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41 Cards in this Set
- Front
- Back
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Analyzing financial statements involves evaluating three characteristics:
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a company's liquidity, profitability, and solvency
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A short-term creditor, such as a bank, is primarily interested in...
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liquidity—the ability of the borrower to pay obligations when they come due
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A long-term creditor, such as a bondholder, looks to...
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profitability and solvency measures that indicate the company's ability to survive over a long period of time.
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Stockholders look at the _____ and _____ of the company
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profitability and solvency
-They want to assess the likelihood of dividends and the growth potential of the stock. |
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Intracompany basis
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This basis compares an item or financial relationship within a company in the current year with the same item or relationship in one or more prior years.
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Industry averages
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compares an item or financial relationship of a company with industry averages (or norms) published by financial ratings organizations such as Dun & Bradstreet, Moody's, and Standard & Poor's.
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Intercompany basis
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compares an item or financial relationship of one company with the same item or relationship in one or more competing companies
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Horizontal analysis
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evaluates a series of financial statement data over a period of time
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Vertical analysis
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evaluates financial statement data by expressing each item in a financial statement as a percent of a base amount
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Ratio analysis
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expresses the relationship among selected items of financial statement data
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Horizontal analysis purpose is to determine the _____ or _____ that has taken place. This change may be expressed as either an amount or a percentage.
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increase or decrease
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Liquidity ratios
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Measures of the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.
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The ratios we can use to determine the enterprise's short-term debt-paying ability are the
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current ratio, the acid-test ratio, receivables turnover, and inventory turnover.
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Current ratio
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A measure used to evaluate a company's liquidity and short-term debt-paying ability; computed by dividing current assets by current liabilities.
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The current ratio is sometimes referred to as
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the working capital ratio
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working capital
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current assets minus current liabilities.
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Acid-test (quick) ratio
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A measure of a company's immediate short-term liquidity; computed by dividing the sum of cash, short-term investments, and net receivables by current liabilities.
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Receivables turnover
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A measure of the liquidity of receivables; computed by dividing net credit sales by average net receivables.
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Inventory turnover
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A measure of the liquidity of inventory; computed by dividing cost of goods sold by average inventory.
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Profitability ratios
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Measures of the income or operating success of a company for a given period of time.
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Profit margin
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Measures the percentage of each dollar of sales that results in net income; computed by dividing net income by net sales.
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Asset turnover
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A measure of how efficiently a company uses its assets to generate sales; computed by dividing net sales by average assets.
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Return on assets
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An overall measure of profitability; computed by dividing net income by average assets.
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Return on common stockholders' equity
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Measures the dollars of net income earned for each dollar invested by the owners; computed by dividing net income minus preferred dividends (if any) by average common stockholders' equity.
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Earnings per share (EPS)
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The net income earned on each share of common stock; computed by dividing net income minus preferred dividends (if any) by the number of weighted-average common shares outstanding.
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Price-earnings (P-E) ratio
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Measures the ratio of the market price of each share of common stock to the earnings per share; computed by dividing the market price of the stock by earnings per share.
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Payout ratio
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Measures the percentage of earnings distributed in the form of cash dividends; computed by dividing cash dividends by net income.
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Solvency ratios
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Measures of the ability of the company to survive over a long period of time.
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Debt to total assets ratio
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Measures the percentage of total assets provided by creditors; computed by dividing total debt by total assets.
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Times interest earned
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Measures a company's ability to meet interest payments as they come due; computed by dividing income before interest expense and income taxes by interest expense.
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Earning power
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means the normal level of income to be obtained in the future. Earning power differs from actual net income by the amount of irregular revenues, expenses, gains, and losses.
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For users of financial statements to determine earning power or regular income, the _____ items are separately identified on the income statement.
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“irregular”
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Companies report two types of “irregular”items.
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Discontinued operations.
Extraordinary items. |
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Discontinued operations
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The disposal of a significant segment of a business.
-Examples involve stopping an entire activity or eliminating a major class of customers. |
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The income (loss) from discontinued operations consists of two parts:
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the income (loss) from operations and the gain (loss) on disposal of the segment.
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Extraordinary items
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Events and transactions that are unusual in nature and infrequent in occurrence.
- volcano |
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Change in accounting principle
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The use of a principle in the current year that is different from the one used in the preceding year.
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Comprehensive income
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Includes all changes in stockholders' equity during a period except those resulting from investments by stockholders and distributions to stockholders.
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Quality of earnings
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Indicates the level of full and transparent information provided to users of the financial statements.
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Pro forma income
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A measure of income that usually excludes items that a company thinks are unusual or nonrecurring.
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improper recognition of revenue
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manipulated the earnings numbers to meet these expectations
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