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Highlighted Terms covered in the book

Generally Accepted Accounting Principles (GAAP)

the practice and procedure guidelines used to prepare and maintain financial records and reports; authorized by the Financial Accounting Standards Board (FASB)

Financial Accounting Standards Board

the accounting profession's rule-setting body, which authorizes generally accepted accounting principles (GAAP)

Public Company Accounting Oversight Board (PCAOB)

A not-for-profit corporation established by the Saarbanese-Oxley Act of 2002 to protect the interest of investors and further the publics interest in the preparation of informative, fair, and independent audit reports.

Securities and Exchange Commission (SEC)

Securities and Exchange Commission (SEC) the federal regulatory body that governs the sale and listing of securities

Stockholder's Report

annual report that publicly owned corporations must provide to stockholders; it summarizes and documents the firm's financial activities during the last year

Letter to Stockholders

typically, the first element of the annual stockholder's report and the primary communication from management.

Income Statement

provides a financial summary of the firm's operating results during a specified period

Dividend per Share (DPS)

the dollar amount of cash distributed during the period on behalf of each outstanding share of common stock

Balance Sheet

summary statement of the firm's financial position at any given point in time

Current Assets

short-term assets, expected to be converted into cash within 1 year or less

Current Liabilities

short-term liabilities, expected to be paid with 1 year or less

Long -Term Debt

debts for which payment is not due in the current year

Paid-in-Capital in Excess of Par

the amount of proceeds in excess of the par value received from the original sale of common stock.

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 Stockholder's Equity

shows all equity account transactions that occurred during a given year

Statement of Retained Earnings

reconciles the net income earned during a given year, and any cash dividends paid, with the change in retained earnings between the start and end of that year. An abbreviated form of the statement of stockholder's equity.

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 the relevant accounts in the statements; they provide detailed information on the accounting policies, procedures, calculations, and transactions underlying entries in the financial statements.

Financial Accounting Standards Board (FASB) Standard No. 52

mandates that U.S. based companies translate their foreign-currency-denominated assets and liabilities into dollars, for consolidation with the parent's company's financial statements. This is done by using the current rate (translation) method.

Current Rate (Translation) Method

technique used by U.S. based companies to translate their foreign-currency-denominated assets into dollars, using the current years exchange rate

Ratio Analysis

involves methods of calculating and interpreting financial ratios to analyze and monitor the firm's performance.

Cross-Sectional Analysis

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


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


a firm's ability to satisfy its short-term obligations as they come due

Current ratio

a measure of liquidity calculated by dividing the firm's current assets by its current liabilities*

Quick (acid test) Ratio

a measure of liquidity calculated by dividing the firm's current assets minus inventory by its current liabilities*

Activity ratio

measures the speed with which various accounts are converted into sales or cash - inflows or outflows.

Inventory Turnover

measures the activity or liquidity, of a firm's inventory*

Average Age of Inventory

average number of day's sales in inventory

Average Collection Period

the average amount of time need to collect accounts receivable*

Average Payment Period

the average amount of time needed to pay accounts payable*

Total Asset turnover

indicates the efficiency with which the firm uses its assets to generate sales

Financial Leverage

the magnification of risk and return through the use of fixed-cost financing , such as debt and preferred stock

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

Coverage ratio

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

Debt Ratio

measures the proportion of total assets financed by the firm's creditors*

Times Interest Earned Ratio

measures the firm's 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 payments obligations*

Common Size Income Statement

an income statement in which each item is expressed as a percentage of sales

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 cost, including interest, 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 investments*

Return on Common Equity(ROE)

measures the return earned on common stockholders' investment in the firm*

Market Ratio

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

Price/Earnings (P/E) Ratio

measures the amount that investors are willing to pay for each dollar of a firm's earnings, the higher the P/E ratio, the greater the investor confidence*

Market/Book (M/B) Ratio

provides an assessment of how investors view the firm's performance. Firms expected to earn high returns relative to their risk typically sell at higher M/B multiples*

DuPont System of Analysis

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

DuPont Formula

multiplies the firm's net profit margin by its total asset turnover to calculate the firm's return on total assets (ROA) *

Modified DuPont Formula

relates the firm's return on their total assets (ROA) to its return on common equity (ROE) using the financial leverage multiplier (FLM)*

Financial Leverage Multiplier (FLM)

the ratio of the firm's total assets to its common stock equity *

Net Working Capital

Current Assets- Current Liabilities


EBIT (1-T)


NOPAT + Depreciation




change in net fixed assets+ depreciation


change in current assets- change in (accounts payable+accruals)


Net Income + Depreciation

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