Analysis of Financial Performance

Vocabulary flashcards covering financial statement concepts, cash flow rules, financial ratios, and DuPont analysis based on the lecture material.

Financial Statement

Summarized and reported accounting data representing a formal presentation of the periodic performance and financial results of a company.

Annual Report

A document issued annually by a corporation containing a discussion of operations (typically a letter from the chairman) alongside the basic financial statements.

Statement of Financial Position

Also known as the Balance Sheet; a tabular sheet presenting the balances of assets, liabilities, and owner's equity at a specific point in time.

Income Statement

A financial statement providing the calculation of income over a particular accounting period by showing net sales, revenues, and all types of expenses.

Statement of Cash Flows

A statement presenting cash generation and its use over a period, categorized under operating, investing, and financing activities.

Statement of Shareholder's Equity

A financial report showing the capital investment made by stockholders and the accumulated retained earnings of the company.

Notes to Financial Statements

Non-quantitative disclosures in an annual report providing details on policies such as inventory valuation, contingent liabilities, and additional explanatory disclosures.

Balance Sheet Structure

The structural layout of a balance sheet showing that total assets (short-term and long-term investments) are equal to total liabilities and equity (short-term debt, long-term debt, and equity financing).

Owners' Equity

The residual interest in the assets of an entity after deducting liabilities, defined as $\text{Owners' Equity} = \text{Total Assets} - \text{Total Liabilities}$.

Net Working Capital

A measure of short-term liquidity calculated as $\text{Net Working Capital} = \text{Current Assets} - \text{Current Liabilities}$.

Book Value Per Share

The accounting value of equity per share, calculated as $\text{Book Value Per Share} = \frac{\text{Common Equity}}{\text{Shares}}$.

Rules for Statement of Cash Flows

The directional guidelines establishing that cash sources arise from increased liabilities/equity or decreased assets, while cash uses arise from decreased liabilities/equity or increased assets.

Sources of Cash

Activities or adjustments that generate cash, such as increasing a liability account (e.g., borrowing), increasing an equity account (e.g., issuing stock), or decreasing an asset account (e.g., selling inventory).

Uses of Cash

Activities or adjustments that consume cash, such as decreasing a liability account (e.g., paying off loans), decreasing an equity account (e.g., paying dividends), or increasing an asset account (e.g., purchasing equipment).

Statement of Retained Earnings

A financial report detailing the changes in common equity retained earnings between balance sheet dates by adding net income and subtracting dividends paid.

Financial Ratio Analysis

The evaluation of accounting numbers translated into relative values to compare relationships between accounts within a firm and across different firms regardless of size.

Liquidity Ratios

A category of financial ratios assessing a firm's ability to pay off its short-term current obligations as they become due.

Asset Management Ratios

A category of financial ratios measuring how effectively and efficiently a firm manages its assets and investments.

Debt Management Ratios

A category of financial ratios evaluating a firm's capital structure mix of debt and equity financing, and its ability to service debt.

Profitability Ratios

A category of financial ratios assessing how the combined effects of liquidity, asset management, and debt management impact operating results.

Market Value Ratios

A category of financial ratios reflecting investors' perceptions of a firm's future financial prospects and risk profile.

Current Ratio

A liquidity ratio calculated as $\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}$.

Quick Ratio

Also known as the Acid Test ratio; a liquidity metric calculated as $\text{Quick Ratio} = \frac{\text{Current Assets} - \text{Inventory}}{\text{Current Liabilities}}$.

Inventory Turnover Ratio

An asset management ratio calculated as $\text{Inventory Turnover} = \frac{\text{Cost of Goods Sold}}{\text{Inventory}}$.

Days Sales Outstanding

An asset management ratio measuring the average collection period for receivables, calculated as $\text{DSO} = \frac{\text{Accounts Receivable}}{\frac{\text{Annual Sales}}{360}}$.

Fixed Assets Turnover Ratio

An asset management ratio measuring how efficiently fixed assets generate sales, calculated as $\text{Fixed Assets Turnover} = \frac{\text{Sales}}{\text{Net Fixed Assets}}$.

Total Assets Turnover Ratio

An asset management ratio assessing overall asset efficiency, calculated as $\text{Total Assets Turnover} = \frac{\text{Sales}}{\text{Total Assets}}$.

Debt Ratio

A debt management metric measuring the percentage of total assets funded by debt, calculated as $\text{Debt Ratio} = \frac{\text{Total Liabilities}}{\text{Total Assets}}$.

Times-Interest-Earned Ratio

A debt coverage ratio measuring the extent to which operating income can decline before interest expense cannot be paid, calculated as $\text{TIE} = \frac{\text{EBIT}}{\text{Interest Charges}}$.

Fixed Charge Coverage Ratio

A coverage metric assessing ability to cover fixed financing charges, calculated as $\text{FCC} = \frac{\text{EBIT} + \text{Lease Payments}}{\text{Interest Payments} + \text{Lease Payments} + \frac{\text{Sinking Fund Payments}}{1 - \text{Tax Rate}}}$.

Net Profit Margin

A profitability ratio measuring net income per dollar of sales, calculated as $\text{Net Profit Margin} = \frac{\text{Net Income}}{\text{Sales}}$.

Return on Total Assets

A profitability metric measuring the net return on total asset investment, calculated as $\text{ROA} = \frac{\text{Net Income}}{\text{Total Assets}}$.

Return on Equity

A profitability metric measuring the rate of return earned on common stockholders' investment, calculated as $\text{ROE} = \frac{\text{Net Income}}{\text{Common Equity}}$.

Price/Earnings Ratio

A market value metric showing the price paid per dollar of earnings, calculated as $\text{P/E Ratio} = \frac{\text{Price Per Share}}{\text{Earnings Per Share}}$.

Market/Book Ratio

A market value metric comparing stock price to book value per share, calculated as $\text{M/B Ratio} = \frac{\text{Market Price Per Share}}{\text{Book Value Per Share}}$.

DuPont Analysis

An analytical framework that deconstructs financial ratios into multiple individual ratios to analyze expense control, asset utilization, and leverage.

Basic DuPont Equation

The formula dividing Return on Assets into profit margin and asset turnover: $\text{ROA} = \text{Net Profit Margin} \times \text{Total Assets Turnover}$.

Extended DuPont Equation

The formula deconstructing Return on Equity to incorporate financial leverage: $\text{ROE} = (\text{Net Profit Margin} \times \text{Total Assets Turnover}) \times \frac{\text{Total Assets}}{\text{Common Equity}}$.

Window Dressing

Techniques or temporary adjustments used by management to make financial ratios look better than they really are prior to reporting periods.