Financial Ratios and Statements Overview

These flashcards cover essential concepts regarding profitability ratios, financial statements, and accounting principles as outlined in the lecture notes.

What is a profitability ratio?

a metric used to assess a company's ability to generate profit relative to sales, assets, or equity.

What does the gross profit margin ratio indicate?

indicates the percentage of revenue that exceeds the cost of goods sold, showing how efficiently a company uses its resources to produce goods.

How is the net profit margin ratio calculated?

dividing net income by total revenues.

What does ROA stand for, and what does it measure?

Return on Assets, measuring a company's effectiveness in using its assets to generate earnings.

What is the formula for calculating return on assets (ROA)?

net income divided by average total assets.

What three approaches do investors use to calculate financial ratios?

company comparison, industry benchmarking, and analysis across time to assess financial ratios.

What is included in a company's balance sheet?

includes assets, liabilities, and stockholders' equity.

What is the purpose of the statement of cash flows?

explains changes in cash over a period of time and categorizes cash transactions into operating, investing, and financing activities.

What is the accounting equation?

Assets = Liabilities + Stockholders' Equity.

What does the income statement report?

company's revenues and expenses over a specified period, typically one year.

What is the definition of equity in accounting?

Equity is the residual interest in the assets of an entity that remains after deducting liabilities, representing ownership interest.

What must all companies follow in preparing financial statements?

Generally Accepted Accounting Principles (GAAP) when preparing financial statements.

What are common accounts found in the assets section of the balance sheet?

Common accounts include cash, accounts receivable, inventory, and equipment.

What is a key function of auditors in financial accounting?

Auditors ensure the integrity of financial statements and compliance with GAAP to prevent fraud.

What is the difference between financial accounting and managerial accounting?

Financial accounting provides information for external users, while managerial accounting focuses on providing information for internal decision-making.

What are retained earnings?

cumulative net income or loss of a company from its inception, minus any dividends paid.