Week 12 - Analysis of reports

Question 1

What is the role of financial statement analysis?

Answer 1

To review and evaluate financial statements to understand the financial performance/stability of a business and enable effective decisions.

Question 2

What is the simply comparison method?

Answer 2

Horizontal analysis

Compares this year amounts with previous years

Question 3

What is the ratio analysis method?

Answer 3

Vertical analysis

Particular amounts are compared with other amounts.

Question 4

What is the trend analysis method?

Answer 4

Reviewing various financial indicators over several accounting periods…. Looking for improvements or deterioration.

Question 5

What is the comparison with benchmark analysis?

Answer 5

Comparing ratios with those of other business or industry averages.

Question 6

Describe ratio analysis?

Answer 6

It reviews the relationship between two amounts (one amount is divided by another)
Vertical analysis - one value compared with the same value from previous years
Horizontal analysis - Ratios compared over time to determine trends.
Benchmark analysis - rations compared with other businesses or industry averages.

Question 7

What are profitability ratios?

Answer 7

They provide insight into the ability of a business to generate a profit:
4 types - 1) Return on assets 2) Return on equity 3) Profit ratio 4) gross profit ratio

Question 8

What are operating efficiency ratios?

Answer 8

Provides insight into how efficiently managers re managing assets and liabilities.
3 types: 
1) Inventory turnover
2) Debtor turnover
3) Operating cash flow margin

Question 9

What are financial gearing/stability ratios?

Answer 9

Provides insight into how the business is funded.
Indicates financial stability or risk
2 types:
1) Debt to asset ratio
2) Debt to equity ratio

Question 10

What is meant by gearing or highly geared?

Answer 10

Gearing is how much of the company assets are funded by external sources (liabilities).
Highly geared business = high proportion of assets are funded by liabilities.

Question 11

What are liquidity ratios?

Answer 11

Provides insight into the businesses ability to pay debts due with the next 12 months.
4 types:
1) Current ratio
2) Quick ratio
3) Interest coverage ratio
4) Cash flow from operating activities to current liabilities.