Financial Reporting & Analysis Chapter 3

<p>Overview of the previous year and future goals (D)</p> Signup and view all the answers

<p>Trend analysis (A)</p> Signup and view all the answers

<p>North American Industry Classification System (NAICS) (D)</p> Signup and view all the answers

<p>Narrative data (D)</p> Signup and view all the answers

<p>Industry averages (A)</p> Signup and view all the answers

<p>They experience less difficulty in capital market access. (A)</p> Signup and view all the answers

<p>By eliminating some difficulties in comparison through standardization. (B)</p> Signup and view all the answers

<p>Current resources and liquidity. (C)</p> Signup and view all the answers

<p>They evaluate information from both investors and creditors' perspectives. (B)</p> Signup and view all the answers

<p>Absolute numbers do not reflect market participation percentages. (B)</p> Signup and view all the answers

<p>The firm's ability to meet its current obligations (A)</p> Signup and view all the answers

<p>Operational ratios (B)</p> Signup and view all the answers

<p>To establish a baseline for assessing performance (D)</p> Signup and view all the answers

<p>Variability of the ratio over time (D)</p> Signup and view all the answers

<p>It does not accurately reflect uneven changes throughout the year (D)</p> Signup and view all the answers

<p>Profitability ratios (A)</p> Signup and view all the answers

<p>They can significantly impact financial reporting and ratios (C)</p> Signup and view all the answers

<p>The firm's liquidity in terms of cash generation (C)</p> Signup and view all the answers

<p>It uses percentages instead of absolute amounts. (C)</p> Signup and view all the answers

<p>As a percentage of a base amount for the same year. (A)</p> Signup and view all the answers

<p>Expressing amounts for multiple years as a percentage of a base year amount. (C)</p> Signup and view all the answers

<p>When both years contain positive values. (B)</p> Signup and view all the answers

<p>Consider the change to be 100%. (A)</p> Signup and view all the answers

<p>No meaningful percent change can be computed with a positive number and a negative number. (C)</p> Signup and view all the answers

<p>The proportion of individual financial statement elements to a base amount. (D)</p> Signup and view all the answers

<p>To present a complete understanding of financial performance. (C)</p> Signup and view all the answers

<p>Standard Industry Classification (B)</p> Signup and view all the answers

<p>According to similar production processes (D)</p> Signup and view all the answers

<p>Four-digit industry number (C)</p> Signup and view all the answers

<p>Inconsistent accounting practices (A)</p> Signup and view all the answers

<p>They can vary due to differing data and methodologies (B)</p> Signup and view all the answers

<p>U.S., Canada, and Mexico (A)</p> Signup and view all the answers

<p>They analyze data based on industry placement. (C)</p> Signup and view all the answers

<p>They lead to reduced transparency in financial statements. (A)</p> Signup and view all the answers

Used to measure a company's ability to pay its short-term debts.

Assess how well a company is protected for long-term creditors.

Measure a company's earning capability.

Analysis should be done by comparing to prior ratios, competitor's ratios, industry averages, or predetermined standards.

Utilizing balance sheet average data is important when analyzing with income statement data, but it does not eliminate seasonal variation or reflect uneven yearly changes.

Financial analysis should be understood within the company's native accounting principles and business practices.

Changes in ratios over time and the degree of fluctuation are crucial for analysis, as they reveal important insights into financial health.

Used to measure a company's ability to generate cash flow.

A method used to compare financial statements by expressing each item as a percentage of a base value. This allows for easier comparison across time periods and between companies of different sizes.

A type of common-size analysis that compares each item on a financial statement to a base value within the same time period (usually net sales revenue or total assets).

A type of common-size analysis that compares each item on a financial statement to a base value from a previous period.

A method used to analyze the change in financial statement items between two periods, using both absolute amounts and percentages.

When an item has a value in one period and zero in the next, the decrease is considered 100%.

A meaningful percent change is not possible when one number is positive and the other is negative, as the direction of change is unclear.

A percent change cannot be calculated if there is no base year value for the item in question.

Year-to-year change analysis uses both absolute amounts and percentages to provide a more comprehensive understanding of changes.

Different industries have unique financial characteristics due to their specific operations and assets.

Businesses in this industry rely heavily on inventory as a principal asset, with sales primarily for cash or credit.

This industry typically has low or no inventory, focusing on providing services rather than tangible products.

Manufacturing businesses hold significant inventory, invest heavily in plant assets, and often have a high cost of sales.

Information provided in reports, periodicals, and industry reviews that helps understand a company's financial position.

A section in financial reports that provides an overview of past performance, future goals, and upcoming projects.

Examining the historical financial data of a company to identify whether ratios are rising, falling, or staying consistent.

A system used by the U.S. Department of Labor to categorize businesses based on their industry.

The comparison of firm sizes based on factors like capital market access, purchasing power, and customer base.

An indicator of a firm's relative size within its industry, revealing its market dominance.

The challenge of comparing companies with vastly different sizes, making direct comparisons difficult.

Managers analyze financial statements from both investors' and creditors' viewpoints when making decisions.

The Standard Industrial Classification (SIC) system categorizes businesses based on their industry. It defines industries by how they are structured within the economy.

SIC uses a numeric code system. It has three levels: the two-digit major group number, the three-digit industry group number, and the four-digit industry number.

The North American Industry Classification System (NAICS) is a joint system between the U.S., Canada, and Mexico. It classifies industries based on production processes.

The U.S. Census Bureau website (www.census.gov) has a detailed NAICS manual that explains the system.

Comparing companies to industry averages can be tricky because some businesses are highly diversified across many industries.

Financial service companies often use industry averages to analyze a business's financial performance within its specific industry.

Industry ratios can vary due to differences in data, accounting methods, and financial policies. This can make comparisons inaccurate.

Differences in data sources, accounting formula variations, accounting treatment choices, fiscal year-end differences, financial policies, and pre-tax/post-tax considerations can all lead to inconsistent ratios.