Financial Statements & Accrual Concepts Review

A comprehensive set of practice flashcards covering core accounting concepts, financial statements, and ratio analysis based on the lecture transcript.

$$10-K$$

The annual report required by the $SEC$ for public companies in the $U.S.$ which includes a comprehensive overview of business operations, audited financial statements, and management's discussion and analysis (MD&A).

$$10-Q$$

The quarterly report filed with the $SEC$ that is condensed in length and focuses on quarterly financials; unlike the $10-K$, it is reviewed by $CPAs$ but remains unaudited.

Income Statement ($IS$)

A financial statement that shows a company's profitability over a specified period by starting with revenue and deducting various costs and expenses to arrive at net income.

Balance Sheet ($BS$)

A snapshot of a company's resources (assets) and sources of funding (liabilities and shareholders' equity) at a specific point in time, following the equation: $\text{Assets} = \text{Liabilities} + \text{Shareholders' Equity}$.

Cash Flow Statement ($CFS$)

A statement that tracks actual cash inflows and outflows during a period, broken into three sections: Cash from Operations, Cash from Investing, and Cash from Financing.

$$EBITDA$$

An acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization, calculated as: $\text{Gross Profit} - \text{SG\&A} - \text{R\&D}$.

$$EBIT$$

Also known as Operating Income, it stands for Earnings Before Interest and Taxes and is calculated as: $\text{EBITDA} - \text{D\&A}$.

Net Income

Commonly referred to as the \text{"bottom line"}, it is calculated as: $\text{Pre-Tax Income (EBT)} - \text{Tax Expense}$.

Goodwill

An intangible asset created when an acquirer pays a purchase price in excess of the fair market value ($FMV$) of an acquired business's net assets.

Revenue Recognition Principle

An accrual accounting rule stating that revenue is recorded in the period a good or service was delivered and earned, regardless of whether $\text{cash}$ was collected.

Matching Principle

An accounting guideline requiring that expenses associated with the production or delivery of a good or service be recorded in the same period as the related revenue.

Straight-Line Depreciation

An allocation method where an equal amount of depreciation is recorded annually, calculated as: $\frac{(\text{Asset Historical Cost} - \text{Salvage Value})}{\text{Useful Life Assumption}}$.

Net Working Capital ($NWC$)

A liquidity metric calculated as: $\text{Operating Current Assets} - \text{Operating Current Liabilities}$, excluding non-operational items like cash and debt.

Days Sales Outstanding ($DSO$)

The average number of days it takes a company to collect payments made on credit, calculated as: $\left( \frac{\text{AR}}{\text{Revenue}} \right) \times 365\,\text{days}$.

Cash Conversion Cycle ($CCC$)

A metric measuring the time it takes to convert inventory into cash from sales, calculated as: $\text{DIO} + \text{DSO} - \text{DPO}$.

Deferred Revenue

A liability representing cash payments collected from customers for products or services that have not yet been provided.

$LIFO$ vs. $FIFO$

Inventory accounting methods where $FIFO$ (First In, First Out) expenses the oldest inventory first, while $LIFO$ (Last In, First Out) assumes the most recently purchased inventory is sold first.

Basic Earnings Per Share ($EPS$)

The amount of earnings allocable to common shares, calculated as: $\frac{(\text{Net Income} - \text{Dividends on Preferred Stock})}{\text{Basic Weighted Average Shares Outstanding}}$.

Return on Invested Capital ($ROIC$)

A measure of how efficiently a management team allocates capital, calculated as: $\frac{\text{NOPAT}}{\text{Invested Capital}}$.

Deferred Tax Liability ($DTL$)

A liability created when tax expense on a $GAAP$ income statement is recognized but not yet paid to the $IRS$ due to temporary timing differences.

Paid-in-Kind ($PIK$) Interest

A non-cash interest expense that accrues toward the ending debt balance rather than being paid in cash during the current period.

Quick Ratio

Also known as the acid-test ratio, it is a liquidity measure calculated as: $\frac{(\text{Cash \& Cash Equivalents} + \text{AR} + \text{Short Term Investments})}{\text{Current Liabilities}}$.

Debt Service Coverage Ratio ($DSCR$)

A creditworthiness test of a company's ability to pay debt obligations, calculated as: $\frac{(\text{EBITDA} - \text{Capex})}{(\text{Mandatory Principal Repayment} + \text{Interest Expense})}$.

Treasury Stock

Shares that were previously issued but have been repurchased by the company and are no longer available to be traded.