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| generally accepted accounting principles are the practice and procedure guidelines used to prepare and maintain financial records and reports; autorized by the Financial Accounting Standards Board |
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| The accounting profession's rule-setting body, which authorizes generally accepted accounting principles |
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| Public Company Accounting Oversight Board --A not-for-profit corporation established by the Sarbanes-Oxley Act of 2002 to protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports. |
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| Annual reportthat pubicly owned corporations must provide to stockholders; it summarizes and documents the firm's financial activities during the past year. |
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| Primary communication from management that describes the events that are considered to have had the greatest effect on the firm during the year. It discusses management philosophy, corporate governance issues, strategies, and actions, as well as plans for the coming year. |
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| Four Key Financial statements |
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| 1) income statement, 2) balance sheet, 3) statement of stockholders' equity, 4) statement of cash flows |
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| Provides a financial summary of the firm's operating results during a specified period. |
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| The dollar amount of cash distributed during the period on behalf of each outstanding share of common stock |
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| Summary statement of the firm's financial position at a given point in time |
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| Short term assets, expected to be converted into cash within 1 year or less. |
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| Short-term liabilities, expected to be paid within 1 year or less. |
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| Debt for which payment is not due in the current year. |
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| paid-in capital in excess of par |
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| The amount of proceeds in excess of the par value received from the original sale of common stock |
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| The cumulative total of all earnngs, net of dividends, that have been retained and reinvested in the firm since its inception. It is an abbreviated form of the statement of stockholders'equity. |
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| statement of stockholders' equity |
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| Shows all equity account transactions that occurred during a given year. |
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| statement of retained earnings |
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| Reconciles the net income earned during a given year, and any cash dividends paid with the change in retained earnings between the start and the end of that year. |
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| 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 |
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| notes to the financial statements |
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| Explanatory notes keyed to relevant accounts in the statements; they provide detailed information on the accounting policies, procedures, calculations, and transactions underlying entries in the financial statements. |
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| Financial Accounting Standards Board mandates that US based companies translate their foreign-currency-denominated assets and liabilities into dollars, for consolidation with the parent company's financial statements. |
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| current rate translation method |
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| Technique used by US based companies to translate their foreign currency denominated assets and liabilities into dollars, for consolidation with the parent company's financial statements, using the year-en exchange rate. |
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| Involves methods of calculating and interpreting financial ratios to analyze and monitor the firm's performance. |
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| Comparison of different firms' 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 |
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| 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. |
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| Evaluation of the firm's financial performance over time using financial ratio analysis. Any significant year to year changes may be symptomatic of a problem, especially if the same trend is not an industry-wide phenomenon. |
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| A ratio-analysis that combines cross-sectional and time-series analyses to assess a trend in relation to a trend in industry. |
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1 Large deviation ratios reveal the possibility of a problem. Additional analysis is needed to determine if there is a problem and to isolate the cause of the problem.
2 A single ratio is not enough information to judge to overall performance of the firm
3 Seasonality can produce erroneous conclusions and decisions
4 Use audited financial statements or the data may not reflect the firm's true financial condition
5 The data being compared should have been developed int eh same way
6 Results can be distorted by inflation |
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| The firm's ability to satisfy its short-term obligations as they come due. -The ease with which a company can pay its bills. This can provide early signs of cash flow problems and impending business failure. Firms need to balance the need for safety against low returns |
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| measures the firm's ability to meet its short-term obligations. It is = current assets / current liabilities. The more predictable a firm's cash flows, the lower the acceptable current ratio. |
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| liquidity and current ratio = (current assets - inventory)/current liabilities |
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| Measure the speed with which various accounts are converted into sales or cash inflows or outflows |
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| Measures the activity or liquidity of the firm's inventory. |
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| average number of days' sales in inventory |
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| average collection period |
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| The average amount of time needed to collect accounts receivable Average collection period = accounts receivable / average sales per day |
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average amount of time needed to pay accounts payable
average payment period = accounts payagle / average purchases per day |
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| The ability of a firm to make the payments required on a scheduled basis over the life of a debt |
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| Ratios that measure the firm's ability to pay certain fixed charges |
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| Measures the proportion of total assets financed by the firm's creditors debt ratio = Total liabilities / total assets |
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| times interest earned ratio |
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measures the firm's ability to make contractual interest payments; sometimes called the interest coverage ratio
times interest earned ratio = earnings before interest and taxes / taxes |
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| fixed-payment coverage ratio |
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| Measures the firm's ability to meet all fixed-payment obligations, such as loan interest and principal, lease payments, and preferred stock dividends. |
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| common-size income statement |
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| An income statement in which each item is expressed as a percentage of sales. It is especially useful in comparing performance across years to see trends |
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Measure the percentage of each sales dollar remaining after the firm has paid for its goods
gross profit margin = sales - cost of goods sold / sales |
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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.
operating profit margin = operating profits / sales |
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Measures the percentage of each sales dollar remaining after all costs and expenses, including interest, taxes,and preferred stock dividends, have been deducted.
net profit margin = earnings available for common stockholders / sales |
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| Measures the overall effectiveness of management in generating profits with its available assets; also called the return on investment. |
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Measures the return earned on the common stockholders' investment in the firm
higher is better
ROE = earnings available for common stockholders / common stock equity |
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| Relate a firm's market value, as measured by its current chare price to certain accounting values. These ratios give insight into how investors in the marketplace feel the firm is doing in terms of risk and return. |
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price/earnings 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
P/E ratio = market price per share of common / earnings per share |
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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
book value per share of common stock = common stock equity / number of shares of common stock outstanding |
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| 1 summarizing all ratios and 2 the DuPont system of analysis |
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| DuPont system of analysis |
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| System used to dissect the firm's financial statements and to assess its financial condition |
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| return on total assets = net profit margin * total asset turnover |
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Relates the firm's return on total assets to its return on common equity using the financial leverage multiplier.
return on common equity = return on total assets * financial leverage multiplier |
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