Module 9 flashcards
what is the purpose of a financial statement
- The purpose of financial statement analysis is to help users make better business decisions.
- Answers key questions for both internal and external users
what are the keys to a financial statement analysis?
- Focuses on one or more key elements of a company’s financial condition or performance.
- When calculating and interpreting analysis measurements, we need comparison standards.
what are the 4 key elements of a F/S analysis?
liquidity
efficiency
solvency
profitability
what is liquidity for a F/S analysis?
– Ability to meet short-term obligations and to generate revenues efficiently
– Answers: does the firm has sufficient cash or cash equivalent to pay its short-term debts?
what is efficiency for a F/S analysis?
– How well the firm uses its assets? Inefficient use of assets can cause liquidity problems
below are inefficient use of assets
1) High Inventories – cash/funds hold on in inventory
Cost of finance
Lose value with time
2) High Account Receivables – longer A/R holding period – tie up cash
Cost of finance
Bad debts
what is solvency for a F/S analysis?
– Ability to generate future revenues and meet long-term debt obligations
– Answers: how dependent is the firm on its creditors?
How much is the firm depends on its creditors/investors?
Look at how the operations are financed?
what is profitability for a F/S analysis?
– Ability to provide financial rewards sufficient to attract and retain investors
Answers: are sufficient profits being generated from the firm’s assets/equity? Poor profitability can lead solvency problem.
what is a intra-company standard for comparisons?
- comparison based on prior performance - historical/trends
Comparing with the firm’s own history
Looking for continuous improvement
what is a inter-company standard for comparisons?
comparison based on competitors’ performance
what is a industry standard for comparisons?
- comparison based on the Industry statistics
- Looking at:
Industry’s overall performance
Where the firm stands
what are the 3 common used analysis tools
horizontal
vertical
ratio
how to calculate liquidity?
Current Ratio = Current assets/Current liabilities
Quick Ratio = (Current assets-Inventory)/Current Liabilities
how to calculate solvency
Debt Ratio = Debt/(Debt +Equity )
= Debt/Total Assets
Equity Ratio = Equity/(Debt +Equity )
= Equity/Total Assets
how to calculate efficiency
Assets Turnover = Total Sales/Total Assets
Each $AMT Asset generates how many $AMT of sales
Inventory Turnover= Total Sales/Inventory
Inventory turned around for how many times?
A/R Turnover = Total Sales/Accounts Receivable
how to calculate profitability?
Profit margin = Net Income/Total sales
Gross profit Ratio = Gross profit/Total sales
what is return on investment (ROI)
A company’s ability to generate an adequate return on invested capital.
Return on Equity = Net income/Equity
what is a horizontal analysis?
trend analysis
- comparison of performance across time
-intra company/historical/trends
- comparison financial statement
what is a vertical analysis
comparison with competitors/industry
- comparison of performance to a base amount
- common size financial statement
what is a ratio analysis
determination of key financial ratios
what are the key financial ratios?
- efficiency
- profitability
- return on assets
- return on investment
- earnings per share (EPS)
- stock price & earnings per share
what is efficiency in the realm of a key financial ratio?
assets turnover = total sales/total assets
inventory turnover = total sales/inventory
A/R turnover = total sales/ accounts receivable
what is profitability in the realm of a key financial ratio?
profit margin = Net income/total sales
gross profit ratio = gross profit/total sales
what is return on assets in the realm of a key financial ratio?
company’s ability to generate an adequate return on invested capital
return on assets = net income/total assets
what is return on investment in the realm of a key financial ratio?
a company’s ability to generate an adequate return on invested capital
return on equity = net income/equity
