Chapter 4

Question 1

Horizontal analysis

Answer 1

Looks at the percentage change in a line item from one year to the next
○ Formula: (Subsequent year - previous year / previous year) 100 = percentage change
○ Goal: determine the percentage change in a line item from one year to the next year
○ Problem: percentage changes can hide major dollar effects

Question 2

Trend analysis

Answer 2

Compares changes over a longer period of time by comparing each year with a base year
Formula: (Any subsequent year - base year / base year) 100

Question 3

Vertical (common-size) analysis

Answer 3

Determines the percentage of one line item that is another line item
Formula: (line item of interest / base line item) 100

Question 4

Horizontal/vertical analysis vs. ratio analysis

Answer 4

Horizontal and vertical analyses are easy to calculate and commonly used but ratio analysis is the preferred approach for gaining an in-depth understanding of financial statements

Question 5

Liquidity

Answer 5

The ability of an organization to turn its receivables into cash; amount of cash it has on hand to meet short-term obligations; how long it takes the organization to pay its bills

Question 6

Ratio

Answer 6

An expression of the relationship between two numbers as a single number

Question 7

Liquidity ratios

Answer 7

Shows how well the organization is positioned to meet its short-term obligations

Question 8

Current ratio (liquidity)

Answer 8

The proportion of all current assets to all current liabilities (current assets/current liabilities). Tells how much of company’s assets can be converted to cash within 12 months to pay debts due within 12 months. The higher, the better.

Question 9

Profitability ratio

Answer 9

Shows how profitable the organization is; how good it is at making money

Question 10

Profit margin ratio (profitability)

Answer 10

Tells how much profit an organization earns compared to its sales (profit/sales). Higher = better

Question 11

Activity ratio

Answer 11

Shows how efficiently the organization is using its assets to produce revenues (aka efficiency ratios: the higher the ratio, the more efficiently the assets are being used)

Question 12

Leveraged

Answer 12

Degree to which an organization is financed by debt

Question 13

Leverage ratio

Answer 13

Tells how much debt a company is using to run and stay alive

Question 14

Debt ratio (leverage)

Answer 14

Tells % of assets paid for by debt (assets - equity / assets). Lower = better

Question 15

Capital structure ratios

Answer 15

How the organization’s assets are financed; how able the organization is to take on new debt

Question 16

Financial leverage

Answer 16

The degree to which an organization is financed by debt

Question 17

Revenue ratios

Answer 17

Measure the amount of operating revenues generated from an organization’s patient care line of business. Revenue ratios are useful for analyzing hospital finances because patient care should be the number one revenue generator of a hospital

Question 18

Expense ratios

Answer 18

Measure operating expenses incurred from providing patient care. Expense ratios are useful for analyzing hospital finances because they show how well a hospital is managing its operating costs