16 Questions
What type of analysis determines the trend and determines the increase or decrease year on year?
Horizontal Analysis
What is the formula for calculating the percentage change in horizontal analysis?
₱ 𝒄𝒉𝒂𝒏𝒈𝒆 = 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒀𝒆𝒂𝒓 𝑩𝒂𝒍 - 𝑷𝒓𝒊𝒐𝒓 𝒀𝒆𝒂𝒓 𝑩𝒂𝒍
What type of analysis expresses each item on a financial statement as a percentage of a base amount?
Vertical Analysis
What is the base amount used in vertical analysis for a Balance Sheet?
Total Assets
What is the base amount used in vertical analysis for an Income Statement?
Net Sales
What is the purpose of financial statement analysis?
To evaluate risks and performance of a business
What is the purpose of a Bank Reconciliation Statement?
To compare the company's accounting records with the bank statement
What is an example of a reconciling item that increases the company's balance?
Deposit in transit
What is the term for a check written and recorded by the company but not yet cleared by the bank?
Outstanding checks
What is the term for a check not honored by the bank due to insufficient balance?
NSF checks
What is the purpose of a Withdrawal Slip?
To withdraw money from an account
What is the term for mistakes made by the bank that can increase or decrease the balance?
Bank errors
What are the fees deducted from the bank statement for processing checking account activity?
Bank service charges
What is the purpose of a Deposit Slip?
To deposit money into an account
What are the common reconciling items between the company's accounting records and the bank statement?
Deposit in transit, outstanding checks, bank errors, bank service charges, and NSF checks
Why is it necessary to regularly monitor cash flows through a Bank Reconciliation Statement?
To identify errors in accounting records or bank transactions
Study Notes
Financial Statement Analysis
- Evaluates risks, performance, financial health, and future prospects of a business
- Types of Financial Statement Analysis:
- Horizontal Analysis: Trend analysis, determining increase or decrease in financial data over time
- Vertical Analysis: Common-size analysis, each financial statement item as a percentage of a base amount
- Ratio Analysis: Relationships among selected items of financial statement data
Horizontal Analysis
- Year-on-year (Y-o-Y) growth calculation: - Change = (Current Year - Prior Year) / Prior Year - % Change = (Change / Prior Year) * 100
- Example: Sales increased by P75,000, representing a 42.86% growth from 2013 levels.
Vertical Analysis
- Balance Sheet:
- Base amount: Total Assets
- Formula: (Item / Total Assets) * 100
- Income Statement:
- Base amount: Net Sales
- Formula: (Item / Net Sales) * 100
Ratio Analysis
- Types of Ratios:
- Profitability Ratios: Ability to generate income from assets and invested capital
- Operational Efficiency Ratios: Ability to utilize assets
- Financial Health Ratios: Solvency and liquidity
- Examples of Ratios:
- Gross Profit Margin: (Gross Profit / Net Sales) * 100
- Operating Income Margin: (Operating Income / Net Sales) * 100
- Return on Assets: (Net Income / Total Assets) * 100
Profitability Ratios
- Gross Profit Margin: Peso value of gross profit earned for every peso of sales
- Operating Income Margin: Percent of profit earned from each peso of sales in core business operations
- Net Profit Margin: Peso value of net income earned for every peso of sales
- Return on Assets: Peso value of income generated by employing assets
Operational Efficiency Ratios
- Asset Turnover: Peso value of sales generated for every peso of assets
- Fixed Asset Turnover: Peso value of sales generated for every peso of fixed assets
- Inventory Turnover: Number of times inventory is sold and replaced during a period
- Accounts Receivable Turnover: Number of times accounts receivable are collected during a period
Financial Health Ratios
- Solvency Ratios:
- Debt Ratio: Percentage of company's assets financed by debt
- Debt-to-Equity Ratio: Company's reliance on debt or liability as a source of financing
- Equity Ratio: Percentage of company's assets financed by capital
- Liquidity Ratios:
- Current Ratio: Ability to pay current liabilities with current assets
- Quick Ratio: Ability to pay current liabilities with liquid assets
- Interest Coverage Ratio: Ability to cover interest expense on liability with operating income
Test your understanding of financial statement analysis, including horizontal and vertical analysis techniques. Evaluate the risks, performance, and future prospects of a business using financial statements. Apply formulas to calculate year-on-year growth and interpret the results.
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