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BAR Review > Chapter 2: Financial Statement Analysis > Flashcards

Chapter 2: Financial Statement Analysis Flashcards

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1
Q

Horizontal and Vertical Statement Analysis

What are the components of a vertical analysis?

A
  • Vertical analysis is based on a single year
  • It is used to compare various industries with similar financial reporting
  • A type of verticial analysis is the common-size financial statements
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2
Q

Horizontal and Vertical Statement Analysis

How is the common-size financial statement calculated?

A
  • The common-size financial statement is based on a percentage, rather than the amount
  • The base amount to determine common-size income statement is Sales
  • The base amount to determine common-size balance sheet are total assets
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3
Q

Horizontal and Vertical Statement Analysis

What is horizontal analysis?

A
  • Horizontal analysis is used to compare two periods (i.e. previous year and current year)
  • The calculation is (Current Year - Base Year)/Base Year
  • The base year for horizontal analysis is the demoninator when calculating the change in percentage
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4
Q

Liquidity Ratios

What is the cash ratio calculation?

A

(Cash + Securities) / Current Liabilities

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5
Q

Liquidity Ratios

What is not included when calculating quick assets?

A
  • Inventory
  • Pre-paid Expenses
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6
Q

Activity Ratios

What is the Asset Turnover Calculation?

A

Sales / Average Total Assets

  • The asset turnover ratio is used to determine a firm’s ability to generate sales from its assets
  • A high turnover indicates more resources are being used to generate sales
  • A high asset turnover may indicate that the company is undercapitalized
  • The company cannot afford to buy enough fixed assets or use its fixed assets efficiently
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7
Q

Activity Ratios

What is the Cash Conversion Cycle?

A

A/R Turnover in Days + Inventory Turnover in Days - A/P Turnover in Days

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8
Q

Activity Ratios

What is the calculation to determine COGS when only the Sales and Gross Profit Percentage are provided?

A

Sales x (1 - Gross Profit %)

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9
Q

Activity Ratios

What is the Fixed Asset Turnover Calculation?

A

Sales / Average Net Fixed Assets

  • The calculation is used to determine the firm’s ability to generate sales using fixed assets
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10
Q

Activity Ratios

What is the Accounts Payable Turnover Calculation?

A

Purchases / Average Accounts Payable

  • If purchases cannot be calculated, use Cost of Goods Sold
  • A high A/P turnover means that it is taking less time to pay suppliers and cash discounts are being applied
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11
Q

Activity Ratios

What is the Accounts Payable Turnover in Days Calculation?

A

(# of Days in Year) / Accounts Payble Turnover
OR
Ending Accounts Payable / (Purchases/# of days in year)

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12
Q

Solvency Ratios and Leverage

What is the purpose for solvency ratios?

A

Solvency ratios are used to measure the company’s ability to pay noncurrent debt when it becomes due and still be able to be in business

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13
Q

Solvency Ratios and Leverage

What ratios are used to determine solvency?

A
  • Debt Ratio
  • Debt to Equity Ratio
  • Times Interest Earned Ratio
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14
Q

Solvency Ratios and Leverage

What is the purpose of the Debt to Equity Ratio?

A
  • How much equity can absorb the debt
  • The lower the ratio, the safer it is for creditors
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15
Q

Solvency Ratios and Leverage

What is the purpose of the Times Interest Earned Ratio?

A
  • It determines how much operating profit can decline before the interest on debt obligations can be met
  • A higher ratio shows that the company can pay off the debt with its current income
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16
Q

Solvency Ratios and Leverage

What is financial leverage?

A

Calculation: % of change in EPS / % of Change in Operating Income

  • Financial leverage shows how much debt, which are all fixed costs, are used in a company’s structure
  • The higher the leverage, the more risk and the more reward
17
Q

Solvency Ratios and Leverage

What is operating leverage?

A

% Change in Operating Income / % Change in Sales

  • Operating leverage is based on how much sales change the operating income
  • If there are more fixed costs (i.e. salaries) than variable costs (i.e. commissions), then there will be a greater risk
  • If sales are increasing, then a high degree of leverage would be beneficial since income will cover the fixed costs
  • If sales are decreasing, a high degree of leverage would create a higher risk since there may not be enought income to cover the fixed costs
18
Q

Returns and Profitability

What is the calculation to determine return on assets?

A
  • Net Income / Average Total Assets
    OR
  • Profit Margin / Asset Turnover
    OR
  • Return on Equity x (1-Debt Ratio)
19
Q

Returns and Profitability

What is the calculation to determine return on sales?

A
  • Operating income / Net Sales
  • Operating income can be calculated in two different ways
    Sale price per Unit x Quantity x Target Rate of Return = (Sell Unit x # of Units) - (Variable Costs x # of Units) - (Total Fixed Costs)
20
Q

Returns and Profitability

What is the calculation for Return on Equity based on the Dupont Analysis?

A

Net Profit x Asset Turnover x Equity Equalizer

Net Income = (Net Income/ Sales)
Asset Turnover = (Credit Sales / Avg. A/R)
Equity Equalizer = (Total Assets / Total Equity)

21
Q

Returns and Profitability

What is the calculation for Return on Equity based on the Extended Dupont Analysis?

A

Tax Burden x Interest Burden x Operating Income x Asset Turnover x Equity Equalizer

Tax Burden = Net Income / Pre-Tax Income (EBT)
Interest Burden = Pre-Tax Income (EBT) / Interest Expsnes
Operating Income = EBIT / Sales

22
Q

Investor and Market Ratios

What is the calculation to determine Price-per-Earnings Ratio?

A

Share Price / EPS

EPS = Net Income / Average Shares Outstanding

  • The P/E ratio indicates the percentage an investor can expect to invest in a company so that they may receive one dollar of that company’s earning
  • A higher P/E ratio may indicate to investors that a higher earnings growth is expected
23
Q

Investor and Market Ratios

What is the calcuation to determine dividend yield?

A

Dividends per Common Stock / Common Stock Market Price

  • How much will an investor earn from an investment based solely on the dividend payments?
  • Companies that are mature and not growing quickly will have a high dividend yield
  • Companies that are new and just starting will have a lower dividend yield
24
Q

Investor and Market Ratios

What is the calculation to determine Dividend Payout Ratio?

A

Dividend / Net Income

  • Investors use this ratio to determine if dividends that were paid are appropriate and within reason
  • A higher payout ratio means share prices are unlikely to appreciate rapidly

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