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62 Cards in this Set

  • Front
  • Back
List the four steps to adjusting from accrual based accounting methods to cash based methods.
1. start with net income 2. add the non-cash charges against income 3. subtract increases in short term non-cash assets 4. add back increases in short term liabilities.
What are financial statements?
The basic language that firms use to communicate their prospects to potential stakeholders in the firm.
What are ratios?
A way to compare firms of different size in a meaningful way.
Why is NI not equal to cash flow?
Accountants use accrual accounting.
How do accountants use inventory accounting methods to manipulate Net Income?
By switching to LIFO when production costs rise.
What California retailer and "stock market darling" went bankrupt while reporting record net income?
W.T. Grant, because they could not pay their bills on time.
Why do we need to look closely at Other income?
To see how sustainable and repeatable the gains or losses are in this category.
In what two way can EPS (earnings per share) be calculated?
Primary: total earnings/# shares outstanding
Fully Dilluted: total earnings/ # of shares outstanding if everyone who has the right to buy shares does so.
What are the only two things that can happen to Retained Earnings?
1. they can be paid out as cash dividends 2. retained or reinvested in the firm
A firm buys back its own stock, is this a positve or negative signal?
Does Warren Buffet like stock splits?
Paying stock dividends is equivalent to what?
Stock splits.
What are Quality Earnings?
Earnings that are sustainable and repeatable through time.
What is the key variable for so called "value investors"?
Quality Earnings
What do value investors believe?
That the future path of earnings is near impossible to predict. They want to buy the demonstrated quality earnings of a firm at the lowest price possible.
What's the key to financial statement analysis?
To distill the firm's financial statements into a "quality earnings" number.
How do you distill a firm's financial statements into a "quality earnings" number?
1. reverse the impact of changes in accouning methods on a firms earnings 2. add back in one time losses and subtract out one time gains.
What is top-down security analysis?
Evaluating the economic and industry conditions to predict how they affect future earnings.
Working Capital
Current Assets - Current Liabilities.
Define current assets/liabilities.
Those that come due or will be sold in teh coming 1 year.
What discussion does working capital bring up?
Working capital is often used in discussions of firm liquidity but is not a very good liquidity indicator.
Total assets
total liabilities + equity
Why do debtholders love equity?
it serves as a buffer against losses and makes the firm's owners risk their own money (not just the debtholder's money).
Is book value or equity equal to market value of equity
What are the two ways to get book value of equity?
1. subtract total liabilities from total assets 2. add up the equity accounts
Why is preferred stock a hybrid security?
It is equity that has debtlike properties.
Market value of Equity
stock price * # of shares outstanding
List the reasons why book value is not equal to market value.
1. accountants carry assets and liabilities at cost not what they could be sold for 2. intangible assets are not on the balance sheet 3. a firm's value is expected to grow (or decline) in the future. Market value is foreward looking while book value is rooted in the past.
What is the current market to book ratio for the S&P 500?
Two ways that a firm can go bankrupt.
1. Run out of liquidity 2. Negative net worth (assets less than liabilities)
two ways to get liquidity
store it on your balance sheet and buy it from an intermediary
Is balance sheet cash a good measure of liquidity?
What is preferred stock to a bondholder?From a common stock holder?
Equity. Debt.
Which is more expensive, secured debt or unsecured debt?
Secured debt. It is hard to sell secured debt because of monitoring and enforcemnet costs from the lender.
Good news and bad news about depreciation?
Good: it reduces taxes by reducing taxable income Bad: it reduces NI
Three areas of the statement of cash flows:
1. operating 2. investing 3. financing
What's the key to understanding cash flows?
Increases in assets use cash & vice versa. Increases in liabilities generate cash and vice versa.
What is the exception?
The depreciation asset account; it's a contra asset account.
Why is operating cash flows the most important?
It is the most sustainable and repeatable through time.
What, for most businesses, is the core of earning power?
Operating cash flows
What's the indirect way to calculate operating cash flows?
1. start with NI
2. add back in noncash charges against income
3. adjust for changes in the current asset and liability accts.
Name a good reason why net income would be sufficiently higher than cash flows?
firm is rapidly expanding into a lucrative new line of business.
Name bad reasons that NI is higher that CF's?
firm is having trouble moving its inventory or collecting its accounts receivable.
a few reasons why it is difficult to calculate the debt/equity ratio:
1. do you include ST debt with the LT debt? 2. include capital leases as debt? 3. market value or book value?
current ratio
current assets/current liabilities
quick ratio
(current assets - inventory)/current liabilities
what does the quick ratio consider?
the fact that inventories might not be very liquid
what's the basic problem with balance sheet liquidity measures?
They don't consider 1. off-balance sheet sources of liquididty such as bank lines of credit and 2. consistent profitability is the best source of liquidity a firm has
What is the relationship like between liquidity and the expected return on assets?
inverse relationship
average collection period
accounts receivable/ average daily sales
inventory turnover
cost of goods sold/ inventory
fixed asset turnover
net sales/ net plant,property and equipment
debt to equity
total liabilities/ stockholders' equity
times interest earned (bond-holder ratio)
operating profit/ interest expense
gross profit margin
gross profit/ net sales
difference between return on assets and return on equity
financial leverage
return on assets
net earnings/ total assets
return on equity
net earnings/ stockholders' equity
two basic sources of risk for a firm
financial leverage, operating leverage
What's the key cash driver for any firm?
gross margin
The higher the expected growth rate the higher the ___________.
P/E ratio.
what is liquidity for an asset
how quickly and efficiently it can be turned to cash