Test 1 Flashcards
Purpose of Ratio Analysis
- Identify a company’s strengths and weaknesses
- Forecast future performance
4 Types of Financial Ratios
- Liquidity
- Capital Adequacy (Financial leverage)
- Asset Quality (Asset Management)
- Earnings (Profitability)
Liquidity ratios…
help to analyze a company’s ability to meet its short term obligations
Quick (acid-test) Ratio excludes…
Inventories (not easily convertible to cash)
Companies want these ratios above 1
Current Ratio, Quick (acid-test) Ratio
Capital Adequacy Ratios
Debt Ratio, Interest Coverage Ratio
Companies like this ratio not close to 1 or close to 0
Debt Ratio
Interest Coverage Ratio =
Earnings before interest and taxes/Interest Expense
Companies want this ratio well above 1
Interest Coverage Ratio
Asset Quality Ratios
Inventory Turnover Ratio, Asset Turnover Ratio
Day’s Inventory =
365/Inventory Turnover
Inventory Turnover Ratio shows…
How quickly the inventory is being turned over
Companys want these ratios as high as possible…
Inventory Turnover Ratio, Asset Turnover Ratio, Profit Margin Ratio
Asset Turnover Ratio shows
how efficiently the company’s assets are being used to generate sales
Earnings Ratios
Profit Margin (Return on Sales) Ratio, Return on Assets Ratio
This ratio allows to meaningfully compare companies of different sizes
Return on Assets Ratio
This ratio doesn’t allow to meaningfully compare companies of different sizes
Profit Margin (Return on Sales) Ratio
Long Term Assets
- Property, Plant and Equipment
- Land
- Long-Term Investments
- Goodwill
- Other
- 6. Accumulated Depreciation
Current Assets
- Cash
- Marketable Securities
- Accounts Receivable
- Inventory
- Prepaid Expenses
- 6. Allowance for Bad Debts
Long Term Debt
Notes Payable + Bonds Payable + Mortgage Payable - Discount on Bonds
Gross Margin
Revenues - Cost of Goods Sold
Net Income
Gross Margin - All Expenses - Income Tax
Gross Margin %
(Total Rev + (Change in Inventory))/Gross Profit
Operating Income
Gross Margin - Operating Expenses
Operating Expenses (Account Names)
Selling, General, Administration Costs
Depreciation Expense
Research and Development
Income Statement
Gross Margin Operating Expenses Operating Income Earning Before Taxes Net Income
Weighted Average
Average cost of each unit
Stockholders’ Equity Calculation
(Common Stock + Paid-in Capital + Retained Earnings) - Treasury Stock
Bad Debt Expense
(Amount Receivable * Estimated percent uncollectible) - Current Balance
Goodwill Created =
Total amount paid - total fair value (assets - liabilities)
Book Value
Amount worth on the balance sheet
Retained Earnings
Beginning Balance + Net Income - Dividend paid
A balance sheet shows…
Claims owners have against assets of the firm
Is Depreciation on the balance sheet?
No
Are Intangible assets current or non-current?
Non-current
Is Dividend Expense included on the Income Statement?
No
Does Net Income include Dividends paid?
No
Does a Balance Sheet show a company’s current market value?
No
The Balance Sheet represents the financial position of the firm for what time period?
The day it is dated only.
The accounting equation can be described as…
Resources of the firm equal the creditor’s and owner’s claim to those resources.
In accrual basis accounting:
Revenues are recognized when earned rather than when the cash is collected
The Income Statement represents the firm’s financial position for what time period?
The previous Fiscal Year
The assumption that a business has perpetual existence is recognized by:
Going concern
Paying a liability will…
Decrease assets and decrease liabilities
Prepaid Expenses are a…
Current Asset
Bond Rate < Market =
Discount
Bond Rate > Market =
Premium
Short Term Debts
Salaries Payable Taxes Payable Dividends Payable Accounts Payable Interest Payable Current Mortgages Payable Current Bonds Payable Current Notes Payable
Notes Payable is a…
Long term debt
Depreciation Expense…
counts towards net income
Bad Debt Calculation (re: current balance)
Subtract current balance at end
