What is the purpose of financial statements?
To communicate a firm’s financial performance and position
What are the 4 key financial statements?
Income statement, Balance sheet, Statement of stockholders’ equity, Statement of cash flows
What are the two main objectives of a firm?
Profitability and liquidity
What are retained earnings?
Accumulated net income minus dividends
Retained earnings formula?
Beginning RE + Net income − Dividends
What are dividends?
Payments to shareholders that reduce equity
What is ratio analysis?
Using financial ratios to evaluate firm performance
Who uses financial ratios?
Shareholders, creditors, management
What are the 5 categories of ratios?
Liquidity, Activity, Debt, Profitability, Market
What is liquidity?
Ability to meet short-term obligations
Current ratio formula?
Current Assets / Current Liabilities
What does current ratio > 1 mean?
Firm can cover short-term debts
Quick ratio formula?
(Current Assets − Inventory) / Current Liabilities
Why exclude inventory in quick ratio?
Inventory is least liquid
What do activity ratios measure?
Efficiency of asset usage
Inventory turnover formula?
Cost of Goods Sold / Inventory
Average age of inventory formula?
365 / Inventory turnover
Average collection period formula?
(365 × Accounts Receivable) / Sales
Average payment period formula?
(365 × Accounts Payable) / Purchases
Total asset turnover formula?
Sales / Total assets
Debt ratio formula?
Total liabilities / Total assets
Debt-to-equity ratio formula?
Total liabilities / Equity
Times interest earned formula?
EBIT / Interest
Gross profit margin formula?
Gross profit / Sales
