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81 Cards in this Set
- Front
- Back
public corporations
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many stockholders with stock for sale in eschange markets
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private corporation
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few stockholders with no public stock sales
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corporations
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- separate legal entities
- limited liability of stockholders - transferable ownership rights (sales and purchases of stock) - ability to acquire capital - continuous life - corporation management (board of directors) - govt. regulation (SEC, Sarbanes-Oxley) - double taxation |
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authorized stock
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max. amt. of stock that a corporation can sell
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outstanding stock
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capital stock issued and held by stockholders
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par value stock
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capital stock that is assigned a per-share value in the corporate charter -- no relationship to the market value
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no-par value stock
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no assigned a value in the charter
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stated capital
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value assigned by the board of directors
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paid-in-capital
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amt. stockholders paid to corporation in exchange for shares of ownership
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retained earnings
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earned capital held for future use in the business
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treasury stock
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corporation own stock that has been issued, paid for, and reacquired by the corporation to be held in its treasury (not retired)
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reasons for treasury stock
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to reissue to employees under various compensation plans
to incrase the trading of stock in the mkt. (may lead ppl. to believe that stock is underpriced) to have additional shares available for use in acquiring other companies to increase earnings per share by reducing the number of shares outstanding |
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cost method of purchasing treasury stock
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companies debit treasury stock by the price paid to reaquire; treasury stock decreases by the same amt. when sold; the amt. must by disclosed on the balance sheet
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preferred stock
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contractual provisions that give it preferences over common stock in dividends and assets in case of liquidation
preferred stockholders have no voting rights shown on b/s |
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cumulative dividend feature
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sometimes in preferred stock contracts
preferred stockholders must be pad current year and unpaid prior year dividends before common stockholders receive their dividends dividend arrears- preferred dividends not declared; not liabilities, but need to be disclosed |
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liquidation preference
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creditors --> preferred --> common
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dividend
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distribution by corporation to stockholders on a pro rata basis
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declaration date
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board formally authorizes the cash dividend and announces it to stockholders --> leagally binding
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record date
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company determines ownership of the outstanding shares for dividend purposes
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payment date
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company mails dividend checks to stockholders
-reduces assets and liabilities |
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cumulative effect of declaration and payment
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- decrease S/E and total assets
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stock dividends
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pro rata distribution of corporations own stock to stockholders
- decreases retained earnings and increases paid-in capital - does not decrease s/e or total assets - often issued due to inadequate cash for cash dividends |
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reasons for issuing stock dividends
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- to satisfy dividends w/out spending cash
- increase marketability of the stock by increasing the number of shares outstanding, which decreases mkt. price - emphasizes a portion of s/e has been permenantly reinvested in the busness |
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small stock dividend
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less than 20-25%
recorded at fair mkt. value per share |
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large stock dividend
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greater than 20-25%
recorded at par or stated value |
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stock splits
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issuance of additional shares of stock to stockholders
reduces par or stated value per share increases of number per shares no effect on paid in capital, retained earnings, or total se does not need to be journalized |
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retained earnings
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net income that the company retains
part of stockholders' claim on total assets of hte corporation net loss - when expenses exceed revenues |
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payout ratio
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cash dividends declared on common stock / average common stockholder's equity
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bonds vs. common stock / debt. vs. equity
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owners control:
bonds - unaffected c/s- diluted tax benefit: bonds - interest is tax deductable c/s - dividends are taxed financial ratio (EPS): bond - unaffected c/s: decreased fixed payment: bonds: yes c/s: no |
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statement of cashflows
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reports receipts, cash payments, and net change in cash resulting from operating, investing, and financing activities during a period
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information in SCF
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ability to generate future cashflows
ability to pay dividends and meet obligations reasons for difference b/t net income and net cash used for operating activities cash investing and financing transactions during the given period |
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types of cashflow
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operating activities
investing activities financing activities |
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cash inflows for operating activities
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from sales of goods/services
from interest and dividends received |
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cash outflows from operating activities
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to supplier for inventory
to employees for services to govt. for taxes to lenders for interest to others for expenses |
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cash inflows from investment activities
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from the sale of PPE
from the sale og investments in debt or equity securities from other companies from the collection of loans to other entities |
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cash outflows from investing activities
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to purchase PPE
to purchase debt or equity securities from other companies/entities to make loans to other entities |
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cash inflows from financing activities
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from the sale of common stock
from the issuance of debt (bonds, notes) |
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cash outflows from financing activities
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to stockholders in the from of dividends
to redeem long-term debt or reacquire capital stock |
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non-cash activities
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direct issuance of common stock in order to purchase assets
conversion of bonds into common stock direct issuance of debt to purchase assets exchanges in plant assets --> non of these are on SCF |
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indirect method for operating activities on SCF
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determine net cash provided/used by operating activies by converting NI from accrual to cash basis
- net income +/- adjustments = net cash used/provided in operating activities add back non cash expenses (ex: depreciation, amortization, depletion) deduct gains and losses from investing and financing analyze changes in noncash current assets and liabilities current assets -- deduct increases and add decreases current liabilities -- add increases and deduct decreases |
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indirect method for investing and financing activites on SCF
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analysze changes in noncurrent assets and liabilities and record as investing and financing activities or as noncash investing investing and financing
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net change in cash for indirect method
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compare the net change in cash on the statement of cash flows
with the change in account reported on the balance sheet to make sure the amts. agree |
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free cash flow
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explains the cash remaining from operations after adjustment for capital expenditures and dividends
= cash provided by operations - cash expenditures - cash dividends |
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liquidity
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ability of a business to meet its immediate obligations
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statement of cashflows
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reports receipts, cash payments, and net change in cash resulting from operating, investing, and financing activities during a period
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information in SCF
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ability to generate future cashflows
ability to pay dividends and meet obligations reasons for difference b/t net income and net cash used for operating activities cash investing and financing transactions during the given period |
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types of cashflow
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operating activities
investing activities financing activities |
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cash inflows for operating activities
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from sales of goods/services
from interest and dividends received |
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cash outflows from operating activities
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to supplier for inventory
to employees for services to govt. for taxes to lenders for interest to others for expenses |
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cash inflows from investment activities
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from the sale of PPE
from the sale og investments in debt or equity securities from other companies from the collection of loans to other entities |
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cash outflows from investing activities
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to purchase PPE
to purchase debt or equity securities from other companies/entities to make loans to other entities |
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cash inflows from financing activities
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from the sale of common stock
from the issuance of debt (bonds, notes) |
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cash outflows from financing activities
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to stockholders in the from of dividends
to redeem long-term debt or reacquire capital stock |
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non-cash activities
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direct issuance of common stock in order to purchase assets
conversion of bonds into common stock direct issuance of debt to purchase assets exchanges in plant assets --> non of these are on SCF |
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indirect method for operating activities on SCF
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determine net cash provided/used by operating activies by converting NI from accrual to cash basis
- net income +/- adjustments = net cash used/provided in operating activities add back non cash expenses (ex: depreciation, amortization, depletion) deduct gains and losses from investing and financing analyze changes in noncash current assets and liabilities current assets -- deduct increases and add decreases current liabilities -- add increases and deduct decreases |
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indirect method for investing and financing activites on SCF
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analysze changes in noncurrent assets and liabilities and record as investing and financing activities or as noncash investing investing and financing
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net change in cash for indirect method
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compare the net change in cash on the statement of cash flows
with the change in account reported on the balance sheet to make sure the amts. agree |
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free cash flow
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explains the cash remaining from operations after adjustment for capital expenditures and dividends
= cash provided by operations - cash expenditures - cash dividends |
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liquidity
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ability of a business to meet its immediate obligations
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CURRENT cash debt coverage ratio
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cash provided by operations/ average current liabilities
lower than .4 is poor |
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solvency
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ability of company to survive over long-term
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cash debt coverage ratio
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cash provided by operations / average total liabilties
-- indicates ability to repay liabilities from cash generated from operations -- below .2 is poor |
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direct method for operating activities on SCF
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determines net cash provided/used by operating activities by converting net income from accrual basis to cash basis
--direct method - compute cash by adjusting each item in the income statement cash receipts - cash payments = net cash |
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direct method for investing activities on SCF
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analyze changes in noncurrent asset and liability accounts and record as investing activities or as significant noncash transactions
both individual outflows and inflows should be shown do not report net income on SCF under the direct method |
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direct method net change in cash on SCF
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compare the net change in cash on the SCF with the change in cash account reported on the balance sheet to make sure the amounts agree
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reasons that corporations invest
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excess cash due to seasonal or economic cycles -- low risk, high liquidity, short-term
investment income is necessary in business banks - debt investment mutual funds - stock investment strategy -- obtaining stock of target company |
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debt investments
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investments in govt. and corp. bonds
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acquisition of debt investments -- cost principle
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cost = price paid + brokerage fees / commissions (if any)
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stock investments
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investments in capital stock of corporations
- when company has stock in several corporations its called a portfolio - accounting depends on influence level |
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cost method
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investment is recorded at cost, and revenue is recorded when cash dividends are received
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equity
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investment is initially recorded at cost, but the investment account is adjusted annually
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valuation and reporting of investments
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debt and stock investments representing a holding of less than 20% are reported at fair value (the amt. at which the investment could be sold in a normal mkt.)
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types of securities
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trading securities: short term; brought and held mainly for sale in the near to generate income on short-term price differences
available for sale securities: short-term /long term; securities that may be sold in the future held-to-maturity securities: long term; debt securities that the investor has intent an ability to hold to maturity |
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sustainable income
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net income adjusted for irregular items
- it is expected to be repeated the future - it makes evaluation and prediction more meaningful |
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irregular items
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discontinued operations
extraordinary items changes in accounting principle |
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discontinued operations
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the disposal of a significant segment of the business
- gain/loss from discontinued operations |
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extraordinary items
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event and transactions that meet two conditions:
- unusual in nature: abnormal - infrequent in occurrence: not expected to occur again in the foreseeable future |
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comprehensive income
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changes in stockholders' equity except those resulting from investments by stockholders and distributions to stockholders - dividends
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horizontal analysis
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evaluating changes over a period of time
- change since base period - current results in relation to base period |
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vertical analysis
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evaluating an individual item as a percentage of a base amt.
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ratio analysis
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liquidity - ability to pay short-term/current liability
solvency- ability to pay long-term liability profitability- ability to generate profit |