Financial Statement Analysis and LT Planning Flashcards
1
Q
How do you standardize balance sheets and income statements?
A
- You compute all of the balance sheet accounts as a percentage of total assets, and compute all line items in the income statement as a percentage of sales
2
Q
Why is standardization useful?
A
- They make it easier to compare financial information and comparing companies of different sizes in the same industry.
3
Q
What are the major categories of financial ratios?
A
- Liquidity ratios, financial leverage ratios, asset management, profitability ratios and market value ratios.
4
Q
What are some of the problems associated with financial statement analysis?
A
- The basic problem with financial statement analysis is that there is no underlying theory to help us identify which quantities to look at and to guide us in establishing benchmarks
5
Q
What is the purpose of financial planning?
A
- To examine interactions, exploring options, avoid surprises, ensuring internal consistency and to conclude.
6
Q
What are the major decision areas involved in developing a plan?
A
- A sales forecast, pro forma statements, assets requirements, financial requirements, the plug variable – depends on type of financing to be used and economic assumptions – state of the economy etc.
7
Q
What is the percentage of sales approach?
A
- It is a financial planning method in which accounts are varied depending on the firm’s predicted sales level.
8
Q
What is the internal growth rate?
A
- The internal growth rate is the maximum growth rate a firm can achieve without external funding of any kind.
9
Q
What is the sustainable growth rate?
A
- The sustainable growth rate is the rate the firm can achieve without external equity financing while maintaining a constant debt-equity ratio.
10
Q
What are the major determinants of growth?
A
- Profit margin, dividend policy, financial policy and total asset turnover. All of these increases return on equity and makes it easier to increase its sustainable growth.
