Read Daily: Concepts to Master

What does the current ratio measure?

Liquidity—Current Assets / Current Liabilities.

What does the quick ratio (acid-test) exclude?

Inventory and prepaid expenses.

What is the formula for working capital?

Current Assets − Current Liabilities.

What does ROA (Return on Assets) measure?

Profitability relative to total assets.

Formula for ROA?

Net Income / Average Total Assets.

What is the formula for ROE (Return on Equity)?

Net Income / Average Shareholders’ Equity.

What does gross profit margin measure?

Gross Profit / Net Sales.

What is the net profit margin formula?

Net Income / Net Sales.

What does the debt-to-equity ratio measure?

Financial leverage—Total Debt / Total Equity.

What does interest coverage ratio assess?

Ability to pay interest—EBIT / Interest Expense.

What is the formula for inventory turnover?

COGS / Average Inventory.

What is the formula for receivables turnover?

Net Credit Sales / Average Accounts Receivable.

What is a vertical analysis?

Expressing financial statement items as a % of a base amount.

What is horizontal analysis?

Comparing financial data over time.

What does a high inventory turnover indicate?

Efficient inventory management.

What is the DuPont formula for ROE?

ROE = Net Profit Margin × Asset Turnover × Equity Multiplier.

What is the cash ratio?

(Cash + Cash Equivalents) / Current Liabilities.

What does a negative working capital indicate?

Potential liquidity problems.

What is comprehensive income?

Net income + Other comprehensive income (OCI).

What is the price-to-earnings (P/E) ratio?

Market Price per Share / Earnings per Share.

What is financial flexibility?

Ability to adapt to financial adversity.

What is a common-size financial statement?

Standardized using percentages for comparison.

What is the formula for asset turnover ratio?

Net Sales / Average Total Assets.

What is solvency?

Long-term ability to meet obligations.

What is liquidity?

Short-term ability to pay debts.

What is the weighted average cost of capital (WACC)?

Average rate a firm pays for capital, weighted by debt/equity.

What is the WACC formula?

(Wd × Rd × (1 − Tc)) + (We × Re)

What does Re stand for?

Cost of equity.

What does Rd stand for?

Cost of debt.

What is CAPM?

Capital Asset Pricing Model: Re = Rf + β(Rm − Rf).

What is β (beta)?

Measure of market risk or volatility.

What is the cost of preferred stock?

Dividend / Market Price.

What is operating leverage?

Fixed operating costs’ impact on earnings.

What is financial leverage?

Use of debt to enhance returns.

What does DFL measure?

Degree of Financial Leverage = EBIT / EBT or % Change in Net Income / % Change in EBIT.

What is the optimal capital structure?

Mix of debt/equity that minimizes WACC.

What is business risk?

Risk from operations and industry factors.

What is financial risk?

Risk from financing with debt.

What is the cash conversion cycle?

CCC = DSO + DIO − DPO.

What is the goal of cash management?

Minimize idle cash, maximize liquidity.

What is factoring?

Selling receivables for cash.

What is a line of credit?

Flexible borrowing arrangement.

What is the difference between commercial paper and T-bills?

Corporate vs. government short-term debt.

What is float?

Time delay in fund transfer.

What is spontaneous financing?

Trade credit, accrued expenses.

What is the matching principle in finance?

Match asset life with financing source.

What is the dividend payout ratio?

Dividends / Net Income.

What is treasury stock?

Repurchased shares not retired.

What is market capitalization?

Stock Price × Shares Outstanding.

What is dilution?

Reduction in EPS due to new shares.

What is the dividend yield formula?

Annual Dividend / Market Price per Share.

What is CVP analysis?

Cost-Volume-Profit analysis for decision-making.

What is the breakeven point?

Sales level where profit is zero.

What is the formula for breakeven in units?

Fixed Costs / Contribution Margin per unit.

What is the contribution margin per unit?

Selling Price − Variable Cost/unit.

What is operating leverage in decision-making context?

Sensitivity of EBIT to sales.

What is a relevant cost?

A cost that changes based on the decision.

What is a sunk cost?

Already incurred and irrelevant for decisions.

What is an opportunity cost?

Benefit lost when choosing an alternative.

What is marginal analysis?

Comparing marginal cost and marginal benefit.

What is sensitivity analysis?

Changing assumptions to see the impact on results.

What is incremental cost?

Additional cost from a decision.

What is a make or buy decision?

Choose between internal production vs. outsourcing.

What is a special order decision?

Accepting orders below normal price if profitable.

What is a joint product decision?

Split-off point considerations.

What is the contribution margin ratio?

CM / Sales.

What is the margin of safety?

Budgeted Sales − Breakeven Sales.

What is elasticity of demand?

Sensitivity of quantity to price.

What is the profit maximization rule?

MR = MC (Marginal Revenue = Marginal Cost).

What is price skimming?

High initial price, then lowered.

What is penetration pricing?

Low price to gain market share quickly.

What is target costing?

Price-driven cost planning.

What is a relevant range?

Normal activity limits where assumptions hold.

What is product mix decision?

Selecting products that maximize CM with constraints.

What is break-even revenue?

Fixed Costs / CM Ratio.

What is a sunk fallacy?

Continuing an investment due to prior costs.

What is capital budgeting?

Process of planning long-term investments.

What is NPV?

Net Present Value – present value of cash flows minus investment.

What is IRR?

Internal Rate of Return – rate where NPV = 0.

What is payback period?

Time to recover investment cost.

What is discounted payback period?

Payback using discounted cash flows.

What is profitability index?

PV of inflows / PV of outflows.

What is a mutually exclusive project?

Only one investment can be selected.

What is capital rationing?

Limited capital requiring project prioritization.

What are sunk costs in capital budgeting?

Irrelevant past costs.

What is working capital investment?

Cash tied up in operations.

What is post-audit in capital budgeting?

Review of project performance after implementation.

What is a hurdle rate?

Minimum acceptable return.

What is depreciation’s role in capital budgeting?

Non-cash expense that affects tax cash flows.

What is MACRS?

Modified Accelerated Cost Recovery System.

What is a terminal cash flow?

Final inflows from asset disposal or recovery.

What is the risk-adjusted discount rate?

Adjusted for project risk level.

What is tax shield on depreciation?

Depreciation × Tax rate.

What is incremental cash flow?

Cash flow difference from a decision.

What is cannibalization?

New product reduces existing product sales.

What is salvage value?

Estimated resale value at project end.

What does IRR > hurdle rate mean?

Accept the project.

When is NPV preferable to IRR?

When comparing mutually exclusive projects.

What is real option analysis?

Flexibility in investment decisions.

What is sensitivity analysis in investment?

Testing variable impacts on outcomes.