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43 Cards in this Set

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Income statement

Provides a financial summary of the firm's operating results during a specified period. Usually covers a 1-year period.

Gross profit

Sales revenue minus cogs equal gross profit.

Operating profit

Sales rev minus cogs minus operating expenses

Operating profit is also called...

Earnings before interest and taxes (EBIT)

Net profit/loss (income) is also called...

earnings available to common stockholders. Sales rev minus cogs minus operating expenses minus interest expenses minus taxes minus preferred stock dividends.

Balance sheet

Summary statement of the firm's financial position at a given point in time. Assets are listed as most liquid (cash) to least liquid.

Retained earnings

The cumulative total of all earnings, net of dividends, that have been retained and reinvested in the firm since its inception.

Statement of stockholders' equity

Shows all equity account transactions that occurred during a given year.

Statement of retained earnings

Retained earnings plus net profit after taxes any cash dividends (preferred and common) paid.

Statement of cash flows

Provides a summary of the firm's operating, investment, and financing cash flows and reconciles them with changes in its cash and marketable securities during the period.

Notes to the financial statements

Explanatory notes keyed to relevant accounts in the statements' they provide detailed information on the accounting policies, procedures, calculations, and transactions underlying entries in the financial statements.

Cross sectional analysis

Comparison of different firms' financial ratios at the same point in time; involves comparing the firms ratios to those of other firms in its industry or to industry averages.

benchmarking

A type of cross-sectional analysis in which the firm's ratio values are compared to those of a key competitor or group of competitors that it wishes to emulate.

Time-series analysis

Evaluation of the firm's financial performance over time using financial ratio analysis.

Six cautions about using ratio analysis

1. Ratios that deviate from the norm merely indicate the possibility of a problem.


2. A single ratio does not provide enough info.


3. Ratios must be calculated using financial statements from the same time.


4. Use audited financial statements.


5. Use financial statements created with the same accounting treatment.


6. Results can be distorted by inflation.

Liquidity, activity, and debt ratios measure...

risk.

Profitability ratios measure...

return.

Market ratios measure...

risk and return.

Liquidity

A firm's ability to satisfy its short-term obligations as they came due.

Current ratio

Measures the firm's ability to meet short-term debts. The higher the ratio, the more liquid the firm. How much liquidity a firm needs depends on its size, access to short-term financing sources, and volatility of its business. The more predictable a firm's cash flow, the lower the current ratio can be.

Quick (acid-test) ratio

Excludes inventory.

Inventory turnover

Measures the activity or liquidity, of a firm's inventory. How many times per year does a firm run through its inventory.

Average collection period

Average number of days' sales in inventory.

Average collection period

The average amount of time needed to collect account receivable. Meaningful only in relation to firm's credit terms.

Average payment period

The average amount of time needed to pay accounts payable. Meaningful only in relation to average credit terms.

Total asset turnover

Indicates the efficiency with which the firm uses its assets to generate sales.

Why is a firm's ability to pay debts important?

Because creditors claims must be satisfied before earnings can be distributed to stockholders, a firm's ability to pay debts is important.

Coverage ratios

Ratios that measure the firm's ability to pay certain fixed charges.

Financial leverage

The magnification of risk and return through the use of fixed-cost financing, such as debt and preferred stock. The more fixed-cost debt a firm uses, the greater will be expected risk and return. With increased debt comes greater risk as well as greater return.

Degree of indebtedness

Measures the amount of debt relative to other significant balance sheet amounts.

Ability to service debts

The ability of a firm to make the payments required on a scheduled basis over the life of a debt.

Debt ratio

Measures the proportion of total assets financed by the firms creditors.

Times interest earned ratio

Measures the firms ability to make contractual interest payments; sometimes called the interest coverage ratio.

Fixed-payment coverage ratio

Measures the firm's ability to meet all fixed-payment obligations (like loan-interest and principal, lease payments, preferred stock dividends).

Common-size income statement

An income statement in which each item is expressed as a percentage of sales. (1) the gross profit margin (2) the operating profit margin (3) net profit margin

Gross profit margin

Measures the percentage of each sales dollar remaining after the firm has paid for its goods.

Operating profit margin

Measures the percentage of each sales dollar remaining after all costs and expenses other than interest, taxes, and preferred stock dividends are deducted; the "pure profits" earned on each sales dollar.

Net profit margin

Measures the percentage of each sales dollar remaining after all costs and expenses, including interests, taxes, and preferred stock dividends, have been deducted.

Return on total assets (ROA)

Measures the overall effectiveness of management in generating profits with its available assets; also called the return on investment (ROI).

Return on common equity (ROE)

Measures the return earned on the common stockholders' investment in the firm.

Market ratios

Relate a firm's market value, as measured by its current share price, to certain accounting values.

DuPont system of analysis

System used to dissect the firm's financial statements and to assess its financial condition.

DuPont formula

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