Review of Accounting

Annual report
Is the most important report that corporations issued annually by a corporation to its
stockholders. It contains basic financial statements as well as management's analysis of the
firm's past operations and future prospects.

Balance sheet
A statement of a firm's financial position at a specific point in time. Shows what assets the
company owns and who has claims on those assets as of a given date

Income statement
Shows the firm's sales and costs (and thus profits) during some past period (e.g. 2016). They
are prepared monthly, quarterly, and annually. The quarterly and annual statements are report
to investors, while the monthly statements are used internally for planning and control purposes

Statement of cash flows

Shows how much cash the firm began the year with, how much cash it ended up with, and what
it did to increase or decrease cash

Statement of stockholders' equity

Shows the amount of equity the stockholders had at the start of the year, the items that
increased or decreased equity, and the equity at the end of the year

Stockholders' equity
Represents the amount that stockholders paid the company when shares were purchased and
the amount of earnings the company has retained since its origination
(1) StockH'E = Paid-in capital + retained earnings
(2) StockH'E = Total assets - total liabilities

Net operating working capital (NOWC)

Is current assets minus non-interest-bearing current liability. NOWC = (cash + a/r+inventory) -
(a/p+accruals)

Income statement
A report summarizing a firm's revenue, expenses, and profits during a reporting period,
generally a quarter or a year

Earnings per share (EPS) "bottom line"

Is equal to net income divided by common shares outstanding. This is the most important info to
stockholders

Dividends per share (DPS)

Is equal to dividends paid to common stockholders divided by common shares outstanding
Book value per share (BVPS)
Is equal to to total common equity divided by common shares outstanding

Depreciation
The charge to reflect the cost of tangible assets used up in the production process. Depreciation
is not cash outlay. (Not cash expenses)

Amortization
A noncash charge similar to depreciation except that it is used to write off the costs of intangible
assets such as patents, copyright, trademark, and goodwill. (Not cash expenses)

EBITDA
Earnings before interest, taxes, depreciation, and amortization

Retained earnings
Is equal to net income less dividends. The [income statement] is tied to the [balance sheet]
through retained earnings. It is a claim against assets. Retained earnings do not represent cash
nor are available for dividends or anything else

Statement of stockholders' Equity

A statement that shows by how much a firm's equity changed during the year and why this
change occurred.

Free cash flow (FCF)

The amount of cash that could be withdrawn from a firm without harming its ability to operate
and to produce future cash flows. FCF = [ EBIT (1- T) + depreciation and amortization ] - [
capital expenditures + net operating working capital ]

Net operating profit after taxes (NOPAT)

The profit a company would generate if it had no debt and held only operating assets. EBIT (1-
T)

Market value added (MVA)

The excess of the market value of equity over its book value

Economic value added (EVA)

Excess of NOPAT over capital cost

Progressive tax
A tax system where the tax rate is higher on higher incomes. The personal income tax in the
United States, which ranges from 0% on the lowest incomes to 35% on the highest incomes, is
progressive
Taxable income
Is defined as "gross income less a set of exemptions and deductions"

Marginal tax
The tax rate applicable to the last unit of a person's income

Average tax rate

Taxes paid divided by taxable income

capital gain or loss

The profit (loss) from the sale of a capital asset for more (less) than its purchase price.

alternative minimum tax (AMT)

created by congress to make it more difficult for wealthy individuals to avoid paying taxes
through the use of various deductions

tax loss carry-back or carry forward

Ordinary corporate operating losses can be carried backward for 2 years and carried forward for
20 years to offset taxable income in a given year.

s corporation
A form of corporation that avoids double taxation by having its income taxed as if it were a
partnership

Financial Statement Analysis

Liquid Asset
An asset that can be converted to cash quickly without having to reduce the asset's price very
much.

Liquidity Ratios
Ratios that show the relationship of a firm's cash and other current assets to its current
liabilities.

Current Ratio
This ratio is calculated by dividing current assets by current liabilities. It indicates the extent to
which current liabilities are covered by those assets expected to be converted to cash in the
near future.

Quick (Acid Test) Ratio

This ratio is calculated by deducting inventories from current assets and then dividing the
remainder by current liabilities.
Asset Management Ratios
A set of ratios that measure how effectively a firm is managing its assets.

Inventory Turnover Ratio

This ratio is calculated by dividing sales by inventories.

Days Sales Outstanding (DSO) Ratio

This ratio is calculated by dividing accounts receivable by average sales per day; it indicates the
average length of time the firm must wait after making a sale before it receives cash.

Fixed Assets Turnover Ratio

The ratio of sales to net fixed assets.

Total Assets Turnover Ratio

This ratio is calculated by dividing sales by total assets.

Debt Ratio
The ratio of total debt to total assests.

Times-Interest-Earned (TIE) Ratio

The ratio of earnings before interest and taxes (EBIT) to interest charges; a measure of the
firm's ability to meet its annual interest payments.

Profitability Ratios
A group of ratios that show the combined effects of liquidity, asset management, and debt on
operating results.

Operating Margin
This ratio measures operating income, or EBIT, per dollar of sales; it is calculated by dividing
operating income by sales.

Profit Margin
This ratio measures net income per dollar of sales and is calculated by dividing net income by
sales.

Return on Total Assets (ROA)

The ratio of net income to total assets.

Basic Earning Power (BEP) Ratio

This ratio indicates the ability of the firm's assets to generate operating income; it is calculated
by dividing EBIT by total assets.

Return on Common Equity (ROE)

The ratio of net income to common equity; measures the rate of return on common
stockholders' investment.

Market Value Ratios

Ratios that relate the firm's stock price to its earnings and book value per share.

Price/Earnings (P/E) Ratio

The ratio of the price per share to earnings per share; shows the dollar amount investors will
pay for $1 of current earnings.

Market/Book (M/B) Ratio

The ratio of a stock's market price to its book value.

DuPont Equation
A formula that shows that the rate of return on equity can be found as the product of profit
margin, total assets turnover, and the equity multiplier. It shows the relationships among asset
management, debt management, and profitability ratios.

Benchmarking
The process of comparing a particular company with a set of benchmark companies.

Trend Analysis
An analysis of a firm's financial ratios over time; used to estimate the likelihood of improvement
or deterioration in its financial condition.

"Window Dressing" Techniques

Techniques employed by firms to make their financial statements look better than they really
are.