Module 2: Review of Financial Statement Presentation, Analysis and Interpretation

Question 1

What are the four basic financial statements of a company?

Answer 1

• Balance Sheet
• Income Statement
• Statement of Retained Earnings
• Statement Of Cash flows

Question 2

is the process an
individual goes through to analyze a company’s
various financial documents in order to make an
informed decision about that business

Answer 2

Financial statement analysis

Question 3

all SFP accounts are presented
as percentage of total assets, while all SCI accounts
are presented as percentage of net sales or
revenues

Answer 3

Vertical Analysis/Common Size

Question 4

the change in financial
statement accounts over time are shown. That is,
the difference of the current and previous year
divided by the previous year

Answer 4

Horizontal Analysis/Trend Analysis

Question 5

Financial Ratios

Answer 5

1. Profitability Ratios
2. Efficiency Ratios
3. Liquidity Ratios
4. Stability/Leverage Ratios

Question 6

A measure of the ability of a company to cover
expenses from the revenues generated

Answer 6

Profitability Ratios

Question 7

• Otherwise called as turnover ratios or activity ratios
• measure the management’s efficiency in utilizing assets

Answer 7

Efficiency Ratios

Question 8

refers to the ability of a company to pay maturing
obligations

Answer 8

Liquidity Ratios

Question 9

Can be called as solvency ratios and debt ratios. It shows how
much of the company’s total assets are financed by debt and how much is finance by equity

Answer 9

Stability or Leverage Ratios

Question 10

Limitations of Financial Statement Analysis

Answer 10

1. Financial analysis deals only with quantitative data.
2. Management can take short-run actions to influence ratios.
3. Difference in accounting principles.
4. Different formulas and interpretations.
5. Historical in nature.
6. A financial ratio standing alone is useless.