Financial Statement Analysis

Question 1

what is ratio analysis?

Answer 1

relationship among various account balances

Question 2

what are the benefits of ratio analysis?

Answer 2

-removes the size effect to allow comparisons of firms of different sizes or firms over time
-allows one to investigate the relationships between financial figures, often there is more information in the relationship between figures than in an individual figure

Question 3

Gaap limitations of ratio analysis

Answer 3

non- captialized csots- related to the concept of measurability is the expensing of costs relating to assets that cannot be identified with enough precisions to warrant capitalization
-ex: brand equity costs from advertising or other promotional activities and research and development costs relating to future products
-historical cost - assets and liabilities are usually recorded at original acquisition or issuance costs. subsequent increases in value are not recorded at original acquisition or issuance costs. Subsequent increases in value are not recorded until realized and declines are only recognized if deem premanent

Question 4

what do profitabilitiy ratios tell you?

Answer 4

tell you how much earnings a company generates from operations

Question 5

what does Return on Assets(ROA) do?

Answer 5

Measures the return generated by companies assets

Question 6

ROA formula

Answer 6

Net income/ average total assets

Question 7

what does Profit Margin (PM) tell you?

Answer 7

how much profit the company earns from each sales dollar

Question 8

PM formula

Answer 8

net income/ sales revenue

Question 9

What does Asset Turnover (AT) tell you?

Answer 9

measures productivity of the companies assets

Question 10

Asset turnover (AT) formula

Answer 10

Sales Revenue/avg total assets

Question 11

ROA Big picture

Answer 11

ROA = Profit Margin * Asset Turnover
ROA = NI/ avg total assets = (PM) ni/sr * (AT) sr/ avg total assets

Question 12

What does Return on Equity(ROE) tell you?

Answer 12

measures the profit generated from the resources that owners provide

Question 13

ROE formula

Answer 13

Net Income / avg shareholders equity

Question 14

ROE Big picture

Answer 14

ROE = PM * AT* Equity multiplier

roe = ni/sr (PM) * SR/avg total assets (AT) * avg total assets / avg equity (EQUITY MULTIPLIER)

Question 15

What do liquidity Ratios tell you?

Answer 15

what is the ability of the company to meet it’s short-term obligations

Question 16

What is liquidity?

Answer 16

Liquidity refers to cash - how much you have, how much is expected and how much can be raised on short notice

Question 17

Current assets/ liabilities

Answer 17

convert to cash or pay off within the next year

Question 18

net working capital or working capital

Answer 18

an excess of current assets over current liabilities (current assets - current liabilities)

Question 19

Working capital formula

Answer 19

current assets - current liabilities

Question 20

Current ratio

Answer 20

current assets / current liabilities

Question 21

Quick ratio

Answer 21

cash + marketable securities + a/R/ current liabilities

Question 22

What does a solvency/Leverage ratio tell you?

Answer 22

what is the ability of the company to pay its longterm obligations?

Question 23

What is solvency?

Answer 23

a companies ability to meet its debt obligations

Question 24

What is leverage?

Answer 24

describes how a company is financed

Question 25

Debt-To-Equity ratio formula

Answer 25

Total Liabilities / Shareholders Equity

Question 26

What can you learn from receivables turnover rate and days sales in receivables

Answer 26

How efficient is the company in managing its receivables?

Question 27

What does the A/R turnover rate tell you?

Answer 27

a/r turnover rate reveals how many times receivables have turned (been collected) during the period

Question 28

avg collection period

Answer 28

shows how many days on average it takes the company to collect their a/r

Question 29

receivables turnover formula

Answer 29

SR/ avg a/r

Question 30

avg collection period formula

Answer 30

365/ receivables turnover

Question 31

Inventory Turnover helpful for?

Answer 31

how eficient is the company at managing their inventory

Question 32

inventory turnover ratio helpful for?

Answer 32

-shows how many times the inventory was turned (sold) during the period

Question 33

avg days in inventory helpful for?

Answer 33

avgt days in inv reveals how many days on avg it takes the company to sell inventory

Question 34

Inventory turnover formula

Answer 34

cogs / avg inv

Question 35

avg days inventory held formula

Answer 35

365 / inventory turnover

Question 36

What do payables ratios tell you?

Answer 36

how long a company is waiting to pay their payables

Question 38

payables turnover ratio tells you?

Answer 38

how many times payables turned (were paid) during the period

Question 39

Payables turnover formula

Answer 39

cogs / avg accounts payable

Question 39

avg days payable tells you?

Answer 39

how manydays on avg the firm waited to pay their suppliers

Question 40

avg days payables formula

Answer 40

365/ payables turnover

Question 41

what does days in financing tell you?

Answer 41

what are the financing costs of the firms operations

Question 42

days in financing formula

Answer 42

days in inventory + days in a/r - days in payables

Question 43

Common size financial statements (vertical analysis)

Answer 43

express each item as a % of total amount within the same year
-typicall total assets for b.s. items and sales for income statements items

Question 44

trend statements (horizontal analysis)

Answer 44

express each item as a percentage of the same item in another year (base year)

Question 45

Ratio analysis practice problem