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Questions and Answers
What does horizontal analysis involve?
What does horizontal analysis involve?
- Setting a base year's amounts equal to 100% and expressing subsequent years' amounts as a percentage of the base amount
- Comparing financial statement items as a percentage of the total
- Predicting the future using income statement data
- Studying percentage changes from year to year in financial statements (correct)
How is horizontal analysis calculated?
How is horizontal analysis calculated?
- Computing the amount of change from the base period to the next and then dividing the change by the base-period amount (correct)
- Expressing financial statement items as a percentage of the total
- Studying the relationship of financial-statement items relative to the total
- Setting a base year's amounts equal to 100% and expressing subsequent years' amounts as a percentage of the base amount
What does trend analysis indicate?
What does trend analysis indicate?
- The percentage changes from year to year in financial statements
- The relationship of financial-statement items relative to the total
- The direction a business is taking by expressing subsequent years' amounts as a percentage of the base amount (correct)
- The fluctuations in financial statement items over a period of time
What does vertical analysis express?
What does vertical analysis express?
What is the primary limitation of horizontal analysis?
What is the primary limitation of horizontal analysis?
What does studying the notes to the financial statements help assess?
What does studying the notes to the financial statements help assess?
What does trend analysis commonly use to predict the future?
What does trend analysis commonly use to predict the future?
What does the current ratio measure?
What does the current ratio measure?
What does the debt ratio show?
What does the debt ratio show?
What does the times-interest-earned ratio measure?
What does the times-interest-earned ratio measure?
What does return on total assets (ROA) measure?
What does return on total assets (ROA) measure?
What does earnings per ordinary share (EPS) indicate?
What does earnings per ordinary share (EPS) indicate?
What does price/earnings ratio (P/E) show?
What does price/earnings ratio (P/E) show?
What does dividend yield measure?
What does dividend yield measure?
What does the quick ratio assess?
What does the quick ratio assess?
What does return on equity (ROE) show?
What does return on equity (ROE) show?
What does the cash conversion cycle measure?
What does the cash conversion cycle measure?
What does the asset turnover ratio assess?
What does the asset turnover ratio assess?
What is the purpose of benchmarking in financial statement analysis?
What is the purpose of benchmarking in financial statement analysis?
What does the receivable turnover measure?
What does the receivable turnover measure?
What is the purpose of preparing common-size financial statements?
What is the purpose of preparing common-size financial statements?
What does the inventory turnover measure?
What does the inventory turnover measure?
Why is consistent calculation of financial ratios important in financial statement analysis?
Why is consistent calculation of financial ratios important in financial statement analysis?
What are the components of cash receipts from customers when using the direct method for preparing the cash flow statement?
What are the components of cash receipts from customers when using the direct method for preparing the cash flow statement?
How are cash disbursements to suppliers calculated when using the direct method for preparing the cash flow statement?
How are cash disbursements to suppliers calculated when using the direct method for preparing the cash flow statement?
What is included in cash disbursements on operating expenses when using the direct method for preparing the cash flow statement?
What is included in cash disbursements on operating expenses when using the direct method for preparing the cash flow statement?
How are cash disbursements to tax authority calculated when using the direct method for preparing the cash flow statement?
How are cash disbursements to tax authority calculated when using the direct method for preparing the cash flow statement?
What are the components of cash flows from operations when using the direct method for preparing the cash flow statement?
What are the components of cash flows from operations when using the direct method for preparing the cash flow statement?
What is the impact of beginning and ending accounts receivable on cash receipts from customers?
What is the impact of beginning and ending accounts receivable on cash receipts from customers?
How do beginning and ending accounts payable affect cash disbursements to suppliers?
How do beginning and ending accounts payable affect cash disbursements to suppliers?
Study Notes
Financial Statement Analysis for Business Decision Making
- Income Statement uses total revenue as the base, while the Balance Sheet uses total assets as the base.
- Preparation of common-size financial statements involves reporting only percentages, without dollar amounts, to facilitate comparisons.
- Benchmarking involves comparing a company to standards set by others in the same industry or market to drive improvement.
- Financial ratio analysis is a major tool for financial analysis and includes efficiency, financial strength, profitability, and investment ratios.
- Consistent calculation of financial ratios adds value to financial statement analysis, even with slight differences in classifications and formulas.
- Inventory turnover measures the number of times a company sells its average inventory during a year, indicating ease or difficulty in selling inventory.
- Receivable turnover measures the ability to collect cash from customers and is computed by dividing net sales by average net accounts receivable.
- Payable turnover measures how quickly a business pays its suppliers and is computed by dividing cost of goods sold by the average accounts payable for the period.
- The cash conversion cycle combines inventory resident period, receivable collection period, and payable collection period to show how long it takes for a business to sell its inventory, collect payments, and make payments to suppliers.
- The cash conversion cycle ideally equals 0, indicating that the days to turn around inventory, generate sales, collect sales, and pay suppliers are balanced.
- Asset turnover ratio assesses the amount of resources used to generate sales or revenue, either on a total assets basis or fixed assets basis.
- Financial statement analysis involves converting companies' financials to common size for easy and meaningful comparisons.
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Description
Test your knowledge of financial statement analysis with this quiz. Explore topics such as income statements, balance sheets, common-size financial statements, benchmarking, financial ratio analysis, inventory turnover, receivable turnover, payable turnover, cash conversion cycle, and asset turnover ratio. Sharpen your skills in interpreting financial data for informed business decision-making.
