Reading # 28: FRA Techniques

Question 1

Define Cross-sectional analysis

Answer 1

comparison of companies for same time period

Question 2

Define Technical Analysis

Answer 2

uses price and volume data as basis for investment decisions

Question 3

Define Time-series or Trend analysis

Answer 3

compares financial data across different time periods

Question 4

What are solvency ratios used for?

Answer 4

used to evaluate ability of a company to meet its long-term obligations

Question 5

what are activity ratios used for?

Answer 5

used to evaluate how efficient company uses its assets

Question 6

What is liquidity ratio used for?

Answer 6

to evaluate ability of company to meet short-term obligations

Question 7

define current ratio

Answer 7

liquidty ratio that compares net amount of current assets expected to be converted into cash within the year

Question 8

define fixed charge coverage ratio

Answer 8

relates known fixed charges to a measure of operating profit or cash flow

Question 9

define coverage ratios

Answer 9

types of solvency ratios. measures ability of company to cover payments related to debts/leases

Question 10

define profitabity ratio

Answer 10

provides information on how well the company generates op profits and net profits from sales

Question 11

what are valuation ratios used for?

Answer 11

sales per share, earnings per share, price to cash flow per share. compares relative valuation of companies

Question 12

What are profitability ratios used for?

Answer 12

provides information on how well company generate OP Income and NI

Question 13

what are valuation ratios used for?

Answer 13

used for comparing relative values of stocks, to analyze investment in common equity

Question 14

receivables turnover ratio formula and definition

Answer 14

annual sales / average receivables

measures accounts receivable

Question 15

days of sales outstanding ratio formula and definition

Answer 15

365/ receivables turnover

inverse of receivables turnover, average collection period for customers to pay their bills

Question 16

inventory turnover ratio formula and definition

Answer 16

COGS/ ave. inventory

firms efficiens processing and inventory management

Question 17

days of inventory on hand ratio formula and definition

Answer 17

365 / inventory turnover

invesre of inventory turnover, number of days of inv. on hand

Question 18

payables turnover ratio formula and definition

Answer 18

purchases / ave trade payables

measures use of trade credit by firm

Question 19

Purchases formula using inventory

Answer 19

purchases = end. inventory - beg invent + COGS

Question 20

number of days payables ratio formula and definition

Answer 20

365 / payables turnover ratio

av amt of time it takes company to pay bills

Question 21

total asset turnover ratio formula and definition

Answer 21

revenue / average total assets

effectiveness of firms use of total assets to create revenue

Question 22

fixed asset turnover ratio formula and definition

Answer 22

revenue / average net fixed assets

utilization of fixes assets

Question 23

working capital turnover ratio formula and definition

Answer 23

rev / ave working capital

how effectively a company is using working capital

Question 24

working capital formula

Answer 24

current assets - current liabilities

Question 25

DuPont system of analysis

Answer 25

used to analyze ROE; to see what changes are driivng the changes in ROE

Question 26

Dupont system original approach ROE formula

Answer 26

net income / equity

Question 27

Dupont three part approach ROE formula

Answer 27

(NI/sales)(sales/assets)(assets/equity)

REMEMBER: (NI/sales)(Sales/Assets)= ROA

Question 28

Dupont three part approach ROE formula using ratios

Answer 28

net profit margin x asset turnover x leverage ratio

Question 29

sustainable growth rate formatul

Answer 29

g = RR x ROE 
RR = retention rate

Question 30

retention rate formula

Answer 30

NI to common - div declared / NI to common

or 1- div payout ratio

Question 31

dividend payout ratio

Answer 31

dividends declared / NI to common

Question 32

coefficient of variation definition

Answer 32

standard deviation / expected value

ex. CV Sales = stnd dev of sales / mean sales

Question 33

define business segment

Answer 33

portion of a larger company that accounts for more than 10% of company’s revenues or assets and is distinguishable from the company’s other lines of business

Question 34

define geographic segments

Answer 34

when size criterion is met and geographic unit has a bus. environment different from other segments of company’s business

Question 35

IFRS, GAAP or both need to report segment data?

Answer 35

both

Question 36

How are vertical common-size data stated?

Answer 36

% of sales for income statements or % of total assets for bal. sheet

Question 37

how are horizontal common-size data stated?

Answer 37

presents each item as % of value in a base year

Question 38

cash conversion cycle formula

Answer 38

(days sales outstanding)+(days of inventory on hand) - (# of days of payables)

Question 39

normal revenue recognition used when

Answer 39

at time of sale if collectivity reasonably assured

Question 40

installment sales method used when

Answer 40

collect ability cannot be reliably estimated

Question 41

cost recovery method used when:

Answer 41

collectivity is highly uncertain

Question 42

what is sensitivity analysis?

Answer 42

baed on hypothetical “what if” questions about a single variable. “range of possible outcomes as specific inputs are changed one at a time”

Question 43

what is simulation technique?

Answer 43

using probability distributions for key variables to create outcomes

Question 44

what is scenario analysis?

Answer 44

based on one or more scenarios (a specific set of outcomes for key variables) includes changes in mult. variables. “ based on a specific set of outcomes for multiple variables”