US CMA Exam: Part 2A - Financial Statement Analysis

Current Ratio

Current Assets / Current Liabilities

Quick Ratio

a financial ratio which is also called as acid-test ratio

Quick Ratio

(Cash + Marketable Securities + Receivables) / Current Liabilities

Cash Ratio

(Cash + Cash Equivalents + Marketable Securities) / Current Liabilities

Net Working Capital

Current Assets - Current Liabilities

Net Working Capital Ratio

Net Working Capital / Total Assets

Debt-to-Equity Ratio

Total Debt / Total Shareholders' Equity

Long-Term Debt-to-Equity Ratio

Long-Term Debt / Total Shareholders' Equity

Debt-to-Total Assets Ratio

Total Debt / Total Assets

Financial Leverage Ratio

Average Total Assets / Average Total Equity

Financial Leverage Ratio

a financial ratio which is also called as equity multiplier

Times Interest Earned (TIE)

EBIT / Interest Expense

Fixed Charge Coverage Ratio

(EBIT + Lease Payments) / (Interest Expense + Lease Payments)

Accounts Receivable Turnover

Net Credit Sales / Average Accounts Receivable

Days Sales Outstanding (DSO)

365 / Accounts Receivable Turnover

Inventory Turnover

COGS / Average Inventory

Days Inventory Outstanding (DIO)

365 / Inventory Turnover

Accounts Payable Turnover

COGS / Average Accounts Payable

Days Payable Outstanding (DPO)

365 / Accounts Payable Turnover

Cash Conversion Cycle (CCC)

DIO + DSO - DPO

Total Asset Turnover

Net Sales / Average Total Assets

Fixed Asset Turnover

Net Sales / Average Net Fixed Assets

Working Capital Turnover

Net Sales / Average Working Capital

Gross Profit Margin

Gross Profit / Net Sales

Operating Profit Margin

Operating Income (EBIT) / Net Sales

Net Profit Margin

Net Income / Net Sales

Return on Assets (ROA)

Net Income / Average Total Assets

Return on Equity (ROE)

Net Income / Average Total Equity

DuPont ROE (3-Step)

(Net Profit Margin) * (Asset Turnover) * (Equity Multiplier)

DuPont ROE (5-Step)

(Tax Burden) * (Interest Burden) * (EBIT Margin) * (Asset Turnover) * (Equity Multiplier)

Return on Invested Capital (ROIC)

Net Operating Profit After Taxes or NOPAT / Total Invested Capital

Basic Earnings Per Share (EPS)

(Net Income - Preferred Dividends) / Weighted Average Common Shares Outstanding

Price-to-Earnings (P/E) Ratio

Market Price per Share / Earnings per Share (EPS)

Book Value per Share (BVPS)

Common Shareholders' Equity / Common Shares Outstanding

Price-to-Book (P/B) Ratio

Market Price per Share / Book Value per Share

Dividend Payout Ratio

Cash Dividends / Net Income

Retention (Plowback) Ratio

1 - Dividend Payout Ratio

Sustainable Growth Rate (SGR)

ROE * Retention Ratio

Vertical Analysis (Balance Sheet)

(Specific Line Item / Total Assets) * 100

Vertical Analysis (Income Statement)

(Specific Line Item / Net Sales) * 100

Horizontal Analysis (% Change)

((Current Year - Base Year) / Base Year) * 100

Translation

The process of converting functional currency into reporting currency.

Remeasurement

process of converting from local/recording currency into its functional currency.

Functional Currency

Currency of the primary economic environment in which an entity operates

Change in Accounting Estimate

Prospective Application

Change in Accounting Principle

Retrospective Application

Correction of Prior Period Error

Retrospective Restatement

Remeasurement Gain or Loss

Difference between the transaction-date (or prior balance-sheet-date) rate and the current exchange rate.

Current Net Income

Where remeasurement gains and losses are recognized.

Functional Currency

The currency of the primary economic environment in which an entity operates, typically where it generates and expends cash.

Foreign Currency Translation

Conversion from the functional currency to the reporting currency.

Foreign Currency Remeasurement

Conversion from the local currency to the functional currency.

Current Exchange Rate

Rate used to translate assets and liabilities from the functional currency to the reporting currency.

Weighted Average Exchange Rate

Rate used for translation of income statement items.

Current Exchange Rate

Remeasurement rate for monetary items.

Historical Exchange Rate

Remeasurement rate for nonmonetary items, such as inventory and PPE.

Weighted Average Exchange Rate

Remeasurement rate for most revenues and expenses.

Historical Exchange Rate

Remeasurement rate for depreciation and cost of goods sold (COGS), because they relate to nonmonetary assets.

Other Comprehensive Income (OCI)

Where translation gains and losses are reported, as a component of equity.

Remeasurement Gains and Losses

Flow directly into current net income, creating earnings volatility.

Translation Gains and Losses

Deferred in OCI (equity), rather than recognized in current net income.

Remain Identical

impact of Translation to pure BS or IS ratios

May Change

impact of Translation to non-pure (mixed) BS or IS ratios

Can Differ Significantly

impact of remeasurement to financial ratios

Monetary Items

Cash, receivables, and payables; these adjust automatically to changes in purchasing power during inflation.

Nonmonetary Items

Fixed assets and inventory carried at historical cost; these remain fixed on the balance sheet during inflation.

Change in Accounting Estimate

A revision such as a change in PPE useful life, depreciation method, or estimated doubtful accounts.

Prospective Application

Treatment for a change in accounting estimate: account for it in current and future periods; do not adjust prior periods.

Change in Accounting Principle

A change in an accounting method, such as inventory valuation from Average Cost to FIFO/LIFO, or adoption of a new GAAP standard.

Retrospective Application

Treatment for a change in accounting principle: adjust beginning retained earnings of the earliest period presented and restate prior financial statements.

Correction of Prior Period Error

Correction of mathematical errors, GAAP/IFRS misapplications, or oversight of facts.

Retrospective Restatement

Treatment for a prior period error, including an adjustment to beginning retained earnings of the earliest period presented.

Change in Accounting Estimate vs. Principle

Estimate changes are prospective; principle changes are generally retrospective under the source notes.

Accounting Profit

Revenue minus explicit costs.

Explicit Costs

Contractual, out-of-pocket costs such as labor, materials, rent, and interest.

Economic Profit

Accounting profit minus implicit costs (opportunity costs).

Implicit Costs

Opportunity costs, such as the required return on equity capital.

Economic Profit Formula

Revenue minus explicit costs and implicit costs.

Book Value

Historical cost adjusted for accumulated depreciation or amortization.

Market Value

Current replacement cost or market capitalization.

Earnings Quality

The degree to which earnings are persistent, repeatable, sustainable, and driven by core operating performance.

High-Quality Earnings

Persistent, repeatable, sustainable earnings driven by core operations rather than nonrecurring gains or accounting choices.

Nonrecurring Gains

Gains that do not arise repeatedly from core operating performance and can reduce earnings quality.