Chapter 13 Flashcards
Liquidity and Efficiency
Ability to meet short-term obligations and generate future revenues
Solvency
Ability to meet long-term obligations and generate future revenues
Profitability
Ability to provide financial rewards to attract and retain financing
Market prospects
Ability to generate positive market expectations
Horizontal analysis
compares financial condition and performance across time
Vertical analysis
comparison to a base amount
Ratio analysis
measurement of key relations between financial statement items
Comparative financial statements
show financials in a side-by-side column on a single statement.
Trend Analysis
Trend % = (analysis period amount / base period amount) x 100
Vertical analysis
common-size analysis
Common size financial statement
Expresses amount as a percent of a base amount. In the balance sheet, total assets is usually the base and is expressed as 100%. In the income statement, net sales is usually the base percent.
Working capital ratio (current ratio)
Current ratio = (current assets / current liabilities) x 100
Acid Test Ratio (quick Ratio)
Acid Test Ratio = (cash + short-term investments + current receivables) / current liabilities
Accounts Receivable Turnover
Accounts receivable turnover = net sales / average accounts receivable, net
Inventory Turnover
How long a company holds inventory before selling it.
Inventory turnover = cost of goods sold / average inventory
Days’ sales uncollected
Measures how frequently a company collects accounts receivable.
Days’ sales uncollected = (accounts receivable, net / net sales) x 365
o Days’ sales in inventory
Evaluates inventory liquidity
If most sales are credit, the inventory is converted into cash by: inventory into receivables + receivables into cash
Days’ sales in inventory = ( ending inventory / cost of goods sold) x 365
o Total asset turnover
Company’s ability to use its assets to generate sales and reflects on operating efficiency
Total asset turnover = net sales / average total assets
o Debt ratio and equity ratio
Debt ratio is the percentage of total assets
• Debt ratio = total liabilities / total assets
Equity ratio shows total equity as a percent of total assets
• Equity ratio = total equity / total assets
o Debt-to equity ratio
Debt must be repaid with interest, whereas equity does not
Debt to equity ratio = total liabilities / total equity
o Times interest earned
A company’s ability to pay interest
A higher ration means less risk for creditors.
• A safe ratio is two or more.
Times interest earned = income before interest expense and income tax expense / interest expense.
o Profit Margin
Measures a company’s ability to earn net income from sales
Different industries require a different profit margin
Profit margin = net income / net sales
o Total asset turnover
Net sales / average total assets (two years worth)
o Return on total assets
Return on total assets = net income / average total assets
A relation between profit margin, total asset turnover, and return on total assets is:
• Profit margin x total asset turnover = return on total assets
