Debt and Equity Financing, Cash Flow Analysis, and Stock Attributes

These flashcards cover key terms and concepts related to debt and equity financing, cash flow activities, and attributes of stocks, providing a comprehensive review tool for exam preparation.

Debt Financing

A method of raising capital where a company borrows money that must be paid back with interest.

Advantages of Debt Financing

Stockholders maintain control, tax-deductible interest expenses, and positive impact on earnings due to borrowing at low rates.

Disadvantages of Debt Financing

Risk of bankruptcy, negative cash flow impact due to repayment obligations.

Contingent Liability

A liability that is probable and can be estimated.

Warranty Liabilities Increase

comprises additional claims made against warranties for defective products.

Warranty Liabilities Decrease

arises when claims are settled or fewer products are sold.

Principal (Bond)

The single payment that is paid back when the bond matures.

Stated or Coupon Rate

The interest rate that a company is legally obligated to pay on a bond.

Market or Yield Rate

The interest rate that other similar bonds are earning in the market.

Installment Note

A loan that is repaid in regular payments over its life, including both principal and interest.

Common Stock Attributes

Includes voting rights, claims on profits, and distribution rights upon business termination.

Authorized Stock

The total number of shares that a corporation can issue as specified in its articles of incorporation.

Issued Stock

The number of shares that have been sold and are held by shareholders.

Outstanding Stock

The shares that are currently held by shareholders and are actively traded.

Stock Split

A procedure in which a company’s existing shares are divided into multiple shares to increase liquidity.

Treasury Stock

Shares that have been repurchased by the issuing corporation, tracked in a contra-equity account and have no stockholder rights.

Operating Cash Flows

Cash generated from normal business operations.

Investing Cash Flows

Cash flows associated with the purchase and sale of long-term assets.

Financing Cash Flows

Cash flows related to borrowing and repaying funds and transactions with shareholders.

Free Cash Flows

Operating cash flows minus capital expenditures.

Indirect Method of Cash Flows

A method for reporting cash flows that starts with net income and adjusts for changes in balance sheet accounts.

Vertical Analysis

Expresses each item in a financial statement as a percentage of a base amount.

Horizontal Analysis

Analyzes trends in financial statement data for a single company over time.

Gross Profit Ratio

Indicates the portion of sales earned above cost of goods sold.

Profit Margin Ratio

Measures income earned on each dollar of sales.

Asset Turnover

Measures sales volume in relation to the investment in assets.

Current Ratio

Compares current assets to current liabilities to assess liquidity risk.

Debt-to-Equity Ratio

Indicates the risk of bankruptcy by comparing liabilities to equity.

Return on Assets (ROA)

Measures income earned on each dollar invested in assets.

Return on Equity (ROE)

Measures income earned for each dollar of stockholders' equity.

DuPont Framework

Depicts return on equity as determined by profitability, asset efficiency, and financial leverage.

Price Earnings (PE) Ratio

Compares a company's share price with its earnings per share, indicating investor expectations.