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FABM2 > ANALYSIS AND INTEPRETATION OF FINANCIAL STATEMENTS > Flashcards

ANALYSIS AND INTEPRETATION OF FINANCIAL STATEMENTS Flashcards

1
Q

It involves careful selection of data from financial statements in order to assess and evaluate the firm’s past performance, present condition, and future business potentials

A

Financial statement analysis

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2
Q

This analysis focuses on the relations among financial statements at a given point in time

A

Vertical analysis

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3
Q

It refers to how quickly an asset can be converted into cash. Companies need to continuously monitor the amount of liquid assets (current assets) relative to the amount they owe to short-term creditors (current liabilities), such as suppliers.

A

Liquidity Ratios

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4
Q

If a company has enough working capital, it assures that the company can pay its creditors in full and on time.

A

Net working
capital

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5
Q

It measures a rough estimate of the ability of the business to meet its currently maturing obligations; this ratio varies in great disparity from one industry to another

A

Current ratio

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6
Q

It is a more severe test of immediate
liquidity to meet currently maturing
obligations.

A

Quick ratio
(Acid-test ratio)

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7
Q

Formula of Net working capital

A

πΆπ‘’π‘Ÿπ‘Ÿπ‘’π‘›π‘‘ π‘Žπ‘ π‘ π‘’π‘‘π‘  βˆ’ πΆπ‘’π‘Ÿπ‘Ÿπ‘’π‘›π‘‘ π‘™π‘–π‘Žπ‘π‘–π‘™π‘–π‘‘π‘–π‘’π‘ 

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8
Q

Formula of Current Ratio

A

πΆπ‘’π‘Ÿπ‘Ÿπ‘’π‘›π‘‘ π‘Žπ‘ π‘ π‘’π‘‘π‘ 
____________________
πΆπ‘’π‘Ÿπ‘Ÿπ‘’π‘›π‘‘ π‘™π‘–π‘Žπ‘π‘–π‘™π‘–π‘‘π‘–π‘’π‘ 

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9
Q

Formula of Quick ratio

A

π‘„π‘’π‘–π‘π‘˜ π‘Žπ‘ π‘ π‘’π‘‘π‘ 
__________________________
πΆπ‘’π‘Ÿπ‘Ÿπ‘’π‘›π‘‘ π‘™π‘–π‘Žπ‘π‘–π‘™π‘–π‘‘π‘–π‘’
or
πΆπ‘’π‘Ÿπ‘Ÿπ‘’π‘›π‘‘ π‘Žπ‘ π‘ π‘’π‘‘π‘  βˆ’ πΌπ‘›π‘£π‘’π‘›π‘‘π‘œπ‘Ÿπ‘¦ βˆ’ π‘ƒπ‘Ÿπ‘’π‘π‘Žπ‘¦π‘šπ‘’π‘›π‘‘π‘ 
______________________________________
πΆπ‘’π‘Ÿπ‘Ÿπ‘’π‘›π‘‘ π‘™π‘–π‘Žπ‘π‘–π‘™π‘–π‘‘π‘–π‘’π‘ 

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10
Q

It measures the efficiency of collections. The higher the turnover, the better, as it would mean a greater number of times receivable is reinvested for more profit

A

Accounts receivable turnover

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11
Q

Formula of Accounts receivable turnover

A

𝑁𝑒𝑑 π‘π‘Ÿπ‘’π‘‘π‘–π‘‘ π‘ π‘Žπ‘™π‘’π‘ 
_______________________________
π΄π‘£π‘’π‘Ÿπ‘Žπ‘”π‘’ π‘Žπ‘π‘π‘œπ‘’π‘›π‘‘π‘  π‘Ÿπ‘’π‘π‘’π‘–π‘£π‘Žπ‘π‘™π‘’

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11
Q

It measures the average number of days to
collect a receivable. The shorter, the better.

A

Average collection period
or
Number of days in accounts receivable

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12
Q

Formula for Number of days in accounts receivable

A

365 π‘‘π‘Žπ‘¦π‘ 
__________________________
π΄π‘π‘π‘œπ‘’π‘›π‘‘π‘  π‘Ÿπ‘’π‘π‘’π‘–π‘£π‘Žπ‘π‘™π‘’ π‘‘π‘’π‘Ÿπ‘›π‘œπ‘£π‘’π‘Ÿ

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13
Q

Formula for Inventory turnover

A

πΆπ‘œπ‘ π‘‘ π‘œπ‘“ π‘”π‘œπ‘œπ‘‘π‘  π‘ π‘œπ‘™π‘‘
________________________
π΄π‘£π‘’π‘Ÿπ‘Žπ‘”π‘’ π‘–π‘›π‘£π‘’π‘›π‘‘π‘œπ‘Ÿπ‘¦

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13
Q

Formula for Average collection period

A

Aπ‘£π‘’π‘Ÿπ‘Žπ‘”π‘’ π‘Žπ‘π‘π‘œπ‘’π‘›π‘‘π‘  π‘Ÿπ‘’π‘π‘’π‘–π‘£π‘Žπ‘π‘™π‘’
____________________________
π΄π‘£π‘’π‘Ÿπ‘Žπ‘”π‘’ π‘‘π‘Žπ‘–π‘™π‘¦ π‘ π‘Žπ‘™π‘’π‘ 

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13
Q

It determines how fast the inventories are converted to sales. It indicates if a firm holds excessive inventories that are unproductive, which lessens the company’s productivity.

A

Inventory turnover

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14
Q

It measures the average number of days that inventory is held before sale

A

Number of days in
inventory

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14
Q

Formula for Number of days in inventory

A

365 π‘‘π‘Žπ‘¦π‘ 
_______________________
πΌπ‘›π‘£π‘’π‘›π‘‘π‘œπ‘Ÿπ‘¦ π‘‘π‘’π‘Ÿπ‘›π‘œπ‘£π‘’π‘Ÿ
or
π΄π‘£π‘’π‘Ÿπ‘Žπ‘”π‘’ π‘–π‘›π‘£π‘’π‘›π‘‘π‘œπ‘Ÿπ‘¦
______________________________________
π΄π‘£π‘’π‘Ÿπ‘Žπ‘”π‘’ π‘‘π‘Žπ‘–π‘™π‘¦ π‘π‘œπ‘ π‘‘ π‘œπ‘“ π‘”π‘œπ‘œπ‘‘π‘  π‘ π‘œπ‘™π‘‘

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14
Q

Formula for Fixed assets turnover

A

𝑁𝑒𝑑 π‘†π‘Žπ‘™π‘’π‘ 
__________________________
π΄π‘£π‘’π‘Ÿπ‘Žπ‘”π‘’ 𝑛𝑒𝑑 𝑓𝑖π‘₯𝑒𝑑 π‘Žπ‘ π‘ π‘’π‘‘π‘ 

15
Q

It measures the level of use of fixed assets
such as property, plant, and equipment to
generate sales.

A

Fixed assets turnover

16
Q

It measures the ability of the business to use debt in maximizing the shareholder’s value.

A

Solvency Ratios or Financial Leverage

16
Q

It measures the effectiveness of asset
utilization and determines the number of
times investments in assets are used to
generate sales.

A

Total assets turnover

17
Q

Formula for Total assets turnover

A

𝑁𝑒𝑑 π‘†π‘Žπ‘™π‘’π‘ 
_____________________
π΄π‘£π‘’π‘Ÿπ‘Žπ‘”π‘’ π‘‘π‘œπ‘‘π‘Žπ‘™ π‘Žπ‘ π‘ π‘’π‘‘π‘ 

17
Q

It measures the use of debt to finance operations and provides a measure of relative amount of resources contributed by the creditors and owners.

A

Debt-to-equity ratio

18
Q

Formula for Debt-to-equity ratio

A

π‘‡π‘œπ‘‘π‘Žπ‘™ π‘™π‘–π‘Žπ‘π‘–π‘™π‘–π‘‘π‘–π‘’π‘ 
______________________
π‘‡π‘œπ‘‘π‘Žπ‘™ π‘ π‘‘π‘œπ‘π‘˜β„Žπ‘œπ‘™π‘‘π‘’π‘Ÿπ‘ β€²π‘’π‘žπ‘’π‘–π‘‘π‘¦

19
Q

It measures the relative share of creditors over the total resources of the firm

A

Debt ratio
or
Debt-to-assets ratio

20
Q

Formula for
Debt ratio
or
Debt-to-assets ratio

A

π‘‡π‘œπ‘‘π‘Žπ‘™ π‘™π‘–π‘Žπ‘π‘–π‘™π‘–π‘‘π‘–π‘’π‘ 
___________________
π‘‡π‘œπ‘‘π‘Žπ‘™ π‘Žπ‘ π‘ π‘’π‘‘π‘ 

1 βˆ’ πΈπ‘žπ‘’π‘–π‘‘π‘¦ π‘Ÿπ‘Žπ‘‘π‘–π‘œ

21
Q

It measures the amount of resources
provided by the owners of the firm.

A

Equity ratio

21
Q

Formula for Equity ratio

A

π‘‡π‘œπ‘‘π‘Žπ‘™ π‘ π‘‘π‘œπ‘π‘˜β„Žπ‘œπ‘™π‘‘π‘’π‘Ÿπ‘ β€²π‘’π‘žπ‘’π‘–π‘‘π‘¦
_________________________
π‘‡π‘œπ‘‘π‘Žπ‘™ π‘Žπ‘ π‘ π‘’π‘‘π‘ 

1 βˆ’ 𝐷𝑒𝑏𝑑 π‘Ÿπ‘Žπ‘‘π‘–π‘œ

22
Q

the income from operations before deducting interest and taxes

A

Times-interest- earned (TIE) or interest coverage ratio

23
Q

a measure of operating effectiveness. It measures the ability of the business to recover long-term investments from money generated by its normal operating activities. It also measures earnings in relation to some base such as assets, sales, or capital.

A

Profitability Ratios

24
Q

It measures net profit percentage per peso sales.it is the peso value of the net income earned for every
pesos of sales.

A

Profit margin on sales / Return on sales
(ROS)

25
Q

It measures the gross profit
percentage on sales to recover
operating expenses.

A

Gross Profit ratio

25
Q

t measures the proportion of the
cost of goods sold to sales.

A

Cost ratio

26
Q

It measures the overall asset
profitability and indicates how the
management has employed
effective assets to produce income

A

Return on investment (ROI)
/
Return on assets (ROA

FABM2 (7 decks)

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