Financial Statement Analysis Flashcards

Direct vocabulary items and financial formulas extracted from Chapter 5 lecture notes regarding Financial Statement Analysis.

Average Inventory

The typical amount of stock a company holds over a period, ignoring holiday rushes or seasonal drops. Formula: $\frac{\text{Inventory Beginning} + \text{Inventory End}}{2}$

Average Trade Receivable

The typical amount of money that customers owe the business for things they bought on credit. Formula: $\frac{\text{Receivable Beginning} + \text{Receivable End}}{2}$

Current Assets

Assets expected to be converted into cash, sold, or used within one year or the normal operating cycle. Examples include cash, receivables, and inventory.

Current Ratio

A liquidity ratio that measures a company's ability to pay its short-term obligations using its current assets. Formula: $\frac{\text{Current Assets}}{\text{Current Liabilities}}$

Debt to Equity Ratio

A comparison showing how much the business relies on bank loans versus using the owners' own money to fund operations. Formula: $\frac{\text{Total Liabilities}}{\text{Total Equity}}$

Inventories

Goods and materials that a business holds for sale or for use in producing goods or services.

Inventory Turnover

Measures how many times a shop completely empties and refills its shelves with stock in a year. Higher is usually better. Formula: $\frac{\text{Cost of Goods Sold}}{\text{Average Inventory}}$

Liquidity Ratio

A ratio used to measure a company's ability to meet its short-term financial obligations. Common liquidity ratios include the current ratio and quick ratio.

Quick Assets

Assets that can be quickly converted into cash, generally including cash, cash equivalents, short-term investments, and trade receivables. Inventory and prepaid expenses are normally excluded. Formula: $\text{Cash} + \text{Trading Securities} + \text{Trade Receivables}$

Quick Ratio / Acid-Test Ratio

Measures whether a company can pay its current liabilities using its most liquid assets. Formula: $\frac{\text{Quick Assets}}{\text{Current Liabilities}}$

Receivable Turnover

A score showing how many times a business collects its debts from customers in a year. It measures how fast customers pay. Formula: $\frac{\text{Net Credit Sales}}{\text{Average Trade Receivable}}$

Operating Expenses

The ongoing, everyday costs required to run a business that are not directly tied to the production of goods (e.g., rent, payroll, marketing, and utilities).

Working Capital

The leftover cash a business has for daily operations after covering its immediate bills.

Non-Profit Margin (Net Profit Margin)

The final percentage of money left over from sales after every single cost—including rent, taxes, and interest—is paid. This is the true takeaway profit.

Gross Profit Margin

The percentage of money left over from a sale after only paying for the direct cost of making that product. Formula: $\frac{\text{Gross Profit}}{\text{Net Sales}}$

Networking Capital Policy

A company's game plan for how much extra cash and stock it wants to keep on hand versus how much risk it wants to take.

Cost of Goods Sold Percentage

The share of every sales dollar spent directly on making or buying the products sold. Formula: $(\frac{\text{Cost of Goods Sold}}{\text{Revenue}}) \times 100$

Trading Securities

Investments like stocks or bonds that a company buys with spare cash, intending to sell them quickly to make a fast profit on price changes.

Trade Receivables

The total amount of money that customers currently owe the business for goods or services they already received but bought on credit.

Net Credit Sales

Total sales made to customers who buy now and pay later using a tab, store credit, or invoice, minus any returns or discounts. Formula: $\text{Gross Credit Sales} - \text{Sales Returns from Credit} - \text{Discounts}$

Cost of Goods Sold

The direct cost of producing the goods sold by a company. Formula: $\text{Beginning Inventory} + \text{Purchases} - \text{Ending Inventory}$

Gross Profit

The money left over from sales after only paying for the direct costs of making or buying the products. Formula: $\text{Net Sales} - \text{Cost of Goods Sold}$

Net Sales

The actual money a company keeps from selling its goods, calculated after subtracting customer discounts, refunds, and broken returns from total sales. Formula: $\text{Gross Sales} - \text{Sales Returns} - \text{Allowances} - \text{Discounts}$

Average Daily Sales

The average amount of money a business pulls in each day. Formula: $\frac{\text{Total Sales}}{\text{Number of Days}}$

Operating Profit Margin

The percentage of sales revenue left over to pay for taxes and interest after covering both the product costs and daily running expenses (like rent and utilities). Formula: $\frac{\text{Operating Profit}}{\text{Net Sales}}$

Return on Investment

A popular percentage score that measures how much profit you make on a specific investment compared to how much money it cost you to buy it. Formula: $\frac{\text{Net Income}}{\text{Return on Assets}}$

Return on Assets

A percentage score that shows how good a company is at turning the things it owns (like machinery, buildings, and cash) into pure profit. Formula: $(\frac{\text{Net Income}}{\text{Average Total Assets}}) \times 100$