Unit 1: Introduction to Financial Statement Analysis

Vocabulary practice flashcards covering core definitions, organizational types, financial statements, and financial analysis ratios from Unit 1.

Sole Proprietorship

A business owned and run by one person, characterized by easy setup, lack of separation between owner and firm, unlimited personal liability for firm debts, and a life limited to the owner's lifespan.

Partnership

A business structure identical to a sole proprietorship except that it has more than one owner, where all partners are liable for the firm's debts and the entity ends upon the death or withdrawal of any partner unless otherwise structured.

Limited Partnership

A partnership with general partners (who are personally liable for firm debts) and limited partners (whose liability is limited to their investment, who lack management authority, and whose ownership interest is transferable).

Limited Liability Company (LLC)

A form of business organization structured as a limited partnership without a general partner, where all owners have limited liability and are permitted to manage the business.

Corporation

A legal entity separate and distinct from its owners that is solely responsible for its own obligations, with ownership divided into shares of stock.

Board of Directors

A group of people elected by shareholders who hold the ultimate decision-making authority in a corporation, setting policies, making rules, and monitoring management performance.

Chief Executive Officer (CEO)

The corporate officer charged with running the corporation by instituting the rules and policies established by the board of directors.

Chief Financial Officer (CFO)

The most senior financial manager in a corporation, reporting directly to the CEO, who is responsible for investment decisions, financing decisions, and cash management.

Agency Problem

A conflict of interest that arises in a corporation because ownership and management are separated, potentially leading managers to put their own interests ahead of those of shareholders.

Balance Sheet

A financial report (or statement of financial position) that lists a firm's assets, liabilities, and stockholders' equity at a specific point in time.

Balance Sheet Identity

The fundamental accounting equation stating that total assets must equal liabilities plus equity: $\text{Assets} = \text{Liabilities} + \text{Stockholders' Equity}$.

Current Assets

Cash or other assets that are expected to be converted into cash within one year, including accounts receivable, inventory, and prepaid expenses.

Long-Term Assets

Assets with a useful life exceeding one year, including tangible property, plant, and equipment (net of accumulated depreciation) as well as intangible assets like goodwill.

Current Liabilities

Debts or obligations due and payable within 12 months or less, such as accounts payable, short-term debt, and current maturities of long-term debt.

Deferred Taxes

Taxes that are owed but have not yet been paid, appearing as a liability on the balance sheet generally when financial reporting income exceeds taxable income.

Book Value of Equity

An accounting measure of a firm's net worth calculated as total assets minus total liabilities on the balance sheet.

Market Capitalization

The total market value of a firm's equity, computed as $\text{Market Value of Equity} = \text{Shares Outstanding} \times \text{Market Price Per Share}$.

Market-to-Book Ratio

A valuation ratio comparing a firm's market value to its historical accounting value, computed as $\frac{\text{Market Value of Equity}}{\text{Book Value of Equity}}$.

Enterprise Value

A measure of the total market value of a company's underlying operating business, calculated as $\text{Enterprise Value} = \text{Market Value of Equity} + \text{Debt} - \text{Cash}$.

Income Statement

An accounting report that details a firm's revenues and expenses over a given period of time, concluding with net income.

Gross Profit

The difference between total sales revenues and the cost of sales on the income statement.

Operating Expenses

Expenses incurred from running the business that are not directly tied to production, including administrative overhead, research and development, and depreciation and amortization.

Earnings Before Interest and Taxes (EBIT)

A firm's operating income adjusted for non-operating income or expenses before deducting interest expense and taxes.

Earnings Per Share (EPS)

A net profitability metric per share calculated as $\text{EPS} = \frac{\text{Net Income}}{\text{Shares Outstanding}}$.

Diluted EPS

An earnings per share measure that accounts for potential dilution from unvested stock grants, stock options, or convertible debt, calculated as $\text{Diluted EPS} = \frac{\text{Net Income}}{\text{Diluted Shares Outstanding}}$.

Statement of Cash Flows

A financial report that utilizes income statement and balance sheet data to track cash generated and spent across operating, investing, and financing activities.

Retained Earnings

The net income retained in the firm rather than distributed as dividends, calculated as $\text{Retained Earnings} = \text{Net Income} - \text{Dividends}$.

Current Ratio

A liquidity ratio evaluating a firm's ability to cover short-term liabilities with short-term assets, calculated as $\frac{\text{Current Assets}}{\text{Current Liabilities}}$.

Cash Ratio

A conservative liquidity ratio measuring a firm's ability to satisfy current liabilities using only cash and cash equivalents, calculated as $\frac{\text{Cash}}{\text{Current Liabilities}}$.

Accounts Receivable Days

A working capital metric estimating the average number of days required to collect cash from credit sales, calculated as $\frac{\text{Accounts Receivable}}{\text{Average Daily Sales}}$.

Accounts Payable Days

A metric evaluating the average number of days a firm takes to pay its suppliers, calculated as $\frac{\text{Accounts Payable}}{\text{Average Daily Cost of Sales}}$.

Inventory Days

A working capital metric measuring the average number of days inventory is held before being sold, calculated as $\frac{\text{Inventory}}{\text{Average Daily Cost of Sales}}$.

Inventory Turnover

An efficiency ratio indicating how many times a company sells and replaces its inventory over a period, calculated as $\frac{\text{Annual Cost of Sales}}{\text{Inventory}}$.

Debt-Equity Ratio

A leverage ratio measuring financial risk by comparing total debt to stockholders' equity, calculated as $\frac{\text{Total Debt}}{\text{Total Equity}}$.

Net Debt

The remaining debt burden of a company after subtracting cash and short-term investments: $\text{Net Debt} = \text{Total Debt} - \text{Cash } \text{\& Short-term Investments}$.

Debt-to-Enterprise Value Ratio

A leverage ratio measuring the proportion of a company's enterprise value financed by net debt, calculated as $\frac{\text{Net Debt}}{\text{Enterprise Value}}$.

Return on Assets (ROA)

An operating profitability metric measuring return on total firm assets, calculated as $\frac{\text{Net Income} + \text{Interest Expenses}}{\text{Book Value of Assets}}$.

Return on Equity (ROE)

A measure of financial profitability evaluating the net income generated per unit of book equity, calculated as $\frac{\text{Net Income}}{\text{Book Value of Equity}}$.

Return on Invested Capital (ROIC)

A performance ratio evaluating how efficiently a company generates operating profit after tax from total invested capital, calculated as $\frac{\text{EBIT} \times (1 - \text{tax rate})}{\text{Book Value of Equity} + \text{Net Debt}}$.

Price-to-Earnings (P/E) Ratio

A valuation ratio measuring the market price per dollar of net income, calculated as $\frac{\text{Market Capitalization}}{\text{Net Income}}$ or $\frac{\text{Share Price}}{\text{Earnings Per Share}}$.