Chapter 3 - Analysis and Interpretation of Financial Statements Flashcards
What are the goals of investors, creditors and managers
Investors: maximize investment return
Creditors: safe return of investment
Managers: maximize stockholder’s value while addressing creditor’s concerns
Why do investors and creditors have conflicts of interest?
Investors want the most money back and are willing to take risks while creditors want the company to make safe decisions and be able to pay back loans
What are the objectives of comparative and common-size analysis?
Common-size (Vertical): Show relationships between different accounts in the same year
Comparative (Horizontal): present changes in the financial and operational condition of a business from one period to the next
How do you perform comparative and common-size analysis?
Common-Size (vertical): # for item / total assets[total revenue] = percentage of individual item
Comparative (horizontal): $ change = Period 2 - Period 1 [absolute]
% change = $ change / period 1 [relative]
How do you interpret the common/comparative analysis?
Common: relationships between different accounts in same year
Comparative: Show changes of the same account in different years
What is the difference between average check and revenue [give equation]
Average check = revenue / # of guests
How do you find trend percentage and trend index
Trend % = (Period[t] - Period [t-1])/Period [t-1]
Trend Index = (Period[t] / Period[1]) x 100
What is the difference between trend percentage and trend index
Trend Percentage: comparison to the previous period
Trend index: Base begins at 100. comparative to 1st period
How does inflation distort manager performance
Revenue can appear to be increasing but it is just the result of inflation. The only way to know is to use the inflation index
What are types of inflation index
Consumer Price Index: National index
Industry Index: national average restaurant trend index
In-house index: based on average check and only what has happened to prices within the restaurant
How do you calculate for inflation?
Current $ = historical $ x (current index/historical index)
