Financial Analysis Tools

Question 1

Zero based

Answer 1

Every budget line items starts at zero and must be justified by the leader

Question 2

Budgeting - Incremental

Answer 2

The numbers from the prior budget are used as a starting point for the current budget. This is the traditional way of budgeting

Question 3

Budgeting - Formula

Answer 3

Different units receive different budget percentages. For example, the decision may be to decrease bonus budgets by 10% across the Company. However, executive bonuses may be decreased by 5% while bonuses for the rest of the staff may be reduced by a larger percentage, but they both roll up into a number that is a 10 percent decrease overall

Question 4

Budgeting - Activity

Answer 4

Budget is based on the value of a service or product for the company. For example, if a reseller like Amazon makes the strategic decision to sell more Amazon video services, the decision may be to invest a larger portion of the budget to marketing and sales instead of research and development

Question 5

Financial Statements - Balance sheet

Answer 5

A snapshot of the company’s financial position.

Assets: everything a company owns
Liabilities: everything a company owes
Equity: what is left after a company pays all liabilities and liquidates all assets

Question 6

Financial Statements - Income statement

Answer 6

Also known as a profit/loss statement; measure of the company’s financial health over a period of time like a year or a quarter

Revenue: a company’s income
Expenses: company’s costs
Profits: difference between income earned and operating costs

Question 7

Financial Statements - Statement of cash flows

Answer 7

Report of how much cash a company has on hand, or how liquid the company is

Operating activities: buying and selling goods and services
Investing activities: gains or losses generated due to the company’s investments
Financing activities: debt or financing a company acquires

Question 8

Financial Ratios - Profit margin

Answer 8

Result of revenues minus costs

Question 9

Financial Ratios - Earning per share

Answer 9

(Net income - Dividends on preferred stock) / Average of outstanding shares

Question 10

Financial Ratios - Return on investment (ROI)

Answer 10

(Investment gains - investment costs) / Investment cost