Chapter 13

Question 1

Liquidity and Efficiency

Answer 1

Ability to meet short-term obligations and generate future revenues

Question 2

Solvency

Answer 2

Ability to meet long-term obligations and generate future revenues

Question 3

Profitability

Answer 3

Ability to provide financial rewards to attract and retain financing

Question 4

Market prospects

Answer 4

Ability to generate positive market expectations

Question 5

Horizontal analysis

Answer 5

compares financial condition and performance across time

Question 6

Vertical analysis

Answer 6

comparison to a base amount

Question 7

Ratio analysis

Answer 7

measurement of key relations between financial statement items

Question 8

Comparative financial statements

Answer 8

show financials in a side-by-side column on a single statement.

Question 9

Trend Analysis

Answer 9

Trend % = (analysis period amount / base period amount) x 100

Question 10

Vertical analysis

Answer 10

common-size analysis

Question 11

Common size financial statement

Answer 11

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.

Question 12

Working capital ratio (current ratio)

Answer 12

Current ratio = (current assets / current liabilities) x 100

Question 13

Acid Test Ratio (quick Ratio)

Answer 13

Acid Test Ratio = (cash + short-term investments + current receivables) / current liabilities

Question 14

Accounts Receivable Turnover

Answer 14

Accounts receivable turnover = net sales / average accounts receivable, net

Question 15

Inventory Turnover

Answer 15

How long a company holds inventory before selling it.

Inventory turnover = cost of goods sold / average inventory

Question 16

Days’ sales uncollected

Answer 16

Measures how frequently a company collects accounts receivable.

Days’ sales uncollected = (accounts receivable, net / net sales) x 365

Question 17

o Days’ sales in inventory

Answer 17

 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

Question 18

o Total asset turnover

Answer 18

 Company’s ability to use its assets to generate sales and reflects on operating efficiency
 Total asset turnover = net sales / average total assets

Question 19

o Debt ratio and equity ratio

Answer 19

 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

Question 20

o Debt-to equity ratio

Answer 20

 Debt must be repaid with interest, whereas equity does not

 Debt to equity ratio = total liabilities / total equity

Question 21

o Times interest earned

Answer 21

 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.

Question 22

o Profit Margin

Answer 22

 Measures a company’s ability to earn net income from sales
 Different industries require a different profit margin
 Profit margin = net income / net sales

Question 23

o Total asset turnover

Answer 23

 Net sales / average total assets (two years worth)

Question 24

o Return on total assets

Answer 24

 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

Question 25

o Return on common stockholders’ equity

Answer 25

 Return on common stockholders’ equity = (net income – preferred dividends) / average common stockholders’ equity

Question 26

o Price-earnings ratio

Answer 26

 Price earnings ration = market price per common share / earnings per share

Question 27

o Dividend yield

Answer 27

 Dividend yield = annual cash dividends per share / market price per share

Question 28

Analysis reporting

Answer 28

A financial statement analysis report consists of six sections

Question 29

o Executive

Answer 29

 Brief analysis of results and conclusions

Question 30

o Analysis overview

Answer 30

 Background of the company, its industry, and the economy

Question 31

o Evidential matter

Answer 31

 Financial statements and information used in the analysis, including ratios, trends, comparisons, and all analytical measures used.

Question 32

o Assumptions

Answer 32

 List of assumptions about a company’s industry and economic environment, and other assumptions underlying estimates

Question 33

o Key factors

Answer 33

 List of favorable and unfavorable factors, both quantitative and qualitive, for company performance: usually organized by areas of analysis

Question 34

o Inferences

Answer 34

 Forecast, estimates, interpretations and conclusions of the analysis report

Question 35

• An income statement that includes income not a regular part of earnings it segments the income statement into four parts

Answer 35

• Continuing operations
• Discontinued Segments
• Comprehensive income
• Earnings per share.