Chapter 14- Financial Statement Analysis

Question 1

Acid-Test Ratio (quick)

Answer 1

A measure of a company’s immediate short-term liquidity. Divide sum of cash, short-term investments, and net receivables by current liabilities.

Question 2

Asset Turnover

Answer 2

A measure of how efficiently a company uses its assets to generate sales; divide net sales by average assets.

Question 3

Change in Accounting Principal

Answer 3

The use of a principle in the current year that is different from the one used in the preceding year.

Question 4

Current Ratio

Answer 4

A measure used to evaluate a company’s liquidity and short-term debt-paying ability; divide current assets by current liabilities.

Question 5

Debt to Total Asset Ratio

Answer 5

Measures the percentage of total assets provided by creditors; divide total debt by total assets.

Question 6

Discontinued Operations

Answer 6

The disposal of a significant segment of a business.

Question 7

Extraordinary Items

Answer 7

Events and transactions that are unusual in nature and infrequent in occurrence.

Question 8

Horizontal Analysis

Answer 8

A technique for evaluating a series of financial statement data over a period of time, to determine the increase or decrease that has taken place. Either amount or percentage.

Question 9

Inventory Turnover

Answer 9

A measure of the liquidity of inventory; divide COGS by average inventory.

Question 10

Liquidity Ratios

Answer 10

Measures of the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.

Question 11

Payout Ratios

Answer 11

Measures the percentage of earnings distributed in the form of cash dividends; divide cash dividends by net income

Question 12

Profitability Ratios

Answer 12

Measures of the income of operating success of a company for a given period of time.

Question 13

Profit Margin

Answer 13

Measures the percentage of each dollar of sales that results in net income; divide net income by net sales.

Question 14

Pro Forma Income

Answer 14

A measure of income that usually excludes items that a company thinks are unusual or non-recurring.

Question 15

Quality of Earnings

Answer 15

Indicates the level of full and transparent information provided to users of the financial statement.

Question 16

Ratio Analysis

Answer 16

A technique for evaluating financial statements that expresses the relationship between selected financial data.

Question 17

Receivables Turnover

Answer 17

A measure of the liquidity of receivables; divide net credit sales by average net receivables.

Question 18

Solvency Ratios

Answer 18

Measures of the ability of the company to survive over a long period of time.

Question 19

Trading on the Equity

Answer 19

Borrowing money at a lower rate of interest than can be earned by using the borrowed money.

Question 20

Vertical Analysis

Answer 20

A technique for evaluating financial statement data that expresses each item within a financial statement as a percent of a base amount.