[h] CPCU 410 – Module 7
[q] Financial statement
[a] A numerical presentation of a company’s financial status and activity.
[q] Accounting equation
[a] An equation applied to the balance sheet. Can be expressed as:
Formula: Assets – Liabilities = Shareholders’ Equity
Alternative formula: Assets = Liabilities + Shareholders’ Equity
[q] Balance sheet
[a] A financial statement that reports a company’s assets, liabilities and shareholders’ equity.
[a] Property owned by an organization. Reported on the balance sheet.
[q] Current assets
[a] Property owned by an organization that will generally be used within one year. Includes cash, inventory, accounts receivable, and marketable securities.
[q] Non-current assets
[a] Property owned by an organization that will generally be used in more than one year. Includes buildings, land, and intangible assets.
[q] Marketable securities
[a] A balance sheet asset that includes temporary assets (such as publicly traded stock) that can be easily sold and converted to cash.
[q] Accounts receivable
[a] A balance sheet asset that consists of amounts owed to a company by customers.
[a] A balance sheet asset that consists of a company’s goods that are available for sale to customers. Also includes raw materials for a manufacturing company.
[q] Prepaid expenses
[a] A balance sheet asset that results from a business making advanced payments for goods or services to be received in the future. They are initially recorded as assets, but their value is expensed over time onto the income statement.
[a] An intangible asset on the balance sheet that accounts for the excess purchase price of another company. Items included are proprietary or intellectual property and brand recognition, which are not easily quantifiable.
[q] Depreciation expense
[a] An accounting method of allocating the cost of a tangible asset over its useful life.
[a] Amounts owed by an organization to creditors.
[q] Current liabilities
[a] Amounts owed by an organization to creditors that are payable within one year.
[q] Long-term debt
[a] Amounts owed by an organization to creditors that are payable in more than one year.
[q] Shareholders’ equity
[a] A balance sheet account that is determined by subtracting liabilities from the company’s assets. If this amount is negative, that indicates the company’s liabilities exceed the company’s assets.
[q] Income statement
[a] A financial statement that reports a company’s revenue and expenses over a period of time.
[a] An item reported on the income statement that represents the gross income generated from the sale of products or services.
[a] An item reported on the income statement that represents certain cash outflows and non-cash costs, such as depreciation.
[q] Gross profit
[a] An item reported on the income statement that represents the net income from sales of products. Calculated as sales less cost of goods sold.
[q] Gross margin
[a] The percentage of sales remaining after deducting cost of goods sold from sales.
[q] Operating income
[a] An item reported on the income statement that represents gross profit less general operating expenses.
[q] Net income
[a] An item reported on the income statement that represents revenue and gains, less expenses, losses, and taxes.
[q] Comprehensive income
[a] A company’s net income, as well as items not required to be reported on the income statement, such as unrealized gains and losses on securities.
[q] Vertical analysis
[a] The use of common-size statements to highlight relationships among items within a set of financial statements.
[q] Common-size statement
[a] A type of financial statement that displays items as a percentage of a common base figure, such as revenue. This type of financial statement allows for easy analysis between companies.
[q] Single-period vertical analysis
[a] Adding common-size percentages to existing financial statements, rather than releasing separate common-size financial statements. Used to compare two or more companies over a single period.
[q] Multiple-period vertical analysis
[a] The application of single-period analysis to more than one period. Can be used to analyze interim period results, as well as annual results.
[q] Trend analysis
[a] A type of financial statement analysis that studies period-to-period changes in a company’s financial statements. Also known as horizontal analysis.
[q] Year-to-year analysis
[a] The most common type of trend analysis. Determines the percentage change in values for financial statement items between consecutive years.
[q] Base-year-to-date analysis
[a] A type of trend analysis that uses the earliest year of the period under consideration as the base year and determines the percentage change in statement item values for each successive year relative to the base year.
[q] Efficiency ratios
[a] Financial ratios that indicate how effectively an organization is using its assets.
[q] Types of efficiency ratios
Accounts receivable turnover ratio.
Asset turnover ratio.
Inventory turnover ratio.
[q] Accounts receivable turnover ratio
[a] A type of efficiency ratio that determines the speed a business collects amounts due from its customers.
Formula = (Credit Sales / Average Accounts Receivable)
[q] Asset turnover ratio
[a] A type of efficiency ratio that measures an organization’s use of assets.
Formula = (Sales / Average Assets)
[q] Fixed assets
[a] Assets which are purchased for long-term use and are not likely to be converted quickly into cash, such as land, buildings, and equipment.
[q] Inventory turnover ratio
[a] A type of efficiency ratio that measures how quickly inventory is sold to customers.
Formula = (Cost of Goods Sold / Average Inventory)
[q] Profitability ratios
[a] A series of ratios that measure the earning capacity of a company.
[q] Types of profitability ratios
Net profit margin.
Return on assets.
Return on equity.
[q] Net profit margin
[a] A type of profitability ratio that measures the amount of each sales dollar remaining after deducting all expenses for the period.
Formula = (Net Income / Average Sales)
[q] Return on assets
[a] A type of profitability ratio that indicates how profitable a company is relative to its investment in assets.
Formula = (Net Income / Total Assets)
[q] Return on equity
[a] A type of profitability ratio that indicates how profitable a company is relative to shareholder investment.
Formula = (Net Income / Shareholders’ Equity)
[q] Liquidity ratios
[a] A series of ratios that measure an organization’s ability to pay off its short-term debt.
[q] Types of liquidity ratios
[q] Working capital
[a] Funds available to support a company’s operations.
Formula = (Current Assets – Current Liabilities)
[q] Current ratio
[a] A type of liquidity ratio that indicates the ability to meet current liabilities with current assets.
Formula = (Current Assets / Current Liabilities)
[q] Acid-test (Quick) ratio
[a] A type of liquidity ratio that measures the ability to pay current liabilities with cash and liquid assets.
Formula = [(Current Assets – Inventory) / Current Liabilities]
Alternative formula = [(Cash + Marketable Securities + Accounts Receivable) / Current Liabilities]
[q] Leverage ratios
[a] A series of ratios that measure the degree to which an organization has borrowed money.
[q] Types of leverage ratios
[q] Debt-to-equity ratio
[a] A type of leverage ratio that measures the extent a company is using debt versus its own funds.
Formula = (Long-term Debt / Shareholders’ Equity)
[q] Debt-to-assets ratio
[a] A type of leverage ratio that measures the percentage of assets financed by debt.
Formula = (Total Liabilities / Total Assets)