Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

afm 182 > unit 6 | income statement analysis & planning > Flashcards

unit 6 | income statement analysis & planning Flashcards

1
Q

The ultimate goal of IS analysis

A

To Analyze Performance

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Revenue Streams

A

Examine the cash inflows received from selling a product or service
- How a product/service is priced determines whether it is transactional or recurring

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

How are products/services priced?

A

How a product/service is priced determines whether it is transactional or recurring

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Transactional Revenue Streams

A

A single transaction made without any further customer obligation

Business requires subsequent transactions from customers to keep earning revenue

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Transactional Revenue Examples

A

Products ($ per t-shirt sold)
Usage ($per day snowboard rental)
Advertising ($ per click on IG)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Recurring Revenue Streams

A

Customer is locked into an obligation to pay a recurring amount based on some set frequency

Business do not require subsequent transactions from customers to keep earning revenue

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Recurring Revenue Examples

A

Rental ($ per square foot/month)
Lease ($ per car leased/month)
Subscription ($ per user/month)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Revenue Drivers

A

The inputs that generate (drive) a company’s revenue, generally a function of volume or price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Difference between Revenue Drivers (price & volume)

A

Price is controllable, volume generally not (by-product of each price point)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Why is it important to understand Revenue Drivers

A

Important to understand the reason behind revenue changes (help management make meaningful & informed decisions)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Cost Structure

A

The combination of all the expenditures that an organization incurs to be able to earn revenue
- When assessing costs, type of business matters more than type of revenue stream
> COGS represent a significant amount of expenses for merchandise business

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Similar Cost Structure Categories between Private & Public Companies

A
  • Salaries/wages, Selling-General-&-Administrative (SG&A), depreciation
  • Could also be presented by function
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Cost Drivers

A

The inputs that generate (drive) a company’s costs, though they are not limited to two main drivers like revenue drivers are
- Depends on the type of cost that is being analyzed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Foundation Types of Financial Analysis and who uses them?

A
  • Horizontal & vertical
  • For management use only (internal)
    > Public companies may choose to include some analysis in external reports (only critical information deemed useful to shareholders)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Horizontal (Trend) Analysis

A

Analyzing variances in line items over a span of time/across periods
- Can be very detailed (every J/E) or very high level (analyzing only FS line items)
- 3 common horizons: monthly, quarterly, & year-over-year (YoY) analysis
- Compared to previous actual results & budget

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Important things to note in Horizontal (Trend) Analysis

A
  1. Pay attention to the analysis thresholds
    - Ie. dollar & percentage variances
  2. Determine whether the variance is expected
    - Eg. COGS should be a certain % of revenue
  3. Try to get 80%+ “coverage” of the variance
    - Eg. if the variance is $10k, try to get an explanation for $8k+ of that variance
  4. Quantify & explain WHY?
    - Eg. $5.2M increase in sales of formal dresses due to corporate formal events in December
17
Q

IS Profitability Metrics is used for what?

A

To assess performance

18
Q

Gross Margin (Gross Profit Percentage) - Formula

A

Gross Margin = Gross Profit / Total Revenue

19
Q

How is Gross Margin (Gross Profit Percentage) used?

A

Compared with prior periods or with competitors
Reconsider relationship or negotiate better prices w/ suppliers if ratio is lower than competitor

20
Q

Operating Margin (EBIT Margin) - Formula

A

Operating Margin = Operating Income / Total Revenue

21
Q

What is Operating Margin (EBIT Margin) used for?

A

The percentage of total revenue left over after all operating expenses have been paid
- Strong OM indicates company operations are effective at driving growth
> Doesn’t necessarily need external financing to be successful in the foreseeable future
- Useful when compared with competitors or industry averages

22
Q

Benchmarking

A

The analytical process of comparing a company’s metrics to the rest of the industry or competitors

23
Q

Net Profit Margin (Return on Sales) - Formula

A

Net Profit Margin = Net Income / Total Revenue

24
Q

How is Net Profit Margin (Return on Sales) used?

A

The percentage of total revenue that remains after all costs are paid
- Can be interpreted as how many cents of profit the business generates for each dollar of sales made
- Useful across time or when used in benchmarking

25
Q

When does Net Profit Margin play a key role?

A

Plays key role when obtaining financing

Potential Lenders → whether company is capable of of repaying debt obligations
Equity Investors → compare with other companies to determine most attractive investment option
Company valuations → pricing initial public offerings

26
Q

Vertical Analysis

A

Compares a journal account, grouping, or FS line item to a base of 100%
- Typically, total assets are used as the base for BS accounts & line items, while total revenue is used as the base for IS accounts & line items
- Needs comparative figures to be meaningful

27
Q

Important things to note in Vertical Analysis

A
  1. Pay attention to the analysis thresholds
    - Ie. percentage variances
  2. Determine whether the variance is expected
    - Eg. if revenue mix changes, COGS mix should too
  3. Coverage is not relevant the way it is in horizontal analysis
    - Eg. focus on relationships between line items
  4. Less focus on quantification, more focus on WHY?
    - Eg. Salaries as a % of total revenue decreased because increase in revenue more than offset increase in salaries expense from extra staff hired in Dec
28
Q

Budget Data allows company to analyze what 2 very important things?

A
  1. Whether their expectations of future performance are reasonable
  2. Whether (and why) they performed, or didn’t perform, as expected
29
Q

Budget

A

An estimate of a company’s financial results & set internal financial targets for the next fiscal year
- Does not change (remain static)
- Expectations based on past experiences, plus
- Goals & targets for the future
> Used to inform internal stakeholders at a high level (to communicate financial targets)

30
Q

What should be done with Budgeting targets?

A

Targets should be clearly communicated internally to ensure all employees understand where the company is heading in the next fiscal year, targets they are expected to meet, & how they can contribute

31
Q

Strategic Planning

A

A corporate team responsible for analytical functions → financial analysis, budgeting, & forecasting

32
Q

The Budgeting Process

A

Highly collaborative (& somewhat negotiated)
- Underlying motivation to dampen expectations so business leaders can achieve targets & be rewarded with bonuses at the end of the year for meeting or exceeding targets
- Executive mg’t (C-Suites) set expectations & targets, but not set in stone (unless top-down budget)
- After initial budgeting → reviews, modifications, & revisions until SM is satisfied
> BOD approves budget (END) → communicated to shareholders & market

33
Q

Top-Down Budgets

A

Driven by executive management, with little to no input from the lower organizational levels

34
Q

Bottom-Up Budgets

A

Driven by lower-level staff and management, with little to no guidance from senior management

35
Q

Hybrid Budgeting

A
  • Combination of the top-down and bottom-up budgeting approach
  • Senior management provides targets like guidelines, while lower-level staff and management work to produce realistic expectations based on those guidelines
  • Most efficient
36
Q

Stretch Targets

A

Financial objectives that are meant to be challenging to attain

37
Q

Important things to note about Budgets

A
  1. Do not obsess over precision
  2. Start with established expectations & known business patterns
    - “Historically, Volume dips in Jan”
  3. Expectations with be established in consultation with other departments
    - Marketing budget discussed with Marketing VP
  4. Not everything will change
    - If no assets are expected to be disposed or purchased → no change
  5. Some line items fluctuate significantly, pick a reasonable estimate
    - Estimate based on an average, or high/low if there is an indicator

afm 182 (11 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions