# Chapter 16

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1. Common-size analysis expresses line items or accounts in the financial statements as
percentages
2. The two forms of common-size analysis are
horizontal analysis and vertical analysis
3. Horizontal Analysis

Also called trend analysis, horizontal analysis expresses a line item as a
• percentage of some prior-period amount
• (allows the trend over time to be assessed)
4. In horizontal analysis, line itmes are expressed as a percentage of a
base period amount.
5. Vertical Analysis

While horizontal analysis involves relationships among items over time, vertical analysis is concerned with the relationships among items within
a particular time period
6. Vertical analysis expresses the line item as a percentage of some other
line item for the same period
7. Vertical Analysis

With this approach, with-in period relationships
can be assessed.
8. Vertical Analysis

Line items on income statements often are expressed as
percentages of net sales.
9. Line items on the balance sheet often are expressed as a
percentage of total assets.
10. Ratio Analysis

Ratio analysis is the second major technique for financial statement analysis.

Ratios are fractions or percentages computed
by dividing one account or line-item amount by another.
11. Standards for Comparison

Ratios by themselves tell little about the financial well-being of a company.

For meaningful analysis, the ratios should be
compared with a standard.
12. Only through comparison can someone using a financial statement
assess the financial health of a company.
13. Two standards commonly uses are the
past history of the company and industrial averages
14. Classification of Ratios

Ratios generally are classified into on of three categories:
1.  Liquidity

2.  Leverage (borrowing capacity)

3.  Profitability
15. Liquidity ratios measure
the ability of a companion to meet its current obligations.
16. Leverage ratios measure
measure the ability of a company to meet its long and short-term obligations.  These ratios provide a measure of the degree of protection provided to a company's creditors.
17. Profitability ratios measure the
earning ability of a company.  These ratios allow investors, creditors, and managers to evaluate the extent to which invested funds are being used efficiently.
18. Liquidity ratio

Current Ratio=
• Current Assets
• Current Liabililtes
19. Liquidity Ratio

Quick Ratio=
• (Cash+Marketable Securities+Accounts Receivable)
• Current Liabilities
20. Liquidity Ratios

Accounts Receivable Turnover Ratio=
• Net Sales
• Average Accounts Receivable
21. Liquidity Ratios

Average Accounts Receivable=
• (Beginning Receivables + Ending Receivables)
•                            2
22. Liquidity Ratios

Turnover in Days=
• 365
• Receivables Turnover Ratio
23. Liquidity Ratios

Inventory Turnover Ratio=
• Cost of Goods Sold
• Average Inventory
24. Liquidity ratios

Average Inventory=
• (Beginning Inventory + Ending Inventory)
•                          2
25. Liquidity Ratio

Turnover in Days=
• 365
• Inventory Turnover Ratio
26. Leverage ratio

Debt Ratio=
• Total Liabilities
• Total Assets
27. Leverage ratio

Debt to Equity Ratio=
• Total Liabilities
• Total Stockholder's Equity
28. Profitability ratios

Return on Sales=
• Net Income
• Sales
29. Profitability ratios

Average Total Assets=
• (Beginning Total Assets + Ending Total Assets)
•                            2
30. Profitability ratios

Return on Stockholders Equity=
• (Net Income - Preferred Dividends)
• Average Common Stockholder's Equity
31. Profitability ratios

Earnings per Share=
• (Net Income  - Preferred Dividends)
• Average Common Shares
32. Profitability ratio

Price- Earnings ratio=
• Market Price per Share
• Earnings per Share
33. Profitability ratio

Dividend Yield=
• Dividends per Common Share
• Market Price per Common Share
34. Profitability ratio

Dividend Payout Ratio=
• Common Dividends
• (Net Income - Preferred Dividends)
35. The most common liquidity ratios are:
• current ratio
• quick or acid test ratio
• accounts receivable turnover ratio
• inventory turnover ratio
36. Current Ratio is a measure of the ability of a company to pay
its short term liabilities out of short term assets

• Current Ratio=   Current Assets
•                           Current Liabilities
37. Current Ratio

Current liabilites must be paid within an
operating cycle (usually within a year) and current assets can be converted to cash within an operating cycle.
38. The current ratio provides a direct measure of the ability of a company to meet its
short-term obligations.
39. Current Ratio

Many creditors use the rule of thumb that a
2.0 ratio is needed to provide good debt-paying ability.
40. Current Ratio

A high current ratio may signal
excessive investment in current resources.
41. Current Ration

A declining current ratio may signal a move
toward more efficient utilization of resources.
42. The quick or acid-test ratio is a measure of
liquidity that compares only the most liquid assets with current liabilites
43. Excluded from the quick ratio are
non-liquid current assets such as inventories.
44. The numerator of the quick ratio includes only the most liquid assets.

Quick ratio=
• (Cash + Marketable Securities + Accounts Receivable)
• Current Liabilites
45. Accounts Receivable Turnover Ratio

A company's liquidity problem can be investigated by examining the liquidity of its receivable or how long it takes the company to turn its receivables into
cash

Accounts Receivable Turnover Ratio=

• Net Sales
• Average Accounts Receivable
46. Accounts Receivable Turnover in Days

The accounts receivable turnover ration can be taken further to determine the number of days the average balance of accounts receivable is outstanding before
being converted into cash.

• Turnover in Days=      365
•                             Receivables Turnover Ratio
47. A low turnover ratio may suggest a need to
modify credit and collection policies to speed up the conversion of receivables to cash.
48. Inventory Turnover Ratio

This ratio tells an analyst how many times the average inventory
turns over, or is sold, during the year.

• Inventory Turnover Ratio=  Cost of Goods Sold
•                                          Average Inventory
49. Inventory Turnover Ratio

A low turnover ratio may signal
the presence of too much inventory or sluggish sales.
50. Inventory Turnover Ratio

The number of days inventory is held before being sold can be computed as:
• Turnover in Days=  365
•                           Inventory Turnover Ratio
 Author: Cshowalter ID: 277878 Card Set: Chapter 16 Updated: 2014-06-30 14:56:42 Tags: Cost Accounting Folders: Cost Accounting Description: Cost Accounting Show Answers: