Chapter 10 Concepts

Question 1

This analysis allows stakeholders to observes changes in financial performance across time, such as revenue growth, change in assets, increases/decreases in COGS, or other profit/expense trends.

Answer 1

Horizontal Analysis

Question 2

This is a process of converting the income statement and balance sheet into common-size financial statements. This means converting all numbers reported into percents.

Income statement: calculate each number as a percent of Total Revenue in the same year

Balance sheet: calculate each number as a percent of Total Assets in the same year

Answer 2

Vertical Analysis

Question 3

shows operational profitability; higher margins indicate effective cost control and pricing strategies.

Answer 3

Net Profit Margin

Question 4

shows operational efficiency; higher ratio indicates the company is generating more revenue per one unit of assets.

Answer 4

Asset Turnover

Question 5

reflects the degree to which assets are financed by debt; a higher multiplier implies greater reliance on debt, which can increase returns (and risk).

Answer 5

Equity Multiplier (Leverage)

Question 6

this is calculated using Net Income ÷ Total Assets

Answer 6

Return on Assets Ratio