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Accounting And Finance > Week 7 > Flashcards

Week 7 Flashcards

1
Q

in analysing financial statements what 3 characteristics of a business are examined

A

1: liquidity
2: solvency
3: profitability

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2
Q

what are the bases of comparative analysis

A

1: intra entity analysis
2: industry averages
3: inter entity basis

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3
Q

what is intra entity analysis

A

compares an item or financial relationship within an entity. it is useful in detecting trends

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4
Q

what is industry averages

A

compares an item or financial relationship of one entity with industry averages. gives information to relative performance

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5
Q

what is inter entity basis

A

compares item or financial relationship of one entity with same in one or more competing entities. gives information about competitive performance

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6
Q

what are the 2 tools for financial statement analysis

A

1: horizontal analysis
2: ratio analysis

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7
Q

what does horizontal analysis do

A

estimates a series of financial statement data over time

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8
Q

what does ratio analysis do

A

expresses the relationship among selected items of financial statement data

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9
Q

what is horizontal analysis also called

A

it is also called trend analysis

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10
Q

what is the purpose of horiziontal analysis

A

determine the increase or decrease that has taken place

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11
Q

does horizontal analysis use a base year

A

year

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12
Q

what is the formula for measuring % increase or decrease from base period

A

current year amount - base year amount / base year

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13
Q

what is the formula for measuring as a % of the base period

A

current year amount / base year amount

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14
Q

what can ratios be used for in analysis of financial statements to evaluate

A

liquidty
solvency
profitability

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15
Q

what do liquidity ratios measure

A

liquidity ratios measures short term ability of entity to pay its maturing obligations and to meet unexpected needs for cash

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16
Q

what do solvency ratios measure

A

solvency ratios measure the ability of an entity to survive over a long period of time

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17
Q

what do profitability ratios measure

A

measure of the profit or operating success of an entity for a given period of time

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18
Q

what 3 types of ratio comparison are used

A

1: intra entity comparisons
2: industry average comparisons
3: inter entity comparisons

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19
Q

what is the measure of liquidity with liquidity ratios

A

how quickly an entity can convert its current assets into cash

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20
Q

what are the ratios used to asses liquidity

A 
current ratio
acid test ratio
receivables turnover
inventory turnover
creditors turnover
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21
Q

what is the current ratio

A

evaluates entity’s liquidity and short term debt paying ability it shows for every dollar of current liabilities how many dollars of current assets are on hand

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22
Q

what is the acid test ratio

A

measure of an entity’s immediate short term liquidity it shows for every dollar of current liabilities how many dollars of short term liquid assets are available

23
Q

what is the receivables turnover ratio

A

measure of the number of times on average receivables are collected during the period, and how quickly they are turned into cash

24
Q

is this ratio turned into terms of days and if so how so

A

yes it is. the ratio is divided by 365

25
Q

what is the general rule with the receivables turnover ratio

A

that collection period should not exceed credit term period

26
Q

what is the inventory turnover ratio

A

measures the number of times on average the inventory is sold during the period

27
Q

is this ratio turned into terms of days and if so how so

A

yes it is the ratio is divided by 365

28
Q

is a higher or lower ratio better (creditors turnover)

A

a higher ratio indicates better payment then a lower ratio

29
Q

is it better to have a high or low inventory ratio

A

low because this prevents the chance of inventory obsolence occurring

30
Q

what is the operating cycle

A

is the sum of average debtors collection period and the average days to sell inventory (in days)

31
Q

what does the operating cycle measure

A

the time it takes to turn an item of inventory in the warehouse into cash

32
Q

what is the creditors turnover ratio

A

measures the time it takes to make payment following the credit purchase of inventory

33
Q

is creditors turnover turned into average period in days

A

yes it is

34
Q

what are the solvency ratios

A

debt to total assets ratio
interest coverage (times interest earned)
cash debt coverage

35
Q

what is the debt to assets ratio

A

the debt to assets ratio measures the % of total assets provided by creditors and indicates the degree of business leverage

36
Q

is it better to have a high or low debt to assets ratio

A

low

37
Q

what is the interest coverage ratio

A

the interest coverage ratio provides an indication of an entity’s ability to meet interest payments as they fall due

38
Q

what is the cash debt coverage ratio

A

the cash debt coverage ratio is a cash based measure used to evaluate solvency. measure of the % cash flows from operating activities per dollar of total liabilities

39
Q

what does the cash debt coverage ratio show

A

proportion of total liabilities funded by cash flows generated each year from normal activities of entity

40
Q

what do profitability ratios affect

A

a business ability to obtain finance, liquidity and ability to grow

41
Q

what are the profitability ratios

A 
return on equity
payout ratio
return on assets ratio
asset turnover ratio
gross profit margin ratio
expense ratio
cash return on sales ratio
42
Q

what is the return on owners equity ratio

A

how many dollars of profit were earned for each dollar of equity

43
Q

what is return on owners equity influenced by

A

debt to total assets ratio. more return on equity if highly geared but more business risk

44
Q

what is the payout ratio

A

measures the % of profits distributed to owners via drawings or dividends

45
Q

what is the return on assets ratio

A

measure of managements efficiency in managing the assets of the business can also be called ROI

46
Q

what is the profit margin ratio

A

measure of the % of each dollar of sales that results in profit

47
Q

what is the asset turnover ratio

A

measures how efficiently a company uses its assets to generate sales

48
Q

what does the asset turnover ratio show

A

dollars of sales produced by each dollar invested in assets

49
Q

what is the gross profit margin ratio

A

measure of the % of each dollar of sales that results in gross profit

50
Q

what is the expense ratio

A

a measure of the expenses incurred for every dollar of net sales

51
Q

what does the expense ratio show

A

for every dollar of net sales how many dollars are expenses

52
Q

what is the cash return on sales ratio

A

measure of the % of each dollar of sales that results from cash operating activities

53
Q

what are the limitations of financial statement analysis

A

1: estimates
2: cost (inflation)
3: atypical data
4: overdiversification

Accounting And Finance (8 decks)

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