Chapter 14 Flashcards
What are three characteristics to look at when analyzing financial statements?
Liquidity: short term ability to pay
Debts and take advantage
Of opportunity
profitability: past performance and
future opportunity
solvency: Weathering bad
economic stormsWhat is horizontal analysis?
trend analysis
Evaluating series of financial statements over a period of time.
Determine in the increase or decrease that has taken place
What is vertical analysis?
common size analysis*
Expresses each financial statement as a percentage of base amount.
% change calculated vertically
net sales = sales revenue - returns
and allowances
What is ratio analysis?
Expresses relationships among selected items of financial statement data.
What are three types of ratio analysis?
intra company, inter company, industry average
What is the liquidity ratio?
Used by short term creditors and suppliers.
-current ratio and acid test ratio
How do you calculate the current ratio?
Current assets divided by current liabilities.
2:1 is favorable in retail
What is the acid test ratio?
cash + short term investments + receivables
_______________________________
Current liabilities
***measures immediate liquidity
How do you calculate receivables turn over
Net credit sales
_______________________________
Average net receivables
Number times on average company collects receivables.
365/turnover = turnover in days
How do you calculate inventory turnover?
Cost of goods sold
_______________________
Average inventory
*days in inventory. 365/ turnover
Name the profitability ratios.
Profit margin, asset turnover, return on assets, return on common stockholders equity, earnings per share, price-earnings, and payout ratio.
How do you calculate profit margin?
Net income
_______________
Net sales
% of each dollar that results in income
How do you calculate asset turnover?
Net sales
______________
Average assets
How do you measure return on assets?
Net income
_____________
average assets
How do you calculate earnings per share?
Net income
__________________
Weighted average common shares outstanding
