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Managerial Accounting > Chapter 14: Financial Statement Analysis > Flashcards

Chapter 14: Financial Statement Analysis Flashcards

1
Q

financial statement analysis to evaluate a company’s financial health and future
prospects.

A

Stakeholders

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2
Q

Examples of Stakeholders

A

Stockholders, creditors & Managers

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3
Q

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.

A

Stockholders and creditors

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4
Q

analysis focuses on the relations
among financial statement accounts at a given point in time.

A

Vertical analysis

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5
Q

A _________ is a vertical analysis in which each financial statement account is expressed
as a percentage.

A

common-size financial statement

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6
Q

In income statements, all items are usually expressed as a percentage of
____________.

A

sales

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7
Q

sales. In balance sheets, all items are usually expressed as a percentage of ______________.

A

total assets

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8
Q

Horizontal analysis can be even more useful when data from a number of years are
used to compute ____________.

A

trend percentages

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9
Q

To compute _________, a base year is selected and the data for all years are stated as a percentage of that base year.

A

trend percentages

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10
Q

involves analyzing financial data
over time, such as computing year-to-year dollar and percentage changes within a set of financial statements.

A

Horizontal Analysis

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11
Q

three analytical techniques
are widely used:

A
  1. Dollar and percentage changes on statements (horizontal analysis).
  2. Common-size statements (vertical analysis).
  3. Ratios.
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12
Q

two limitations of financial statement analysis that managers
should always keep in mind

A
  1. comparing financial data across companies
  2. looking beyond ratios when formulating conclusions.
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13
Q

refers to how quickly an asset can be converted to cash.

A

Liquidity

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14
Q

________assets can be converted to cash quickly, whereas ________ assets cannot.

A

Liquid; I-ll liquid

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15
Q

The excess of current assets over current liabilities is known as

A

Working Capital

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16
Q

Formula of Working Capital

A

Working capital = Current assets − Current liabilities

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17
Q

What are the 3 Financial Ratios for Assessing Liquidity

A
  1. Working Capital
  2. Current Ratio
  3. Acid-test ratio
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18
Q

A company’s working capital is frequently expressed in ratio form.

A

Current Ratio

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19
Q

is a more rigorous test of a company’s ability to meet its short-term debts than the current ratio.

A

acid-test (quick) ratio

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20
Q

formula of acid-test (quick) ratio

A

Acid-test ratio =

Cash + Marketable securities + Accounts receivable + Short-term notes receivable _______________________________________

Current liabilities

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21
Q

Formula of Current Ratio

A

Current ratio = Current assets / Current liabilities

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22
Q

RATIO ANALYSIS—ASSET MANAGEMENT

A
  1. Accounts Receivable Turnover
    2.
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23
Q

The _____________ and average ____________ measure how quickly credit sales are converted into cash.

A

accounts receivable turnover ; collection period ratios

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24
Q

Formula of Accounts Receivable Trunover

A

Accounts receivable turnover =

Sales on account ______________________________
Average accounts receivable balance

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25
Q

The Formula of Average collection period

A

Average collection period =

365 days
________________________
Accounts receivable turnover

26
Q

______________ measures how many times a company’s inventory has
been sold and replaced during the year.

A

inventory turnover ratio

27
Q

The number of days needed on average to sell the entire inventory

A

Average Sales Period

28
Q

Formula of Average Sales Period

A

Average sale period =
365 days
________________
Inventory turnover

29
Q

measures the elapsed time from when inventory is received from
suppliers to when cash is received from customers.

A

Operating Cycle

30
Q

Formula of Operating Cycle

A

Operating cycle = Average sale period + Average collection period

31
Q

is a ratio that compares total sales to average total assets.

It measures how efficiently a company’s assets are being used to generate sales. This ratio
expands beyond current assets to include noncurrent assets, such as property, plant, and
equipment. It

A

Total Asset Turnover

32
Q

Formula of Total Asset Turnover

A

Total asset turnover =

Sales
_________________
Average total assets

33
Q

refers to borrowing money to acquire assets in an effort to increase sales and profits.

A

Financial Leverage

34
Q

If the company’s rate of return on total assets exceeds the rate of return the company pays its creditors, financial leverage is ________.

A

positive

35
Q

If the rate of return on total assets is less than the rate of return the company pays its creditors, financial leverage is
_____________.

A

negative

36
Q

What are the 3 Debt Management

A
  1. Time interest earned ratio
  2. Debt-to-equity ratio
  3. Equity multiplier
37
Q

The most common measure of a company’s ability to provide protection to its long-term
creditors is the ______________

A

Time interest earned ratio

38
Q

Formula of Time Interest earned ratio

A

Times interest earned ratio =

Earnings before interest expense and income taxes
_________________________________________
Interest Expense

39
Q

is one type of leverage ratio that indicates the relative proportions of debt and equity at one point in time on a company’s balance sheet.

As the ___________ increases, it indicates that a company is increasing its financial leverage.

In other words, it is relying on a greater proportion of debt rather than equity to fund its assets.

A

Debt-to-equity Ratio

40
Q

Formula of debt-to-equity ratio

A

Debt-to-equity ratio =

Total liabilities
_________________
Stockholders’ equity

41
Q

is another type of leverage ratio that indicates the portion of a company’s assets funded by equity.

A

Equity Multiplier

42
Q

Formula of Equity Multiplier

A

Equity multiplier
=
Average total assets
________________________
Average stockholders’ equity

43
Q

What are the

A
  1. Gross Margin Percentage
44
Q

should be more stable for retailing companies than for other companies because the cost of goods sold in retailing excludes fixed costs.

A

Gross Margin Percentage

45
Q

Formula of Gross Margin Percentage

A

Gross margin percentage

Gross margin
___________
Sales

46
Q

The gross margin percentage focuses on
only one type of expense (cost of goods sold) and its impact on performance, whereas the
__________________ also looks at how selling and administrative expenses, interest expense, and income tax expense have influenced performance.

A

net profit margin percentage

47
Q

Formula of net profit margin percentage

A

Net profit margin percentage

Net Income
______________
Sales

48
Q

The return on total assets looks at profits relative to total assets, whereas the _______________ looks at profits relative to the book value of stockholders’ equity.

A

return on equity

49
Q

Formula of Return of Equity

A

Return on Equity

Net income
________________________
Average stockholders’ equity

50
Q

It also bears emphasizing that many managers and investors take a more in-depth
look at return on equity using principles pioneered by ________________________________

A

E.I. du Pont de Nemours and
Company (better known as DuPont).

51
Q

Formula for DuPont Analysis in Return of Equity

A

Return on equity = Net profit margin
percentage × Total asset turnover × Equity
multiplier

52
Q

An investor buys a stock in the hope of realizing a return in the form of either dividends or future increases in the value of the stock. Because earnings form the basis for dividend payments and future increases in the value of shares, investors are interested in a company’s __________.

A

earnings per share.

53
Q

Formula of earnings per share.

A

Earnings per share

Net income
_______________________________________
Average number of common shares outstanding

54
Q

An index of whether a stock is relatively cheap or rel-
atively expensive in relation to current earnings

A

Price-earnings ratio

55
Q

Formula of Price-earnings ratio

A

Market price per share ÷ Earnings per share

56
Q

An index showing whether a company pays out most
of its earnings in dividends or reinvests the earnings internally

A

Dividend payout ratio

57
Q

Formula of Dividend payout ratio

A

Dividends per share ÷ Earnings per share

58
Q

Shows the return in terms of cash dividends being
provided by a stock

A

Dividend yield ratio

59
Q

Formula of Dividend yield ratio

A

Dividends per share ÷ Market price per share

60
Q

Measures the amount that would be distributed to
common stockholders if all assets were sold at
their balance sheet carrying amounts and if all
creditors were paid off

A

Book value per share

61
Q

Formula of Book value per share

A

Total stockholders’ equity ÷ Number of common shares outstanding

Managerial Accounting (10 decks)

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