Analytical Procedures

Question 1

When are Analytical Procedures Required?

Answer 1

In the Planning stage and Review stage

Recommended as a SUB Test

Question 2

5 Basic Analytical Procedures

Answer 2

CRAFT

Client vs Industry
Related Accounts
Actual vs Budget
Financial vs Non-Financial
This Year vs Prior

Question 3

Working Capital Ratio

Answer 3

Current Assets - Current Liabilities

Measures Company’s Solvency

Question 4

Current Ratio

Answer 4

Current Assets/Current Liabilities

Measures ST debt paying Ability

Question 5

Quick or Acid Test Ratio

Answer 5

Cash, Marketable Securities, Net Receivables/Current Liabilities

Measures Immediate ST Liquidity

Question 6

Current Cash Debt Coverage Ratio

Answer 6

net Cash Provided by Operating Activities/Average Current Liabilities

Measures company’s ability to pay off its current liabilities in a given year from operations

Question 7

Receivables Turnover

Answer 7

Net Credit Sales/Average Trade Receivable

measures Liquidity of Receivables

Question 8

Inventory Turnover

Answer 8

COGS/Average Inventory

Measures liquidity of Inventory

Question 9

Asset Turnover

Answer 9

net Sales/Average Total Assets

Measures how efficiently assets are used to generate sales

Question 10

Number of days’ supply in average inventory

Answer 10

=360/ Inventory Turnover

OR

=Average (ending) inventory/Average daily COGS

Measures # of days required to sell inventory

Question 11

Number of Days’ sales in Average Receivables

Answer 11

=360/Receivables Turnover

Measures # of days required to collect receivables

Question 12

Profit Margin on Sales (Gross Profit)

Answer 12

Net Income/Net Sales

Measures NI generated by each dollar of sale

Question 13

Rate of Return on Assets

Answer 13

Net Income/ Average Total Assets

Measures overall profitability of Assets

Question 14

Rate of Return on Common Stock Equity (Return on Equity)

Answer 14

Net Income - Preferred Dividends/ Average Common Stockholders’ Equity

Measures Profitability of Owners’ Investment

Question 15

Earnings per Share

Answer 15

Net Income - Preferred Dividends/ Weighted shares of outstanding

Measures NI earned on each share of common stock

Question 16

Price Earnings Ratio

Answer 16

Market Price of Stock/Earnings per share

measures ratio of market price per share to earnings per share

Question 17

Debt to Equity

Answer 17

Total Debt/Stockholders’ Equity

Shows creditors the corporation’s ability to sustain losses

Question 18

Payout Ratio

Answer 18

Cash Dividends/Net Income

Measures % of earnings distributed in form of cash dividends

Question 19

Debt to Total Assets

Answer 19

Total Debt/Total Assets

Measures % of total assets provided by creditors

Question 20

Times Interest Earned

Answer 20

Income before Interest Expense and Taxes/Interest Expense

Measures ability to meet interest payments as they come due

Question 21

Cash Debt Coverage

Answer 21

Net Cash Provided by Operating Activities/Average Total Liabilities

Measures a company’s ability to repay its total liabilities in a given year from its operations

Question 22

Book Value per Share

Answer 22

Common Stockholders’ Equity/Outstanding Shares

Measures amount each share would receive if the company were liquidated at the amounts reported on B/S

Question 23

Two Different Audit Approaches

Answer 23

Test of Balances

Test of Transactions

Question 24

Test of Balances

Answer 24

Audit Ending Balance

Many transactions, small dollar amounts

Cash, AR, Inventory, AP

Question 25

Test of Transactions

Answer 25

Few Transactions, Large Dollar Amounts

Investments, PP&E, Bonds, N/P, Stockholders Equity