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16 Cards in this Set
- Front
- Back
What are the 5 different ratios that are used to evaluate a business? Define first two. |
1. Liquidity: ability to meet current obligations 2. Borrowing: ability to meet long-term obligations 3. Profitability 4. Investors' 5. Cashflow |
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In what ways are ratios usually interpreted? |
1. Past 2. Competitors 3. Industrial 4. Pre-determined Standard 5. Trend and variability |
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What are common problems associated with averaging out balance sheet items? |
It does not eliminate seasonal and cyclical factors as well as uneven changes throughout the year. |
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Define: common-size analysis. What is one purpose of this? |
Comparative ratios expressed in percentages; to compare firms of varying sizes |
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What is the difference between Vertical and Horizontal analysis? |
Vertical: Uses a certain base item to compare with others within the same year Horizontal: Uses a certain base year and makes inter-year comparisons |
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What are some examples of descriptive information regarding the financial position of a firm? |
1. Annual Reports 2. Trade Periodicals 3. Industry Reportsf |
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What are some examples of variation by industry in financial statements? |
Receivables: firms which charge cash may have low receivables and vice versa Non-current Assets: some, such as advertising firms, may not require equipment, or buildings Inventory: merchandising firms will have high inventory, but none for service firms |
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What are some types of comparisons (ratio)? |
Trend and Industry Average |
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What are some dangers regarding comparisons? What can be a way around this? |
1. Alternative accounting methods: firms may not be comparable if both use different valuation, revenue recognition or expense methods 2. Formulas: firms and even industry averages may use different formulas 3. Year-end dates 4. Financial Policies 5. Debt structures 6. Unusual years for firms |
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Who are the major users of financial statements? What is their purpose regarding them? |
1. Management: ability to meet obligations, profitability, asset and debt structure 2. Investors: future profitability compared to current position 3. Creditors -Short Term: current resources -Long Term: future prospects |
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What is the effect of share repurchases on profitability ratios and balance sheet items? |
Increases EPS and CFPS as total shares outstanding contract. It decreases retained earnings as share repurchases are charged against Common Stock. |
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What is the name of the standardized list of financial ratios? |
There is none. |
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What is the problem with comparing income statement items with those of a balance sheet? The solution? |
Timing. Use the average value of balance sheet items |
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What is the difference between absolute and percentage change in ratio analysis? Which is generally a better measure? Why? |
Absolute change refers to the actual change in the item, while the percentage change is the relative difference. Percentage change is generally better as seemingly immaterial amounts could be material if relatively measured. |
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Define: trend analysis. What is its use? |
A study of the financial history of a firm for comparison. To see the change over time. |
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Define: absolute ratio or figures. Why are they not useful at times? |
Ratios or figures without a frame of reference to others. They are not useful as they are meaningless on their own and must be compared with others. |