Financial Management

A financial statement that indicates what assets the firm owns and how those assets are financed in the form of liabilities or ownership interest.

Shareholders' equity minus preferred share ownership. Basically, net worth is the common shareholders' interest as represented by common stock par value, contributed surplus, and retained earnings. If you take all of the assets of the firm and subtract its liabilities and preferred stock, you arrive at net worth.

A value equal to income after taxes plus noncash expenses. In capital budgeting decisions, the usual noncash expense is amortization.

This manual outlines the requirements for financial statements prepared by chartered accountants.

A method of inflation-adjusted accounting recommended by the CICA for use by larger companies. Financial statements are adjusted to reflect changing price levels using specific price indexes related to the specific types of goods being adjusted. If the firm elects to follow the recommendation, this is shown as supplemental information in the firm's annual report.

The earnings available to common shareholders divided by the number of common stock shares outstanding.

Cash flow from operating activities, minus expenditures required to maintain the productive capacity of the firm, minus dividend payouts.

The traditional method of accounting, in which financial statements are developed based on original cost minus depreciation.

A financial statement that measures the profitability of the firm over a time period. All expenses are subtracted from sales to arrive at net income.

The relative convertibility of short-term assets to cash. Thus, marketable securities are highly liquid assets, while inventory may not be.

The rate that applies to the last dollar of taxable income.

The price of a share traded on a public exchange by open auction.

Shareholders' equity minus preferred share ownership. Basically, net worth is the common shareholders' interest as represented by common stock par value, contributed surplus, and retained earnings. If you take all of the assets of the firm and subtract its liabilities and preferred stock, you arrive at net worth.

The multiplier applied to earnings per share to determine current value. The P/E ratio is influenced by the earnings and sales growth of the firm, the risk or volatility of its performance, the debt-equity structure, and other factors.

The total ownership position of preferred and common shareholders.

A required financial statement that outlines a company's cash flows over the course of a specified period.

The reduction of taxes otherwise payable by the ability to lower taxable income. This takes the form of a deduction to which the taxpayer is entitled.

A group of ratios that measures the speed at which the firm is turning over or utilizing its assets. We measure inventory turnover, capital asset turnover, total asset turnover, and the average time it takes to collect accounts receivable.

A group of ratios that indicates to what extent debt is being used and the prudence with which it is being managed. Calculations include debt to total assets, times interest earned, and fixed charge coverage.

A levelling off or slowing down of price increases.

A credit-rating agency that publishes information on over 30 million business establishments through its Reference Book.

An analysis of profitability that breaks down return on assets between the profit margin and asset turnover. The second, or modified, version shows how return on assets is translated into return on equity through the amount of debt that the firm has. Actually return on assets is divided by (1 2 Debt/assets) to arrive at return on equity.

A system of writing off inventory into cost of goods sold in which the items purchased first are written off first. Referred to as first-in, first-out.

Profits generated as a result of an inflationary economy, in which old inventory is sold at large profits because of increasing prices. This is particularly prevalent under FIFO accounting.

A system of writing off inventory into cost of goods sold in which the items purchased last are written off first. Referred to as last-in, first-out.

A group of ratios that allows one to measure the firm's ability to pay off short-term obligations as they come due. Primary attention is directed to the current ratio and the quick ratio.

A group of ratios that indicates the return on sales, total assets, and invested capital. Specifically, we compute the profit margin (net income to sales), return on assets, and return on equity.

The cost of replacing the existing asset base at current prices as opposed to original cost.

An analysis of performance that is made over a number of years to ascertain significant patterns.

b. the ability of the firm to earn an adequate return on sales, total assets, and invested capital

a. the speed at which the firm is turning over its assets

c. the firm's ability to pay off short term obligations as they are due

d. the debt position of the firm in light of its assets and earning power

b. net income/total assets

a. profit margin times assets turnover

c. an asset utilization ratio

b. current ratio and quick ratio

d. debt to sales

c. trend analysis

d. The firm's dividend policy.

a. weigh and evaluate the operating performance of the firm

b. profitability

c. liquidity

d. debt to total assets

The weighted-average cost of capital is calculated as the required rate of return (i.e., cost of capital) on each source of capital weighted by the proportion of total capital provided by each source and the resulting weighted costs are summed to get the total weighted average. The cost of capital for debt must be the computed net of the tax benefit provided by the deductibility of interest expense. Therefore, for the facts given, the computation would be:
Debt 30% x (10% x [1 - 30% tax rate]) = 30% x (10% x 70%) = 30% x 7.0% = 2.10%
C/S 60% x 12% = 7.20%
P/S 10% x 10% = 1.00%
WEIGHTED-AVERAGE (Sum) = 10.30%

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