Chapter 7 (Financial Statement Analysis) Flashcards
Horizontal Analysis
- compares two or more years in dollar changes and percentage changes. Assesses how a company’s accounts have changed over time.
Vertical Analysis
- presents various accounts as a percentage of a key financial statement figure (i.e. total assets on balance sheet, net sales on the income statement)
- helpful for comparing different sized firms in the same industry
Ratio Analysis
- _____________: how efficiently a firm has performed in its pursuit of profits
- measured by: gross profit percentage (______ ______/ Net _____)
Profitability
Gross profit / Net sales
Ratio Analysis Continued
- Profitability Measures: Return on Sales (Net ______/ Net Sales; also called profit ______), Asset Turnover (Net sales / Avg. Total _______), Return on Assets (Net Income/ Avg. Total Assets), Return on Equity (Net Income / Avg. Stockholders’ Equity)
- Liquidity Measures: Current ratio (Current _______/ Current ___________), Quick Ratio (____ + short term inventory + __ / current liabilities), Operating CF / CL (Operating ____ ____ / Avg. Current Liabilities), AR Turnover (Net _____ / net Avg. AR)
Income, margin, Assets
(Current assets / currents liabilities), (cash + short term inventory + AR / current liabilities), (Operating Cash Flow / Avg. Current liabilities), Sales
Ratio Analysis Continued
- Liquidity Measures: Avg. Collection Period (365 / __ Turnover), Inventory Turnover (COGS / Avg. Inventory), Days Sales in Inventory (365 / __________ Turnover)
- Solvency Measures: Debt-to-Equity (Total ___________/ Total Stockholders’ Equity), Times Interest Earned (NI + Interest Expense + Income Tax Expense / Interest Expense)
- Common Stockholders Ratios’: Price Earnings (Market Price Per Share / Earnings Per Share), Dividend Yield (Annual Dividend Per Share / Market _____ Per Share), Dividend Payout (Annual Dividend Per Share / ________ Per Share)
AR, Inventory
Liabilities
Price, Earnings
Ratio Analysis Definitions
- Profitability
1) Gross Profit Percentage
2) ROS
3) Asset Turnover
4) ROA
5) ROE
a) The amount of sales generated from each dollar invested in assets
b) The rate of return generated by a business for its stockholders
c) The rate of return generated on a company’s investment in assets from all sources
d) The percentage of net income remaining from a dollar of sales after subtracting all expenses
e) The percentage of income generated from sales after deducting the cost of goods sold
3a, 5b, 4c, 2d,1e
Ratio Analysis Definitions Continued
- Liquidity
1) Current Ratio
2) Quick Ratio
3) Operating CF / CL
4) AR Turnover
5) Avg. Collection Period
6) Inventory Turnover
7) Days Sales in Inventory
a) The number of days required, on average, to sell the inventory currently on hand
b) The number of days required, on average, to collect an outstanding account receivable
c) The number of sales/collection cycles experienced by a firm in a year
d) The amount of current assets available to service current liabilities
e) The amount of liquid assets available to pay short-term liabilities
f) The number of production/sales cycles experienced by a firm in a year
g) The company’s ability to pay current liabilities from operating cash flows
7a, 5b, 4c, 1d, 2e, 6f, 3g
Ratio Analysis Definitions Continued
- Solvency
1) Debt-to-Equity
2) Times Interest Earned
a) The ability to pay current interest charges from operating income
b) The relative investment of creditors versus
shareholders in a business
- Common Stockholders Ratios
1) Price Earnings
2) Dividend Yield
3) Dividend Payout
a) The percentage of earnings paid out as dividends
b) Indication of the fair value of a company’s stock
c) How much a company pays out in dividends relative to the company’s share price
2a, 1b
1b, 2c, 3a
- when conducting a vertical analysis on an income statement, each amount is expressed as a percentage of net _____
sales
