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74 Cards in this Set

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Annual Report
1) Letter from the President
2) Valance Sheet
3) Income Statement
4) Statement of Retained Earnings
5) Statement of Cash flows
Assets Column of Balance Sheet
Current Assets

Fixed Assets
Intangible Assets

Total Assets
Liabilities and Owner's Equity Side of Balance Sheet
Current Liabilities
Long Term Liabilities
Preferred Stock
Common Stock
Retained earnings
Total Liabilities and Shareholder's Equity
Net Working Capital
Current Assets- Current Liabilities
Book Value
listed value on the balance sheet
Market Value
Stock Price*shares
Goodwill
Purchase Price- Book value at the time
Retained Earnings
Dividends + Addition to Retained Earnings ( over time)- not liquid
Balance Sheet
A statement from one point in time (i.e. one point in time)
Income Statement
Sales- COGS- Depreciation= EBIT
- Interest= EBT
- TAxes= Net Income
3 Components of Cash flow Statements
Operating Activities
Investing Activities
Financing Activities
Marginal Taxes
Tha tax rate paid on the next dollar earned
Average Tax Liability
tax bill/ net taxable income
Cash flows from Assets
=Cash Flow to Creditors + Cash Flow to Stockholders (accounting equation) or

Operating Cash Flow – Net Capital Spending – Changes in NWC
Operating Cash flow
EBIT + Depreciation- Taxes
Net Capital Spending
ending net fixed assets - Beginning Fixed Assets + Depreciation
Cash Flows to Creditors
Interest Paid- net new borrowing
Cash Flows to Stockholder's
Dividends Paid - Net new money raised
Internal Uses for financial Statement Information
Performance Evaluation and planning
External uses of financial statements
1) Creditors
2) Suppliers
3) Stockholders
4) Customers
Benchmarking Methods
1) Time trend analysis- how the company is changing over time

2) Peer Group Analysis- how the company stacks up to other companies in that industry
Problems with Benchmarking
1) difficult for diversified firms

2) globalization and international trade makes comparison difficult because there are different accounting regulations worldwide

3) extraodrinary events
Common Size Balance Sheets
compute all accounts as a percentage of total assets

(useful in comparing companies of different sizes)
Common Size Income Statement
mpute all items as a percentage of sales

(useful in comparing companies of different sizes)
5 categories of Financial Ratios
1) Short term solvency
2) Long term Solvency
3) Asset Management
4) profitability Ratios
5) Market Value Ratios
Long Term Solvency
FInancial Leverage Ratios

measures the relative contributions of stockholders & creditors to the firm’s total financing
Asset Management
Turnover Ratios
Market Value ratios
Incorporates investors’ perception of the value of the firm
Current Ratios
Current Assets/ Current Liabilities
Quick Assets
quick assets- Inventory/ Current Liabilities

(inveotry is less liquid than other assets)
Cash Ratio
Cash/ Current Liabilities
Total Debt Ratio
(Total Assets – Total Equity) / Total Assets
shows the proportion of the company’s value represented by borrowed funds
Equity Multiplier
Total Assets/ Total Equity
Long Term Debt Ratio
LTD / (LTD + Total equity)
Times Interest Earned Ratio
EBIT/Interest
(measures the number of times the income available to pay interest charges covers the firm’s interest expense)
Cash Coverage
= (EBIT + Depreciation)/interest

(measures the amount of cash available to cover itnerest charges.
Receivables Turnover =
Sales / Accts Rec

How many times a year do we collect opur Acct. Rec.
Average collection Period
365/ Receivables Turnover Ratio
Inventory Turnover Ratio
COGS/ inventory
Average sale ofinventory
365/ Inventory turnover ratio
Total Asset Turnover
Sales/ Total Assets
Fixed Asset Turnover
Sales/NFA

(shows the sales volume generated per dollar invested into fixed assets)
Profit Margin
=net income/ sales
ROA
Net Income/ Total Assets
(measures the ability for the firm to use its Assets)
ROE
Return on Equity= Net Income/ Total Equity
Profit Margin Info
measures the firm's operating efficiency
dividends paid are what part of the statement of cash flows
financing
bonds paying coupons are what part of the statement of cash flows
operating
number of shares info.
shares outstanding all shares- shares in treasury
Three forms of financing
Cash
Issue equity
Issue debt
incremental cash flows
cash flows that will be included only if the project is accepted
Erosion
new product revenues gained at the expense of existing products or services
Types of Incremental Cash flows
1) Purchase of Equipment- cash outflow

2) Sale of Old Equipment- Cash inflow
3) Change in net working capital

The tax liability depends on the capital gains on the sale

MV-taxes= cash flow generated
costs not included in incremental costs
sunk costs
financing costs (interest etc.)
info. Assets are usually listed on the balance sheet in order of liquidity
1
what are the 4 corporate tax rates (%)
15,25,34,35
another name for cash flow from assets
free cash flow
common base year statement
a standardized financial statement presenting all items relative to a certain base year amount
short term solvency- liquidity ratios
1) Current Ratio (CA and CL are converted into cash with 1 year so it measures liquidity)
2) Quick (acid test) ratio- better measure of liquidity
3) Cash ratio
4) Net working capital to total assets
5) interval measure (how long could the business keep running?
Long term solvency ratios
1) total Debt Ratio
2) Long term debt ratio
3) Times interest earned ratio (how well does the company have its interest obligations covered)
Asset Management/ Turnover ratios
1) inventory turnover ratio and Days sales in inventory
2) Receivables turnover and days' sales in receivables
3) NWC turnover (how much work do we get out of our working capital)
4) Fixed Asset turnover ratio (sales generated for every dollar in fixed assets)
5) Total Asset Turnover ( for every dollar in assets, this amount of sales was generated)
Profitability measures
1) Profit Margin
2) ROA- percentage of profit per dollar of assets
3) ROE- how did the shareholders do-for every dollar of equity this much money was generated
Market Value Measures
1) PE-typical large company is 15-20. in 1974 it was 5. Japanese PE are generally higher than in the US

2)Price to sales-

3) Market to Book Ratio- (historic norm on DJIA is 1.7

4) Tobin's Q ratio- market value of asset/ replacement cost (if this ratio is high, the firm has attractive investment opportunities
short term solvency- liquidity ratios
1) Current Ratio (CA and CL are converted into cash with 1 year so it measures liquidity)
2) Quick (acid test) ratio- better measure of liquidity
3) Cash ratio
4) Net working capital to total assets
5) interval measure (how long could the business keep running?
Long term solvency ratios
1) total Debt Ratio
2) Long term debt ratio
3) Times interest earned ratio (how well does the company have its interest obligations covered)

4) debt/equity ratio

5) Equity Multiplier

6) cash coverage ratio
Asset Management/ Turnover ratios
1) inventory turnover ratio and Days sales in inventory
2) Receivables turnover and days' sales in receivables
3) NWC turnover (how much work do we get out of our working capital)
4) Fixed Asset turnover ratio (sales generated for every dollar in fixed assets)
5) Total Asset Turnover ( for every dollar in assets, this amount of sales was generated)
Profitability measures
1) Profit Margin
2) ROA- percentage of profit per dollar of assets
3) ROE- how did the shareholders do-for every dollar of equity this much money was generated
Market Value Measures
1) PE-typical large company is 15-20. in 1974 it was 5. Japanese PE are generally higher than in the US

2)Price to sales-

3) Market to Book Ratio- (historic norm on DJIA is 1.7

4) Tobin's Q ratio- market value of asset/ replacement cost (if this ratio is high, the firm has attractive investment opportunities

5) PEG
Du Pont analysis
breaks down ROE into 3 parts

1) operating efficiency (profit margin)

2) asset use efficiency (total asset turnover)

3) financial leverage ( equity multiplier

if ROE is unsatisfactory, the dupont analysis will tell you why
what is Acrs depreciation method
an accelerated type of depreciation method
What is the macrs Depreciation method?
everything is assigned to a depreciation class for tax purposes
What is a capital gain
only if the market price exceeds the original book value
If an assets is sold the difference between Market Value and Book value is taxed`
If market value is greater than book value the asset was overdepreciated and as a result undertaxed so we owe a tax liability

If the book value is greater than the market value the .asset was under depreciated and we realize a tax saving
3 approaches to OCF
1) The Bottom-up Approach-start at the bottom line Net Income and then add back in depreciation

2) The Top-Down Approach- start at the top Sales- Costs-Taxes

3) The Tax Shield Approach (all equal the same answer