Financial Statement Analysis Flashcards

Vocabulary flashcards covering cash flows, standardized statements, and key financial ratios from Chapter 3 Financial Statement Analysis lecture notes.

Sources of Cash

Activities that bring in cash to a firm, such as a decrease in an asset account or an increase in a liability or equity account.

Uses of Cash

Activities that involve spending cash in a firm, such as an increase in an asset account or a decrease in a liability or equity account.

Common-Size Financial Statements

Standardized financial statements that present all items in percentage terms to facilitate comparisons across firms of different sizes.

Common-Size Balance Sheet

A standardized financial statement in which each account balance is expressed as a percentage of total assets.

Common-Size Income Statement

A standardized financial statement in which each item is expressed as a percentage of total sales or net revenue.

Common-Size Statement of Cash Flows

A financial statement constructed from a sources and uses of cash statement, expressing each item as a percentage of total sources or total uses.

Common-Base Year Statement

A standardized financial statement used for trend analysis that expresses all items relative to a chosen base year amount.

Financial Ratios

Quantitative relationships computed from a firm's financial information used to compare performance over time or across different companies.

Short-Term Solvency Ratios

Financial metrics, also called liquidity ratios, designed to assess a firm's ability to pay its short-term debt obligations.

Current Ratio

A primary measure of short-term liquidity calculated as $\text{Current ratio} = \frac{\text{Current assets}}{\text{Current liabilities}}$.

Quick Ratio

A liquidity measure, also known as the acid-test ratio, calculated as $\text{Quick ratio} = \frac{\text{Current assets} - \text{Inventory}}{\text{Current liabilities}}$.

Cash Ratio

A liquidity metric used by short-term creditors calculated as $\text{Cash ratio} = \frac{\text{Cash}}{\text{Current liabilities}}$.

Net Working Capital to Total Assets Ratio

A liquidity ratio calculated as $\text{Net working capital to total assets} = \frac{\text{Net working capital}}{\text{Total assets}}$, where low values indicate low liquidity.

Interval Measure

A liquidity metric calculated as $\text{Interval measure} = \frac{\text{Current assets}}{\text{Average daily operating costs}}$, measuring how long a business can operate without generating new current assets.

Long-Term Solvency Ratios

Financial metrics, also called financial leverage ratios, used to evaluate a firm's ability to meet its long-term financial obligations.

Total Debt Ratio

A leverage metric covering all debts of all maturities calculated as $\text{Total debt ratio} = \frac{\text{Total assets} - \text{Total equity}}{\text{Total assets}}$.

Debt-Equity Ratio

A measure of financial leverage calculated as $\text{Debt-equity ratio} = \frac{\text{Total debt}}{\text{Total equity}}$.

Equity Multiplier

A leverage ratio calculated as $\text{Equity multiplier} = \frac{\text{Total assets}}{\text{Total equity}}$.

Long-Term Debt Ratio

A long-term leverage metric calculated as $\text{Long-term debt ratio} = \frac{\text{Long-term debt}}{\text{Long-term debt} + \text{Total equity}}$.

Times Interest Earned Ratio

A long-term solvency ratio, also called the interest coverage ratio, calculated as $\text{Times interest earned ratio} = \frac{\text{EBIT}}{\text{Interest}}$.

Cash Coverage Ratio

A measure of cash flow available to meet interest obligations calculated as $\text{Cash coverage ratio} = \frac{\text{EBIT} + \text{Depreciation}}{\text{Interest}}$.

Asset Management Ratios

Financial metrics, also known as turnover ratios, that measure how efficiently or intensively a firm uses its assets to generate sales.

Inventory Turnover

An asset turnover ratio calculated as $\text{Inventory turnover} = \frac{\text{Cost of goods sold}}{\text{Inventory}}$, measuring how many times the firm sells off its entire inventory.

Days' Sales in Inventory

A measure of inventory age calculated as $\text{Days' sales in inventory} = \frac{365\,\text{days}}{\text{Inventory turnover}}$.

Receivables Turnover

A turnover metric calculated as $\text{Receivables turnover} = \frac{\text{Sales}}{\text{Accounts receivable}}$, measuring how many times a firm collects outstanding credit accounts.

Days' Sales in Receivables

A metric calculated as $\text{Days' sales in receivables} = \frac{365\,\text{days}}{\text{Receivables turnover}}$, representing the average collection period for credit sales.

NWC Turnover

An efficiency ratio calculated as $\text{NWC turnover} = \frac{\text{Sales}}{\text{NWC}}$, measuring how much work is generated from working capital.

Fixed Asset Turnover

An asset efficiency ratio calculated as $\text{Fixed asset turnover} = \frac{\text{Sales}}{\text{Net fixed assets}}$.

Total Asset Turnover

An asset efficiency metric calculated as $\text{Total asset turnover} = \frac{\text{Sales}}{\text{Total assets}}$, representing sales generated per dollar in assets.

Profitability Ratios

Financial metrics that evaluate how efficiently a firm uses its assets and manages operations to generate net earnings.

Profit Margin

A profitability measure calculated as $\text{Profit margin} = \frac{\text{Net income}}{\text{Sales}}$, indicating how much profit is generated per dollar of sales.

Return on Assets (ROA)

An accounting rate of return measuring profit per dollar of assets, calculated as $\text{ROA} = \frac{\text{Net income}}{\text{Total assets}}$.

Return on Equity (ROE)

An accounting rate of return measuring profit generated per dollar of owners' equity, calculated as $\text{ROE} = \frac{\text{Net income}}{\text{Total equity}}$.

Market Value Ratios

Financial metrics based on market stock prices that measure how market investors value a firm relative to its financial metrics.

Price-Earnings Ratio

A market value metric calculated as $\text{Price-earnings ratio} = \frac{\text{Price per share}}{\text{Earnings per share}}$, measuring how much investors pay per dollar of current earnings.

PEG Ratio

A valuation metric calculated as $\text{PEG ratio} = \frac{\text{Price-earnings ratio}}{\text{Earnings growth rate (\%)}}$.

Price-Sales Ratio

A market value metric calculated as $\text{Price-sales ratio} = \frac{\text{Price per share}}{\text{Sales per share}}$, useful when earnings are extendedly negative.

Market-to-Book Ratio

A valuation ratio calculated as $\text{Market-to-book ratio} = \frac{\text{Market value per share}}{\text{Book value per share}}$, comparing market value of investments to historical cost.

Tobin's Q Ratio

A market value ratio calculated as $\text{Tobin's Q ratio} = \frac{\text{Market value of assets}}{\text{Replacement cost of assets}}$.

Enterprise Value-EBITDA Ratio

A market valuation metric calculated as $\text{Enterprise value-EBITDA ratio} = \frac{\text{Enterprise value}}{\text{EBITDA}}$.