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