Chapter 13 - Financial Performance

Question 1

What is horizontal analyses used for?

Answer 1

• to help financial statement user recognize important financial changes that unfold over time.
• compating results across time, often expressing changes in account balances as a percentage of a prior year

Question 2

What is ratio analyses used for?

Answer 2

• to understand relationships among various items reported in one or more of the financial statements.
• can relate to inventory levels to evaluate inventory management decisions.

Question 3

What is formula for horizontal analyses?

Answer 3

CURRENT-PRIOR/PRIOR x 100

Question 4

What is Net profit margin ratio?

Answer 4

NET INCOME/NET SALES REVENUE x 100

- indicates how much profit earned from each dollar of revenue

Question 5

What is return on equity ratio?

Answer 5

NET INCOME/AVG SHAREHOLDERS EQUITY

- reports net amount earned as a % of each dollar contributed by shareholders

Question 6

What is earnings per share ratio?

Answer 6

NET INCOME/AVG # OF COMMON SHARES OUTSTANDING

- indicates amount of earnings generated for each common share outstanding

Question 7

What is receivables turnover ratio (and days to collect?)

Answer 7

NET CREDIT SALES REVENUE/AVG NET RECEIVABLES

• then 365 days/ # of turns
• turnover of accounts receivable

Question 8

What is current ratio?

Answer 8

CURRENT ASSETS/CURRENT LIABILITIES

- measures company’s ability to pay its current liabilities

Question 9

Define discontinued operations.

Answer 9

• result from the disposal of major component of the business and are reported net of income tax effects.

Question 10

Define profitability

Answer 10

• the extent in which a company generates income

Question 11

Define liquidity

Answer 11

• the extent to which a company is able to pay its currently maturing liabilities

Question 12

Define solvency

Answer 12

• the ability to survive long enough to pay lenders when debt matures