Module 10 Study Guide Flashcards
Solvency
ability to pay debts as they become due.
Liquidity
state of possessing liquid assets, such as cash and other assets easily converted to cash.
Profitability
ability to generate income.
Financial statement analysis
applying analytical tools and techniques to financial statements and other relevant data to obtain useful information.
common-sized statements
Financial statements that show only percentages and no absolute dollar amounts are common-sized statements.
horizontal analysis
The calculation of dollar changes or percentage changes in the statement items or totals is called horizontal analysis. This analysis detects changes in a company’s performance and highlights trends including positive and negative trends.
Ratios
Ratios are expressions of logical relationships between items in the financial statements of a single period. Ratios are grouped into three categories: liquidity, profitability, and leverage.
Generally, we are concerned with two areas when evaluating profitability:
relationships on the income statement that indicate a company’s ability to cover operating costs and expenses, and
relationships of income to various balance sheet measures that indicate the company’s relative ability to earn income on assets employed.
Trend percentages
similar to horizontal analysis except that comparisons are made to a selected base year or period.
leverage
Leverage, or equity, ratios show the relationship between debt and equity financing in a company. Leverage ratios include the equity ratio and the debt to equity ratio.
Working capital
the excess of total current assets over total current liabilities.
current ratio
indicates the ability of a company to pay its current liabilities from current assets.
