Ch 6 - Income Statement Analysis Flashcards
Whats a revenue driver?
Inputs that drive a company’s revenue, generally a function of their volume or price
What are cost drivers? What is the difference between revenue vs. cost drivers?
Inputs that generate (“drive”) a company’s costs, though are not limited to two main drivers like revenue driveres are.
What is a horizontal analysis? What’s an interchangeable term for it?
It’s an analysis that involves comparing line items over a span of time, or more specificallly the variances in these items ACROSS PERIODS.
An interchangeable term for it is a “trend analysis”
What is a vertical analysis?
A type of analysis that compares a journal acc. or financial statement line item to a base, representing 100%.
Typically, total assets are used as a base for balance sheet accts. and line items, while total revenue is used as the base for income statement accounts and line items.
What is gross margin, and what is another term for it?
It is an income statement analysis metric expressed as Gross Profit / Total Revenue.
Also known as “Gross Profit Percentage”
What is operating margin? What is another term for it?
It is an income statement analysis metric expressed as:
Operating Income / Total Revenue
Also known as EBIT Margin
What is benchmarking?
Comparing company’s metrics to rest of the industry/competitors.
What is net profit margin, and what’s another term for it?
It is an income statement analysis metric expressed as:
Net Income / Total Rev.
It is also known as “Return on Sales”
What are Top-down budgets?
Budgets driven by exec. management, with little to no input from lower organization levels.
What are bottom-up budgets?
Budgets driven by lower-level staff and management, with little to no guidance from senior management.
What are hybrid budgets?
A combination of the top-down and bottom-up budgeting approach.
Senior management provides targets, like guidelines, while lower-level staff and management work to produce realistic expectations based on those guidelines.
What are stretch targets?
Financial objectives that are meant to be challenging to attain
What’s a budget?
An estimate/set of targets for a company’s financial results (performance) for the next fiscal year
What does a strong operating margin signify? When is Operating margin most useful?
That the company doesn’t necessarily need external financing to be successful in the foreseeable future.
It is most useful when tracked across time (horizontal analysis) OR in benchmarking.
How can Net Profit Margin be interpreted?
As how many cents of profit the business generates for each dollar of sales made.
Also, using a company’s NPM, lenders can determine if a company is capable of paying debt obligations. Equity investors can compare it to other companies to see which company is better to invest in.
What is the most important factor to consider when analyzing costs?
whether the company primarily sells goods or provides services.
(NOT Q) Review Notes …
Review how to make (a):
- Horizontal Analysis
- Budget Preparation
