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Exam 3
Chapter 13: Analysis of Financial Statement, Chapter 12: Reporting Cash Flows
| Term | Definition |
|---|---|
| financial statement analysis | application of analytical tools to financial statements and related data for making business decisions |
| four building blocks of financial statement analysis | liquidity & efficiency, solvency, market prospects |
| liquidity | availability of resources to meet short-term cash requirements |
| efficiency | company’s productivity in using its assets; usually measured relative to how much revenue a certain level of assets generates |
| solvency | company’s long-run financial viability and its ability to cover long-term obligations and generate future revenues |
| profitability | company’s ability to generate an adequate return on invested capital |
| market prospects | expectations (both good and bad) about a company’s future performance as assessed by users and other interested parties |
| general-purpose financial statements | statements published periodically for use by a variety of interested parties |
| general-purpose financial statements | include the income statement, balance sheet, statement of owner’s equity (or statement of retained earnings for a corporation), statement of cash flows, and notes to these statements |
| financial reporting | process of communicating information relevant for making investment, credit, and business decisions |
| benchmarks for financial analysis | intracompany, competitor, industry, guidelines (rules of thumb) |
| intracompany | the company's current performance is compared to its prior performance and its relations between financial items |
| competitor | provide standards for comparisons |
| industry | provide standards of comparisons |
| guidelines (rules of thumb) | standards of comparison can develop from experience |
| horizontal analysis | comparison of a company’s financial condition and performance across time |
| vertical analysis | evaluation of each financial statement item or group of items in terms of a specific base amount; common-size analysis; up-down or down-up as we review common-size financial statements |
| ratio analysis | determination of key relations between financial statement items as reflected in numerical measures |
| comparative financial statements | statement with data for two or more successive periods placed in side-by-side columns, often with changes shown in dollar amounts and precents |
| analysis period | the financial statements under analysis |
| base period | the financial statements used for comparison |
| dollar change equation | dollar change = analysis period amount - base period amount |
| percent change (%) | percent change (%) = analysis period amount - base period amount x 100 |
| trend analysis | computing trend percents that show patterns in data across periods; expresses a percent of base, not a percent of change |
| trend percent | trend percent (%) = analysis period amount/base period amount x 100 |
| index | the comparison of the analysis period to the base period |
| line graph | helps us see trends and detect changes in direction or magnitude |
| common-size financial statement | statement that expresses each amount as a percent of a base amount; in the income statement, net sales (revenues) is usually the base; on the balance sheet, total assets is the base |
| common-size percent | common-size percent (%) = analysis amount/base amount x 100 |
| working capital | current assets minus current liabilities at a point in time |
| current ratio | current assets/current liabilities |
| acid-test ratio (quick ratio) | evaluates a company's short-term liquidity; cash + short-term investments + current receivables/current liabilities |
| accounts receivable turnover | measures how frequently a company converts its receivables into cash; net sales/ average accounts receivable, net |
| inventory turnover | measures how long a company holds inventory before selling it; cost of goods sold/average inventory |
| days' sales uncollected | measures how frequently a company collects accounts receivable; accounts receivable, net/net sales |
| days' sales in inventory | used to evaluate inventory liquidity; ending inventory/cost of goods sold x 365 |
| total asset turnover | measures a company's ability to use its assets to generate sales and reflects on operating efficiency; net sales/average total assets |
| capital structure | a company's makeup of equity and debt financing |
| debt ratio | ratio of total liabilities to total assets; used to reflect risk associated with a company’s debts; total liabilities/total assets |
| equity ratio | portion of total assets provided by equity, computed as total equity divided by total assets; total equity/total assets |
| debt-to-equity ratio | another measure of solvency; total liabilities/total equity |
| times interest earned | measures a company's ability to pay interest; income before interest expense and income tax expense/interest expense |
| profitability | a company's ability to earn an adequate return |
| profit margin | measures a company's ability to earn net income from sales; net income/net sales |
| return on total assets | net income/average total assets |
| return on total assets | profit margin x total asset turnover |
| net income/average total assets | net income/net sales x net sales/average total assets |
| return on common stockholders' equity | measures a company's ability to earn income for common stock holders; net income - preferred dividends / average common stockholder's equity |
| price-earnings ratio | measures market expectations for future growth; market price per common share/earnings per share |
| dividend yield | used to compare the dividend-paying performance of different companies; annual cash dividends per share/market price per share |
| financial statement analysis report | 1. Executive summary 2. Analysis overview 3. Evidential matter 4. Assumptions 5. Key factors 6. Inferences |
| executive summary | brief analysis of results and conclusions |
| analysis overview | background on the company, it's industry and the economy |
| evidential matter | financial statements and information used in the analysis, including ratios, trends, comparisons, and all analytical measures used |
| assumptions | list of assumptions about a company's industry and economic environment and other assumptions underlying estimates |
| key factors | list favorable and unfavorable factors both quantitative and qualitative, for company performance; usually organized by areas of analysis |
| inferences | forecasts estimates interpretations, and conclusions of the analysis report |
| sustainable income | the income level most likely to continue into the future |
| business segment | part of company that can be separately identified by the products or services that it provides or by the geographic markets that it serves; also called segment |
| retrospective application | applying a different accounting principle to prior periods as if that principle had always been used |
| statement of cash flows | a financial statement that lists cash inflows (receipts) and cash outflows (payments) during a period; arranged by operating, investing, and financing; pertains to cash and cash equivalents |
| operating activities | activities that involve the production or purchase of merchandise and the sale of goods or services to customers, including expenditures related to administering the business |
| investing activities | transactions that involve purchasing and selling long-term assets; includes making and collecting notes receivable and investments in other than cash equivalents |
| financing activities | transactions with owners and creditors that include obtaining cash from issuing debt, repaying amounts borrowed, and obtaining cash from or distributing cash to owners |
| direct method | presentation of net cash from operating activities for the statement of cash flows that lists major operating cash receipts less major operating cash payments |
| indirect method | presentation that reports net income and then adjusts it by adding and subtracting items to yield net cash from operating activities on the statement of cash flows |
| cash flow on total assets | ratio of operating cash flows to average total assets; not sensitive to income recognition and measurement; partly reflects on earnings quality |
Created by:
ryanriggs18
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