Ch 3 Flashcards
(17 cards)
Horizontal Analysis
Compares financial numbers from different periods to track increases or decreases
Vertical Analysis
Compares all numbers in a financial statement to the largest number (e.g., total sales) to calculate percentages.
Financial Analysis Definition
Evaluating a company’s financial performance using ratios to identify relationships between financial statement accounts.
Goal of Financial Analysis
Links ratios to profitability and value but may not answer all questions, leading to further inquiries.
Profitability Ratios
Show how profitable a company is (e.g., Profit margin, ROA, ROE).
Asset Utilization Ratios
Measure how efficiently a company uses its assets (e.g., Receivable turnover, Inventory turnover).
Liquidity Ratios
Measure a company’s short-term financial health (e.g., Current ratio, Quick ratio).
Debt Utilization Ratios
Assess how well a company uses and manages debt (e.g., Debt to total assets, Times interest earned).
DuPont Analysis Purpose
Explores how profitability, asset utilization, and debt ratios interact.
Trend Analysis
Compares a company’s ratios over several years to identify improvements or worsening trends.
Industry Comparisons
Comparing a company’s ratios to industry averages might not be accurate due to market fluctuations
Business Cycle Impact
Yearly ratio analysis may not always reflect an accurate picture due to sales and profit fluctuations.
Historical Accounting Issues
Inflation/disinflation may distort financial results, affecting revenues and asset values differently
Accrual-Based Accounting
Allows flexibility in matching revenues and expenses, which can cause some distortion.
LIFO vs. FIFO
Cost of Goods Sold can be impacted by using different inventory valuation methods (LIFO or FIFO).
Asset Write-Downs
Adjustments made to asset values can distort reported financial results.
Net Income Adjustments
Accounting adjustments can impact the reported net income, creating potential distortions.
