110.309 Analysis Of Financial Statements

Front 1

What is horizontal analysis?

Back 1

An analysis of the change from year to year expressed as a percentage.

Front 2

What is trend analysis?

Back 2

The earliest period is the base period with all subsequent periods compared with the base.

Front 3

What is vertical analysis?

Back 3

It involves restating the dollar amount of each item reported on an individual financial statement as a percentage of a specific item on the same statement.

Front 4

What are the three main categories of ratios?

Back 4

Profitability ratios
Liquidity ratios
Financial stability ratios

Front 5

How do you calculate return on assets?
Profitability ratio

Back 5

= Profit (before tax) / Average total assets

Front 6

What does return on assets measure?

Back 6

Return on assets measures the return earned through total assets provided by both creditors and owners.
Profitability ratio

Front 7

How do you calculate return on ordinary equity?
Profitability ratio

Back 7

= Profit - Preference dividends / Average ordinary equity

Front 8

What does return on ordinary equity measure?

Back 8

Return on ordinary equity measures the return earned on assets provided by owners.

Profitability ratio

Front 9

How do you calculate profit margin?

Profitability ratio

Back 9

= Profit / Revenue

Front 10

What does profit margin measure?

Back 10

Profit margin measures the net profitability of each dollar of sales.
Profitability ratio

Front 11

How do you calculate earnings per share?
Profitability ratio

Back 11

= Profit (after tax) - Preference dividends / Weighted average number of ordinary shares

Front 12

What does earnings per share measure?

Back 12

Earnings per share measures profit earned on each ordinary share.
Profitability ratio

Front 13

How do you calculate dividend yield?
Profitability ratio

Back 13

= Annual dividend per share / Market price per share

Front 14

What does dividend yield measure?

Back 14

Dividend yield measures the return to shareholders based on current market price.
Profitability ratio

Front 15

How do you calculate current ratio?

Liquidity ratio

Back 15

= Current assets / Current liabilities

Front 16

What does the current ratio measure?

Back 16

The current ratio measures short-term liquidity and indicates the ability of an entity to meet short-term debts from current assets.
Liquidity ratio

Front 17

How do you calculate receivables turnover?
Liquidity ratio

Back 17

= Net sales revenue / Average receivables balance

Front 18

What does receivables turnover measure?

Back 18

Receivables turnover measures the effectiveness of collections.
Liquidity ratio

Front 19

How do you calculate the average collection period?
Liquidity ratio

Back 19

= Average receivables balance x 365 / Net sales revenue

Front 20

What does the average collection period measure?

Back 20

The average collection period measures the average number of days taken by an entity to collect its receivables.

Liquidity ratio

Front 21

How do you calculate the inventory turnover?

Liquidity ratio

Back 21

= Cost of sales / Average inventory balance

Front 22

What does inventory turnover measure?

Back 22

Inventory turnover measures the number of times inventory was sold on average during a period.
Liquidity ratio

Front 23

How do you calculate the debt ratio?
Financial stability ratio

Back 23

= Total liabilities / Total assets

Front 24

What does the debt ratio measure?

Back 24

The debt ratio measures the percentage of assets provided by creditors and the extent of using gearing.

Financial stability ratio

Front 25

How do you calculate the equity ratio?
Financial stability ratio

Back 25

= Total equity / Total assets

Front 26

What does the equity ratio measure?

Back 26

The equity ratio measures the percentage of assets provided by shareholders and the extent of using gearing.

Financial stability ratio

Front 27

How do you calculate times interest earned?

Financial stability ratio

Back 27

= Profit (before tax) + Net finance costs / Net finance costs

Front 28

What does times interest earned measure?

Back 28

Times interest earned measures the ability of the entity to meet its interest payments on borrowings out of current profits.

Financial stability ratio

Front 29

How do you calculate asset turnover ratio?

Financial stability ratio

Back 29

= Revenue / Average total assets

Front 30

What does the asset turnover ratio measure?

Back 30

The asset turnover ratio measures the effectiveness of an entity in using its assets during the period.

Financial stability ratio

Front 31

Name four limitations of financial analysis.

Back 31

Historical data is used to predict future performance.

Year-end data may not be typical of the entity's position during the year.

Lack of disclosure may inhibit the extent of analysis.

One-off items can bias the information.

Front 32

What are the 2 things that ratios derived from the Statement of Cash Flows help evaluate?

Back 32

Cash sufficiency
Cash flow efficiency

Front 33

What is cash sufficiency?

Back 33

The adequacy of the cash flows to meet the entity's cash needs.

Front 34

What is cash flow efficiency?

Back 34

How well the entity generates cash flows relative both to other periods and to other entities.

Front 35

How do you calculate the cash flow adequacy ratio?
Cash sufficiency ratio

Back 35

= Cash flow from operating activities / Repayment of long-term borrowing + Assets acquired + Dividends paid

Front 36

What does the cash flow adequacy ratio measure?

Back 36

Cash flow adequacy measures the entity's ability to cover its main cash requirements.
Cash sufficiency ratio

Front 37

How do you calculate repayment of long term borrowings ratio?

Cash sufficiency ratio

Back 37

= Repayment of long term borrowings / cash flows from operating activities

Front 38

What does the repayment of long term borrowings ratio measure?

Back 38

The repayment of long term borrowings measures the entity's ability to cover its long term debt out of cash from operating activities.

Cash sufficiency ratio

Front 39

How do you calculate the dividend payment ratio?
Cash sufficiency ratio

Back 39

= Dividends paid / Cash flows from operating activities

Front 40

What does the dividend payment ratio measure?

Back 40

The dividend payment ratio measures the entity's ability to cover its dividend payments.

Cash sufficiency ratio

Front 41

How do you calculate the cash flow to revenue ratio?

Cash flow efficiency ratio

Back 41

= Cash flows from operating activities / Revenue

Front 42

What does the cash flow to revenue ratio measure?

Back 42

The cash flow to revenue ratio measures the ability to convert revenue into cash flows.
Cash flow efficiency ratio

Front 43

How do you calculate the operations index ratio?
Cash flow efficiency ratio

Back 43

= Cash flows from operating activities / Profit

Front 44

What does the operations index ratio measure?

Back 44

The operations index ratio measures the relationship between profit and operating cash flows.
Cash flow efficiency ratio

Front 45

How do you calculate the cash flow return on assets ratio?
Cash flow efficiency ratio

Back 45

= Cash flows from operating activities / Average total assets

Front 46

What does the cash flow return on assets ratio measure?

Back 46

The cash flow return on asset ratio measures the operating cash flow return on assets before interest and tax.

Cash flow efficiency ratio