Financial Statements Analysis

Question 1

the process of providing funds for business activities.

Answer 1

Financing

Question 2

Types of financing

Answer 2

Equity and Debt

Question 3

is calculated by dividing total liabilities by total asse

Answer 3

Financing ratio

Question 4

also called debt rate representing creditors’ risk in the business.

Answer 4

Financing ratio

Question 5

used to evaluate the level of debt relative to another financial metric.

Answer 5

Leverage ratio

Question 6

Common leverage ratios

Answer 6

Debt to equity ratio, equity multiplier, times interest earned

Question 7

A measure of the degree to which a company is financing its operations with debt rather than its own resources.

Answer 7

Debt to equity ratio

Question 8

measures the portion of a company’s assets financed by shareholders’ equity rather than debt

Answer 8

equity multiplier

Question 9

it is a solvency ratio that indicates its ability to pay its debts

Answer 9

times interest earned

Question 10

the Return on Equity (ROE) is greater than the Return on Assets (ROA)

Answer 10

Good financial leverage

Question 11

are ratios that analysts and investors can use to analyze and make predictions about a company’s financial performance and potential future growth.

Answer 11

Investing Ratios

Question 12

involves the comparison of two periods (months, or quarters, or years, etc.), two companies, actual and budgets and other bases of analyses.

Answer 12

Horizontal or comparative analysis

Question 13

the difference between the figures are calculated and the %age change from one period to the next is computed using the earlier period as the base

Answer 13

Horizontal or comparative analysis

Question 14

it is a form of horizontal analysis but the comparison extends beyond two years.
-used to track what happened in the past to provide a pattern of what may happen in the coming years.

Answer 14

Trend Analysis

Question 15

it uses indexes and ratios for easier interpretation.

Answer 15

Trend Analysis

Question 16

expresses each item within a financial statement as a percent of a base amount; generally the base amounts commonly used is the total assets for the balance sheet and the net sales for the income statement.

Answer 16

VERTICAL OR COMMON-SIZE ANALYSIS

Question 17

it can be used to compare two periods to analyze the reasons for the changes; or to compare two entities to check their performances; or to budgeted figures to evaluate adherence

Answer 17

VERTICAL OR COMMON-SIZE ANALYSIS

Question 18

take into account the interrelationships of the items in each financial statement

Answer 18

FINANCIAL MIX RATIOS

Question 19

Determines the portion of sales that went into the company’s earnings.

Answer 19

Profit Margin or Return on Sales

Question 20

measures the ability to generate return on every asset that are used to operate the business

Answer 20

Return on Assets (ROA)

Question 21

measures the amount earned on the owners’ or stockholders investment.

Answer 21

Return on Equity (ROE)

Question 22

measured when the company issues two classes of stocks.

Answer 22

Return on Ordinary Equity (ROOE)

Question 23

measures the amount of net income earned by each common share. computed for ordinary shares only.

Answer 23

Earnings Per Share (EPS)

Question 24

indicate how fast a company or its business is growing

Answer 24

Growth Ratios

Question 25

compares a stock’s price to its earnings.

Answer 25

Price-earnings ratio

Question 26

stocks with high P/E ratios may suggest that investors are expecting _______ earnings growth in the future.

Answer 26

Higher

Question 27

stocks with low P/E ratios are appealing to value investors because it means they are paying ____ for every dollar of earnings they receive.

Answer 27

Less

Question 28

shows how much a company pays out in dividends each year relative to its stock price.

Answer 28

Dividend yield ratio

Question 29

reflects the ability of the organization to return investments to owners in terms of cash or dividend, not in terms of actual profit.

Answer 29

Dividend yield ratio

Question 30

the total amount of dividends that a company pays to shareholders relative to its net income.
-this ratio is the percentage of earnings paid to shareholders via dividends.

Answer 30

Dividend payout ratio

Question 31

-measures the book value of a firm on a per-share basis

Answer 31

Book value per share

Question 32

used to determine a debtor’s ability to pay off current debt obligations without raising external capital

Answer 32

LIQUIDITY RATIOS

Question 33

a measure of a company’s ability to pay its current liabilities with its current assets (liquidity).

Answer 33

Current ratio or WC ratio

Question 34

used to determine a company’s short-term liquidity and ability to cover its current liabilities without selling inventory assets.

Answer 34

Quick ratio or acid test ratio

Question 35

it represents a company’s ability to pay current liabilities with assets that can be converted to cash quickly.

Answer 35

Quick ratio or acid test ratio

Question 36

defensive assets are technically the same as quick assets: cash, cash equivalents, marketable securities, current receivables.

Answer 36

Defensive interval ratio

Question 37

the concept of using borrowed capital as a funding source.
-it is often used when businesses invest in themselves for expansions, acquisitions, or other growth methods.

Answer 37

FINANCIAL LEVERAGE

Question 38

used to evaluate the level of debt relative to another financial metric.

Answer 38

leverage ratio

Question 39

leverage ratios are referred to as ________ratios

Answer 39

gearing

Question 40

a measure of financial leverage that demonstrates the degree to which a firm’s operations are funded by equity capital versus debt financing; it compares some form of owner’s equity or capital to debt or funds borrowed by the company.

Answer 40

Gearing ratio