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Questions and Answers

What is horizontal analysis primarily used for?

Understanding percentage changes from year to year in financial statements (correct)

Predicting the future using income statement data

Providing insight into the relationship of financial-statement items relative to the total

Expressing financial statement items as a percentage of the total

How is horizontal analysis calculated?

By expressing financial statement items as a percentage of the total, which is represented as 100%

By studying the notes to the financial statements to assess the likelihood of future amounts repeating

By setting a base year's amounts equal to 100% and expressing subsequent years' amounts as a percentage of the base amount

By computing the amount of change from the base period to the next and then dividing the change by the base-period amount (correct)

What does trend analysis indicate?

Percentage changes from year to year in financial statements

The likelihood of future amounts repeating

The direction a business is taking by expressing subsequent years' amounts as a percentage of the base amount (correct)

The relationship of financial-statement items relative to the total

What is vertical analysis also known as?

Component analysis Signup and view all the answers

What does vertical analysis provide insight into?

The relationship of financial-statement items relative to the total Signup and view all the answers

What is the main difference between horizontal and vertical analysis?

Horizontal analysis studies percentage changes from year to year, while vertical analysis expresses financial statement items as a percentage of the total Signup and view all the answers

What does trend analysis commonly use to predict the future?

Income statement data Signup and view all the answers

What are the components of cash flows from operations according to the direct method?

Cash receipts from customers, cash payments to suppliers, cash disbursements on operating expenses, cash disbursements to tax authority Signup and view all the answers

What does the direct method of cash flow statement preparation require?

One Income Statement and two Balance Sheets Signup and view all the answers

What is used to calculate cash receipts from customers under the direct method?

Sales of current period + beginning period Accounts Receivable - end of period Accounts Receivable Signup and view all the answers

What is the formula to calculate cash disbursements to suppliers under the direct method?

Purchases + beginning period Accounts Payable - end of period Accounts Payable Signup and view all the answers

What is included in the cash disbursements on operating expenses under the direct method?

General expenses - beginning period Prepaid Expenses + beginning period Expenses Payable - ending Prepaid Expenses + ending Expenses Payable Signup and view all the answers

How are cash disbursements to tax authority calculated under the direct method?

Property Taxes + beginning period Property Taxes Payable - end of period Property Taxes Payable Signup and view all the answers

What is the main difference between the direct method and indirect method of preparing the cash flow statement?

The presentation of operating cash flows Signup and view all the answers

What does the cash conversion cycle measure?

The time it takes for a business to sell its inventory, collect payments, and make payments to suppliers Signup and view all the answers

What does the receivable turnover measure?

The ability to collect cash from customers Signup and view all the answers

What does the payable turnover measure?

How quickly a business pays its suppliers Signup and view all the answers

What is the purpose of benchmarking in financial analysis?

To compare a company to standards set by others in the same industry or market to drive improvement Signup and view all the answers

What is the key difference between Income Statement and Balance Sheet in terms of their base?

Income Statement uses total revenue as the base, while the Balance Sheet uses total assets as the base Signup and view all the answers

What does the asset turnover ratio assess?

The amount of resources used to generate sales or revenue Signup and view all the answers

What is the purpose of preparation of common-size financial statements?

To report only percentages, without dollar amounts, to facilitate comparisons Signup and view all the answers

What does the current ratio measure?

Ability to pay current liabilities with current assets Signup and view all the answers

What does the debt ratio show?

Proportion of assets financed with debt Signup and view all the answers

What does the times-interest-earned ratio measure?

Number of times operating income can cover interest expense Signup and view all the answers

What does return on total assets (ROA) measure?

Company's success in using assets to earn a profit Signup and view all the answers

What does return on equity (ROE) show?

Relationship between net income and ordinary shareholders' investment Signup and view all the answers

What does earnings per ordinary share (EPS) indicate?

Amount of net income earned for each outstanding ordinary share Signup and view all the answers

What does the price/earnings ratio (P/E) show?

How much an investor is willing to pay for each unit of earnings Signup and view all the answers

What does dividend yield measure?

Percentage of a share's market value returned annually to shareholders as dividends Signup and view all the answers

What does book value per ordinary share indicate?

Recorded accounting amount for each share of ordinary shares Signup and view all the answers

Study Notes

Financial Statement Analysis and Managerial Accounting

Financial strength ratios indicate an entity's ability to meet financial obligations, including liquidity ratios for short-term and solvency ratios for long-term obligations.
The current ratio, calculated as current assets divided by current liabilities, measures the ability to pay current liabilities with current assets.
The quick ratio, or acid-test ratio, assesses whether a business can pay all current liabilities immediately and uses a narrower base than the current ratio.
The debt ratio shows the proportion of assets financed with debt, with a ratio of 1 indicating all assets are financed with debt, and 0.50 meaning half the assets are financed with debt.
The times-interest-earned ratio measures the number of times operating income can cover interest expense, with a high ratio indicating ease in paying interest.
Profitability ratios, including gross profit margin, operating profit margin, and net profit margin, show the percentage of each sales dollar earned as gross, operating, and net profit.
Return on total assets (ROA) measures the company's success in using assets to earn a profit, with the numerator being the net profit and the denominator being the average total assets.
Return on equity (ROE) shows the relationship between net income and ordinary shareholders' investment in the company.
Earnings per ordinary share (EPS) indicates the amount of net income earned for each outstanding ordinary share and is computed by dividing net income by the weighted-average number of ordinary shares.
Price/earnings ratio (P/E) shows how much an investor is willing to pay for each unit of earnings, widely quoted in financial statistics.
Dividend yield measures the percentage of a share's market value returned annually to shareholders as dividends.
Book value per ordinary share indicates the recorded accounting amount for each share of ordinary shares, calculated as ordinary shareholders' equity divided by the number of ordinary shares outstanding.

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Description

Test your knowledge of financial statement analysis and managerial accounting with this quiz. Learn about financial strength ratios, profitability ratios, and key financial metrics used to assess a company's performance and financial health.