Percentage of net sales
(Income statement item in $/ net sales in $) x100
Vertical analysis
The process of using a single variable on a financial statement as a constant and determining how all other variables relate as a percentage of the single variable.
Horizontal analysis
A determination of the percentage increase or decrease in an account from a base time period to successive time periods.
Ratio analysis
A process used to determine the health of a business as it compares to other firms in the same industry or similar industries. The process makes use of mathematical ratios to express numbers.
Liquidity ratios
A ratio that determines how much of a firm's current assets are available to meet short term creditor's claims.
Current ratio
Calculated by dividing total current assets by total current liabilities.
Activity ratios
Indicate how efficiently a business is at using its assets.
Inventory turnover ratio
Indicates how efficiently a firm is moving its inventory.
Accounts receivable turnover ratio
Allows us to determine how fast our company is turning its net credit sales into cash.
Fixed asset turnover ratio
Indicates how efficiently fixed assets are being used to generate revenue forms firm.
Total asset turnover ratio
Indicates how efficiently our firm uses its total assets to generate revenue for the firm.
Leverage (debt) ratios
Indicate what percentage of the business's assets is financed with creditor's claims.
Debt-to-equity ratio
Indicates what percentage of the owner's equity is debt, or for every dollar of equity, how many dollars of debt the firm owes.
Debt-to-total-assets ratio
Indicates what percentage of a business's assets is owned by creditors.
Profitability ratios
Used by potential investors and creditors to determine how much of an investment is returned from either earnings on revenues or appreciation of assets.
Gross profit margin ratio
Used to determine how much gross profit is generated by each dollar in net sales.
Operating profit margin ratio
Used to determine how much each dollar of sales generates in operating income.
Net profit margin ratio
Tells us how much a firm earned on each dollar in sales after paying all obligations, including interest and taxes.
Operating return on assets ratio
Allows us to determine how much we are actually earning on each dollar in assets before paying interest and taxes.
Return on assets (ROA)
Tells us how much a firm earns on each dollar in assets after paying both interest and taxes.
Return on equity (ROE)
Tells the stockholder or individual owner what each dollar of his or her investment is generating in net income.
Market ratios
Used to compare firms within the same industry.
Price earnings ratio
Magnification of earnings per share in terms of the market price of stock per share.
Price earnings to growth ratio
A ratio comparing the price earnings ratio to the earning-per-share growth rate.
Operating cash flow per share ratio
Compares the operating cash flow on the statement of cash flows to the average number of shares common stock outstanding.
Efficiency
Obtaining the highest possible return with the minimum use of resources.
Effectiveness
Accomplishing a specific task or reaching a goal.
Profit
An absolute number earned on an investment.
Accounting profit
What a business has left from its revenues after paying all of its expenses. Typically shown at the bottom of the income statement.
Entrepreneurial profit
An amount earned above and beyond what the entrepreneur would have earned if he or she had chosen to invest time and money in some other enterprise.
Profitability
Return on investment, measured by dividing net profit by average total assets.
Earning power of a company
1) the company's ability to generate income on the amount of revenue it receives, which is also known as net profit margin; 2) Its ability to maximize sales revenue from proper asset employment or total asset turnover.
Break even analysis
A process determining how many units of production must be sold or how much revenue must be obtained before we begin to earn a profit.
Fixed costs
The costs of running a business that are not tied to the amount of production or sales.
Price
What the company charges for the product or service.
Variable costs
All costs associated with producing or procuring a product or service that is sold by a firm and are directly related to sales.
Contribution margin
Amount of profit made by a company on each unit that is sold above and beyond break-even quantity.
Break-even dollars
Revenue required for the break even point. Express the contribution margin as a percentage of sales,or a percentage of price, rather than the dollar amount.
Break even chart
A graph used to visually depict total revenue, total cost, break even, and profit and loss in terms of sales volume.
Leverage
The magnification of a return to a company by using fixed costs of operations and financing efficiently.
Operating leverage
The percentage change in operating income that occurs as a result of the percentage change in sales.
Financial leverage
The percentage change in earnings per share that occurs as a result of the percentage change in operating income.
Degree of financial leverage
The percentage of change inn earnings per share as a result of the percentage change in operating incomes.
Degree of combined leverage
The percentage change in sales that has a multiplier effect on the change in earnings per share.
Bankruptcy
A state of insolvency in which the liabilities of a firm or individual exceed the assets and the firm or individual does not have sufficient cash flow to make payment creditors.
Chapter 7 bankruptcy
A form of bankruptcy that requires the company or individual to liquidate all of its assets and make payment to its creditors.
Chapter 11 bankruptcy
A form of bankruptcy in which a business seeks court protection while it develops a plan to pay off its creditors.
Chapter 13 bankruptcy
Reserved for individuals and sole proprietorships. But much simpler than chapter 11 bankruptcy. It also requires a plan to pay its creditors. Creditor do not vote for a reorganization plan, but can object to the terms of the plan.
Forecast
A quantifiable estimate of future demand.
Forecasting
The process of estimating the future demand for our products and services.
Judgmental models
Forecasting models that are qualitative and essentially use estimates based on expert opinions.
Time series model
Forecasting models that use historical records that are readily available within a firm or industry to predict future sales.
Casual models
Take into account variables in the general economy that affect the sales of a firm or industry.
Surveys of sales forces
Conducted by managers to determine future sales within the company's sales territories.
Surveys of customers
Effective for virtually all firms, but particularly for the company that has a few large customers.
Historical analogy
A qualitative forecast that uses historic similarities to project the possible success or failure of new products or services.
Market research
A qualitative method of forecasting that uses surveys, tests, and observations to project sales.
Delphi method
A qualitative forecasting method that uses a panel of experts to obtain a consensus of opinion.
Moving average model
A forecasting model that assumes some recent time periods are the best predictor of future sales.
Weighted moving average model
A model that assumes that some recent time periods are a more accurate predictor of sales than previous time periods, but that the predictive ability of the time periods used is not equal.
Exponential smoothing model
A forecasting model that uses a smoothing constant as a adjustment in determining the forecast. The assumption is that both the forecast of current period sales and actual sales can be used to predict future sales.
Smoothing constant
A value assigned by the forecaster to adjust the forecast based on the forecaster's assumption of the relationship between sales in one time period and sales in the next time period.
Linear regression
A time series forecasting model that uses a statistical method known as least squared regression.
Dependent variable
A variable that relies on other variables for its value.
Independent variable
A variable that does not depend on other variables for its value.
Slope
Rise over run.
Fixed expenses
Expenses over which we have little or no control, such as mortgage payments, automobile loan or lease payments, property taxes, insurance, and income taxes.
Start-up expenses
Expenses incurred by the business only once.
Variable expenses
Pertains to a personal cash flow statement.
Pro forma financial statement
A financial statement that is developed to project the future condition of a business based on a forecast.
Pro forma financial analysis
A process of generating future financial statements using the sales of forecast as a basis.
Pro forma cash budget
Projects future receipts and expenditures and determines how much financing is needed on a monthly basis to correct any shortfalls in cash flows.
Pro forma balance sheet
A projected balance sheet for a future time period. It is required by lenders when evaluating a company to determine if the company is a good financial risk.
Percentage of sales method
Based on the fact that assets and liabilities historically vary with sales causes a subsequent buildup in both assets and liabilities.
Percentage of sales method for determining new financing
A method of determining how much new financing a company will need in the future based on the fact that assets and liabilities historically vary with sales.
Gantt chart
Shows all tasks that must be performed and the time that it takes to accomplish these tasks.
Gross working capital
Items that a business can turn into cash within 1 year, also known as current assets.
Net working capital
The difference between a business's total current assets and its total current liabilities.
Petty cash
Used to pay for small daily items.
Cash on hand
Consists of daily sales and a change fund.
Cash in bank, checking
May draw interest but are usually charged for each check that is written against them.
Cash in bank, savings
1) savings accounts usually earn higher interest rates than checking accounts 2) the small business must set aside employee taxes, sales taxes and other payments due to governmental agencies 3) some funds should be reserved for emergency repairs and servi
Disbursement float
The time that elapses between payment by a check and the check's actually clearing the bank, at which point funds are removed from the checking acccount.
Collection float
The amount of time that elapses between when you deposit a debtor's check in your account and the check clearing, at which point the funds are actually placed in your account.
Lockbox
Post office box that is opened by an agent of the bank and checks received there are deposited in our account immediately.
Electronic funds transfer
Accomplished when funds are transferred immediately from one bank account to another via computer.
Marketable securities
Investment vehicles that include money market mutual fund, treasury bills, cd's, government and corporate bonds, and stocks.
Factoring
Process of selling our accounts receivable to another firm at a discount off of the original sales price.
Character
Used in credit evaluation to determine if a customer has paid his or her bills on time in the past and has favorable credit references.
Capacity
A term used in credit evaluation to determine whether a customer has enough cash flow or disposable income to pay back a loan or pay off a bill.
Capital
The applicant's net worth or total assets minus total liabilities.
Collateral
The ability to satisfy a debt or pay a creditor by selling assets for cash.
Conditions
Involve items like the general state of the economy or the borrower's specific conditions.
Credit decision
Involves making sure that the customer is a good credit risk after conducting a five-step credit evaluation.
Credit terms
The requirements that our business establishes for payment of a loan.
Reorder point (ROP)
Has 3 factors that are used in determining the quantity of an item that exists when we actually place order: lead time, daily demand, and safety stock.
Lead time
Time lapse from order placement to to order receipt.
Daily demand
The quantity of a product that is used or purchased by customers in a business per day.
Safety stock
The quantity of stock held to satisfy variations in demand.
Raw materials
Items a company uses in producing its final product.
Work-in-process
Items that are in the midst of the transformation process.
Finished goods
Items that are actually sold by the business.
Maintenance, repair and operating
Items that are used by the firm in usual operations but that are not manufactured and sold by the firm.
Short-term debt
Consists of business obligations that will be paid within the current accounting period.
Accrued liabilities
Obligations of the firm accumulated during the usual course of business.
Federal employment taxes
Consists of income, social security, medicare and unemployment taxes.
State employment taxes
Consist of income, unemployment, and workmen's compensation taxes.
Trade discounts
Amounts deducted from list prices of items when specific services are performed by the trade customer.
Cash discounts
Offered to credit customers to entice them to pay promptly.
Quantity discounts
Offered by vendors to increase their own cash flow when they offer discounts to customers who purchase items in large quantities.
Cumulative discounts
Offered on total purchases of an item during the vendor's fiscal year.
Forecasting process
1) determine the type of forecasting model to be used 2) determine the forecast horizon 3) select one or more forecasting models 4) evaluate the models 5) apply the chosen model 6) monitor and control the model
5 C's of credit evaluation
Character, capacity, capital, collateral, conditions
Economic order quantity
To minimize inventory costs we determine the total cost of inventory, which includes ordering cost, carrying costs, the price of goods to be ordered, and the losses incurred by lost sales(opportunity cost).
Types of forecasting models
Judgmental (qualitative), time series (quantitative), casual (cause and effect)