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MAS > 04 Financial Statement Analysis > Flashcards

04 Financial Statement Analysis Flashcards

1
Q

Involves assessment and evaluation of the firm’s past performance, its present condition and future business potential

A

FS Analysis

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2
Q

Types of information to extract in FS Analysis

A
  1. profitability
  2. ability to meet obligations (liquidity and solvency)
  3. safety of investment in the business
  4. effectiveness of management in running the firm (proper utilization of assets)
  5. overall company marketability (sale of stocks)
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3
Q

Enables investors and analysts to see what has been driving a company’s financial performance over time by identifying trends and growth patterns using two or more periods

A

Horizontal Analysis (Trend Percentages and Index Analysis)

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4
Q

Process of comparing figures in the financial statements of a single period

A

Vertical Analysis (Common-size FS)

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5
Q

Common base year in horizontal analysis

A

Prior year

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5
Q

Common base of SFP and Income Statement in Vertical Analysis

A

SFP - Assets
Income Statement - Sales

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6
Q

Financial statement that summarizes the amount of cash and cash equivalents entering and leaving a company

A

SCF

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7
Q

Main components of SCF

A

Operating
Investing
Financing

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8
Q

Positive operating activities net cash flow means

A

Company is self-sustaining

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9
Q

Cash left over after a company pays for its Opex and CaPex

A

Free Cash Flow

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10
Q

Cash flow available for the company to repay creditors or pay dividends and interest to investors

A

Free Cash Flow

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11
Q

Compute FCF from operating activities

A

CF from operating activities
+ Interest expense
- Tax shield on interest expense
- CAPEX
= Free Cash Flow

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12
Q

Compute FCF from EBIT

A

EBIT x (1 - tax rate)
+ Non-cash exp (Dep, Amort, etc.)
- Change in working capital
- CAPEX
= FCF

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13
Q

Compute FCF from Net Income

A

Net income
+ Interest Expense
- Tax shield on Int Exp
+ Non-cash exp (Dep, Amort, etc.)
- Change in working capital
- CAPEX
= FCF

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14
Q

Increasing FCF means

A

increased earnings, company too liquid

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15
Q

Shrinking FCF means

A

unable to sustain earnings growth but not a bad thing if increasing capex

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16
Q

Measures the change in total sales and gross profit brought about changes in selling price

A

Sales Price Variance or Sales Factor
= Sales this year - Sales this year at last year’s price

  • only affects sales
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16
Q

Used to determine reasons why the GP margin chanegs from period to period so that management can take steps to bring GM in line with expeectations

A

GP Analysis
(change in SP, change in unit cost, change in units sold)

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17
Q

Two primary factors that result to revenue variances

A

Price
Physical/Quantity Factors

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18
Q

Measures the change in cost of sales and gross profit brought about changes in unit cost

A

Cost Price Variance or Sales Factor
= Cost of sales this year - Cost of sales this year at last year’s price

  • only affects cost of sales
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19
Q

Measures the change in total sales and gross profit brought about by change in units sold

A

Sales Quantity Variance
= Sales this year at last year’s price - Sales last year

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20
Q

Measures the net effect on gross profit due to change in units sold

A

Sales Volume Variance or Quantity Factor
= Sales Quantity Variance + Cost Quantity Variance

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21
Q

Measures change in cost of sales and gross profit about by changes in units sold

A

Cost Quantity Variance
= Cost of sales this year at last year’s price - Cost of sales last year

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22
Q

Quantitative method for gaining insight into a company’s liquidity, operational efficiency and profitability by examining FS such as SFP and SCI

A

Ratio Analysis

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23
Q

General rules in interpreting ratios

A

higher ratio = better (exception debt ratios)
lower period = better

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24
Q

When to use average in formulating ratios

A

Average:
* comparing real account to nominal account (SFP and I/S accounts)
* average SFP account and another average SFP account

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25
Q

Formula of liquidity ratios

A

Current Ratio = CA / CL
* are current assets sufficient to cover current liabilities?

Acid Test Ratio = Quick Assets / CL
* quick assets = cash and AR

Cash Ratio = Cash and marketable securities / CL

Working Capital = CA - CL

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26
Q

Is cash ratio an absolute measure of liquidity?

A

Yes

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26
Q

Is current ratio an absolute measure of liquidity?

A

No because it includes inventory and prepaid assets

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27
Q

Is acid test ratio an absolute measure of liquidity?

A

No because it includes AR

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28
Q

Effect of purchase of marketable securities for cash on:
Current Ratio
Working Capital
Quick Ratio

A

No effect - marketable securities and cash are similarly current assets

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29
Q

Effect of disposal of marketable securities resulting to no gain on:
Current Ratio
Working Capital
Quick Ratio

A

No effect

30
Q

Effect of disposal of marketable securities resulting to loss on:
Current Ratio
Working Capital
Quick Ratio

A

Decrease

31
Q

Effect of disposal of marketable securities resulting to gain on:
Current Ratio
Working Capital
Quick Ratio

A

Increase

32
Q

Effect of collection of AR to:
Current Ratio
Working Capital
Quick Ratio

A

No effect

33
Q

Effect of collection of previously-written AR (Allowance Method) to:
Current Ratio
Working Capital
Quick Ratio

A

No effect

34
Q

Effect of collection of previously-written AR (Direct WO Method) to:
Current Ratio
Working Capital
Quick Ratio

A

Increase

34
Q

Effect of WO of AR (Allowance Method) to:
Current Ratio
Working Capital
Quick Ratio

A

No effect

34
Q

Effect of WO of AR (Direct WO) to:
Current Ratio
Working Capital
Quick Ratio

A

Decrease

35
Q

Effect of purchase of inventories on account to:
Current Ratio
Working Capital
Quick Ratio

A

It depends

36
Q

Effect of purchase of inventories for cash to:
Current Ratio
Working Capital
Quick Ratio

A

Current Ratio - no effect
Working Capital - no effect
Quick Ratio - decrease

37
Q

Effect of stock divs to:
Current Ratio
Working Capital
Quick Ratio

A

No effect

37
Q

Effect of settlement of AP to:
Current Ratio
Working Capital
Quick Ratio

A

It depends

37
Q

Formula of receivable turnover

A

Credit sales / Average receivable

37
Q

Effect of cash divs to:
Current Ratio
Working Capital
Quick Ratio

A

Date of declaration - decrease
Date of record - no effect
Date of settlment - depends

37
Q

Effect of sale of inventories for cash
or on account to:
Current Ratio
Working Capital
Quick Ratio

A

Increase

38
Q

Effect of disposal of NCA to:
Current Ratio
Working Capital
Quick Ratio

A

Increase (because cash increased)

39
Q

Turnover and age are tests of ___________ and ___________ respectively.

A

activity; liquidity

39
Q

Formula of age of receivables

A

Average receivables / Average daily credit sales

40
Q

Formula of inventory turnover

A

COGS / Average inventory

41
Q

Formula of average age of inventory

A

Average inventor / average daily COGS

42
Q

Formula of operating cycle

A

Average age of receivables + average age of inventories

43
Q

Formula of age of trade payables

A

Average AP / Average daily credit purchase

44
Q

Formula of current asset turnover

A

COGS + Opex - Non-cash Expenses
/ Average Current Assets

44
Q

Formula of cash conversion cycle

A

operating cycle - trade payables

44
Q

Formula for trade payables turnover

A

Net credit purchases / Average trade payables

45
Q

Formula for Times Interest Earned and what type of ratio is it?

A

EBIT / Interest Expense
Solvency ratio

46
Q

Debt Ratio

A

Total liabilities / Total Assets

46
Q

Debt-Equity ratio formula

A

Total liabilities / Total SHE

47
Q

Equity ratio

A

Total SHE / Total Assets

48
Q

Equity multiplier

A

Average total assets / average SHE

49
Q

Times P/S Dividend requirements

A

Earnings after tax / Preferred dividends

50
Q

Times fixed charges earned

A

EBIT / Total fixed charges (int, div, etc.)

51
Q

Return on sales formula

A

Earnings after tax / Sales

52
Q

Gross profit or margin ratio

A

GP / Sales

53
Q

Return on assets

A

Earnings before interest but after tax / average total assets

54
Q

ROE

A

earnings after tax / average owner’s equity

55
Q

EPS

A

earnings after tax less P/S dividends
/ wanos

56
Q

P/E ratio

A

Price per share / earnings per share

57
Q

Dividend yield

A

Ordinary dividend per share / price per share

58
Q

Earnings yield

A

Earnings per share / price per share

59
Q

Dividend payout

A

O/S dividend per share / EPS

60
Q

Plow-back ratio

A

1- payout ratio

61
Q

Useful technique used to decompose the different drivers of ROE

A

Du Pont Equation

62
Q

What represents operating efficiency, asset use efficiency and leverage in Du Pont Equation?

A

operating efficiency - net profit margin
asset use efficiency - asset turnover ratio
leverage - equity multiplier

63
Q

Du Pont Equation

A

earnings after tax / average shareholder’s equity

64
Q

Way of calculating how much new funding will be required so that the firm can realistically look at whether or not they will be able to generate the additional funding and therefore be able to achieve the higher sales level

A

Additional Funds Needed

65
Q

Formula of AFN

A

Projected increase in assets - spontaneous increase in liabilities - any increase in RE

MAS (6 decks)

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