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Questions and Answers

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?

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?

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?

Financial statement items as a percentage of the total Signup and view all the answers

What is the primary limitation of horizontal analysis?

It does not explain the reasons behind specific changes Signup and view all the answers

What does studying the notes to the financial statements help assess?

The likelihood of 2016 amounts repeating in the future 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 does the current ratio measure?

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

What does the debt ratio show?

The proportion of assets financed with debt Signup and view all the answers

What does the times-interest-earned ratio measure?

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

What does return on total assets (ROA) measure?

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

What does earnings per ordinary share (EPS) indicate?

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

What does 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?

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

What does the quick ratio assess?

Whether a business can pay all current liabilities immediately Signup and view all the answers

What does return on equity (ROE) show?

The relationship between net income and ordinary shareholders' investment 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 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 benchmarking in financial statement 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 does the receivable turnover measure?

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

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

To facilitate comparisons by reporting only percentages Signup and view all the answers

What does the inventory turnover measure?

The number of times a company sells its average inventory during a year Signup and view all the answers

Why is consistent calculation of financial ratios important in financial statement analysis?

It adds value to financial statement analysis, even with slight differences in classifications and formulas Signup and view all the answers

What are the components of cash receipts from customers when using the direct method for preparing the cash flow statement?

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

How are cash disbursements to suppliers calculated when using the direct method for preparing the cash flow statement?

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

What is included in cash disbursements on operating expenses when using the direct method for preparing the cash flow statement?

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

How are cash disbursements to tax authority calculated when using the direct method for preparing the cash flow statement?

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

What are the components of cash flows from operations when using the direct method for preparing the cash flow statement?

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

What is the impact of beginning and ending accounts receivable on cash receipts from customers?

Beginning period Accounts Receivable increases cash receipts, while ending period Accounts Receivable decreases cash receipts Signup and view all the answers

How do beginning and ending accounts payable affect cash disbursements to suppliers?

Beginning period Accounts Payable increases cash disbursements, while ending period Accounts Payable decreases cash disbursements Signup and view all the answers

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.