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43 Cards in this Set

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  • Back
The three methods of analyzing financial statements.
Vertical, horizontal, and ratio analysis
The process of using a single variable on a financial statement as a constant and determining how all other variables relate as a percetage of the single variable; used to determine how much of a company's net sales are being consumed by each individual entry on the income statement.
Vertical Analysis
Percentage of net sales = (Income statement item in $ / Net sales in $) * 100
Vertical Analysis of an income statement
Percentage of total assets = (Balance sheet item / Total assets) * 100
Vertical Analysis of a balance sheet
A determination of the percentage increase or decrease in an account from a base time period to successive time periods.
Horizontal Analysis
Percentage change = ((New time period amount - Old time period amount) / Old time period amount) * 100
Horizontal Analysis Formula
Used to determine the health of a business, especially as that business compares with oher firms in the same industry or similar industries.
Ratio Analysis
Determine how much of a firm's current assets are available to meet short-term creditor's claims.
Liquidity Ratios
Current assets / Current Liabilities = ?
Current Ratio
(Current assets - Inventory) / Current liabilities = ?
Quick (Acid Test) Ratio
Indicate how efficiently a business is using its assets.
Activity Ratios
Indicates how efficiently a firm is moving its inventory; how many times per year the firm movies its average inventory.
Inventory Turnover Ratio
Cost of Goods Sold / Average inventory at cost = ?
Inventory Turnover
(Beginning inventory + Ending Inventory) / 2 = ?
Inventory Turnover (alternate)
Allows us to determine how fast our company is turning its credit sales into cash.
Accounts receivable turnover ratio
Credit sales / Accounts receivable = ?
Accounts receivable turnover ratio
Indicates how efficiently fixed assets are being used to generate revenue for a firm.
Fixed asset turnover ratio
Net sales / Fixed assets = ?
Fixed asset turnover
Indicates how efficiently a firm uses its total assets to generate revenue for the firm.
Total asset turnover ratio
Net sales / Total assets = ?
Total asset turnover
Indicate what percentage of the business's assets is financed with creditors' dollars.
Leverage (debt) ratio
Indicates what percentage of the owner's equity is debt.
Debt-to-equity ratio
Total liabilities / Owner's equity = ?
Debt-to-equity ratio
Indicates what percentage of a business's assets is owned by creditors.
Debt-to-total-assets ratio
Total liabilities / Total assets = ?
Shows the relationship between operating income and the amount of interest in dollars the company has to pay to its creditors on an annual basis.
Times-interest-earned ratio
Operating income / Interest = ?
Used by potential investors and creditors to determine how much of an investment will be returned from either earnings on revenues or appreciation of assets.
Profitability ratios
Used to determine how much gross profit is generated by each dollar in net sales.
Gross profit margin ratio
Gross profit / Net sales = ?
Gross profit margin ratio
Used to determine how much each dollar of sales generates in operating income.
Operating profit margin ratio
operating income / Net sales = ?
Operating profit margin
Tells how much a firm earned on each dollar in sales after paying all obligations, including interest and taxes.
Net profit margin ratio
Net profit / Net sales = ?
Net profit margin
Allows you to determine how much we are actually earning on each dollar in assets before paying interest and taxes.
Operating return on assets ratio
Operating income / Total assets = ?
Operating return on assets
Shows how much a firm earns on each dollar in assets after paying both interest and taxes.
Net return on assets (ROA) ratio
Net profits / Total assets = ?
Net return on assets
Used to compare firms within the same industry.
Market ratios
Shows the amount earned on each share of common stock.
Earnings per share ratio
(Net income - Preferred dividends) / Number of common shares = ?
Earnings per share
Magnification of earnings per share in terms of market price of stock.
Price earnings ratio
Market price of stock / Earnings per share = ?
Price earning ratio