Chapter 3: Financial Analysis Flashcards
Types of Ratio Analysis
Profitability
Asset Utilization
Liquidity
Debt Utilization
Impact of inflation on Ratio Analysis
Fake sources of profit
Replacement cost increase in inflationary environment
Reduces incomes, increases asset value, lower debt to assets ratio
Explaning Discrepencies
Sales - revenue regonition
COGS - LIFO, FIFO
Net income - financial reporting discrepencies
What are potential problems of utilizing ratio analysis?
Trends and industry averages are historical in nature.
Financial data may be distorted due to price-level changes.
Firms within an industry may not use similar accounting methods.
Trend and industry analysis provide what type of information
benchmarking.
the progress of the company.
a basis for decision making about capital structure.
Investors and financial analysts wanting to evaluate the operating efficiency of a firm’s managers would primarily look at the firm’s
___ ratio
Asset utilization
An increasing average receivables collection period indicates
the company is becoming less efficient in its collection policy.
How to find current ratio
Current ratio = Current assets ÷ Current liabilities
How to find ROA
Profit Margin x Asset Turnover
OR
In 2020, Turnpoint Incorporated had net income of $400,000, assets of $5,000,000, sales of $2,000,000, and debt of 2,000,000. In 2021, Turnpoint Incorporated had net income of $700,000, assets of $4,000,000, sales of $1,300,000, and debt of 2,000,000. Did Turnpoint Incorporated’s return on equity improve from 2020 to 2021?
Yes
2020 ROE:
Total assets = Total debt + Total equity
$5,000,000 = $2,000,000 + Total equity
Total equity = $3,000,000
Return on equity = Net income ÷ Stockholders’ equity = $400,000 ÷ $3,000,000 = 0.133
2021 ROE:700,000(4,000,000−2,000,000)=35%
Disinflation, as compared to inflation, would normally be good for investments in
bonds
Industries most sensitive to inflation-induced profits are those with
cyclical products.
Assuming proper accounting disclosure is used, a large, extraordinary loss has what effect on the normal operating profits in the future?
no effect
During inflation, replacement cost accounting will
increase the value of assets.
lower the debt-to-asset ratio.
reduce incomes.
a. Potential investors look at
b. banker/credit look at
c. long term creditor (bond)
a. Primary - Profit
Secondary - liquidy and debt
b. liquidity
c. primary - debt and profit
