Generally Accepted Accounting
Principles – practice and procedure to
maintain financial records; authorized
by FASB
Financial Accounting Standards Board –
accounting profession’s rule-setting
body
Public Company Accounting Oversight
Board – established by SOX to protect
interest of investors and for informative,
fair, and independent audit reports
Stockholders’ Report – annual report
that summarizes and documents
financial activities during the past year
Letter to Stockholders – first element of
annual report and primary
communication from mgt
Income Statement – financial summary
of the firm’s operating result during
specified period (as of)
Dividends per share – amount of cash
distributed during the period on behalf
of each outstanding common stock
Balance Sheet – summary of financial
position in given point in time
Current Asset – short term assets and
expected to be encashed within 1 year
or less
Current Liabilities – short term liabilities
and expected to be paid within 1 year
or less
Long-term Debt – debt for which
payment is not due in the current year
Paid-in Capital in excess of par –
amount of proceeds in excess of the
par value received from the original sale
of common stock
Retained Earnings – cumulative total of
all earnings, net of dividends that have
been retained and reinvested
Statement of Stockholders’ Equity –
shows equity account transactions that
occurred during a given year
Statement of Retained Earnings –
reconciled NI earned during the year
and any paid dividends
Statement of Cash Flows – provides
summary of firms’ operating, investing,
and financing activities and reconciles
with changes in its cash and marketable
sec
Notes to the Financial Statement –
provide detailed info on the acctg
policies, procedures, etc
Ratio Analysis – methods of calculating
and interpreting financial ratio to
analyze the firm’s performance
Cross Sectional Analysis – comparison of
diff firms’ FR at the same point of time
(industry average)
Benchmarking – type of CSA in which
ratio values are compared to key
competitors
Time-series Analysis – evaluation of firm’s
FP over time using FRA
Liquidity – ability of firm to satisfy short
term obligations as they due
*FOR FORMULAS: SEE BOOK*
LIQUIDITY RATIOS
* Current Ratio – higher CR indicates
higher degree of liquidity
* Liquidity Ratio – indicates the % of
annual debt that an individual can
meet using current liquid assets
*Quick (Acid test) Ratio – provides
better measure of liquidity only if
inventories cannot be easily converted
into cash
ACTIVITY RATIOS – measure the speed
w/ w/c various accounts are converted
into sales or cash inflow or outflow
*Inventory Turnover – measures the
activity, or liquidity of inventory
*Average Age of Inventory – ave
number of days’ sales in inventory
*Average Collection Period – ave
amount of time needed to collect AR
*Average Payment Period – ave
amount of time needed to pay AP
*Total Asset Turnover – indicates the
efficiency w/ w/c firm uses its assets to
generate sales
*DEBT RATIOS – measure proportion of
total asses financed by creditors; the
higher ratio – greater debt position
Debt Position – amount of other
people’s money being used to
generate profit
Financial Leverage – magnification of
risk and return through the use of fixed
cost financing – debt and preferred
stock; the more debt – greater FL
Degree of Indebtedness – measures
amount of debt relative to other
significant balance sheet amounts
Ability to Service Debts – make
payments required on a scheduled
basis over the life of the debt
Coverage Ratios – measure the firm’s
ability to pay certain fixed charges
*Debt Ratio – measures the proportion
of total assets financed by the creditors
*Times Interest Earned Ratio – measures
firm’s ability to make contractual
interest payments; interest coverage
ratio
*Fixed Payment Coverage Ratio –
measures firm’s ability to meet all fixed
payment obligations
PROFITABILITY RATIOS – enable analysts
to evaluate the firm’s profits w/ respect
to sales, assets, and investments
Common Size IS – IS where each item is
expressed as percentage of sales
*Gross Profit Margin – measures the % of
each sales dollar remaining after
deducting COS
*Operating Profit Margin - measures the
% of each sales dollar remaining after
costs and expenses except interest,
taxes, and PSD are deducted; pure
profits
*Net Profit Margin - measures the % of
each sales dollar remaining after all of
the expenses are deducted
*Earnings per Share
*Return on Total Assets – measures
overall effectiveness of mgt in
generating profits with available assets;
ROI
*Return on Common Equity – measures
return earned on the common
stockholders’ investment
MARKET RATIOS – relate a firm’s MV as
measured by its current share price
*Price/Earnings Ratio – measures the
amount investors are willing to pay for
each dollar of firm’s earnings; higher
ratio – greater investor confidence
*Market/Book Ratio – provides
assessment of investors’ views in the
firm’s performance; expect high returns
relative to risk to sell at higher MB
DuPont System of Analysis – used to
dissect FS and assess its financial
conditions
DuPont Formula – ROA
Modified DuPont Formula – ROE using
FLM
Financial Leverage Multiplier – ratio of
firm’s total asset to its common stock
equity
Depreciation – portion of the costs of
fixed assets charged against annual
revenues over time
Modified Accelerated Cost Recovery
System – determines the depn of assets
for tax purposes; DDB using half year
convention
Half Year Convention – half year of the
1st year’s depn recovered in the 1st year,
and the other half of depn is recovered
in the year immediately following the
assets’ stated recovery period
Depreciable Life – time period over w/c
an asset is depreciated
Recovery Period – appropriate
depreciable life of particular asset as
MACRS
Operating Flows – sale and production
of products and services
Investment Flows – purchase and sale of
fixed assets and equity investments in
other firms
Financing Flows – debt and equity
financing transactions
Noncash Charge – expense that is
deducted in IS but does not involve
cash outlay
Operating Cash Flow – cash flow a firm
generates from normal operations
NOPAT – earnings before interest and
after taxes
Free Cash Flow – cash flow available to
investors, creditors after firm met all
operating needs and paid for
investments in fixed and current assets
Financial Planning Process – begins with
long term (strategic) that guide the
formulation of short term (operating)
plans and budget
Long term (strategic) FP – co.’s planned
financial actions and impact of actions
over 2-10 years
Short term (operating) FP – short term
plans and impact of actions
Cash Budget (Forecast) – statement of
planned cash flows used to estimate its
short term cash requirement
Sales Forecast – prediction of sales over
given period; key input to short term FP
External Forecast – SF based on
relationships observed b/w sales and
certain key external economic cond
Internal Forecast – SF based on buildup,
consensus of SF through firm’s sales
channels
Cash Receipts – inflows of cash during
given period
Cash Disbursement – cash outlays
during given period
Net Cash Flows – difference b/w
receipts and disbursements

Ending Cash – sum of beg cash and net

cash flow

Required Total Financing – funds

needed by the firm if ending cash is less
than minimum cash balance; notes
payable

Excess Cash Balance – amount

available for investment if ending cash is
greater than minimum cash balance;
marketable securities

Pro forma Statements – projected or

forecasted, IS and BS

Percent of Sales Method – method

developing proforma IS; forecasts sales
and expresses IS items as percentages
of projected sales

Judgmental Approach – approach for

preparing proforma BS which firm
estimates values of BS accounts and
uses its external financing as balancing
“plug” figure

External Financing (plug) Figure –

amount of external financing needed to
bring the statement into balance;
positive or negative value