# Shared Flashcard Set

## Details

AFL- Ch. 8
Financial Statement Analysis
31
Accounting
12/03/2012

Term
 Ratio Analysis
Definition
 A series of conventions used to analyze the financial condition and performance of an entity
Term
 Operating Cycle
Definition
 The average period of time over which an entity’s cash is converted into inventory, the inventory to AR, and the AR into cash again
Term
 How can you assess the short-term health of a business?
Definition
 By their ability to pay its debts as they come due.
Term
 (Net) Working Capital
Definition
 Current assets minus current liabilities.   Note: Too little WC and it threatens an entity’s ability to pay its debts as they come due Too much WC can mean that resources are not being deployed in optimal ways
Term
 Current Ratio
Definition
 The ratio of current assets (all those that are expected to be realized in cash within the operating cycle- usually one year) to current liabilities Note: Generally, a good current ratio is 2
Term
 Quick Ratio
Definition
 The ratio of current assets that are expected to be converted into cash in a period shorter than a year (say, 6 months) to current liabilities Note: a minimum quick ratio of 1 is desirable; higher ratios are generally better
Term
 What is Inventory Turnover Ratio? How is it calculated?
Definition
 A ratio showing how many times a company's inventory is sold an replace over a period.   (Current year’s) COGS divided by average inventory over that year (add beginning inventory to ending inventory and divide by 2)   CY COGS / ([BI + EI] / 2)   Note: An inventory turnover ratio of 4.25 is good (at least for BIC Co.)
Term
 What is Accounts Receivable Turnover Ratio? How is it calculated?
Definition
 The speed by which accounts receivable are collected.   Credit sales (\$) divided by ([beginning AR + ending AR] / 2) An AR turnover ratio of 8.27 was relatively liquid for BIC Co. BUT whether or not an AR ratio is good depends on how quickly payments are due
Term
 What is a Debt-To-Equity Ratio? How is it calculated?
Definition
 Measures an entity's borrowing capacity (basically the level of comfort a lender can have in the entity's ability to repay indebtedness) Generally, the ratio between the entity’s total debt (short-term and long-term) divided by amount of owner’s equity (p. 181-2)
Term
 Profit Margin
Definition
 The relationship between operating income and sales -- (operating income divided by net sales)   Note:Positive trends in profit margin is good, but isn’t necessarily the result of greater efficiency (could be random good market conditions etc.)
Term
 Gross Profit Margin
Definition
 Gross profit on saled divided by net sales
Term
 Gross Profit
Definition
 Revenue minus COGS
Term
 Variation Analysis
Definition
 Analysis that examines financial data trends from period-to-period, especially the level of expenses in the income statement
Term
 Common Size Ratios
Definition
 Comparing businesses of different sizes using percentages of sales.
Term
 How do you calculate the Preferred Dividend Coverage Ratio where no debt ranks higher than the preferred stock?
Definition
 Earnings divided by the # of preferred shares outstanding
Term
 How do you calculate the Preferred Dividend Coverage Ratio where senior debt exists?
Definition
 [Earnings minus the interest obligations on the senior debt] divided by the # of preferred shares outstanding
Term
 Earnings Per Share
Definition
 Total earnings during a period (after giving effect to interest and taxes) divided by the average # of equity shares outstanding during that period.
Term
 What is the Price Earnings Ratio (PE Ratio)? How is it calculated?
Definition
 Compares the market price per share of common stock w/ the earnings per share.   Market price of common stock divided by the entity's earnings per share.   Note: Generally the higher the PE Ratio, the more optimitic investor's are about an entity's prospects
Term
 Management Discussion and Analysis (MD&A)
Definition
 The required narrative discussion and analysis that accompanies financial statements of public companies.
Term
 What five things must a Management Discussion and Analysis (MD&A) address?
Definition
 (1) liquidity, (2) capital resources, (3) results of operations, (4) "particularly critical" accounting policies, and (5) info relating to trends and uncertainty about aspects of business.
Term
 Segment Reporting
Definition
 The financial statements of a complex business need to reveal how various component parts of the entity are performing and how capital is being allocated among them. Note: GAAP doesn’t require segment cash flow data.
Term
 What does EBITDA stand for? Why is it important?
Definition
 Earnings Before Interest, Taxes, Depreciation, and Amortization Important if you are thinking about buying a company because interest and taxes that the company is currently paying won’t be the same after purchase.
Term
 What is Return on Equity? How is it calculated?
Definition
 The amount a business earned on capital owned by its shareholders (owner’s equity) Net income (current year) divided by Equity (end of prior year) Note: This is a very good performance measure--22.5% is respectable--
Term
 What is Return on Investment (ROI)? How is it calculated?
Definition
 The amount a business earned on both the equity held by its shareholders and the capital supplied by lenders on a long-term basis. Earnings Before Interest and Taxes (EBIT) divided by total capital
Term
 What is Return on Assets? How is it calculated?
Definition
 The amount a business earned on all of its resources- not only owners’ equity and long term borrowing but short term resources generated by effective management of working capital Earnings Before Interest and Taxes (EBIT) divided by total assets (which, as we know, is L + OE)
Term
 What is the Interest Coverage Ratio (or Times Interest Earned Ratio)? How is it calculated?
Definition
 A measure of a company's ability to honor its debt payments by expressesing the # of times interest obligations are covered by earnings. EBIT divided by interest expense
Term
 Solvency
Definition
 The degree to which the current assets of an entity exceed the current liabilities of that entity.
Term
 Earnings per share depends on which shares are included in calculating average shares oustanding. In the Diluted Earnings Per Share method, which shares are included?
Definition
 All shares outstanding at the time AND  all stock options, warrants, convertibles, and other potential sources of dilution that are currently exercisable.
Term
 Earnings per share depends on which shares are included in calculating average shares oustanding. In the Basic Earnings Per Share method, which shares are included?
Definition
 The number of shares outstanding at the time.
Term
 How do you calculate the "average number of shares outstanding" during a period?
Definition
 I don't know how to write this in the abstract, but here's an example:   On Jan. 1, BIC has 10,000 outstanding shares. They repurchase 2,000 of them on April 1:   (10,000 X [3/12]) + (8,000 X [9/12] = 8,500
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