ch 14 test 1 Flashcards
What is horizontal analysis?
Provides a year-to-year comparison of a company’s performance in different periods
What does vertical analysis evaluate?
The relative size of each line item in the financial statements
What is ratio analysis used for?
Evaluating the relationship between key components of the financial statements
What are the two steps in horizontal analysis?
- Compute the dollar amount of the change from the earlier period to the later period
- Divide the dollar amount of change by the earlier period amount
What is a trend percentage?
Indicates the direction a business is taking over a longer period of time
What are the steps to calculate a trend percentage?
- Select a base year
- Set base year equal to 100%
- Each following year is expressed as a percentage of the base amount
What is a benchmark in financial analysis?
Comparison of a company against either competitors or industry averages
What is a common-size statement?
Used to compare companies to each other by reporting only percentages
What does liquidity measure?
The ability to pay current liabilities
What is working capital?
Current assets – Current liabilities
What is the formula for current ratio?
Current assets / Current liabilities
What does a current ratio of 1.5 to 2.0 indicate?
Generally strong ability to pay current liabilities
What is inventory turnover?
Cost of goods sold / Average inventory
What does a high inventory turnover indicate?
Ease of selling inventory
What is accounts receivable turnover?
Net credit sales / Average net accounts receivable
What does a higher accounts receivable turnover indicate?
Faster cash collection
How do you calculate days’ sales in receivables?
Average net accounts receivable / One day’s sales
What is the formula for gross profit percentage?
Gross profit / Net sales
What does earnings per share (EPS) measure?
Amount of net income earned for each share of company’s outstanding common stock
What are some red flags in financial statement analysis?
- Movement of sales, inventory, and receivables
- Earnings problems
- Decreased cash flow
- Too much debt
- Inability to collect receivables
- Buildup of inventories
What is the triple-bottom line?
People, Planet, and Profit
What is the purpose of the Principles of Responsible Investing (PRI)?
Investors will include environmental, social, and governance factors in investment decisions
Where can information related to sustainability be found?
- SEC 10-K filings
- Corporate Social Responsibility (CSR) reports
- Integrated report
