Accounting - Chapter 13

Front 1

What is horizontal analysis?

Back 1

Horizontal analysis is the study of percentage changes in comparative financial statements.

Front 2

What is the first step in horizontal analysis?

Back 2

The first step is to subtract the amount of the later period from the base period.

Front 3

What is the second step in horizontal analysis?

Back 3

The second is to the divide the amount of change by the base-period amount.

Front 4

What are trend percentages?

Back 4

They are a form of horizontal analysis that indicate the direction a business is taking.

Front 5

How to compute trend percentages?

Back 5

Divide any later year by a base year and set to 100%

Front 6

What is vertical analysis?

Back 6

It is an analysis of a financial statement that reveals the relationship of each statement item to a specified base of 100%

Front 7

How to compute vertical analysis percentage?

Back 7

Divide each income statement item by the total revenue

Front 8

What is a common-size statement?

Back 8

It is a financial statement that reports only percentages

Front 9

What is the common size in the balance sheet?

Back 9

In the balance sheet we use total assets to be the common size to which we relate the other amounts

Front 10

What is benchmarking?

Back 10

Benchmarking is the comparison of a company to a standard set by other companies with a view toward improvement

Front 11

How is benchmarking done?

Back 11

The two companies in comparison must change their balance sheet to common-size and compare percentages.

Front 12

Why is the analysis of the cash flows statement necessary?

Back 12

Because how the business utilizes its cash shows in the cash flow statement. Too much cash is not good, but too little could also be bad.

Front 13

How many ratios can we use to measure the ability to pay current liabilities and which ones are they?

Back 13

There are three ratios, they are ; the working capital ration, the current ratio, and the acid test ratio

Front 14

How does the working capital ratio work?

Back 14

It is the current assets minus the current liabilities and it measures the business's ability to pay its short-term liabilities with current assets

Front 15

How does the current ratio work?

Back 15

It is the current assets divided by current liabilities, and it measures a company's ability to pay current liabilities with current assets

Front 16

What is the interpretation of the current ratio?

Back 16

Usually the higher the ratio is the better position the company is in.

Front 17

How does the acid-test ratio work?

Back 17

It is the sum of cash plus the short-term investments plus the net current receivables divided by the total current liabilities, and it is an indicator of how fast the company can pay its dues.

Front 18

How is the acid-test ratio measured?

Back 18

The higher the better, but usually a ratio of .90 to 1.00 is acceptable in most industries

Front 19

In how many ways can we measure the ability to sell inventory and collect receivables and which are they?

Back 19

There are three ways and they are inventory turnover, accounts receivable turnover and day's sales in receivables.

Front 20

How does inventory turnover work?

Back 20

It is a ratio of cost of goods sold to average inventory and it indicates how fast the inventory is sold

Front 21

How does accounts receivable turnover work?

Back 21

It measures the ability of the company to collect cash from credit customers, and it is computed by dividing net sales by average net accounts receivable

Front 22

How does days' sales in receivables work?

Back 22

It is a ratio that measures how many days' sales remain in accounts receivable and it has two steps

Front 23

What is the first step in days' sales in receivables?

Back 23

First step is to divide net sales by 365 (days in a year)

Front 24

What is the second step in days' sales in receivables?

Back 24

The second step is to divide average net accounts receivable by one days' sales (the previous number we obtained)

Front 25

In how many ways can we measure the ability to pay long-term debt and what are they?

Back 25

There are two ways, we can use the debt ratio or the times-interest-earned ratio

Front 26

How does the debt ratio work?

Back 26

It is a proportion of a company's assets that is financed with debt and it is computed by dividing the total liabilities by the total assets

Front 27

How does the times-interest-earned ratio work?

Back 27

It is computed by dividing income from operations from the interest expense and it measures the number of times that operating income can cover interest expense

Front 28

What are the ways we can measure profitability?

Back 28

One way to measure profitability is using the rate of return on net sales, the rate of return on total assets, the rate of return on common stockholder's equity, or the earnings per share

Front 29

How does the rate of return on net sales work?

Back 29

It is the net income divided by the net sales and it measures the profitability of the company

Front 30

How does the rate of return on total assets work?

Back 30

It measures the company's success in using its assets to earn income for the persons who finance the business and it is computed by adding net income plus interest expense and dividing it by the average total assets

Front 31

How does the rate of return on common stockholder's equity work?

Back 31

It is computed by subtracting the net income minus the preferred dividends and dividing it by the average common stockholder's equity, and it also measures profitability

Front 32

What does it mean to use leverage?

Back 32

It means that the company is earning more income on borrowed money than the related interest expense, which means it is increasing the earnings for the owners of the business

Front 33

How does the earnings per share work?

Back 33

It is computed by subtracting net income minus preferred dividends and dividing it by the number of shares of common stock outstanding, and it measures the amount of a company's net income earned for each share of its outstanding common stock

Front 34

How do we analyze the stock investments?

Back 34

There are three ways, one is to use the price/earnings ratio, the dividend yield or the book value per share of common stock

Front 35

How does the price/earnings ratio work?

Back 35

It measures the value that the stock market places on 1 dollar of a company's earnings, and it is computed by dividing the market price per share of common stock by the earnings per share

Front 36

How does the dividend yield work?

Back 36

It is the dividend per share of common stock divided by the market price per share of common stock and it measures the percentage of a stock's market value that the company returns to the stockholders as dividends

Front 37

How does the book value per share of common stock work?

Back 37

It is the total stockholder's equity minus the preferred equity divided by the number of shares of commons stock outstanding, and it indicates the recorded amount for each share of common stock outstanding