Finance chapter 3 (week 2)

?
  • Created by: jmf00632
  • Created on: 14-10-19 14:19
statement of financial postition (balance sheet)
financial statement showing a firms accounting value on a particular date
1 of 60
net working capital
current assets - current liabilites
2 of 60
international accounting standards (IAS)
The common sets of standards and procedures by which audited finncial statements are prepared in europe and many other countries
3 of 60
incom statement
a financial statement summarizing a firms performace over a period of time
4 of 60
non- cash items
expenses charged against revenues that do not directly affect cash flow such as deprication
5 of 60
operating cash flow
cash generated from a firms normal business activites
6 of 60
cash flow from financing activites
cash generated or expensed as a result of its debt or equity choices
7 of 60
cash flow from investing activites
cash generated or expanded from a firms long-term investments
8 of 60
financial ratios
relationships determined from a firms financial information and used for comparison purposes
9 of 60
du pont identity
popular expression breaking ROE into 3 parts:operating efficency, asset use efficency and financial leverage
10 of 60
book value
The book value literally means the value of a business according to its books (accounts) that is reflected through its financial statements.- amount of money that its chareholders and investors can expect back if the company is liquidated
11 of 60
market value
The market value represents the value of a company according to the stock market
12 of 60
acrurals principle:
recognise reveneue as it occurs
13 of 60
matching priniciple
recognise costs in the same period as the revenues to which they relate
14 of 60
where will bank loans be in the cash flow stament?
you will find this item in the operating section as investment and tax is an operating activity
15 of 60
why do we have a ratio analysis?
we have a ratio analysis so we can Simplify data into key indicators to highlight trends and variances in:
16 of 60
what 3 things?
• Profitability • Financial strength & stability • Cash flow generation
17 of 60
what is a ratio analysis?
A ratio analysis is a Tool to evaluate, interpret and assess financial information.
18 of 60
what 2 types of analysis are there?
1. Trend Analysis: same company, different time periods -> “what’s changed? why?” 2. Peer Analysis: several companies (e.g. in same sector) -> “weakest/strongest? why?”
19 of 60
what does the ratio analysis use?
• the ratio analyse uses both ratios and underlying figures to understand relative changes and magnitude
20 of 60
what are the key stages to the ratio analysis process?
1. gather data 2. calculate ratios 3. interpret results 4. take action
21 of 60
EBIT
earnings before taxation
22 of 60
Asset turnover
this is all about how efficient the company is – we are focusing on the investment decision
23 of 60
inventory turnover
high inventory indicates efficient management of inventory
24 of 60
Inventory and Receivables Days
the lower this is the quicker inventory is sold
25 of 60
total asset turnoverr
high asset turnover indicates efficient management of assets.
26 of 60
return on assets
amount of profit we generated per £1 we invested in assets – e.g. we got 6p profit per £1 invested -THIS IS NOT A GOOD RETURN
27 of 60
profit margain
The higher, the better! However, high-volume companies can be profitable with small profit margins
28 of 60
return on assets
Measure of profit generated per unit value of assets
29 of 60
return on equity
Measure of profit generated per unit value of equity (investments by shareholders) - so of most interest to shareholders
30 of 60
what is on a statement of financial position/ blalance sheet?
assets, liabilites and equity
31 of 60
non- current assets can also be called......
fixed assets
32 of 60
long-current liabaities can also be called.....
long term debt
33 of 60
how is the statement of financial position presented?
fixed assets + current assets - current liabities = long term debt +share holders equity
34 of 60
EPS (earning per share) can also be known as what?
dividends per share
35 of 60
when looking at the income statement what does the financial manager have to keep in mind?
international accounting standards and cash versus non cash items
36 of 60
what is the balance sheet identity?
It calculates the actual book value of a company. Book value is what a business is worth after it pays all of its debts.
37 of 60
is the book value or market value more important to a financial manager?
Market Values Reflect The Amount Someone Is Willing To Pay Today For An Asset.- impacts the financial statements and is crucial to the balance sheet
38 of 60
what is the income statement equation?
Revenues – Expenses = Net Income
39 of 60
why is accounting income not the same as cash flow?
because the income tatement includes cash and non-cash items such as depriciation
40 of 60
what is the difference between a marginal and an average tax rate?
Marginal rate is how much tax you will pay on your next dollar of income. average tax rate is the taxes you have paid divided by your total income
41 of 60
what is the cash flow identity? explain what it says?
summarizes the amount of cash and cash equivalents entering and leaving a company. it measures how well a company manages its cash position, meaning how well the company generates cash to pay its debt obligations and fund its operationa
42 of 60
What are the 3 components of operating cash flow?
divided into 3 parts- - cash flow from operating activities, cash flow from investing, and cash flow from financing activites
43 of 60
What are the 5 groups of ratios?
Liquidity Ratios. Activity Ratios. Debt Ratios. Profitability Ratios. Market Ratios
44 of 60
what are some uses for financial stament analysis? (3)
external stakeholders use it evaluate the financial performance of a business and understand the overall health of a business and to find out the value of the business
45 of 60
what are some uses for ratio analysis?
evaluate or analyze the financial performance of the firm in terms of Risk, Profitability, Solvency, and Efficiency.
46 of 60
What are 6 problems with financial statement analysis (1)
an underlying theory does not exist to help us identify which quantities to look at or guide us in establishing bench marks
47 of 60
(2)
it works best when you are in the same line of business.
48 of 60
(3)
major competitors and peers may be in different countries. - this is a problem as financial staements from europe do not conform to international accoun standards. - the fact they have diff standards and pocedures makes it diff to compare statemen
49 of 60
(4)
different firms use different accounting procedures- for property, plant and equipment e.g. this makes it diff to compare statements
50 of 60
(5)
different firms end their fiscal (tax) year at different times e.g tesco at christmas time. this can make it hard to compare staements because of fluctations in accounts throughout the year
51 of 60
(6)
unusual events - such as a one time profit from an asset sale - may affect financial performance in comparing firms as events like this can give misleading signals
52 of 60
how do you find shareholders equity
total assets - total liabities
53 of 60
how to calculate net working capital
total current assets - total current liabilities
54 of 60
how to calculate long term debt ratio
long term debt/total assets
55 of 60
how to calculate net income
total expenses- total revenue - tax
56 of 60
how to calculate retained earnings
net income - dividends
57 of 60
In preparing a balance sheet, why do you think International Accounting Standards allow both historical cost and fair value approaches?
Historical costs can be objectively and precisely measured whereas market values can be difficult to estimate, and different analysts would come up with different numbers
58 of 60
there is a trade off between what?
relevance (market values) and objectivity (book values).
59 of 60
what happens if net income is negative?
A firm can still pay out dividends if net income is negative; it just has to be sure there is sufficient cash flow to make the dividend payments
60 of 60

Other cards in this set

Card 2

Front

net working capital

Back

current assets - current liabilites

Card 3

Front

international accounting standards (IAS)

Back

Preview of the front of card 3

Card 4

Front

incom statement

Back

Preview of the front of card 4

Card 5

Front

non- cash items

Back

Preview of the front of card 5
View more cards

Comments

No comments have yet been made

Similar Business Management resources:

See all Business Management resources »See all finance resources »