Chapter 5: Basics Of Analysis

Front 1

What are the 5 different ratios that are used to evaluate a business? Define first two.

Back 1

1. Liquidity: ability to meet current obligations

2. Borrowing: ability to meet long-term obligations

3. Profitability

4. Investors'

5. Cashflow

Front 2

In what ways are ratios usually interpreted?

Back 2

1. Past

2. Competitors

3. Industrial

4. Pre-determined Standard

5. Trend and variability

Front 3

What are common problems associated with averaging out balance sheet items?

Back 3

It does not eliminate seasonal and cyclical factors as well as uneven changes throughout the year.

Front 4

Define: common-size analysis. What is one purpose of this?

Back 4

Comparative ratios expressed in percentages; to compare firms of varying sizes

Front 5

What is the difference between Vertical and Horizontal analysis?

Back 5

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

Front 6

What are some examples of descriptive information regarding the financial position of a firm?

Back 6

1. Annual Reports

2. Trade Periodicals

3. Industry Reportsf

Front 7

What are some examples of variation by industry in financial statements?

Back 7

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

Front 8

What are some types of comparisons (ratio)?

Back 8

Trend and Industry Average

Front 9

What are some dangers regarding comparisons? What can be a way around this?

Back 9

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

Front 10

Who are the major users of financial statements? What is their purpose regarding them?

Back 10

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

Front 11

What is the effect of share repurchases on profitability ratios and balance sheet items?

Back 11

Increases EPS and CFPS as total shares outstanding contract. It decreases retained earnings as share repurchases are charged against Common Stock.

Front 12

What is the name of the standardized list of financial ratios?

Back 12

There is none.

Front 13

What is the problem with comparing income statement items with those of a balance sheet? The solution?

Back 13

Timing. Use the average value of balance sheet items

Front 14

What is the difference between absolute and percentage change in ratio analysis? Which is generally a better measure? Why?

Back 14

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.

Front 15

Define: trend analysis. What is its use?

Back 15

A study of the financial history of a firm for comparison. To see the change over time.

Front 16

Define: absolute ratio or figures. Why are they not useful at times?

Back 16

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.