Financial Statement Analysis | Quiz 2 Flashcards
Why do we analyze financial statements
- An objective measure of management’s success in meeting financial goals
- Identify problem areas
- Identify areas performing well
- A guide to determining the depth of the problems
- Sets priorities for management activity
- Helps establish goals for future periods
Consolidated Income Statement
Revenue -cost of goods sold =gross profit -operating expense =operating income \+other income =Earning before interest and tax (EBIT) -interest expense =taxable income -tax =net income
Current assets
Cash
| Accounts receivable
| Inventories
| Prepaid expenses
Long-term assets
Property, plant & equipment
| Accumulated depreciation
| Goodwill
| Intangibles
Other Assets
Long-term investment
| Leasehold costs
| Deferred Expenses
Current Liabilities
Accounts payable
| Accrued expenses
| Income tax payable
| Current portion of Mortgage
Inventory
The cost of raw materials, goods in use and finished goods (i.e. direct labor)
Cost of goods sold
Cost of materials and direct labor
| Similar to prime cost
| Portion of inventory that is sold becomes COGS
| usually variable
Operating Expense
Administrative and selling expenses
| Usually fixed
Margin vs Markup
The difference between revenue and COGS. Markup is based on cost but margin is based on revenue
Common-Size (Vertical) Analysis
Express each individual item as a percentage of total assets or revenues
Trend Analysis
Trend percentage (period1 - periodt-1) / periodt-1 [percentage change from the previous period] Trend Index (periodt / period1) x 100 [Account size in relation to the base period]
Profitability ratios
Management’s effectiveness in producing profits
ROA = NI / avg. assets
ROE = NI / avg. equity
Profit margin = NI / rev.
Activity ratios | Asset management ratios
Management’s effectiveness in managing assets
| AR turnover = credit sales / avg. AR
| Inventory turnover = COGS / avg. inventory
| Inventory holding period = # of operating days/inventory turnover
| Fixed asset turnover = revenue / avg. fixed assets
| W.C. turnover = revenue / avg. W.C.
Liquidity ratios
A company’s ability to meet its current obligations
Current ratio = CA/CL
Quick ratio = CA before inventory/CL
