Accounting evaluation Flashcards
Two processes of evaluation
Analysis – process of breaking down something complex (accounting reports) into smaller, simpler parts
Interpretation – process of explaining the meaning of a financial item or analytical ratio
Need for evaluation
- Improve quality of available info
- Provides additional info to that already available
- Uses percentages; allow info to be compared in similar terms
- Involves areas such as profitability, liquidity and financial stability
Vertical analysis
breakdown of an accounting report into percentages in a vertical fashion
Horizontal analysis
comparison of financial results across the page, usually by reporting several consecutive trading periods
Profitability
comparison of a profit figure with a base figure
Gross profit margin
percentage of sales dollar remaining after accounting for cost of goods sold
- Increase in markup, cost price remains constant –> increase in GPM
- Both cost price and selling price increase, but SP at greater rate –> increase GPM
- Cost price increased, selling price remains constant –> decrease in GPM
- Cost price remains constant, selling prices decrease –> decrease in GPM
- Both cost and selling prices increase, but cost prices at greater rate –> decrease in GPM
Return on assets
Asset turnover
Return on owner’s investment
Working capital ratio
Quick asset ratio
Debt ratio
Cash flow cover
Limitations of financial analysis
Benchmarks
Financial indicators
Non-financial indicators
Inventory turnover
