Chapter 14: Financial Statement Analysis Flashcards
financial statement analysis to evaluate a company’s financial health and future
prospects.
Stakeholders
Examples of Stakeholders
Stockholders, creditors & Managers
analyze a company’s financial statements to estimate its potential for earnings growth, stock price appreciation, making dividend payments, and paying principal and interest on loans.
Stockholders and creditors
analysis focuses on the relations
among financial statement accounts at a given point in time.
Vertical analysis
A _________ is a vertical analysis in which each financial statement account is expressed
as a percentage.
common-size financial statement
In income statements, all items are usually expressed as a percentage of
____________.
sales
sales. In balance sheets, all items are usually expressed as a percentage of ______________.
total assets
Horizontal analysis can be even more useful when data from a number of years are
used to compute ____________.
trend percentages
To compute _________, a base year is selected and the data for all years are stated as a percentage of that base year.
trend percentages
involves analyzing financial data
over time, such as computing year-to-year dollar and percentage changes within a set of financial statements.
Horizontal Analysis
three analytical techniques
are widely used:
- Dollar and percentage changes on statements (horizontal analysis).
- Common-size statements (vertical analysis).
- Ratios.
two limitations of financial statement analysis that managers
should always keep in mind
- comparing financial data across companies
- looking beyond ratios when formulating conclusions.
refers to how quickly an asset can be converted to cash.
Liquidity
________assets can be converted to cash quickly, whereas ________ assets cannot.
Liquid; I-ll liquid
The excess of current assets over current liabilities is known as
Working Capital
Formula of Working Capital
Working capital = Current assets − Current liabilities
What are the 3 Financial Ratios for Assessing Liquidity
- Working Capital
- Current Ratio
- Acid-test ratio
A company’s working capital is frequently expressed in ratio form.
Current Ratio
is a more rigorous test of a company’s ability to meet its short-term debts than the current ratio.
acid-test (quick) ratio
formula of acid-test (quick) ratio
Acid-test ratio =
Cash + Marketable securities + Accounts receivable + Short-term notes receivable _______________________________________
Current liabilities
Formula of Current Ratio
Current ratio = Current assets / Current liabilities
RATIO ANALYSIS—ASSET MANAGEMENT
- Accounts Receivable Turnover
2.
The _____________ and average ____________ measure how quickly credit sales are converted into cash.
accounts receivable turnover ; collection period ratios
Formula of Accounts Receivable Trunover
Accounts receivable turnover =
Sales on account ______________________________
Average accounts receivable balance