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Questions and Answers
What is the primary purpose of a balance sheet?
What is the primary purpose of a balance sheet?
What is the difference between a short-term asset and a long-term asset?
What is the difference between a short-term asset and a long-term asset?
What is the purpose of depreciating an asset?
What is the purpose of depreciating an asset?
What is the formula for calculating earnings per share (EPS)?
What is the formula for calculating earnings per share (EPS)?
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What is the purpose of a cash flow statement?
What is the purpose of a cash flow statement?
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What is the return on equity (ROE) ratio used to measure?
What is the return on equity (ROE) ratio used to measure?
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What is the purpose of liquidity and leverage measures?
What is the purpose of liquidity and leverage measures?
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What is the acid test ratio used to measure?
What is the acid test ratio used to measure?
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Study Notes
Balance Sheets
- A snapshot of a company's financial position at a specific point in time
- Assets are listed on the left side, and claims on assets are listed on the right side
- Equityholders have a claim on assets once debtholders have been satisfied
- Book value refers to an asset's value at the time of purchase
Assets
- Short-term assets are also known as current assets
- Long-term assets are also known as fixed assets, and include land, equipment, and property
- Some long-term assets, such as equipment and property, are affected by depreciation, or the loss of value over time
- Other assets include patents and goodwill
Liabilities
- Current liabilities include debts that must be paid within a year, such as accounts payable and notes payable
- Long-term liabilities include debts that do not need to be paid within a year
- Other liabilities also exist
Equity
- Preferred shares and common equity are both types of equity
Income Statements
- The accrual method is used to prepare income statements
- Revenue minus costs and expenses equals profit, which is calculated over a period of time
- Earnings per share (EPS) is calculated by dividing net income by the number of common shares outstanding
Cash Flow Statements
- Cash flow statements show the inflow and outflow of cash in a straightforward manner
- Cash flow is divided into three categories: operating activities, investing activities, and financing activities
- Depreciation is added back into the cash flow from operating activities
Performance Measures
- Financial ratios, also known as ratio analyses, are used to evaluate a company's performance
- Return on equity (ROE) measures a company's overall profitability relative to shareholders' investment
Profitability Measures
- Profitability measures focus on the income statement
- Gross margin percentage measures profitability
- Expense ratio measures the impact of expenses on profitability
Resource Management Measures
- Resource management measures use data from both the income statement and the balance sheet
- Age of inventory (days) measures the average time between purchase and sale
- Inventory turnover measures the number of times inventory is sold and replaced within a year
- Age of accounts receivable (days) measures the average time it takes to collect accounts receivable
- Age of accounts payable (days) measures the average time it takes to pay accounts payable
Liquidity and Leverage Measures
- Liquidity measures a company's ability to meet short-term and long-term obligations
- Leverage measures evaluate a company's optimal use of debt
- Short-term liquidity measures include the current ratio and acid test ratio
- Long-term leverage measures include the debt-to-equity ratio and long-term debt-to-capital ratio
- Interest coverage measures a company's ability to pay interest expenses
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Description
This quiz covers the concept of balance sheets, which provide a snapshot of a company's financial position at a particular point in time. It includes assets, liabilities, and equity, and how they are classified and valued.
