Module 3 (Midterm Coverage) Flashcards
This is comparison within a company to detect changes in financial relationships and significant trends.
Intra-company basis
This is comparison with other companies to provide insight into a company’s competitive position.
Inter-company basis
This is comparisons with the industry to provide information about a company’s relative position within the industry.
Industry averages
This is an analytical method by which comparative
statements are presented to show changes in each item as of different dates or for different period as a means of
determining improvement or deterioration of the financial
condition or results of operations of a business enterprise.
Horizontal or Trend analysis
This highlights the peso and the percentage increase or decrease of each item in the comparative statements.
Increase/Decrease Method
This shows the changes in financial statement items from a base year to the following years to show the extent and direction of change.
Trend Percentages or Index Numbers
Differentiate percent change and trend percentage.
Percent change - compares data of only two years
Trend percentage - compares data of more than two years
This is a technique, also known as common-size analysis, for evaluating financial statement data that expresses each item
in a financial statement within a year as percent of a base
amount.
This is the procedure of preparing common-size statements.
Vertical Analysis
This common-size statement is where total assets represent 100% in vertical analysis.
Common-size statement of financial position
These are percentages, turnovers, or ratios expressing the relationship between selected items derived from the statement of financial
position, from the statement of comprehensive income, or from both.
Ratio Analysis
These measure the ability of a company to meet its current obligation.
Liquidity ratios
This is another way to express the relation between current assets and current liabilities. This is also known as the working capital ratio.
Current ratio
What does the working capital ratio near 2:1 mean?
Standard or satisfactory
What does the working capital ratio less than 1 mean?
Unacceptable. The current liabilities exceed current assets.
It is used as a complementary
ratio to the current ratio. It is a more rigorous test of a company’s ability to meet its short-term debts than the current ratio since it excludes less liquid current assets such as inventories and prepaid expenses. It measures the firm’s ability to pay off
short-term obligations without relying on the sale of inventories.
Acid-test ratio
These are calculated to measure the efficiency with
which a firm’s resources have been employed. They are also called turnover ratios.
Efficiency Ratios
This is a measure of
how quickly accounts receivables are turned into cash or how quickly receivables are collected.
Accounts Receivable Turnover
This ratio is used to evaluate credit management and account collection practices.
It measures the quality of debtors.
Average Collection Period
This measures how quickly inventory is converted into sales.
Inventory Turnover
True or False: The current ratio and inventory turnover are related.
True
True or False: The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.
True
This inventory turnover
ratio measures how quickly inventory is manufactured.
Work in Process Inventory Turnover
This inventory turnover ratio
measures how quickly raw materials are used. It gives an indication of the sufficiency of raw materials in stock.
Raw Materials Inventory Turnover
It calculates the number of days, on average, that elapsed between finished goods production and sale of
product.
Average Sales Period
Average Age of Inventory
Inventory Holding Period
