure of the efficiency with which a firm uses its fixed assets, calculated by the number of dollars of net fixed asset investment.

Front 32

Total asset turnover

Back 32

A measure of the efficiency with which a firm uses all its assets to generate sales; calculated by dividing the dollars of sales a firm generates by the dollars of asset investment.

Front 33

Financial leverage

Back 33

Using fixed-cost sources of financing, such as debt and preferred stock, to magnify both the risk and the expected return on a firm's securities.

Front 34

Coverage ratio

Back 34

A debt ratio that focuses more on income statement measures of a firm's ability to generate sufficient cash flow to make scheduled interest and principal payments.

Front 35

Debt ratio

Back 35

A measure of the proportion of total assets financed by a firm's creditors.

Front 36

Assets-to-equity (A/E) ratio

Back 36

A measure of the proportion of total assets financed by a firm's equity. Also called the equity multiplier.

Front 37

Debt-to-equity ratio

Back 37

A measure of the firm's financial leverage, calculated by divided long-term debt by stockholders' equity

Front 38

Times interest earned ratio

Back 38

A measure of the firm's ability to make contractual interest payments, calculated by dividing earnings before interest and taxes by interest expense.

Front 39

Gross profit margin

Back 39

A measure of profitability that represents the percentage of each sales dollar remaining after a firm has paid for its goods.

Front 40

Operating profit margin

Back 40

A measure of profitability that represents the percentage of each sales dollar remaining after deducting all costs and expenses other than interest and taxes.

Front 41

Net profit margin

Back 41

A measure of profitability that represents the percentage of each sales dollar remaining after all costs and expenses, including interest, taxes, and preferred stock dividends, have been deducted.

Front 42

Return on total assets (ROA)

Back 42

A measure of the overall effectiveness of management in generating returns to common stockholders with its available assets.

Front 43

Return on common equity (ROE)

Back 43

A measure that captures the return earned on the common stockholders' (owners') investment in a firm.

Front 44

DuPont system

Back 44

An analysis that uses both income statement and balance sheet information to break the ROA and ROE ratios into component pieces.

Front 45

Price/earnings (P/E) ratio

Back 45

A measure of a firm's long-term growth prospects that represents the amount investors are willing to pay for each dollar of a firm's earnings.

Front 46

Market/book (M/B) ratio

Back 46

A measure used to assess a firm's future performance by relating its market value per share to its book value per share.

Front 47

Ordinary corporate income

Back 47

Income resulting from the sale of the firm's goods and services.

Front 48

Average tax rate

Back 48

A firm's tax liability divided by its pretax income.

Front 49

Marginal tax rate

Back 49

The tax rate applicable to a firm's next dollar of earnings.

Front 50

Capital gains

Back 50

The difference between the sale price and the original purchase price resulting from the sale of a capital asset, such as equipment or stock held as an investment.

Front 51

Capital loss

Back 51

The loss resulting from the sale of a capital asset, such as equipment or stock held as an investment, at a price below its book, or accounting value.