managerial finance -- Chapter 2

vocabulary

Generally accepted accounting principles (GAAP) -- the practice and procedure guidelines used to prepare and maintain financial records and reports; authorized by the Financial Accounting Standards Board (FASB)
Financial Accounting Standards Board (FASB) -- the accounting profession's rule setting body, which authorizes generally accepted accounting principles (GAAP)
Public Company Accounting Oversight Board (PCAOB) -- a nonprofit corporation established by the Sarbanes-Oxley Act of 2002 to protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports
Securities and Exchange Commission (SEC) -- the federal regulatory body that governs the sale and listing of securities
stockholders report -- annual report that publicly owned corporations must provide the stock orders; it summarizes and documents the firm's financial activities during the past year
letter to stockholders -- typically, the first element of the annual stockholders report and the primary communication for management
income statement -- provides a financial summary of the firm's operating results during a specified period
dividend per share (DPS) -- the dollar amount of cash distributed during the period on behalf of each outstanding share of common stock
balance sheet -- summary statement of the firm's financial position at a given point in time
current assets -- short-term assets, expected to be converted into cash within one year or less
current liabilities -- short-term liabilities, expected to be paid within one year or less
long-term debt -- debts for which payment is not do in the current year
paid in capital in excess of par -- the amount of proceeds in excess of the par value received from the original sale of common stock
retained earnings -- the cumulative total of all earnings, net of dividends, that have been retained and reinvested in the firm since its inception
statement of stockholders equity -- shows all equity account transactions that occurred during a given year
statement of retained earnings -- reconciles the net income earned during a given year, and any cash dividends paid, with the change in retained earnings between the start and the end of that year ( an abbreviated form of the statement of stockholders equity)
statement of Cash flows -- provides a summary of the firms operating, investment, and financing cash flows and reconciles them with changes in its cash and marketable securities during the period
Notes to the financial statements -- footnotes detailing information on the accounting policies, procedures, calculations, and transactions underlying entries in the financial statements
Financial Accounting Standards Board (FASB) Standard No. 52 -- mandates that US-based companies translate their foreign-currency denominated assets and liabilities into dollars, for consolidation with the parent company's financial statements. This is done by using the current rate (translation) method
current rate (translation) method -- technique used by US-based companies to translate their foreign-currency denominated assets and liabilities into dollars, for consolidation with the parent company's financial statements, using the year end (current) exchange rate
ratio analysis -- involves methods of calculating and interpreting financial ratios to analyze and monitor the firm's performance
Cross sectional analysis -- comparison of different firms financial ratios at the same point in time; involves comparing the firm's ratios to those of other firms in the same industry or to industry averages
benchmarking -- a type of cross-sectional analysis in which the firm's ratio now use are compared to those of a key competitor or group of competitors that it wishes to emulate
timeseries analysis -- evaluation of the firm's financial performance over time using financial ratio analysis
liquidity -- a firm's ability to satisfy its short-term obligations as they come due
current ratio -- a measure of liquidity calculated by dividing the firm's current assets by its current liabilities
quick (acid test) ratio -- a measure of liquidity calculated by dividing the firm's current assets minus inventory by its current liabilities
activity ratios -- measure the speed with which various accounts are converted into sales or cash, inflows or outflows
inventory turnover -- measures the activity, or liquidity, of a firm's inventory
average age of inventory -- average number of days sales in inventory
average collection period -- the average of amount of time needed to collect accounts receivable
average payment period -- the average amount of time needed to pay accounts payable
total asset turnover -- indicates the efficiency with which the firm uses its assets to generate sales
financial leverage -- the magnification of risk and return introduced through the use of fixed cost financing, such as debt and preferred stock
degree of indebtedness -- measures the amount of debt relative to other significant balance sheet amounts
ability to service debt -- the ability of a firm to make the payments required on a scheduled basis over the life of a debt
coverage ratios -- ratios that measure the firm's ability to pay certain fixed charges
debt ratio -- measures the proportion of total assets financed by the firm's creditors
Times interest earned ratio -- measures the firm's ability to make contractual interest payments; sometimes called the interest coverage ratio
fixed payment coverage ratio -- measures the firms ability to meet all fixed payment obligations
comment size income statement -- an income statement in which each item is expressed as a percentage of sales
Gross profit margin -- measures the percentage of each sales dollar remaining after the firm has paid for its goods
operating profit margin -- measures the percentage of each sales dollar remaining after all costs and expenses other than interest, taxes, and preferred stock dividends are deducted; the pure profits earned on each sales dollar
net profit margin -- measures the percentage of each sales dollar remaining after all costs and expenses, including interest, taxes, and preferred stock dividends, have been deducted
return on total assets (ROA) -- measures the overall effectiveness of management in generating profits with its available assets; also called the return on investment (ROI)
return on common equity (ROE) -- measures the return earned on the common stockholders investment in the firm
market ratios -- relate a firm's market value, as measured by its current share price, to certain accounting values
Price/earnings (P/E) ratio -- measures the amount that investors are willing to pay for each dollar of a firm's earnings; the higher the P/E ratio, the greater the investor confidence
market/book (M/B) ratio -- provides an assessment of how investors view the firm's performance. Firms expected to earn high returns relative to their risk typically sell at higher M/B multiples
DuPont system of analysis -- system used to dissect the firm's financial statements and to assess its financial condition
DuPont formula -- multiplies the firms net profit margin by its total asset turnover to calculate the firm's return on total assets (R0A)
modified DuPont formula -- relates the firm's return on total assets (R0A) to its return on common equity (ROE) using the financial leverage multiplier (FLM)
financial leverage multiplier (FLM) -- the ratio of the firm's total assets to its common stock equity