Finance Info and Valuation Chapter 1, 2, 3, 4 Questions and Answers

Finance Info and Valuation Chapter 1, 2, 3, 4 Questions and Answers financaial statment analysis scrutinizing a company's financial statments future and current while valuing equity and debt owner claim reflected in equity value nonowner claim reflected in obligation 4 step process 1) understand the business enviornment and account info 2) adjusting and assesing Fin. info 3) forecasting fin. info. 4) using info for valuaiton 4 main business activities - plan business activities - finance activities - invest in those actions - engage in operating activities - past financial statments provide info for these decisions - current decisions affect future fin. statements EDGAR collects all public firms financial statements Discolsure benefits -lower cost of capital - recruiting and retaining labor - negotiation w/ customers and suppliers discolusre cost - time and effort to prepare - competitive disadvantage - legal and political costs Sarbarnes-Oxley Act -2002 - protect investors rights balance sheet reports firms finance position at a point in time - reports assets, liabilities, equity - reports resources and financing activities Income Statement reports firms performance over a period of time - revenue-expenses= profit - profitablity largerly determined by ability to create barriers to competitive pressure and control operating expense Statement of Cash Flows reports inflows and outflows of cash during a period of time 3 flows 1) operating activity 2) investing activity 3) financing activity Statement of Shareholders' Equity report changes in equity over a period of time - contributed capital - stockholders net contributions to the company 5 fources of business enviornment 1) industry competition 2) barganing power of suppliers 3) bargaining power of distributors 4) threat of subsitition 5) threat of entry assets -owned or controlled by the company - generate expected future economic benefits -sorted in terms of liquidity current assets cash and other assets expected to be exchanged for cash or consumed within a year -cash/cash equivalent -short term investments -accounts recivables -inventory -pre-paid expense long term assets assets that are expected to be used in business operations for longer than one year -PP&E -long term investments -intangible assets market value product of stock price and the # of outstanding common shares book value determined by GAAP (historical cost) liabilities non-owner financing; represents future economic sacrifies stockholders equity owner financing -capital invested by stockholder -direct purchases of stock -indirect via retained earnings -contributed capital -earned capital Current liabilities liabilities due within a short time, usually within a year - accounts payable - accrued liabilities -unearned revenue -short term notes payable -current maturities of long term dent Net working capital current assets - current liabilities - high NWC = high liquidity cash cycle the time between cash disbursement and cash collection -can be negative noncurrent liabilities obligations that a company does not expect to pay within one year -long term debt -other long term liabilities contributed capital net funding a company receives from issuing and reacquiring its shares to stockholders - common stock - additional paid in capital - preffered stock -treasury stock (negative balance) Earned captial cumulative net income retained (retained earnings) operating expense An expense incurred in carrying out an organization's day-to-day activities -COGS -sellng, general, and admin expense - R&D expense -depreciation and amortization expense non operating expense expenses that are not related to a business's normal operations - interest expense -interenst income -equity income -tax expense Revenue Recognition Principle The principle that companies recognize revenue in the accounting period in which the performance obligation is satisfied. Expense Recognition Principle Match expenses with revenues in the period when the company makes efforts to generate those revenues Gross Profit Margin Gross Profit/Sales margin operating expense operating expense/sales operating activities (CF) cash flows related to day-to-day activities investing activities (cf) Cash flows related to investments financing activities CFs from borrowing and equity financial statement prep 1) analyze transactions and prepare financial statements effect template 2) prepare adjustments 3) prepare statements 4) close book 4 types of adjustments 1) prepaid expenses 2) uneraned revenue 3) accrued expense 4) accrued revenue close books To transfer the balances in all revenue and expense accounts to retained earnings, which resets the revenue and expense accounts to zero so that they are ready to record the next period's transactions. Return on Equity (ROE) relates net income to amount of equity invested in the company = net income/ average stockholders equity - reflects performance and leverage -reflects operating and nonoperating performance -ROE= operating return + nonoperating return = return on assets X financial leverage = profit margin Asset turnover financial leverage Return on Assets (ROA) = net income/ average total assets = profit margin *asset turnover = (net income/ sales)*(sales/avg. total assets) Financial Leverage =average total assets/ average stockholders equity -reflects how assets are financed-mix of debt and equity gross profit margin Gross Profit/Sales higher is favorable Profitability Analysis operating expense margin SGA expense/ Sales lower is favorable Profitability Analysis Account Rec turnover sales/ average account receivable productivity analysis inventory trunover COGS/ average inventories productivity analysis Accounts payable turnover COGS/ average accounte payable productivity analysis Cash Conversion Cycle (CCC) the length of time funds are tied up in working capital, or the length of time between paying for working capital and collecting cash from the sale of the working capital PPE turnover Sales / Average PPE -higher level indicated lower level of capital intensity total liabilities to eqiuty ratio total liability/stockholder equity times interest earned ratio EBIT/Interest expense Retrun on net operating assets =(net operating profit after taxes)/(average net operating assets) = net operating profit margin * net operating asset turnover (Net operating profits after taxes) NOPAT a firm's earnings before interest and after taxes =EBIT-tax on operating profit =EBIT- tax shield NOA (Net Operating Assets) Operating Assets - Operating Liabilities tax shield -tax saved by having the tax-deductible nonoperating expense =pretax net non-operating expense * statutory tax rate =(operating income-income before taxes)*(statutory tax rate) (NOPM) net operating profit margin how much operating profit company earns from every dollar of sales = NPOAT/Sales NOAT (net operating asset turnover) productivity of company operating assets =Sales/Average Net Operating Assets vertical analysis expresses each item in a financial statement as a percentage of the same base amount -Income statement expressed as % of net income -Balance sheet expressed as % of total assets -compare comapinies of different size horizontal analysis examines fianancial data across time -analysis of trends in company performance -predicition of future performance demand for credit comapnies demand credit for various operating, investing, and financing activities credit for operating activities -routine low risk credit for cyclical operating cash needs -high risk credit- used to cover operating loss