Flashcards: Financial Statement Analysis — 55 cards

Why must financial analysis distinguish assets, wealth, and cash?

Because what a firm owns, its worth, and its cash are different concepts.

What does financial analysis evaluate about a company?

Whether it is financially healthy enough to retain stakeholder trust and attract investors.

Which stakeholders use financial analysis based on equity orientation?

Investors, companies, corporate finance employees, stock analysts, pension funds, and private equity providers.

Which stakeholders use financial analysis based on debt capital orientation?

Banks, mortgage-credit institutes, bondholders, and companies.

Which stakeholders use financial analysis based on compensation orientation?

Management, executives, and boards of directors.

What factors influence stock prices besides supply and demand?

Investor expectations and financial and extra-financial information influence stock prices.

Which matters more to investors: future or past firm performance?

Future performance generally matters more to investors.

What was Apple's reported revenue in Q4 2015?

Apple reported $75.9 billion in revenue.

Why couldn't Apple's stock-price effect be inferred from financial figures alone in Q4 2015?

Because investors also considered slowing iPhone growth and a strong dollar.

What should financial managers maximize while considering stakeholder effects?

Financial managers should maximize firm value.

What must financial managers preserve between the firm and stakeholders?

They must preserve confidence between the firm and its stakeholders.

What are financial statements?

Periodic accounting reports showing past performance and asset financing.

Which are the main financial statements?

Balance sheet, income statement, cash flows, and shareholders' equity statements.

Name two major financial reporting standards.

GAAP and IFRS.

What is the role of an auditor in financial reporting?

A neutral third party checking compliance and reliability of financial statements.

What are the main steps in a financial analysis process?

From strategic and sector assessment to growth, profitability, risk analysis, and recommendations.

What must a company do to survive in the long run?

Create shareholder value, meet stakeholder commitments, generate wealth, invest, finance investments, generate sufficient return, and manage illiquidity risk.

How is Return on Invested Capital (ROIC) calculated?

ROIC equals NOPAT divided by Capital Employed.

How can ROIC be decomposed?

As Operating Margin multiplied by Asset Turnover.

How is Return on Equity (ROE) calculated?

ROE equals Net Income divided by Equity.

How can ROE be expressed besides its basic formula?

As ROIC plus the Leverage Effect.

What does a balance sheet list at a given point in time?

A firm's assets, liabilities, and shareholders' equity.

What is the balance-sheet identity formula?

$Total\ Assets = Liabilities + Shareholders’\ Equity$

What type of assets produce benefits for more than one year?

Long-lived assets.

What are inventories held for?

Sale or production.

What are accounts receivable?

Amounts owed by customers.

What type of assets are cash and marketable securities?

Liquid assets.

What defines long-term financial debt?

Maturities beyond one year.

What are accounts payable?

Amounts owed to suppliers for credit purchases.

Why doesn't the balance sheet show a firm's financial position throughout the year?

It provides a snapshot at a specific date.

How does seasonality affect balance-sheet components?

It can materially change inventories and cash across the year.

What percentage of LEGO's annual sales occur between September and December?

80% of LEGO's annual sales occur then.

What determines the relevant balance-sheet items for a company?

The industry and business model heavily influence them.

What does the income statement list over a period?

Revenues and expenses affecting a company's wealth.

What is the sequence in a condensed income statement from net sales?

Net sales to gross profit, EBITDA, EBIT, earnings before taxes, pretax income, and net earnings.

How do operating expenses differ from capital expenditures?

Operating expenses reduce wealth immediately, capital expenditures are investments not recorded as expenses immediately.

How are capital expenditures on fixed assets treated in the income statement?

They are not immediately recorded as income-statement expenses.

How is a €39 million expenditure on a new building recorded at time zero in the JIT example?

It is not recorded as an operating expense in the income statement.

When does accrual accounting recognize a sale?

When the sale is made, not when cash is received.

What does the matching principle record in the period of related revenues?

Costs associated with those revenues.

What does depreciation recognize about fixed assets?

Their wearing out and declining value as they age.

Is depreciation a cash or non-cash accounting charge?

It is a non-cash accounting charge.

Why does net income typically differ from cash earned by a firm?

Because of non-cash items, accruals, capital expenditures, and other cash uses not on the income statement.

What does the cash-flow statement show about a company?

How much cash was generated and allocated during a period.

Into which three categories are cash flows classified?

Operating, investing, and financing activities.

What does the sum of the three cash flow categories explain?

The increase or decrease in cash between the period's start and end.

What was the cash from operating activities in JIT's Year 2?

€1.3 million.

What was the cash from investing activities in JIT's Year 2?

−€39.8 million.

What was the cash from financing activities in JIT's Year 2?

€41.2 million.

What was the change in cash in JIT's Year 2 cash-flow statement?

€2.7 million.

What does an equity contract give investors?

Shares and shareholder status.

What does a debt contract give a lender?

A creditor claim requiring repayment.

Who funds a startup?

Its investors.

Who funds an established business?

Its clients.

What does financial risk analysis include?

Capital-structure ratios, short-term illiquidity risk, and insolvency analysis.