Chapter 16

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  1. Common-size analysis expresses line items or accounts in the financial statements as
  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

    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
Card Set:
Chapter 16
2014-06-30 14:56:42
Cost Accounting
Cost Accounting
Cost Accounting
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