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Finance 201 Test 1
Terms in this set (24)
Name the 3 Sub-specialties of Finance
Name the careers within Finance
-Method that measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur
Based on matching principle of revenue and expenses
Why is Historical Cost important
-Historical cost accounting means that items that appear on the financial statements are stated at their historical cost
-Obviously, this can create situations where the numbers on the financial statements have little resemblance to market values.
How does the IS carry over to the BS?
Balance sheet is snap shots in time.
Income statement shows how the money moved between that time period.
Dividends + Retained Earnings
3 Types of Cash flow
Earning Management 7 Stratagies
1. Watch Inventories: LIFO vs FIFO
2. Beware of Rising Receivables
3. Uncover Extraordinary Expenses
4.Investigate asset sales
5. Who's skimping on Research?
6. When is revenue really not?
7. Spot out of balance Growth (ex) unusual sales jump
EBIT - Cash Taxes + Depr - CAPEX - Increase NWC
NI + Depr - CAPEX - Increase NWC + Increase Net LTD
NOPAT - [Wacc x (costly capital)]
Return on Equity
3 ways to use Ratio Analysis
1. Trend / time series
Types of Ratios (4)
Ratios help analysts know what ?s to ask
They do not answer the questions
What are the LIQUIDITY Ratios?
(Current Ratio) = CR = CA / CL
(Quick Ratio) = QR = (CA - Inven.) / CL
(Average Collection Period) ACP = AR / Daily Credit Sales
AR Turnover = Credit Sales / AR
Inven Turnover = COGS / Inven
operating income return on investment
What are the EFFICIENCY Ratios?
Total Asset Turnover = sales / total assets
Fixed Asset Turnover = sales / fixed assets
OIROI = EBIT / total assets
**OIROI aka: Profitability ratio
What are the PROFITABILITY ratios?
Gross Margin = Gross Profit / Sales
Operating Margin = EBIT / Sales
Net Margin = NI / Sales
Return on Assets = ROA = NI / A
Return on Equity = ROE = NI / E
What are the FINANCING ratios?
Debt Ratio = Total Debt / Total Assets
Times Interest Earned = TIE = EBIT / Interest Expense
Earnings Before Income and Taxes
How to get NI from the Income Statement
Step 1) Revenues - COGS = Gross Profit
Step 2) Gross Profit - Operating Expenses =EBIT
(Operating Expense include: Depr. expense, wage expense, rent, office and clerical expense, non-direct labor, etc)
Step 3) EBIT - Interest Expense = EBT
Step 4) EBT - Tax expense = NI
(Tax expense is taken out of EBT, not Revenues or Gross Profit)
Net PPE (20x8) - Net PPE (20x7) + Depr
Increase in NWC =
[CA (20x2) - CL (20x2)] - [CA (20x1) - CL (20x1)]
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