Balance Sheets and Financial Position

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