Financial Management and Income Taxation Reviewer

Comprehensive vocabulary flashcards covering Financial Ratios, Taxation Principles, Individual/Corporate Tax Rules, and Strategic Case Analysis.

Ratio Analysis

The most powerful tool of financial statement analysis that measures relationships between two or more figures as a statistical yardstick using the basic formula $\text{Ratio} = \frac{\text{One Number}}{\text{Another Number}}$.

Profitability Ratios

A category of financial ratios that measure the results of business operations or overall performance and effectiveness of the firm.

Gross Profit Ratio

A profitability ratio computed as $\text{Gross Profit Ratio} = \frac{\text{Gross Profit}}{\text{Net Sales}} \times 100$, showing how much profit is left after paying for the products or services sold.

Net Profit Ratio

A profitability ratio computed as $\text{Net Profit Ratio} = \frac{\text{Net Profit}}{\text{Net Sales}} \times 100$, showing how much profit the business keeps after all expenses.

Operating Ratio

A ratio computed as $\text{Operating Ratio} = \frac{\text{Cost of Goods Sold} + \text{Operating Expenses}}{\text{Net Sales}} \times 100$, showing how much of sales is used up by the cost of goods and operating expenses.

Return on Shareholders' Investment

A ratio calculated as $\text{ROI} = \frac{\text{Net Profit (after interest and tax)}}{\text{Shareholder's Fund}} \times 100$, showing the return owners receive from their invested money.

Return on Equity Capital (ROEC)

A ratio calculated as $\text{ROEC} = \frac{\text{Net Profit Before Tax} - \text{Net Profit After Tax} - \text{Preference Dividend}}{\text{Equity Share Capital}} \times 100$, showing how well the company uses owners' money to make a profit.

Earnings Per Share (EPS) Ratio

A ratio calculated as $\text{EPS} = \frac{\text{Net Profit After Tax} - \text{Preference Dividend}}{\text{No. of Equity Shares}}$, showing how much profit belongs to each common share.

Return on Asset

A ratio calculated as $\text{Return on Asset} = \frac{\text{Net Income}}{\text{Total Assets}}$, showing how well the company uses its assets to generate profit.

Liquidity Ratios

Ratios that measure the short-term solvency of a firm's financial position and its ability to pay short-term debts and meet current obligations.

Current Ratio

A liquidity ratio calculated as $\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}$, showing if a business can pay short-term debts using its current assets.

Liquid / Acid-Test / Quick Ratio

A liquidity ratio computed as $\text{Liquid Ratio} = \frac{\text{Liquid Assets}}{\text{Current Liabilities}}$, where $\text{Liquid Assets} = \text{Cash} + \text{Accounts Receivable}$.

Cash Ratio

A liquidity ratio computed as $\text{Cash Ratio} = \frac{\text{Cash and Cash Equivalents}}{\text{Current Liabilities}}$, indicating the ability to pay short-term debts using cash and cash equivalents only.

Activity Ratios

Ratios (also called turnover ratios) that measure the efficiency with which the resources of a firm are employed, indicating the speed at which assets are converted into sales.

Inventory Turnover Ratio

An activity ratio calculated as $\text{Inventory Turnover Ratio} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}}$, measuring the velocity of conversion of inventory into sales.

Debtor / Receivables Turnover Ratio

An activity ratio computed as $\text{Debtor Turnover Ratio} = \frac{\text{Net Credit Sales}}{\text{Average Trade Receivables}}$, indicating how many times debtors are turned over in a year.

Average Collection Period

A metric computed as $\text{A.C.P} = \frac{360\,\text{Days}}{\text{Receivable Turnover}}$, showing how many days it usually takes customers to pay.

Asset Turnover Ratio

An activity ratio calculated as $\text{Asset Turnover Ratio} = \frac{\text{Revenue}}{\text{Total Assets}}$, measuring how effectively a company uses its assets to generate revenue.

Creditors Payable Turnover Ratio

An activity ratio calculated as $\text{C.P.T.R} = \frac{\text{Net Credit Purchase}}{\text{Average Trade Creditors}}$, showing how quickly or frequently the business pays its suppliers.

Working Capital Turnover Ratio

An activity ratio computed as $\text{W.C.T.R} = \frac{\text{Cost of Sales}}{\text{Net Working Capital}}$, showing how efficiently working capital is utilized to generate sales.

Fixed Assets Turnover Ratio

An activity ratio calculated as $\text{F.A.T.R} = \frac{\text{Net Fixed Assets}}{\text{Cost of Sales}}$, measuring the utilization efficiency of fixed assets in generating sales.

Solvency Ratios

Ratios (also known as leverage ratios) that measure a company's ability to pay its maturing long-term debts while sustaining operations indefinitely.

Debt Ratio

A solvency ratio computed as $\text{Debt Ratio} = \frac{\text{Total Liabilities}}{\text{Total Assets}} \times 100$, measuring total liabilities as a percentage of total assets.

Equity Ratio

A solvency ratio calculated as $\text{Equity Ratio} = \frac{\text{Total Equity}}{\text{Total Assets}}$, showing the proportion of assets financed by the owners.

Debt-to-Equity Ratio

A leverage ratio calculated as $\text{Debt-to-Equity Ratio} = \frac{\text{Total Liabilities}}{\text{Total Equity}}$, comparing funds provided by creditors relative to owners.

Times Interest Earned

A solvency metric calculated as $\text{Times Interest Earned} = \frac{\text{Income Before Interest and Taxes}}{\text{Interest Expense}}$, showing ability to pay interest expenses.

Taxation

A system of mandatory payments that individuals and businesses are required to pay to the government.

Income Tax

A direct tax imposed by the government on the earnings of individuals and businesses, including wages, salaries, business profits, and investment income.

Personal / Poll / Capitation Tax

A classification of tax consisting of a fixed amount imposed on individuals residing within a specified territory, such as a Community tax.

Property Tax

A tax imposed on property according to its value or another reasonable basis, such as a real estate tax.

Excise Tax

A tax imposed on an act, privilege, occupation, or specified goods manufactured domestically or imported.

Direct Tax

A tax where the statutory taxpayer directly shoulders the tax burden and pays it to the government without shifting it to another person.

Indirect Tax

A tax where the statutory taxpayer can pass or shift the tax burden to another person, usually the final consumer.

Specific Tax

A tax assessment based on a fixed physical unit or quantity, such as number, weight, measurement, or classification.

Ad Valorem Tax

A tax assessed as a fixed proportion or percentage of the monetary value of the taxed item or property.

Proportional Tax

A tax system where the tax rate remains constant or identical regardless of the size of the tax base.

Progressive / Graduated Tax

A tax structure in which the tax rate increases as the taxable amount or tax base increases.

Regressive Tax

A tax structure where the tax rate decreases as the tax base increases.

Tax Shifting

A legal form of tax escape involving the transfer of the tax burden from the statutory taxpayer to another party.

Tax Capitalization

A form of tax escape where the selling price of a taxed asset is reduced to compensate for anticipated future tax obligations.

Tax Transformation

A form of tax escape where the taxpayer absorbs the tax burden but offsets it by improving production efficiency to lower unit costs.

Tax Avoidance

The legal optimization or minimization of tax liabilities using permissible methods and statutory provisions.

Tax Evasion

The illegal reduction or defeat of tax liability through intentional fraud, malice, misrepresentation, or deliberate omission.

Tax Exemption

A grant of immunity or freedom from a tax obligation that other taxpayers are generally required to pay.

Head of the Family

An unmarried or legally separated individual who supports and maintains in one household dependents related by blood, marriage, or adoption.

Personal Exemption

An allowable basic deduction granted to individual taxpayers, set at ₱50,000.

Additional Exemption

A deduction allowed for qualified dependent children equal to ₱25,000 per child, up to a maximum of 4 dependents (₱100,000).

Tax Deduction

An allowable statutory reduction that directly subtracts from gross income to compute taxable income.

Tax Credit

A direct dollar-for-dollar reduction subtracted directly from the total calculated tax liability.

Marginal Rate

The specific tax percentage applied to the next additional dollar or unit of taxable income earned.

Average Tax Rate

The effective tax percentage calculated as $\text{Average Rate} = \frac{\text{Total Tax}}{\text{Total Income}}$.

Strengths (SWOT)

Internal positive attributes and advantages that represent what an organization does well.

Weaknesses (SWOT)

Internal factors and disadvantages that hinder organizational growth or performance.

Opportunities (SWOT)

External favorable factors and potential market developments that a company can exploit to its advantage.

Threats (SWOT)

External environmental risks and adverse factors that could cause loss or damage to a business.