exam 2 Flashcards
Financial Statement Analysis
a set of tools used to make the general purpose financial statements for useful for varied users
Horizontal Analysis
Focuses in the dollar amount and/or percent change in accounts on the income or balance sheet from year to year
Facilitates identifying trends
Vertical Analysis
Used to evaluate the relationship within a single financial statement
Expresses each item within a financial statement as a percent of a selected item
Ratio Analysis
Expresses the mathematical relationship between 2 or more financial variables
Liquidity Ratios
Provide a measure of a company’s ability to meet current obligations in a timely manner
- working capital
- current ratio
- acid test (quick)
Working capital
a widely used general measure for evaluating liquidity
Current Ratio
a widely used general measure for evaluating a company’s ability to pay short term liabilities with current assets
Acid-Test (Quick) ratio
measures ability to pay short term debt, but excludes less liquid current assets
Profitability Ratios
- Provide a measure of the earnings or earning potentials of the company
- significant to investors because they help evaluate if invested funds are being used efficiently
1. gross margin percent
2. net margin percent
3. return on assets
4. return on equity
Gross Margin Percent
provides a measure of the percent of sales that remain after inventory expenses are covered
Net margin percent
- Provides a measure of the percentage of sales that remain after all expenses are covered
- General Cost Control
Return on assets
measures the ability of the firm to earn a return on asset
provides a measure of how efficiently assets are bein gused
Return on equity
measure the ability of the company to earn a return on SHE
Debt Management Ratio
- Provides insight into the ability of a company to pay ALL liabilities
- Provides a measure of risk
1. Times interest earned
2. Debt to equity
3. Equity Multiplier
Time Interest Earned
measures a companies ability to meet interest payments as they become due
A high Times Interest Earned ratio means
they are more likely able to make those payments
Debt to equity
- Measure the relative proportion of financing provided by creditors as opposed to stockholders
- Best measure of risk
Equity Multiplier
Indicates the portion of companies assets that are funded by SHE
Asset Management Ratios
- Assess how well a company uses its assets
1. Account Receivable Turnover
2. Inventory Turnover
3. Operating Cycle
4. Total Asset Turnover
5, Financial leverage
Accounts receivable turnover
- Used to assess the liquidity of the receivables
- Determines if we are collecting them according to our credit terms
Average Collection Period
average number of days it takes to collect an account receivable
Inventory turnover
- Indicates the liquidity of inventory
- measures the number of times, on average, inventory is sold in the period
Average Sale Period
Computes the average number of days it takes to sell the average inventory balance one time
Operating Cycle
Measures the elapsed time from when inventory is received from suppliers and when cash is received from consumers
Total Asset Turnover
Measures how efficiently a company’s assets are being used to generate sales
Financial Leverage
- Results from the difference in the rate of return on its assets and rate of return it must pay creditors on an after-tax basis
- Is it good to borrow money
Positive Financial Leverage
- the return on assets exceeds the return paid to creditors
- means debt can benefit the stockholders
Negative Financial Leverage
- The return on assets is less than the return paid to creditors
How to determine financial leverage?
return on assets v interest rate on the bond
return on assets v return on equity
- if the return on equity is greater than the return on assets, financial leverage is positive because a greater return was given to the stockholders
Market Performance Ratios
Used by investors to assess and measure the earning and/or earning potential of the company
- earnings per share
- price earning
- dividend pay out
- dividend yield
- Book value per share
Earnings per share
measures the amount of net income earned on each share of common stock
Price Earning ratio
- Measure the ratio of mkt price per share vs earnings per share
- reflects an assessment of a company’s earning from perspective of the stock market
- reflects investors expectation concerning the future
dividend pay out
measures the percent of earnings distributed in cash dividends
dividend yield
measures the rate of return from dividends earned by an investor who buys a share at the current market price
Book value per share
measures the amount a common shareholder would receive if the assets were sold at carrying value and all creditors were paid
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Job order cost system
use if we customized, our products are highly differentiated, or big ticket items
process cost system
use if we mass produce, have homogeneous products, or in a continuous production process
Operation Costing System
- A hybrid system that employs elements from both job order and process costing
- Use if products produced have some common and some unique characteristics
- usually assign DM to each batch and DL and OH by department
Similarity in Job Order and Process Costing
in the way production costs are recorded (WIP)
Differences in Job Order and Process Costing
- Method of assigning the costs to individual units of inventory
Process Costing: assigning cost to units
- Must be recorded as WIP in each department
- Cost flow in sequence from one dept. to another
- cost accumulate as inventory moves through departments
- Must have WIP for each dept.
For MGMT and Inventory Valuations….
cost must be allocated between completed units and end wip units
Cost of production report
- An internal document for management that shows production quantity and cost data for a department
- Provides a basis for evaluating productivity and cost control of each dept., setting prices, etc.
How often does process costing determine costs
every period
weighted average method
average all cost over all equiv units
- Most Widely USed
FIFO Method
Transfer to finished goods in 2 layers
- beginning layer
- current layer (calculate current cost/eu)
TRANSFERRED IN COSTS
- cost that were incurred in a previous process and brought in a later process as part of the production cost
- requires a separate cost/eu
Traditional (conventional) costing
allocates manu OH costs to products based on the activity that causes costs to be incurred
Activity/Cost Pool
any event, action, transaction, or work sequence that incurs cost when producing a product
3 key differences: traditional vs ABC
- Under ABC, some non-manu cost may be assigned to products ( if a definite cause and effect exists)
- Under ABC, some manu cost may not be assigned to products (if the cost is not caused by producing the product)
- ABC uses numerous OH rate
ABC hierarchy of costs
classifies costs into 4 activity levels
facilitates the allocation of OH costs to appropriate cost pools
Unit level activity: Example
- electricity to power machines
- indirect material used
- products assembled by hand
Batch Level activities: examples
process purchase orders
setting up machines
Product level activity: examples
maintaining parts
product design and redesign
issuing engineering change notices
Facility level activity: examples
- factory management salaries
- insurance costs
- depreciation
- maintenance on general purpose machines
- security guards
benefits of ABC
more accurate product costing
enhanced control over OH costs
Limitations of ABC
Very expensive
Some OH costs are still allocated by arbitrary volume based cost drivers
Factors that show that ABC is cost effective
- product lines differ greatly in volume or manufacturing complexity
- OH costs constitute a significant portion of total costs
ABC serving customers
assign customer related cost to specific customers
customer support, service calls, sales calls, evaluating credit
ABC serving suppliers
assign supplier related cost to specific suppliers
reordering, expedited shipping, warranty work
