Lecture 10 - Financial Statement Analysis (Chapter 12) Flashcards
Analysis techniques, trend, financial ratios, "How do you calculate x?"
Account for the two types of analysis techniques.
- Horizontal analysis
- Vertical analysis
What’s a trend?
It’s an indication of the financial direction that a company is taking.
How do you calculate a company’s trend?
Trend = A given year’s amount / Base year’s amount
Provide examples of financial ratios.
Efficiency ratios, financial strength ratios, and profitability ratios.
What does a low turnover rate of “accounts receivable” indicate?
It indicates ineffectiveness in collecting cash from customers.
True or false: a higher current ratio generally indicates a strong financial position.
True
What’s the difference between “gross profit” and “net profit”?
“Gross profit” shows the profit a company makes after subtracting “Cost of Goods Sold” from revenue, while “net profit” shows the profit a company makes after subtracting total expenses from revenue.
How do you calculate “gross profit”?
Gross profit = Revenue - Cost of Goods Sold
How do you calculate “net profit”?
Net profit = Revenue - Total expenses
What does “profit margin” measure?
It measures profitability.
What does “asset turnover ratio” measure?
It measures efficiency.
What does “equity multiplier” measure?
It measures financial strength.
How do you calculate “return on equity” (ROE)?
Return on equity (ROE) = Profit margin * Asset turnover ratio * Equity multiplier
or
Return on equity (ROE) = Net profit / Average equity
What does “inventory turnover” measure?
It measures the number of times a company sells its inventory during a year.
How do you calculate “return on assets” (ROA)?
Return on assets = Rate of return on assets * Asset turnover ratio
What does “current ratio” measure?
it measures a company’s ability to pay/finance current liabilities with current assets.
How do you calculate a company’s current ratio?
Current ratio = Current assets / Current liabilities
What does “debt ratio” measure?
It measures the relationship between a company’s assets and liabilities.
How do you calculate a company’s debt ratio?
Debt ratio = Total liabilities / Total assets
