Chapter 6 - review

Question 1

What is a horizontal analysis

Answer 1

It’s the variances of inline items over some time

Question 2

How do we usually see these variances with a horizontal analysis?

Answer 2

1. By dollar amount
2. Percentage

Question 3

How are the comparisons made

Answer 3

current period results to prior periods results

Question 4

How do you make your explanations

Answer 4

Based on the comaprisons between line items

Question 5

What is a vertical analysis

Answer 5

It comapres a journal item, to a ‘financial statement line item’ to a base

Question 6

What are example of base lines?

Answer 6

1. IS - Total revenue
2. BS: Total assets

Question 7

What is the gross margin ratio purpose?

Answer 7

To see how much we have left to cover operating expenses

Question 8

What does gross margin tell us if we compare to others

Answer 8

1. If we are effectively securing inventory prices
2. Pricing our inventory well

Question 9

What is operating margin (EBIT margin)?

Answer 9

Total revenue we have left over after cover operating expenses

Question 10

What does a high EBIT margin means?

Answer 10

+ Indicates a companies operations are effective enough to drive company growth without external financing

Question 11

How cna a company make their EBIT more meaningful?

Answer 11

+ Its most useful when compare to industry averages or competitors

Question 12

What is benchmarking?

Answer 12

The process of comparing company metric to the rest of the industry or competitors

Question 13

What is net profit margin also known as?

Answer 13

Return on Sales

Question 14

What is ‘return on sales’?

Answer 14

Its the % of total revenue after all costs are paid

Question 15

What is the metric commonl y used for

Answer 15

Obtaining external financing

Question 16

WDYM external financing?

Answer 16

+ A lot of capital providers often wat to see if one they are capable of repaying debt obligations

+ Or investors might compare to other companies to see which is the most attractive investment option

Question 17

What ratios ca we do for a vertical analysis

Answer 17

1. Return on sales
2. EBIT MARGIN

Question 18

What are budgets

Answer 18

Budgets are a companies estimates on its finacial results

Question 19

What is a strategic planning process

Answer 19

when a company lays out their operational and fincaila plans over the medium and long term

Question 20

What is a finanical planning and analysis team?

Answer 20

This is a function that does the budgeting, financial analysis, forecasting

Question 21

What are ‘top down budgets’

Answer 21

Budgets that are made by executive mangement with little to no input from lower organization levels

Question 22

What are ‘borrom up budgets’

Answer 22

Budgets made by lower level managemetn and no little input form senior management

Question 23

What is ‘hybrid budgeting’?

Answer 23

The expectations from executive management are more as targets + guidlines and there’s flexiblity

Question 24

What are stretch targets

Answer 24

Financial objectives that are hard to maintain