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
