86 terms

Financial statement analysis

Chapters 1-4
STUDY
PLAY
Balance Sheet
provides a snapshot of a company's financial position as of a certain date
Assets
items of value such as inventory and equipment are financed with liabilities(debt) or stockholders' equity(owners' shares)
Assets= liabilities + stockholders' equity
Income Statement
reports the company's profitability during an accounting period
Revenues
amounts recieved from customers for products sold or services provided
Expenses
costs incurred to produce revenues
Net Income
Revenues-Expenses
Statement of Stockholders equity
reports if the earnings of this accounting period are distributed as dividends or retained in the business as retained earnings. Also reports amounts paid by stockholders to purchase common stock and preferred stock
Retained earnings(ending)
Retained earnings + Net Income - (Dividends)
Contributed capital (ending)
Contributed capital, beginning + issuance of shares - (Repurchase to retire shares)
Statement of cash flows
reports cash inflows + cash outflows during an accounting period
Accounts recievable
amounts to be recieved in the future from customers
Accounts Payable
amounts that the corporation must pay to suppliers in the future
Stockholders' Equity
portion of assets the owners are free and clear of any liabilities
Contributed Capital
amounts paid by stockholders to purchase common stock and preferred stock
Retained Earnings
Net income earned by the company since its incorporation and not yet distributed as dividends
Cost of Goods Sold
largest expense item which reports the wholesale costs of inventory sold during the accounting period
Operating activities
relate to a company's main business: selling products or services to earn net income
Investing activities
relate to the need for investing in property, plant, and equipment or expanding by making investments in other companies
Financing activities
relate to how a company finances its assets with debt or stockholders' equity
GAAP
rules that management must follow when preparing financial statements available to investors
FASB
most accounting reporting standards that formulate GAAP are set by the 7 full time voting members
Audits
attest to whether a company's financial statements comply with the GAAP rules
CPAS
licensed by the state/conduct audits
AICPAs
defines ethical behavior code of professional conduct
PCAOB
establish auditing standards and conduct inspections of the public accounting firm that perform audits
SEC
legislative authority to set the reporting rules for accounting info of publicly held corporations
Historical cost principle
states that companies should record assets and services at their acquisition cost, the amount paid for them, because this is the most reliable information
Debt Ratio
Total liabilities/ Total assets
reveals the proportion of assets financed with debt and solvency
Asset Turnover
Sales revenue/ total assets
measures how efficiently the company uses assets to generate revenue
Return on Sales
Net Income/Sales Revenue
measures the profitability of each dollar of revenue
Return on Asset
Net Income/ total assets
reveals how efficiently assets are used to generate profit
Trend index
Current amount/base year amount x 100
measures the percentage of change from the base year and indicates growth trends for a company
common size income statement
compares all amounts within one year to revenue of that same year
Common-size balance sheet
compares all amounts within on year to total assets of that same year
Liquidity
a company's ability to pay liabilities as they come due in the next year
solvency
a company's ability to pay liabilities for many years into the future
Current assets
expected to be converted into cash, sold, or consumed within the next 12 months
noncurrent assets
all assets not listed as current
current liabilites
are liabilities due within 12 months
Noncurrent liabilities
due after 12 months
Cash and Cash equivalents
actual currency, bank accounts, and investments that can be liquidated immediately
Recievables
Monies to be recieved by the company from customers
inventories
Merchandise held for sale to customers
Television costs
cost of television programs that will be aired during the next year
Depreciation Expense
cost allocated to each year of the assets life
Accumulated Depreciation
total amount of depreciation expensed since the assets' date of purchase
Intangible assets
patents, trademarks, and copyrights that have value but not any physical presence
goodwill
extra value that is recorded when buying another company
Debtor
borrowing corporation records bonds payable
creditor
entity loaning the money records a bond recievable
Stockholders
entities owning shares of stock are the owners of the corporation
current ratio
Current assets/current liabilites
measure short term liquidity and the ability to pay current liabilities as they come due
Sales
refer to revenues from the sale of merchandise
Net Sales
Indicate that returns or discounts were subtracted from total sales
Revenue Recognition Principle
revenues are recorded in the period earned, not necessarily in the period that the company collects the money
Expenses
Cost of bringing in revenues
Accrual Accounting
idea that accountants usually record transactions when they occur, not necessarily when cash is recieved or paid
Cash- Basis Accounting
records transactions when cash is recieved or paid
Gross Profit
equals the difference between revenues and cost of sales
Operating Expenses
includes all costs of generating sales besides cost of sales
Operating Income
Subtracting operating expenses from gross profit (Income from Operations)
Gains and Losses
arise from the sale of long-lived assets or investments
Nonrecurring items
accountants deem unusual and infrequent, may appear in the bottom section of the income statement
Discontinued Operations
recored when a company closes down or sells part of its business
Extraordinary items
highly unusual transactions that are considered unusual in nature and infrequent in occurence
Productivity
measures how efficiently you can generate desired outputs from given inputs
Gross Profit Margin
Gross profit/Sales revenue
compares gross profit to revenue expressing gross profit as a percentage of net revenue
Publicly traded
shares are bought and sold on stock exchanges such as the New york stock exchange
Initial Public Offering (IPO)
when a company sells stock to the public for the first time as a publicly traded corporation
Treasury stock
stock bought back from investors not recorded as an asset because it is impossible for a company to own itself
Shares Outstanding
the total number of shares actually held by investors at a given time
=Shares issued-treasury shares
Par value
a legal value assigned to each share of stock
preferred stock
carries a dividend rate which must be paid to preferred stockholders before any dividends can be paid to common stockholders
Accumulated other comprehensive income
recorded in stockholders equity 1. unrealized gains/losses on certain securities 2. Foreign currency translation adjustments 3. Certain gains/losses on pension plans
Stock splits
proportional increases in the number of shares outstanding
Stock dividends
smaller proportional increases in the number of shares outstanding
Return on Equity
Net Income/ Stockholders Equity
measures how effectively stockholders' equity is used to produce net income
Return on Common Equity
Net Income-Preferred Dividends/Common Stockholders equity
To analyze stock performance
Financial Leverage
total assets/Stockholders equity
Explains the difference between return on assets and return on equity. A high debt ratio and the high financial risk can boost profits
Times Interest Earned Ration
Operating Income/Interest Expense
compares the amount of income available to make interest payments to interest payment requirements
Earnings per share
Net Income-Preferred dividends/Average number of common shares outstanding
Amount of net income earned by each individual share of stock held by investors
Market value per share
Stock market trading price of the company's common stock
Basic earnings per share
companies divide net income by the actual average number of common shares outstanding
Stock options
contracts that give their holders the right to buy or sell shares of stock at a certain market price
Dividend rate
Annual common stock dividends paid/average number of common shares outstanding
amount of dividends paid annually for each share of stock held by investors
Price earnings ratio
Market price per share/EPS
to measure how expensive a company's stock is compared to EPS