Prelim Exam Flashcards
are created with the use of numerical values taken from financial statements to gain meaningful information about a company.
Financial ratios
are financial ratios that measure a company’s ability to repay both short- and long-term obligations.
Liquidity ratios
measures a company’s ability to pay off short-term liabilities with current assets
Current ratio
5 financial ratios
Liquidity ratios
Leverage ratios
Efficient ratios
Profitability ratios
Market value ratios
measures a company’s ability to pay off short-term liabilities with quick assets
Acid-test ratio
measures a company’s ability to pay off short-term liabilities with cash and cash equivalents
Cash ratio
is a measure of the number of times a company can pay off current liabilities with the cash generated in a given period
Operating cash flow ratio
Current ratio f
Current ratio = Current assets / Current liabilities
Acid-test ratio f
Acid-test ratio = Current assets – Inventories / Current liabilities
Cash ratio f
Cash ratio = Cash and Cash equivalents / Current Liabilities
Operating cash flow ratio f
Operating cash flow ratio = Operating cash flow / Current liabilities
measure the amount of capital that comes from debt. They are used to evaluate a company’s debt levels.
Leverage ratios
measures the relative amount of a company’s assets that are provided from debt
Debt ratio
Debt ratio f
Debt ratio = Total liabilities / Total assets
calculates the weight of total debt and financial liabilities against shareholders’ equity
Debt to equity ratio
Debt to equity ratio f
Debt to equity ratio = Total liabilities / Shareholder’s equity
shows how easily a company can pay its interest expenses
Interest coverage ratio
Interest coverage ratio f
Interest coverage ratio = Operating income / Interest expenses
reveals how easily a company can pay its debt obligations
Debt service coverage ratio
Debt service coverage ratio f
Debt service coverage ratio = Operating income / Total debt service
also known as activity financial ratios, are used to measure how well a company is utilizing its assets and resources
Efficiency ratios
measures a company’s ability to generate sales from assets
Asset turnover ratio
Asset turnover ratio f
Asset turnover ratio = Net sales / Average total assets
measures how many times a company’s inventory is sold and replaced over a given period
Inventory turnover ratio
Inventory turnover ratio f
Inventory turnover ratio = Cost of goods sold / Average inventory
COGS
Net sales
Less: cost of sales
= gross profit
Less: operating expenses
= net profit/loss or net income
measures how many times a company can turn receivables into cash over a given period
Accounts receivable turnover ratio
Receivables turnover ratio f
Receivables turnover ratio = Net credit sales / Average accounts receivable
measures the average number of days that a company holds on to inventory before selling it to customers
Days sales in inventory ratio
Days sales in inventory ratio f
Days sales in inventory ratio = 360 / Inventory turnover ratio
measure a company’s ability to generate income relative to revenue, balance sheet assets, operating costs, and equity
Profitability ratios
compares the gross profit of a company to its net sales to show how much profit a company makes after paying its cost of goods sold
Gross margin ratio
Gross margin ratio f
Gross margin ratio = Gross profit / Net sales
sometimes known as the return on sales ratio, compares the operating income of a company to its net sales to determine operating efficiency
Operating margin ratio
Operating margin ratio f
Operating margin ratio = Operating income / Net sales
measures how efficiently a company is using its assets to generate profit
Return on assets ratio
Return on assets ratio f
Return on assets ratio = Net income / Total assets
measures how efficiently a company is using its equity to generate profit
Return on equity ratio
Return on equity ratio f
Return on equity ratio = Net income / Shareholder’s equity
are used to evaluate the share price of a company’s stock
Market value ratios
calculates the per-share value of a company based on the equity available to shareholders
book value per share ratio
book value per share ratio f
Book value per share ratio = (Shareholder’s equity – Preferred equity) / Total common shares outstanding
measures the amount of dividends attributed to shareholders relative to the market value per share
Dividend yield ratio
Dividend yield ratio f
Dividend yield ratio = Dividend per share / Share price
measures the amount of net income earned for each share outstanding
Earnings per share ratio
Earnings per share ratio f
Earnings per share ratio = Net earnings / Total shares outstanding
compares a company’s share price to its earnings per share
Price-earnings ratio
Price-earnings ratio f
Price-earnings ratio = Share price / Earnings per share
Refers to the function of providing professional advisory (consulting) services, the primary purpose of which is to improve the clients use of its capabilities and resources to achieve the objectives of the organization
Management advisory services
Defines the companies business, its objectives, and its approach to reach those objectives
Mission
It describes the desired future position of the company
Vision
Role of management accountant
Provide managers information in helping formulate strategy
Matching knowledge of marketplace, opportunities, and threats with company’s resources and capabilities
Strategic analysis
Managers taking action by using planning and control systems to help the collective decisions of an organization
Implementing strategy
Three roles of management accountants for success
problem-solving
scorekeeping
attention directing
Comparative analysis for decision making
Problem-solving
Accumulating data and reporting reliable results
Scorekeeping
Helping directors properly focus their attention
Attention directing
Managerial accounting
Reports are for internal users
Has a strong emphasis on the future
Data should be relevant
Focuses on timeliness of information
Focuses on segments of a company
Not bound by GAAP
Not mandatory
Financial accounting
Reports are for external users
Summarizes, past transactions
Data should be objective and verifiable
Focuses on precision
Concerned with reporting for a company as a whole
Must conform with GAAP
Mandatory
Covers all managerial accountants in the Philippines
Cord of ethics in effect in the Philippines
Three basic tools in a financial statement analysis
Horizontal analysis or trend analysis
Vertical analysis or common size analysis
Racial analysis
A technique for evaluating a series of financial statement data over a period of time
Horizontal analysis
Its purpose is to determine the increase and decrease the test. They can please express either an amount or a percentage.
Horizontal analysis
Involves comparison of amount shown in the FS of two or more consecutive periods.
The difference and percentage change of the amounts are calculated using the earlier period as the base period
Horizontal analysis
Horizontal analysis f
Percentage of change = (current year value - base year value) / base year value
The process of comparing figures in the FS of a single period. It involves conversion of amounts in the FS to a common base.
Vertical analysis
This is accomplished by expressing all figures in the FS percentages of an important items, such as total assets or net sales
Vertical analysis
Base for balance sheet; income statement
Total assets; net sales
This technique, establishing relationship among financial statement accounts at given date or period of time.
These ratios analyze the firm’s liquidity, the use of leverage, asset management, cost control, profitability growth, and valuation.
Ratio analysis
Provides information about the firm’s ability to pay its current obligations and continue operations
Liquidity ratio
To evaluate companies liquidity and ability to pay current obligations
Current ratio
Cash, short term investments, and accounts receivable
Quick assets
This ratio is a much more stringent test of short term liquidity. It measures the number of times that the current liabilities could be paid with available cash and near cash assets.
Acid test ratio or quick ratio
