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Annual report
Is the most important report that corporations issued annually by a corporation to its
stockholders. It contains basic financial statements as well as management's analysis of the
firm's past operations and future prospects.
Balance sheet
A statement of a firm's financial position at a specific point in time. Shows what assets the
company owns and who has claims on those assets as of a given date
Income statement
Shows the firm's sales and costs (and thus profits) during some past period (e.g. 2016). They
are prepared monthly, quarterly, and annually. The quarterly and annual statements are report
to investors, while the monthly statements are used internally for planning and control purposes
Stockholders' equity
Represents the amount that stockholders paid the company when shares were purchased and
the amount of earnings the company has retained since its origination
(1) StockH'E = Paid-in capital + retained earnings
(2) StockH'E = Total assets - total liabilities
Income statement
A report summarizing a firm's revenue, expenses, and profits during a reporting period,
generally a quarter or a year
Depreciation
The charge to reflect the cost of tangible assets used up in the production process. Depreciation
is not cash outlay. (Not cash expenses)
Amortization
A noncash charge similar to depreciation except that it is used to write off the costs of intangible
assets such as patents, copyright, trademark, and goodwill. (Not cash expenses)
EBITDA
Earnings before interest, taxes, depreciation, and amortization
Retained earnings
Is equal to net income less dividends. The [income statement] is tied to the [balance sheet]
through retained earnings. It is a claim against assets. Retained earnings do not represent cash
nor are available for dividends or anything else
Progressive tax
A tax system where the tax rate is higher on higher incomes. The personal income tax in the
United States, which ranges from 0% on the lowest incomes to 35% on the highest incomes, is
progressive
Taxable income
Is defined as "gross income less a set of exemptions and deductions"
Marginal tax
The tax rate applicable to the last unit of a person's income
s corporation
A form of corporation that avoids double taxation by having its income taxed as if it were a
partnership
Liquid Asset
An asset that can be converted to cash quickly without having to reduce the asset's price very
much.
Liquidity Ratios
Ratios that show the relationship of a firm's cash and other current assets to its current
liabilities.
Current Ratio
This ratio is calculated by dividing current assets by current liabilities. It indicates the extent to
which current liabilities are covered by those assets expected to be converted to cash in the
near future.
Debt Ratio
The ratio of total debt to total assests.
Profitability Ratios
A group of ratios that show the combined effects of liquidity, asset management, and debt on
operating results.
Operating Margin
This ratio measures operating income, or EBIT, per dollar of sales; it is calculated by dividing
operating income by sales.
Profit Margin
This ratio measures net income per dollar of sales and is calculated by dividing net income by
sales.
DuPont Equation
A formula that shows that the rate of return on equity can be found as the product of profit
margin, total assets turnover, and the equity multiplier. It shows the relationships among asset
management, debt management, and profitability ratios.
Benchmarking
The process of comparing a particular company with a set of benchmark companies.
Trend Analysis
An analysis of a firm's financial ratios over time; used to estimate the likelihood of improvement
or deterioration in its financial condition.