Chapter 5 Flashcards
Translate peso amounts to percentages, which indicate the relative size of an item in proportion to the whole.
Common-size financial statements
it show assets, liabilities and equity as a percentage of total assets
common size statements of financial position
It express revenue and expenses as a percentage of sales revenues
common-size income statement
also known as “component percentage” or “100 percent” statements
Common-size statements
purposes of Common-size statements
- comprehend or visualize the changes in individual items that have taken place from year to year in relation to the total assets, total liabilities, and owner’s equity or total net sales.
- Compare statements of two or more companiesor statement of one company with the statements for an entire industry and evaluate their current financial position and operating results.
- Point out efficiences and inefficiencies that might otherwise go unnoticed.
financial position conversion procedures
each item therein is converted to percent by dividing it by total assets.
conversion procedures of income statement
each item is restated as a percentage of net sales or net operating revenue by dividing the former by the latter.
a method of using income statement and balance sheet data to detect trends and problems in the business
Ratio Analysis
comparison in fraction, proportion, decimal or percentage form of two significant figures taken from FS.
Financial Ratio
ratios that measure the firms’ ability to meet cash needs as the arise of liability
liquidity Ratios
it shows the probability of operations, soundness of short-term and long-term financial condition and efficiency of which management has utilized the resources.
Ratio Analysis
show direct relationship between two or more quantities in the statement of financial position and income statemen
Financial Ratio
measure the extent of firm’s financing, with debt relative to equity and its ability to cover interest and other fixed charges such as rent and sinking fund payments.
leverage ratio
measures the liquidity of specific assets and efficiency in managing assets such as accounts receivable, inventory and fixed assets.
Activity Ratios
ratios that measure the overall performance of the firm and its efficiency managing assets, liabilities, and equity.
profitability ratios
measure of short-term debt-paying ability.
current ratio
current ratio formula
current assets over current liabilities= current ratio
measures the excess of very liquid current assets-cash and accounts receivable to current liabilities. The ratio takes the perspective of whether the firm could pay its current debts if it were not able to sell its inventories.
quick ratio
acid test ratio formula
quick assets over (cash + marketable securities + accts. rec., net) over current liabilities
cash-flow liquidity ratio formula
cash+ marketable securities+ cash flow from operating activities over current liabilities
accounts receivable turnover formula
net sales over average accts. receivable balance
average collection period formula
365 days over accounts receivable turnover OR ave. accts. receivable over ave. daily sales
inventory turn over formula
cost of good sold over average inventory balance
measures the efficiency of the firm in managing and selling inventory.
inventory turnover
