Finance Ch. 2 Flashcards

Terms Definitions
accrual-basis approach
used by accountants to construct financial statement
cash flow approah
focuses on current and prospective inflows and outflows of cash; used by financial professionals
marketable securities
represent liquid short-term investments
deferred taxes
a long-term liability that reflects the difference between the taxes that firms actually pay and the tax liabilities they report on their public financial statements
preferred stock
the form of ownership that has preference over common stock when the firm distribute income and assets
common stock
= (number of outstanding common shares) X (par value per share)
paid-in-capital in excess of par
= (number of shares outstanding) X (original selling price of the shares)
gross profit
amount by which sale revenue exceeds the cost of goods sold
dividend payout ratio
the fraction of current earnings available for common stockholders paid out as dividends
operating flows
cash inflows and outflows directly related to the production and sale of products and services
investment flows
cash flows associated with the purchase or sale of fixed assets and business equity
financing flows
result from debt and equity financing transactions
free cash flow (FCF)
amount of ash flow available to investors (providers of debt and equity capital); represents the net amount of cash flow remaining after the firm has met all operating needs and has made all required payments on both long and short term investments
net operating profits after taxes (NOPAT)
the firm's earnings before interest and after taxes; = earnings before interest and taxes (EBIT) X [1-T (corporate tax rate)]
Operating Cash Flow (OCF)
= NOPAT + Depreciation (or any other noncash charge)
noncash charge
expenses that appear on the income statement but do not involve an actual outlay of cash; such as depreciation, amoritiation, and depletion of allowances
net working capital
measures the firm's overall liquidity; higher values reflect greater solvency; =current assets - current liabilities
ratio analysis
involves calculating and interpreting financial ratios to assess a firm's performance and status
liquidity ratios
measure a firms ability to satisfy its short term obligations as they come due; common precursor to financial distress or bankruptcy
current ratio
most commonly cited financial ratio; measures the firms ability to meet its short term obligations; = current assets/current liabilities
quick (acid-test) ratio
similar to current ratio except it excludes inventory which is the least liquid asset; = current assets-inventory/current liabilities
activity ratios
measure the speed with which the firm converts various accounts into sales or cash
inventory turnover
provides a measure of how quickly a firm sells its goods; = cost of goods sold/inventory
average age of inventory
= inventory turnover/number of days in a year
average collection period
useful for evaluating credit and collection policies; average daily sales = annual sales/365 days; average collection period = AR/ average daily sales
average payment period
used by firms to evaluate their payment performance; measures the average length of time it takes a firm to pay its suppliers; average daily purchases = annual purchases/ 365 days; average payment period= AP/ average daily purchases
fixed asset turnover
measures the efficiency at which a firm uses its fixed assets; tells analysts how many dollars of sales the firm generates per dollar of investment in fixed assets; = sales/ net fixed assets
total asset turnover
indicates the efficiency which which a firm uses all of its assets to generate sales; indicates how many dollars of sales a firm generates per dollar of asset investment; = sales/ total assets
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