Lesson 5-7 Flashcards
inform the readers of a company’s financial position, results of operations, cash flows, and changes in equity.
Financial statements
The process of evaluating risks, performance, financial health, and future prospects of a business using computational and analytical techniques with the objective of making economic decisions.
Financial statement analysis
also known as trend analysis. It is a technique that involves the comparison of a line item (account) over a number of periods
Horizontal Analysis
preparation of common-size financial statements. It is a technique that expresses each financial statement line item as a percentage of a base amount.
Vertical analysis
the process of evaluating risks, performance, financial health, and future prospects of a business using computational and analytical techniques to make economic decisions.
Financial statement analysis
trend analysis is a technique that involves the comparison of a line item (account) over a number of periods. Changes can be expressed in monetary value (peso) and percentages.
Horizontal Analysis
technique that expresses each financial statement line item as a percentage of a base amount.
Vertical analysis
composed of a numerator and a denominator. It expresses the relationship between specific financial statement data.
financial ratio
we know how much income the company gets for every peso of sales. This ratio is called
net profit margin
measure the ability of the company to generate income from the use of its assets and invested capital
Profitability ratios
expresses gross profit as a percentage of sales. It can be interpreted as the peso value of the gross profit earned for every peso of sales.
Gross profit margin
expresses operating income as a percentage of net sales. It is the peso value of the operating income earned for every peso of net sales.
Operating profit margin
computed as gross profit less operating expenses.
Operating income
expresses net income as a percentage of sales. It can be interpreted as the peso value of the net income earned for every peso of sales.
Net profit margin
computed as net income divided by average total assets.
an also be computed using the ending balance of total assets instead of average total assets
It is a popular measure of the profitability of the company’s assets
Return on Assets
computed as net income divided by average total equity.
Return on equity (ROE)
measures the ability of the company to utilize its assets
measured based on the company’s ability to generate sales from the utilization of its assets, as a whole or individually.
Operational efficiency
indicator of the efficiency with which the company is utilizing all its assets. It measures the peso value of sales generated for every peso of the company’s assets.
Asset turnover ratio
This ratio is similar to asset turnover, fixed assets only
Fixed Asset Turnover
is composed of property, plant, and equipment. It is an indicator of the efficiency of fixed assets in generating sales.
Fixed asset
measured based on the cost of goods sold and not sales
Inventory Turnover
measures the number of times the company can convert accounts receivable to cash during the year.
Accounts receivable turnover
indicates the company’s reliance on debt or liability as a source of financing relative to equity.
Debt to equity ratio
This is a ratio similar to the debt to equity ratio. It indicates the percentage of the company’s assets that are financed by debt. A’high debt to asset ratio implies a high level of debt.
Debt Ratio
This ratio measures the company’s ability to cover the interest expense on its liability with its operating income.
Interest Coverage Ratio
This ratio is used to evaluate the company’s liquidity.
Current Ratio
This ratio is stricter than the current ratio. It suggests that not all current assets can be easily liquidated to pay for short-term liabilities.
Quick Ratio
columnar notebooks used for recording transactions.
accounting books
two basic accounting books:
the journal and the ledger.
known as the book of original entry
Journal
Recording on the journal is called
journalizing
also known as the book of accounts, maintains at least one sheet per account.
The general ledger
journal entry has four basic components:
the date of the transaction,
the debit side,
the credit side, and the explanation.
the accounting journal used to record sales made on credit terms.
sales journal
used to record all receipts of cash including cash sales
cash receipts journal
the accounting book used to record all payments of cash including cash purchases.
cash disbursements journal
composed of receivables from various customers.
Accounts receivable
book of accounts.
general ledger
used for accounts that require balances of its components such as Accounts Receivable and Accounts Payable.
Subsidiary ledgers
such as AR-control or AP-control, are general ledger accounts with subsidiary accounts.
Control accounts
