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Financial Statements
Ch.4 - Ex.1: Evaluating the Company's Financial Performance
| Term | Definition |
|---|---|
| Annual Report | issued annually by a firm to its shareholders, which contains the management’s analysis of the firm’s past operations and future prospects |
| Basic Financial Statements | 1. Balance Sheet 2. Income Statement 3. Statement of Retained Earnings 4. Statement of Cash Flows |
| Balance Sheet | - provides a snapshot of a firm’s financial position at one point in time - Shows what assets the firm owns and who has claims on those assets as of a given date |
| Income Statement | summarizes a firm’s revenues and expenses over a given period of time; also known as Profit and Loss (P&L) Statement |
| Statement of Retained Earnings | shows how much of the firm’s earnings were retained, rather than paid out as dividends |
| Statement of Cash Flows | reports the impact of a firm’s activities on cash flows over a given period of time |
| Accounting Book Value | value of an asset as shown in the balance sheet; it represents the historical cost of the asset rather than current market value or replacement cost |
| Balance Sheet Equation | Total Assets = Total Liabilities + Total Shareholder’s Equity |
| Current Assets | 1. Cash 2. Accounts Receivables (A/R) 3. Inventories 4. Other Current Assets |
| Gross Working Capital | aka Current Assets |
| Cash | refers to Cash on hand, demand deposits, short-term marketable securities that can be quickly converted into cash |
| Accounts Receivables (A/R) | money owed by customers who purchased goods & services on credit |
| Inventories | raw materials, work in progress, and finished goods held for eventual sale |
| Other Current Assets | items such as prepaid expenses |
| Long-term Fixed Assets | - Net Property, Plant, and Equipment - Other Long-Term Assets (Land, Long-Term Investments, Intangible Assets – like Patents, Copyrights, Trademarks, Goodwill) |
| Depreciation Expense | a non-cash expense (found in Income Statement) to allocate the cost of depreciable assets, such as machinery and equipment, over the asset’s expected useful life |
| Accumulated Depreciation | sum of all depreciation taken over the entire life of a depreciable asset (found in Balance Sheet) |
| Gross Fixed Assets | reflect the original cost of fixed assets |
| Net Fixed Assets | Gross Fixed Assets minus Accumulated Depreciation taken over life of the assets |
| Fixed Assets | - Will be used over a number of years - Purchase cost of fixed assets are booked as assets and are not considered expenses in Income Statement |
| Current Liabilities | 1. Accounts Payables (A/P) 2. Accrued Expenses 3. Short-Term Debt (Notes Payable 4. Other Current Liabilities |
| Current Liabilities (Short-Term Debt) | borrowed money that must be repaid within 12 months |
| A/P or Trade Credit | the credit suppliers have extended when materials or inventories were purchased and will be paid within 30, 60, and 90 days |
| Accrued Expenses | unpaid short-term liabilities incurred during the firm’s operations |
| Short-Term Notes | borrowings from banks or other FIs that are due and payable within 12 months |
| Long-term Liabilities | - Long-Term Loans - Corporate Bonds - Mortgages |
| Liabilities (Debt) | money that was borrowed and must be repaid at a predetermined date |
| Long-Term Liabilities (L/T Debt) | borrowed money from banks or other financial institutions that must be repaid longer than 12 months |
| Corporate Bonds | borrowings of the firm through issuance of its own securities with medium to long-term maturities |
| Mortgages | loan to finance real estate where the lender has first claim on the property in the event the borrower is unable to repay the loan |
| Shareholders’ Equity | includes both preferred and common shareholders’ investment in the firm |
| Preferred Stockholders | stockholders that have claims on the firm’s income and assets after creditors, but before common stockholders; Receives dividends that are fixed in amount |
| Common Stockholders | investors who own the firm’s common stocks; also known as residual owners of the firm |
| Common Stocks | the amount the firm receives after selling the stocks, which represent ownership in a corporation |
| Par Value | the arbitrary value a firm puts on each share of stock prior to its being offered for sale |
| Additional Paid-In Capital | the amount the firm receives from selling stock to investors above par value |
| Treasury Stock | firm’s stock that has been issued and the repurchased by the firm |
| Retained Earnings | cumulative profits retained in business up to the date of the balance sheet |
| Income Statement | - Shows the firm’s sales and costs over a given time period - Equation : Sales – Expenses = Profits - Known also as Profit & Loss (P&L) Statement; indicates the amount of profits generated by a firm, which is calculated on an accrual basis |
| Accrual Basis Accounting | method of accounting whereby revenue is recorded when it is earned, whether or not the revenue has been received in cash. Likewise, expenses are recorded when they are incurred, even if the money has not actually been paid out |
| Cost of Goods Sold | the cost of producing or acquiring a product or service to be sold in the ordinary course of business |
| Gross Profits | Sales or Revenues minus Cost of Goods Sold |
| Operating Income or Operating Profits | also called earnings before interest & taxes (EBIT); the result of management's decisions relating only to the operations of the business |
| DuPont Equation | Formula that shows the relationship among asset management, debt management, and profitability ratios: |
| Profit Margin | Expense Control; tells the firm how much it earns on sales, which determines its command on premium price and holding down of costs |
| Total Assets Turnover | Asset Utilization; tells the firm how many times the profit margin is earned each year for each pesos of sales and how many times its assets turned over each year |
| Equity Multiplier | Debt Utilization; the adjustment factor |
| Three Key Activities that Explain Cash Inflows & Cash Outflows | 1. Operating (Generating Cash Flows from Day-to-Day ) 2. Investing in Fixed Assets & Other Long-Term Investments 2. Financing the Business |
| Economic Value Added (EVA) | Financial performance that measures a firm's economic profit - cost to the equity capital (the opportunity cost of funds provided by the shareholders) - interest cost on the firm's debt |
| Five Major Categories of Financial Ratios | 1. Liquidity 2. Asset Management 3. Debt Management 4. Profitability 5. Market Value |
| Generating Cash Flows from Day-to-Day Operations | how much cash is coming from the normal course of operating a business, starting with : - purchasing inventories on credit - selling on credit - paying for the inventories - collection on sales made on credit |
| Investing in Fixed Assets & Other Long-Term Investments | when a firm purchases or sells fixed assets, like equipment or building, there can be a significant cash inflows and outflows |
| Financing the Business | cash inflows & outflows occur from: - borrowing and repaying S/T and L/T Debt - paying dividends to the shareholders - issuing new equity stocks or repurchasing stocks from shareholders |
| Revenues | Total Sales Pesos equals Selling Price X Units Sold, whether sold in cash, thru credit, on installment or deferred |
| Amortization Expense | noncash expense to allocate the cost of the intangible assets, such as copyrights, over the life of the asset |
Created by:
jezmarzan
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