module 10- interpreting financial statements

Question 1

financial statement analysis

Answer 1

consists of applying analytical tools and techniques to financial statements and other relevant data to obtain useful information.

Question 2

liquidity

Answer 2

the state of possessing liquid assets such as cash and other assets easily converted to cash.
- ability to pay short term debt

Question 3

solvency

Answer 3

the ability of a company to pay its debts as they come due.

Question 4

comparative financial statments

Answer 4

present the same company’s financial statements for one or two successive periods in side by side columns

Question 5

horizontal analysis (trend)

Answer 5

comparing 2 different points in time of the same item. (ex. comparing same item month to month)
-This analysis detects changes in a company’s performance and highlights trends including positive and negative trends.

Question 6

vertical analysis (common siezed)

Answer 6

comparing to different numbers from the same period.
(looking in the same period and breaking it down) Vertical analysis is especially helpful in analyzing income statement data such as the percentage of cost of goods sold to sales.

Question 7

common-sized statements

Answer 7

Financial statements that show only percentages and no absolute dollar amounts.
while all the items in a common-sized income statement are percentages of net sales.

Question 8

trend percentages

Answer 8

similar to horizontal analysis.
except that comparisons are made to selected base year or period.
-Trend percentages are useful for comparing financial statements over several years because they disclose changes and trends occurring through time.

Question 9

what are ratios for?

Answer 9

A ratio can show a relationship between two items on the same financial statement or between two items on different financial statements (e.g., balance sheet and income statement).

Question 10

major sections of an annual report

Answer 10

1. financial statements 
2 notes to financial statement.
3.letters to stockholders
4. reports of in-depended
 accountants 
5. managements and discussion analysis.

Question 11

consolidated financial statments

Answer 11

include a balance sheet containing two years of comparative data, a statement of cash flows containing three years of comparative data. and statements of owners equity containing 3 years of comparative data.

Question 12

positive trend (horizontal analysis)

Answer 12

If the change between the two dates is an increase from Year 1 to Year 2, the change is a positive figure.

Question 13

Negative trend (horizontal analysis)

Answer 13

If the change is a decrease, the change is a negative figure and is shown in parentheses.

Question 14

% change (horizontal analysis)

Answer 14

% Change = Current Year – Prior Year / Prior Year

Question 15

types of ratios

Answer 15

• liquidity ratios
• Leverage-equity, or long-term solvency, ratios
• profitability tests
• market tests

Question 16

liquidity ratios

Answer 16

Liquidity ratios indicate a company’s short-term debt-paying ability.
ex: current ratio and acid-test

Question 17

current ratio formula

Answer 17

Current assets / Current liabilities

Question 18

acid -test (quick ratio) formula

Answer 18

Test of immediate short-term debt-paying ability
** it eliminates inventory

Quick assets (cash + marketable securities and net receivables) / Current liabilities

Question 19

current ratio

Answer 19

indicates the ability of a company to pay its current liabilities from current assets and, thus, shows the strength of the company’s working capital position.

Question 20

working capital

Answer 20

is the excess of total current assets over total current liabilities. The ratio that relates total current assets to total current liabilities is the current (or working capital) ratio.
Working Capital = Current Assets – Current Liabilities

Question 21

profitability ratios focus on 2 things

Answer 21

1. relationships on the income statement that indicate a company’s ability to cover operating costs and expenses.
2. relationships of income to various balance sheet measures that indicate the companies relative ability to earn income on assets employed.
   Ex.
   -earnings per share
   -return on sales
   -return on assets

Question 22

return on assets

Answer 22

This ratio shows the earning power of the company on its operating assets.
-formula: net income /total assets

Question 23

return on sales

Answer 23

indicator of the amount of net profit on each dollar of sales.
- formula: net income/net sales

Question 24

earnings per share of common stock

Answer 24

measure of the return to investors per share.

-formula: earnings available for common stockholders/ weighted-average number of common share holders.

Question 25

leverage ratio

Answer 25

equity ratio

Question 26

what financial statement is used for liquidity ratio

Answer 26

balance sheet only

Question 27

what financial statement is used for profitability ratio

Answer 27

income statement and balance sheet

Question 28

financial statements for leverage ratios

Answer 28

balance sheet only