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74 Cards in this Set
- Front
- Back
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What are the different types of Financial statements?
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- balance sheet: snap shot of a business
- Income statement: Profit/ loss over a period - Statement of retained earnings: Undistributed income Statement of cash flows: Where money comes from and goes to |
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What are the 3 categories on the Balance sheet?
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Assets: uses of funds
Liability: Sources of funds Owners Equity |
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What are types of Assets?
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Cash
Marketable securities Accounts Receivable Inventory prepaid expenses property plant & equipment accumulated depreciation Net PPE Intangible assets Other assets |
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What are types of Liability?
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Accounts payable
wages payable accrued expenses unearned revenues notes payable long term debt |
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What are types of owners equity ?
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Capital stock
paid in capital contributed capital retained earnings |
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What is an asset?
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an asset is a use of funds. with assets you acquire inventory, build factories, provide credit to customer, pay for expenses in advance.
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What are current assets and non- current assets ?
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Current assets are :
Cash marketable securities accounts receivable inventory prepaid expenses Non-current expenses: Property plant and equipment |
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what are current liabilities and non- current liabilities?
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Current liabilities:
accounts payable Accrued expenses current portion of long term debt Non- current liabilities: long term debt |
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Leverage
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The extent to which assets are funded through liabilities relative to owner's equity.
- in general greater leverage brings more risk. - greater leverage can bring more return to owners. |
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Balance sheet equation
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Assets = Liabilities+ Equity
or Equity = assets- Liability |
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What is the Income Statement?
what is the incomes statement equation? |
The income statement lets us know if the business is profitable.
Revenues- expenses= profit |
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What is Accrued basis accounting?
What is cash Basis accounting? |
This measures the performance as a difference between revenues and expenses (ex: someone paying you in 30 days)
This measures the difference between cash received and cash paid. |
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What is GAAP?
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GAAP is rules for recognizing Revenues and Expenses.
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How do you recognize Revenue ?
How do you recognize Expenses? |
Revenue recognition assumes that 1. goods were delivered/ service was completed 2. Reasonably assured to receive payment.
Expense recognition 1. you recognize expenses when you recognize revenue |
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What are the sub categories in an income statement?
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REVENUES :net sales - cost of goods sold = gross profit
Expenses: Operating expenses( Selling general administrative, depreciation |
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What is cash?
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growth requires cash,
inventory requires cash- INVENTORY PURCHASE IS NOT AN EXPENSES Debt servicing requires cash dividends may require cash, but dividend is never an expense |
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What is not cash?
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Profit is not the same as cash
Revenue is accounts receivable no cash expense is not necessarily cash depreciation is an expense but never cash |
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What is stockholder's equity?
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stockholder's equity = Contributed capital plus retained earnings
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Current assets are considered?
long term assets are considered? |
current assets are considered operating expenses
long term assets are considered investing activities ? |
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What is an example of an explicit and implicit activity?
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-an explicit activity is a transaction. for example you buy and book and pay for it. that transaction directly impacts assets, liability and owners equity.
- and implicit activity is an unobservable activity. ex: if tom brady injures himself. |
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If a company borrowed 50,000 from the bank and agreed to pay it back in two years, on the balance sheet what accounts would be affected?
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Assets / cash would go up 50,000
& Liabilities/ notes payable. |
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if you buy 5,000 of inventories and pay the supplier 20% and say you'll pay the rest in in 60 days, What accounts on the balance sheet will be affected?
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Assets:
up 5,000 for inventory, down 1,000 cash Liabilities: up 4000 accounts payable. |
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When analyzing a transaction whos point of view should you take it from?
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when analyzing a transaction always take it from the companies point of view.
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What is "double entry"?
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this is the system used to record transactions in a precise and concise manner. known as book keeping.
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What is accounting known as?
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accounting is known as the language of business because it adopts a common method to communicate with stakeholders ?
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Why is accounting called double entry?
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accounting is called double entry because companies not only record what they have, but also how they are financed.
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Where are transactions first recorded?
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transaction are recorded in journals and then in ledgers.
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What terms does accounting use to make it simple and meaningful?
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accounting uses a system of debits and credits.
debit is left Credit is right |
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What is a debit?
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Debit is the left side which consists of assets
all assets accounts are debit terms |
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what is a credit?
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Credit is the right side and consists of liabilities and owners equity.
all liability accounts are credit terms |
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When you debit an asset what happens?
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when you debit an asset, you are debiting a debit so it INCREASES in value.
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What happens with you credit a liability ?
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When credit a liability, you are crediting a credit, so it increases in value.
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What happens when you credit an asset?
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when you credit an asset, you are crediting a debit so it DECREASES in value.
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in what format is debit and credit written?
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the debit is always written first. then credit.
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what is the beginning balance of a new cash T account?
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the beginning balance is the old balance sheet total.
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What are types of T
accounts that have activities in accounts recievable, accounts payable, and equipment? |
Accounts receivables:
-is affected by credit sales( aka debited) -Write offs Accounts payables: -is affected by purchases (credited so it increases) - debited/ decreases by payment. Equipment is : -is debited by purchase of new equipment meaning it increases - credited by sales of old equipment, so it decreases |
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How are T accounts applicable to the balance sheet?
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when you make a T account to get the total and then that becomes a # on a the balance sheet.
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depreciation is considered a revenues or expense?
Revenue is considered a debit or a credit? expenses is considered a debit or a credit? |
depreciation is considered an expense, not cash. and cash is considered a debit.
revenue is considered a credit |
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in preparation for the Statement of Cash flow( SCF) what method is used?
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In preparation the indirect method is used to create The SCF. This indirect method is adopted by most companies, it is less intuitive but easy to apply.
You just use income and reconcile( or just adjust) non- cash items. |
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What is the statement of cash flow made up of? What does it take from other statements?
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The statement of cash flow is made up of the income sheet and the balance sheet.
from the income sheet it has Net profits and depreciation. from the balance sheet it has changes in assets and liabilities from operating ( negetive #) , PPA, Long term debt. you record the changes in from year to year and that difference goes on the SCF. |
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What is cash flow from operations ?
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Cash flow from operations includes :
Net income Depreciation adjusted accounts accounts recievable inventory accounts payable accrued expenses bank loans current portion to long term debt |
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What is a cash flow from investing?
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cash flow from investing =
PPA |
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What is cash flow from financing ?
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Cash flow from financing is:
Changes to long term debt changes to paid in capital |
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What is the statement of Retained earnings( RE) include?
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The statement of RE includes:
-Beginning balance from last years balance sheet - Net incomes from current income statement - Dividends from current SCF - Ending balance from current balance sheet So the RE has : beginning balance, income, dividends, and ending balance. |
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What is common sizing?
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common sizing is coming up with the percentages in comparison to sales/ revenue.
ex: Revenue= 100 |
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What is cash flow from operations ?
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Cash flow from operations includes :
Net income Depreciation adjusted accounts accounts recievable inventory accounts payable accrued expenses bank loans current portion to long term debt |
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What is a cash flow from investing?
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cash flow from investing =
PPA |
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What is cash flow from financing ?
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Cash flow from financing is:
Changes to long term debt changes to paid in capital |
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What is the statement of Retained earnings( RE) include?
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The statement of RE includes:
-Beginning balance from last years balance sheet - Net incomes from current income statement - Dividends from current SCF - Ending balance from current balance sheet So the RE has : beginning balance, income, dividends, and ending balance. |
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What is common sizing?
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common sizing is coming up with the percentages in comparison to sales/ revenue. so what percentage is cost of goods.
common size ex: Revenue= 100 100% COG= 60 60% |
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what is longitudinal analysis?
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longitudinal analysis examines the company performance over time - if you choose a base year and examine the companys growth in various accounts.
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What is liquidity?
What is the liquidity ratios? |
this refers to how easily something can be turned into cash. the assets sheet is put into order based on this.
these ratios are useful ratio to analysis of liquidity Ratios SHORT TERM Current ratio= current assets/ current liabilities Quick ratio = current assets- inventory/ current liabilities LONG TERM Debt/ equity ratio leverage--- rick, interest burden interest coverage ratio: Ebit (earning before interest and tax)/ current liability |
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What are the ratios for Profitability?
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Profitability ratios
Return on equity: net income / average owners equity return on assets: EBIT/ Average total assets Return on sales: Net income/ Revenues |
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What are the effciency ratios?
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effeciancy ratios
accounts receivable turnover: credit sales/ average A. R Inventory turnoer: COGS/ average inventory Assets turnover: Sales/ average total assets. |
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What happens in the stock market?
What is the exchange? How does it work? |
Stock markets are NYSE, NASDAQ
- The exchange is a place where you trade stocks, virtual trading= Nasdaq - investors are usually represented by a broker -"go long" buy the stock -" sell short" sell the stock without owning it Conventional: borrowing from someone else and replace at later date, paying fee naked: sell without borrowing - investors leverage investment capital by trading options or by buying margin. |
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What are the Stock Market Related terms
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Market capitalization = number or shares times share price.
financial strength- opinion based on data margin( profitability)- gross margin, operating margin. |
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What is the Role of market behavior?
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-Market bring together buyers and sellers
- the stock market report the most recent prices at which trades are taking place - under normal circumstances investors is rational - need reliable information. 1987 the #s were 3 hours old. buy low - sell high When a stock is mispriced there is a Valuation model. |
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When we read that a stock is mispriced we know that it is being compared to a ?
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Violation model
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Is asset price and stock price always the same ?
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no necesarily, land is an asset and does not depreciate.
for example penn central railroad Also Amazon. com had negative book value. CURRENT MARKET OF ASSETS MATTER, not book value. |
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What does stock price reflect?
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Stock prices today reflect the expected future earnings to which you are entitled to. Share holders own future earnings
- earning is paid to you as dividends OR retained by the firm to generate future growth. |
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Why would stock prices change?
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stock prices may swing when people start to suspect that future earning of the company are wrong
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When are company earning reported? what are they called?
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earnings are reported quarterly
this earnings reports are called sec fillings. 10 Q |
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What is the "LAW OF ONE PRICE"?
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the law of one price states that in a competitive market if two assets are equivalent , they will tend to have the same market price.
- they will have the same valuation ratios. - since no two firms have the same number of shares there needs to be adjustment but they do tend to have the same valuation ratios |
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What is the PE ratio?
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The PE RATIO =
Price per share / earnings per share this is how much profit accrues( in principle) to each share of a firms stock |
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What is the market to book ratio?
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The market to book ratio =
Total value of the shares/ the book of values of the stock |
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What is Valuing by comparables?
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valuing by comparables is assesing relative value by compairing PE and markey book price ( MB)
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What kind of things tend to move the the market?
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Things that tend to move the market are:
-Macro events ( tax, laws, interest rate changes, unemployment, trade figures) move entire market supply shocks ( oil, gas, coffee, coca) moves less that macro - competition and consumers behavior moves most of the rest. |
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What is a stock index?
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A stock index represents a basket of stocks and if often used as a surrogate for the whole stock market .
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what are the three most widely used stock indices?
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the three most widely used stock indices are:
* the S& P 500 * The Dow Jones 30 industries * The NASDAQ 100 these are used to evaluate the performance of a stock or portfolio of stocks. and comparison |
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What does it mean to "sell short"?
What is the other way of selling short? |
Selling short means you believe a stock is currently being sold for higher than its actual value. The conventional way is to borrow the shares from a broker and then sell them. You have an agreement that you will return these share. you get the different once you get the shares back.
Naked short is another way of selling short Naked short means you neither own or borrow the stock. you sell it high and buy it back low and delivery it back. frowned upon, but still done. |
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What is a trade option?
What is it in place for? |
you buy options to purchase. help in buying stocks
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What is leverage on investment?
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you get leverage on investment by buying on margin. buying on margin means you borrow money to pay the stock price from a bank. this can be great if the stock goes up but it the stock goes down, this is very bad because you owe someone money. Very risky.
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What are the Valuation ratos?
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PE (price per earning) : Price/ Earning per share. If this ratio is high than that means you can expect greater growth
Market to book ratio: Market capitilization/ Book value . book value is the same things as equity. and equity is assets- liability. market capitilization is share price times shares outstanding. |
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What is market cap?
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Share price time shares outstanding.
this reflects corporate economic size. |
