Chapter 6 - review Flashcards
What is a horizontal analysis
It’s the variances of inline items over some time
How do we usually see these variances with a horizontal analysis?
- By dollar amount
- Percentage
How are the comparisons made
current period results to prior periods results
How do you make your explanations
Based on the comaprisons between line items
What is a vertical analysis
It comapres a journal item, to a ‘financial statement line item’ to a base
What are example of base lines?
- IS - Total revenue
- BS: Total assets
What is the gross margin ratio purpose?
To see how much we have left to cover operating expenses
What does gross margin tell us if we compare to others
- If we are effectively securing inventory prices
- Pricing our inventory well
What is operating margin (EBIT margin)?
Total revenue we have left over after cover operating expenses
What does a high EBIT margin means?
+ Indicates a companies operations are effective enough to drive company growth without external financing
How cna a company make their EBIT more meaningful?
+ Its most useful when compare to industry averages or competitors
What is benchmarking?
The process of comparing company metric to the rest of the industry or competitors
What is net profit margin also known as?
Return on Sales
What is ‘return on sales’?
Its the % of total revenue after all costs are paid
What is the metric commonl y used for
Obtaining external financing
WDYM external financing?
+ 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
What ratios ca we do for a vertical analysis
- Return on sales
- EBIT MARGIN
What are budgets
Budgets are a companies estimates on its finacial results
What is a strategic planning process
when a company lays out their operational and fincaila plans over the medium and long term
What is a finanical planning and analysis team?
This is a function that does the budgeting, financial analysis, forecasting
What are ‘top down budgets’
Budgets that are made by executive mangement with little to no input from lower organization levels
What are ‘borrom up budgets’
Budgets made by lower level managemetn and no little input form senior management
What is ‘hybrid budgeting’?
The expectations from executive management are more as targets + guidlines and there’s flexiblity
What are stretch targets
Financial objectives that are hard to maintain
