9 - Analysis & Interpretation of Financial Statements Flashcards
Define trend percentages
Trend % = any year $ / base year
What is a horizontal analysis?
Selecting a base year whose amounts are set equal to 100% and then the amounts of each other year are expressed as a percentage of the base amount.
What is a vertical analysis?
Compares each item in a financial statement at a base number set to 100%. Every item on the financial statement is then reported as a percentage of that base.
What are common-size statements?
Used to compare one company to other companies, and to the industry average
What ratio is considered to be the primary measure of profitability?
Return on Total Assets - expresses the relationship between the net profit and the assets owned by the business
What is the Average Inventory Turnover Period?
The ratio measures the average period for which inventory is being held in days.
Inventory turnover = average inventory held / cost of sales x 365
What does the Average Settlement for Accounts Receivable calculate?
How long on average credit customers take to pay the amounts they owe
Define gearing
The relationship between the amount financed by the owners and the amount contributed by outside sources reflects the degree of risk associated with a business.
Also referred to as ‘solvency’
What are some limitations of financial analysis?
Ratios only offer a restricted view of ‘relative’ performance and position - not the full picture.
No two businesses are identical and the greater their differences, the greater the limitations of ratio analysis as a basis for comparison.
No single ratio or one-year figure should be relied upon to provide an assessment of a company’s performance.
