Podcast
Questions and Answers
What is considered a principal asset for a merchandising company?
What is considered a principal asset for a merchandising company?
Which type of industry typically has low or nonexistent inventory?
Which type of industry typically has low or nonexistent inventory?
Which financial component is often a major expense for manufacturing companies?
Which financial component is often a major expense for manufacturing companies?
What does the Management Discussion and Analysis (MD&A) provide?
What does the Management Discussion and Analysis (MD&A) provide?
Signup and view all the answers
Which type of analysis involves studying the financial history of a firm?
Which type of analysis involves studying the financial history of a firm?
Signup and view all the answers
Which classification system is used to categorize industries in North America?
Which classification system is used to categorize industries in North America?
Signup and view all the answers
What type of data might help explain a firm's financial position?
What type of data might help explain a firm's financial position?
Signup and view all the answers
Which type of average is commonly compared to a company's financial data for benchmarks?
Which type of average is commonly compared to a company's financial data for benchmarks?
Signup and view all the answers
What is one advantage of larger firms in terms of market presence?
What is one advantage of larger firms in terms of market presence?
Signup and view all the answers
How does common-size analysis assist in the comparison of firms?
How does common-size analysis assist in the comparison of firms?
Signup and view all the answers
What is a key focus for short-term creditors in their analysis?
What is a key focus for short-term creditors in their analysis?
Signup and view all the answers
Which of the following statements best describes the role of management in financial statement analysis?
Which of the following statements best describes the role of management in financial statement analysis?
Signup and view all the answers
Why is it challenging to compare firms of disparate sizes based solely on absolute numbers?
Why is it challenging to compare firms of disparate sizes based solely on absolute numbers?
Signup and view all the answers
What do liquidity ratios measure in a firm?
What do liquidity ratios measure in a firm?
Signup and view all the answers
Which of the following is NOT a type of ratio analysis mentioned?
Which of the following is NOT a type of ratio analysis mentioned?
Signup and view all the answers
Why is it important to interpret ratios in comparison with industry standards?
Why is it important to interpret ratios in comparison with industry standards?
Signup and view all the answers
What key aspect should be considered when analyzing the trend of a financial ratio?
What key aspect should be considered when analyzing the trend of a financial ratio?
Signup and view all the answers
What is a limitation of using average data from the balance sheet for analysis?
What is a limitation of using average data from the balance sheet for analysis?
Signup and view all the answers
Which type of ratio analysis specifically measures the earning ability of a firm?
Which type of ratio analysis specifically measures the earning ability of a firm?
Signup and view all the answers
What should be taken into account regarding native accounting principles during analysis?
What should be taken into account regarding native accounting principles during analysis?
Signup and view all the answers
What do cash flow ratios measure in a firm's financial analysis?
What do cash flow ratios measure in a firm's financial analysis?
Signup and view all the answers
What is the primary advantage of using common-size analysis?
What is the primary advantage of using common-size analysis?
Signup and view all the answers
In vertical analysis, how are amounts presented?
In vertical analysis, how are amounts presented?
Signup and view all the answers
What does horizontal analysis involve?
What does horizontal analysis involve?
Signup and view all the answers
When is a percent change considered meaningful in year-to-year analysis?
When is a percent change considered meaningful in year-to-year analysis?
Signup and view all the answers
What should be done when comparing a base year's data with a year that has no value?
What should be done when comparing a base year's data with a year that has no value?
Signup and view all the answers
What limitation exists when computing percent change between two years?
What limitation exists when computing percent change between two years?
Signup and view all the answers
In the context of financial analysis, what does a common-size financial statement primarily illustrate?
In the context of financial analysis, what does a common-size financial statement primarily illustrate?
Signup and view all the answers
Why is it important to use both absolute amounts and percentages in year-to-year change analysis?
Why is it important to use both absolute amounts and percentages in year-to-year change analysis?
Signup and view all the answers
What does SIC stand for in the context of classifying businesses?
What does SIC stand for in the context of classifying businesses?
Signup and view all the answers
How does NAICS primarily define industries?
How does NAICS primarily define industries?
Signup and view all the answers
What is a key feature of the SIC coding structure?
What is a key feature of the SIC coding structure?
Signup and view all the answers
What complicates the comparison of industry averages for diversified companies?
What complicates the comparison of industry averages for diversified companies?
Signup and view all the answers
What is a significant caution to consider when using industry averages?
What is a significant caution to consider when using industry averages?
Signup and view all the answers
Who jointly created the NAICS classification system?
Who jointly created the NAICS classification system?
Signup and view all the answers
What aspect of financial services is highlighted in relation to industry comparisons?
What aspect of financial services is highlighted in relation to industry comparisons?
Signup and view all the answers
Which issue may arise due to optional accounting treatments?
Which issue may arise due to optional accounting treatments?
Signup and view all the answers
Study Notes
Financial Reporting & Analysis
- This textbook covers financial reporting and analysis using financial accounting information.
- The author is Charles H. Gibson.
- Copyright information shows ©2013 Cengage Learning.
Chapter 3: Basics of Analysis
- This chapter likely discusses fundamental analysis concepts.
Ratio Analysis
- Liquidity ratios: Measure a firm's ability to meet current obligations.
- Borrowing capacity (leverage) ratios: Measure protection for long-term creditors.
- Profitability ratios: Measure the firm's earning ability.
- Cash flow ratios: These likely measure the firm's ability to generate cash flow.
Ratio Analysis—Continued
- Ratios are interpreted in comparison with:
- Prior ratios of the company.
- Competitor's ratios.
- Industry ratios.
- Predetermined standards.
- Trends and variability of a ratio are significant considerations.
Complexities and Context
- When comparing with income data, average data from the balance sheet is needed.
- Seasonal and cyclical variations should be eliminated from analysis.
- Consider accounting principles and business practices.
Common-Size Analysis
- Percentages are preferred over absolute amounts.
- Vertical analysis: Expresses all amounts as a percentage of the base amount in a given year (e.g., net sales revenue, total assets) for one time period.
- Horizontal analysis: Expresses comparative amounts as percentage of the base year amount.
Exhibit 5-1: Melcher Company—Vertical Common Size
- This exhibit provides a financial analysis of Melcher Company using vertical common size format for 2011, 2010, and 2009.
- Each financial element is displayed as a percentage of sales revenue.
Exhibit 5-1: Melcher Company—Horizontal Common Size
- This exhibit analyzes financial changes over time (2011, 2010, and 2009) using horizontal common-size format.
- Each financial element is shown as a percentage of the base year.
Year-to-Year Change Analysis
- Use both absolute and percentage changes for analysis.
-
Guidelines:
- A 100% decrease occurs when an item has a value in the base year and none in the next period.
- Meaningful percent change is not possible if one number is positive and the other is negative.
- No change percentage can be calculated if there's no data for the base year.
Industry Variations
- Financial components are different across various industries.
- Merchandising: Inventory is a major asset and sales are often on credit.
- Service: Little to no inventory and often no significant cost of goods.
- Manufacturing: High inventory, large plant asset investment, and a high cost of goods sold.
Descriptive Information
-
Narrative data: Includes:
- Annual reports.
- Trade periodicals.
- Industry reviews.
- Management Discussion and Analysis (MD&A): Provides an overview of previous year's performance and future goals.
Comparisons
- Provides context for ratio analysis and financial data. Includes:
- Trend analysis: Study of ratio history.
- Standard Industrial Classification (SIC) Manual: Classification system by industries.
-
North American Industry Classification System (NAICS): Another industry classification standard.
- Industry averages and competitor comparisons provide comparative benchmarks.
Comparisons: Trend Analysis
- Studies financial history to determine if ratios are falling, rising, or relatively constant.
- Helps identify effective management or problems.
Comparisons: SIC
- Classifies businesses by industry.
- Follows a coding structure (two-digit, three-digit, and four-digit numbers).
Comparisons: NAICS
- A jointly developed classification of industries (U.S., Canada, and Mexico).
- The U.S. Census Bureau provides details.
Comparisons: Industry Averages
- Industry comparison is complicated by company diversification.
- Financial services often base analysis on industry placement.
- Composite data of industries is usually derived from this study.
Comparisons: Caution in Using Industry Averages
- Industry averages can differ due to variances in data, inconsistent construction of formulas/calculations, optional accounting treatments, different fiscal year-ends, varying financial policies, and/or inconsistent basis (before or after tax).
Relative Size of Firm
- Comparing different sizes of companies (small vs large). Issues such as capital market access and economies of scale may effect financial analysis.
- Common-size analysis and percentage of market share eliminate the need to compare absolute figures.
The Users of Financial Statements
- Management: Analyze reports from both investors and creditors.
- Investors: Use past and present information to predict company future prospects.
- Creditors: Short-term creditors focus on current resources; long-term creditors focus on future prospects.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Related Documents
Description
Explore the basics of financial analysis with a focus on ratio analysis. This chapter discusses liquidity ratios, leverage ratios, profitability ratios, and cash flow ratios, along with their interpretations and comparisons. Understand how to measure a firm's financial health through these key metrics.
