Week 2 Flashcards
Income statement Layout
Sales LESS: COGS Gross Profit LESS: Expenses LESS: Depreciation Operating Profit LESS: Tax Net Profit
What is a Cross-Sectional Analysis?
Comparing firms or industry averages at the same point in time.
What is time series analysis?
Analysis of performance over time
What does liquidity ratio measure?
Ability to satisfy short term creditors
What does an excessively high liquidity ratio suggest?
High inventory levels
What does the quick ratio measure?
Ability to satisfy short term creditors excluding inventory.
What is a better Quick or current ratio?
The quick ratio is better when inventory is not highly liquid.
What does inventory asset turnover measure?
Amount of inventory sold or used in a time period
What does a high/low inventory turnover mean?
Higher = More Sales Lower = Holding excess stock
What could an excessively high inventory turnover mean?
May mean inventory levels are too low, will result in tock outs and therefore loss of sales.
What does a high/low average collection period mean?
High = Difficulty collecting AR Low = Efficient Management of AR
Can the average collection period be too low?
YES.
Means credit policy is too stringent and can result in lost sales.
What does the debt to equity ratio measure?
how much debt there is as a proportion od=f equity?
Higher = More in debtness
What does times interest earned measure?
ability to rap interest on debt
What does the fixed payment coverage ratio measure?
Measures the ability to meet all fixed payment obligations
