Financial Statement Analysis

Question 1

Accounts Receivable Turnover

Answer 1

is a measure of the reasonableness of the accounts outstanding. This measurement uses net credit sales, which includes notes receivable from sales transactions.

Question 2

Acid-Test Ration

Answer 2

measures immediate liquidity. This ratio uses quick assets which are cash, receivables, and marketable securities.

Question 3

Asset Turnover

Answer 3

The ratio of net sales to total assets measures the effective use of assets in making sales. The higher the asset turnover, the more effectively the assets of the company are being used.

net sales/
Total Assets

Question 4

Average Collection Period

Answer 4

The accounts receivable turnover can be used to determine the average collection period The ratio of 365 days to the accounts receivable turnover; also called the number of days’ sales in receivables of accounts receivable, or number of days’ sales in receivables. The average collection period is computed as follows:

365 days/
AR Turnover

Question 5

Common Size Statements

Answer 5

A company financial statement that displays all items as percentages of a common base figure. This type of financial statement allows for easy analysis between companies or between time periods of a company.

Question 6

Current Ratio

Answer 6

measures the ability of a business to pay its current debts using current assets.

Question 7

Horizontal Analysis

Answer 7

A procedure in fundamental analysis in which an analyst compares ratios or line items in a company’s financial statements over a certain period of time. The analyst will use his or her discretion when choosing a particular timeline; however, the decision is often based on the investing time horizon under consideration.

Question 8

Industry Averages

Answer 8

Metrics provided by trade organizations used to compare against to determine performace.

Question 9

Leveraged buyout

Answer 9

In a leveraged buyout Purchasing a business by acquiring the stock and obligating the business to pay the debt incurred, the purchasers of a business buy the stock, having the corporation agree to pay the sellers. The result is that the debt created by the purchase is a debt of the corporation.

Question 10

Liquidity

Answer 10

The ability to convert assets into cash. Ultimately the ability of a company to pay its debts.

Question 11

Price-earnings Ratio

Answer 11

compares the market value of common stock with the earnings per share of that stock. It is computed as follows:

Market Price per share/
earnings per share

Question 12

Quick Assets

Answer 12

which are cash, receivables, and marketable securities.

Question 13

Ratio Analysis

Answer 13

Ratio analysis is used to assess a company’s profitability, financial strength, and liquidity. Ratio analysis investigates a relationship between two items either as a ratio (2 to 1 or 2:1) or as a rate (percentage).

Question 14

Return on Common Stock Holders equity

Answer 14

is a key measure of how well the corporation is making a profit for its shareholders. It is computed as follows:
Income available to CSH/
CSH Equity

Question 15

Total Equities

Answer 15

The sum of a corporation’s liabilities and stockholders’ equity.

Question 16

Trend Analysis

Answer 16

An aspect of technical analysis that tries to predict the future movement of a stock based on past data. Trend analysis is based on the idea that what has happened in the past gives traders an idea of what will happen in the future.

There are three main types of trends: short-, intermediate- and long-term.

Question 17

Vertical Analysis

Answer 17

A method of financial statement analysis in which each entry for each of the three major categories of accounts (assets, liabilities and equities) in a balance sheet is represented as a proportion of the total account. The main advantages of vertical analysis is that the balance sheets of businesses of all sizes can easily be compared. It also makes it easy to see relative annual changes within one business.

Question 18

Working Capital

Answer 18

is a measure of the ability of a company to meet its current obligations. It represents the margin of security afforded short-term creditors. Working capital, sometimes called net working capital, is computed as follows:

Current assets - current liabilities

Question 19

Financial ratios have three classifications:

Answer 19

1. Profitability, operating results, and efficiency
2. Financial strength
3. Liquidity

Question 20

Rate of Return on Sales

Answer 20

The rate of return on sales measures what part of each sales dollar remains as net income. It measures operating efficiency and profitability. The higher the rate of return on net sales, the more satisfactory are the business operations. Management should look for and investigate unfavorable trends.

net income/net sales =

Question 21

Earnings per share of common stock

Answer 21

measures the profit accruing to each share of common stock owned. It is computed as follows:

Income available to CSH/
Average shares available in a year.

Question 22

rate of return on total assets measures

Answer 22

measures the rate of return on the assets used by a company. This rate helps the analyst to judge managerial performance, measure the effectiveness of the assets used, and evaluate proposed capital expenditures. The rate is computed as follows:

Income Before expense and income taxes/
Total assets

Question 23

NUMBER OF TIMES BOND INTEREST EARNED

Answer 23

A measure of financial strength, it shows if net income is sufficient to cover the required bond interest payments.

Income before I&IT/
bond interest cash requirement

Question 24

Ratio of Stockholders equity

Answer 24

A financial measure of the portion of total capital provided by the stockholders. It indicates the protection afforded creditors against possible losses.

SH Equity/
total equities

Question 25

ratio of stockholders’ equity to total liabilities

Answer 25

is known as the ratio of owned capital to borrowed capital. It is computed as follows:

SH Equity/
Total Liabilities