Notes for Module Flashcards
vertical analysis
All ___ ___ amounts are divided by the amount of ___ ___ so that the income statement figures will become percentages of net sales.
All ____ ____ amounts are divided by the ___ ___ figures so that the balance sheet figures will become percentages of total assets.
A type of financial analysis involving INCOME STATEMENTS and BALANCE SHEETS.
All INCOME STATEMENT amounts are divided by the amount of NET SALES so that the income statement figures will become percentages of net sales.
All BALANCE SHEET amounts are divided by TOTAL ASSETS so that the balance sheet figures will become percentages of total assets.
A type of financial analysis involving income statements and balance sheets
vertical analysis
All income statement amounts are divided by the amount of net sales so that the income statement figures become percentages of net sales
vertical analysis
All balance sheet amounts are divided by total assets so that the balance sheet figures will become percentages of total assets.
vertical analysis
statement of financial position
balance sheet
what does the balance sheet tell you?
- whether the company can ___ ___ ___ on time.
- its ___ ____ to acquire capital and
- its ability to ___ ___ in the form of dividends to the company’s owners.
PAY ITS BILLS
FINANCIAL FLEXIBILITY
DISTRIBUTE CASH
What are the three items at the top of a balance sheet?
(1) the legal name of the entity;
(2) the title (i.e., balance sheet or statement of financial position); and
(3) the date of the statement.
Does a balance sheet represent the financial position of the owners or the entity?
the entity itself,.
the balance sheet is always for ____.
for a specific point in time: instead of just a date of, say, December 31, 20XX, it would be more accurate to write December 31, 20XX, 11:59:59, or any particular moment on the 31st.
the balance sheet presents the company’s ___, ___, and ___.
assets, liabilities, and shareholders’ equity.
Items that provide probable future economic benefits
Assets are items that provide probable future economic benefits
Obligations of the firm that will be settled by using assets
Liabilities
the residual interest that remains after you subtract liabilities from assets
Equity (variously called stockholders equity, shareowners equity or owners equity)
the key accounting equation
Assets = Liabilities + Owners Equity, or A=L+OE
assets are normally listed on the ___ ___ and are listed on the ___ with ordinarily ___ balances
assets in a balance sheet are listed on the left; they ordinarily have debit balances.
liabilities and ___ ___ are listed on the ___ with ordinarily ___ balances
and owners equity are on the right, and typically have credit balances.
the income statement tells you both the ___ and ___ of a busienss
The income statement (also known as the profit and loss statement or P&L) tells you both the earnings and profitability of a business.
the P&L is always for a ___ ___ ___ ___.
The P&L is always for a specific period of time, such as a month, a quarter or a year.
the income statement is broken into several parts
- Income from continuing operations
- Results from discontinued operations (if any)
- Extraordinary items (if any)
- Cumulative effect of a change in accounting principle (if any)
- Net income
- Other comprehensive income
- Earnings per share information
For vertical analysis: All income statement amounts are divided by ___ so that the income statement figures become ___ of net sales
the amount of net sales
percentage
earnings per share is shown on the ___ ___
income statement
The current ratio is a ___ ___ that measures the company’s ability to pay ___ and ___ obligations.
liquidity ratio
short-term
long-term
The formula for calculating a company’s current ratio then is:
The formula for calculating a company’s current ratio, then, is:
Current Ratio = Current Assets / Current Liabilities
The current ratio is called “current” because, unlike some other liquidity ratios, it incorporates all current ___ and ___.
assets
liabilities.
The ___ ___ is mainly used to give an idea of the company’s ability to pay back its ___ (debt and accounts payable) with is ___ (cash, marketable securities, inventory, accounts receivable)
current ratio
liabilities
assets
The current ratio can be used to take a ___ ___ of the company’s ___ ___.
rough measurement
financial health.
A current ratio under 1 indicates that a company’s ___ are greater than it’s ___ and suggests that the company in question would be ___ to pay off its ___ if they came due.
A ratio under 1 indicates that a company’s liabilities are greater than its assets and suggests that the company in question would be unable to pay off its obligations if they came due at that point.
A high current ratio (over 3) does not necessarily indicate that a company is in a state of ___ ___.
A high ratio (over 3) does not necessarily indicate that a company is in a state of financial well-being.
Companies that have trouble getting paid on their ___ or have long ___ ___ can run into liquidity problems because they are unable to ___ their ___.
Companies that have trouble getting paid on their receivables or have long inventory turnover can run into liquidity problems because they are unable to alleviate their obligations
The higher the current ratio, the more ___ the company is of ___ ___ ___, as it has a larger proportion of ___ ___ relative to the value of its ___.
The higher the current ratio, the more capable the company is of paying its obligations, as it has a larger proportion of asset value relative to the value of its liabilities.
A high current ratio may suggest that a company is not using its current ___ efficiently, not securing ___ well, or is not managing its ___ ___ well.
A high current ratio may suggest that that company is not using its current assets efficiently, is not securing financing well or is not managing its working capital well.
The quick ratio is an indicator of the company’s short -term ___.
The quick ratio is an indicator of a company’s short-term liquidity.
The quick ratio measures a company’s ability to meet its ___ ____ with its most ___ ___.
The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
The quick ratio excludes ___ from current assets.
The current ratio excludes inventories from current assets.
Quick ratio formula
Quick ratio = (current assets – inventories) / current liabilities, or
= (cash and equivalents + marketable securities + accounts receivable) / current liabilities
The quick ratio measures the dollar amount of ___ ___ available for each dollar of ___ ___.
liquid assets
current liabilities.
