Notes for Module

Question 1

vertical analysis

All ___ ___ amounts are divided by the amount of ___ ___ so that the income statement figures will become percentages of net sales.

All ____ ____ amounts are divided by the ___ ___ figures so that the balance sheet figures will become percentages of total assets.

Answer 1

A type of financial analysis involving INCOME STATEMENTS and BALANCE SHEETS.

All INCOME STATEMENT amounts are divided by the amount of NET SALES so that the income statement figures will become percentages of net sales.

All BALANCE SHEET amounts are divided by TOTAL ASSETS so that the balance sheet figures will become percentages of total assets.

Question 2

A type of financial analysis involving income statements and balance sheets

Answer 2

vertical analysis

Question 3

All income statement amounts are divided by the amount of net sales so that the income statement figures become percentages of net sales

Answer 3

vertical analysis

Question 4

All balance sheet amounts are divided by total assets so that the balance sheet figures will become percentages of total assets.

Answer 4

vertical analysis

Question 5

statement of financial position

Answer 5

balance sheet

Question 6

what does the balance sheet tell you?

• whether the company can ___ ___ ___ on time.
• its ___ ____ to acquire capital and
• its ability to ___ ___ in the form of dividends to the company’s owners.

Answer 6

PAY ITS BILLS
FINANCIAL FLEXIBILITY
DISTRIBUTE CASH

Question 7

What are the three items at the top of a balance sheet?

Answer 7

(1) the legal name of the entity;
(2) the title (i.e., balance sheet or statement of financial position); and
(3) the date of the statement.

Question 8

Does a balance sheet represent the financial position of the owners or the entity?

Answer 8

the entity itself,.

Question 9

the balance sheet is always for ____.

Answer 9

for a specific point in time: instead of just a date of, say, December 31, 20XX, it would be more accurate to write December 31, 20XX, 11:59:59, or any particular moment on the 31st.

Question 10

the balance sheet presents the company’s ___, ___, and ___.

Answer 10

assets, liabilities, and shareholders’ equity.

Question 11

Items that provide probable future economic benefits

Answer 11

Assets are items that provide probable future economic benefits

Question 12

Obligations of the firm that will be settled by using assets

Answer 12

Liabilities

Question 13

the residual interest that remains after you subtract liabilities from assets

Answer 13

Equity (variously called stockholders equity, shareowners equity or owners equity)

Question 14

the key accounting equation

Answer 14

Assets = Liabilities + Owners Equity, or A=L+OE

Question 15

assets are normally listed on the ___ ___ and are listed on the ___ with ordinarily ___ balances

Answer 15

assets in a balance sheet are listed on the left; they ordinarily have debit balances.

Question 16

liabilities and ___ ___ are listed on the ___ with ordinarily ___ balances

Answer 16

and owners equity are on the right, and typically have credit balances.

Question 17

the income statement tells you both the ___ and ___ of a busienss

Answer 17

The income statement (also known as the profit and loss statement or P&L) tells you both the earnings and profitability of a business.

Question 18

the P&L is always for a ___ ___ ___ ___.

Answer 18

The P&L is always for a specific period of time, such as a month, a quarter or a year.

Question 19

the income statement is broken into several parts

Answer 19

• Income from continuing operations
• Results from discontinued operations (if any)
• Extraordinary items (if any)
• Cumulative effect of a change in accounting principle (if any)
• Net income
• Other comprehensive income
• Earnings per share information

Question 20

For vertical analysis: All income statement amounts are divided by ___ so that the income statement figures become ___ of net sales

Answer 20

the amount of net sales

percentage

Question 21

earnings per share is shown on the ___ ___

Answer 21

income statement

Question 22

The current ratio is a ___ ___ that measures the company’s ability to pay ___ and ___ obligations.

Answer 22

liquidity ratio
short-term
long-term

Question 23

The formula for calculating a company’s current ratio then is:

Answer 23

The formula for calculating a company’s current ratio, then, is:

Current Ratio = Current Assets / Current Liabilities

Question 24

The current ratio is called “current” because, unlike some other liquidity ratios, it incorporates all current ___ and ___.

Answer 24

assets

liabilities.

Question 25

The ___ ___ is mainly used to give an idea of the company's ability to pay back its ___ (debt and accounts payable) with is ___ (cash, marketable securities, inventory, accounts receivable)

Answer 25

current ratio liabilities assets

Question 26

The current ratio can be used to take a ___ ___ of the company's ___ ___.

Answer 26

rough measurement | financial health.

Question 27

A current ratio under 1 indicates that a company's ___ are greater than it's ___ and suggests that the company in question would be ___ to pay off its ___ if they came due.

Answer 27

A ratio under 1 indicates that a company’s liabilities are greater than its assets and suggests that the company in question would be unable to pay off its obligations if they came due at that point.

Question 28

A high current ratio (over 3) does not necessarily indicate that a company is in a state of ___ ___.

Answer 28

A high ratio (over 3) does not necessarily indicate that a company is in a state of financial well-being.

Question 29

Companies that have trouble getting paid on their ___ or have long ___ ___ can run into liquidity problems because they are unable to ___ their ___.

Answer 29

Companies that have trouble getting paid on their receivables or have long inventory turnover can run into liquidity problems because they are unable to alleviate their obligations

Question 30

The higher the current ratio, the more ___ the company is of ___ ___ ___, as it has a larger proportion of ___ ___ relative to the value of its ___.

Answer 30

The higher the current ratio, the more capable the company is of paying its obligations, as it has a larger proportion of asset value relative to the value of its liabilities.

Question 31

A high current ratio may suggest that a company is not using its current ___ efficiently, not securing ___ well, or is not managing its ___ ___ well.

Answer 31

A high current ratio may suggest that that company is not using its current assets efficiently, is not securing financing well or is not managing its working capital well.

Question 32

The quick ratio is an indicator of the company's short -term ___.

Answer 32

The quick ratio is an indicator of a company’s short-term liquidity.

Question 33

The quick ratio measures a company's ability to meet its ___ ____ with its most ___ ___.

Answer 33

The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.

Question 34

The quick ratio excludes ___ from current assets.

Answer 34

The current ratio excludes inventories from current assets.

Question 35

Quick ratio formula

Answer 35

Quick ratio = (current assets – inventories) / current liabilities, or = (cash and equivalents + marketable securities + accounts receivable) / current liabilities

Question 36

The quick ratio measures the dollar amount of ___ ___ available for each dollar of ___ ___.

Answer 36

liquid assets | current liabilities.

Question 37

A quick ratio of 1.5 means that a company has $1.50 of ___ ___ available to cover each $1 of ___ ___.

Answer 37

liquid assets | current liabilities.

Question 38

The higher the quick ratio, the better the company's ___ ___.

Answer 38

liquidity position

Question 39

The quick ratio is also known as the ___ ratio or ___ ___ ratio.

Answer 39

acid-test ratio | quick assets

Question 40

To gauge this ability, the ___ ___ considers the ___ ___ ___ of a company (both liquid and illiquid) relative to that company's ___ ___ ___.

Answer 40

current ratio current total assets current total liabilities

Question 41

The current ratio is also know as the ___ ___ ratio.

Answer 41

working capital ratio.

Question 42

compare current ratio and quick ratio: 1. current ratio shows how well you can pay ___ while quick ratio shows ___; shows most liquid assets 2. current ratio formula is ___/___ while quick ratio is ___ - ___/ liabilities 3. current ratio is the ___ ___ ratio while quick ratio is the ___ / ___ ___ ratio

Answer 42

1. obligations / liquidity 2. assets, liabilities / assets, inventory 3. working capital / acid-test, quick assets

Question 43

The long term debt to total assets ratio is a ___ representing the ___ of a corporation's ___ financed with loans or other financial obligations lasting more than ___ ___.

Answer 43

``` measurement percentage assets loans one year ```

Question 44

The calculation for the long-term debt to total assets ratio is:

Answer 44

long-term debt / total assets = long-term debt to total asset ratio.

Question 45

A year-over-year decrease in long term debt to total assets ratio may suggest:

Answer 45

a company is progressively becoming less dependent on debt to grow its business.

Question 46

A key metric used to measure an enterprise’s ability to meet its debt and other obligations.

Answer 46

solvency ratio

Question 47

The solvency ratio indicates whether a company’s cash flow is ___ to meet its short-term and long-term ___.

Answer 47

sufficient | liabilities

Question 48

The lower a company's ___ ratio, the greater the probability that it will ___ on its debt obligations.

Answer 48

solvency | default

Question 49

The measure is usually calculated as follows:

Answer 49

((net income (after tax)+ depreciation)) / (short-term + long-term liabilities)

Question 50

ARR provides a quick estimate of a ___ ___ over its ___ ___.

Answer 50

project's worth | useful life

Question 51

ARR is calculated by finding a capital investment's average ___ ___ before ___ and ___ but after depreciation and ___ (also known as "EBIT") and dividing that number by the ___ ___ of the average amount invested.

Answer 51

``` operating profits interest taxes amortization book value ```

Question 52

ARR can be expressed as:

Answer 52

ARR = Average Profit / Average Investment

Question 53

ARR compares the amount ___ to the ___ earned over the course of a project's ___. The higher the ARR, the ___.

Answer 53

invested profits life better

Question 54

ARR

Answer 54

accounting or average rate of return

Question 55

The fixed-asset turnover ratio is, in general, used by analysts to measure ___ ___. It is a ratio of ___ ___ to ___ ___.

Answer 55

operating performance net sales fixed assets

Question 56

___ analysis is a method of financial statement analysis in which each entry for each of the three major categories of accounts, or ___, ___ and ___, in a balance sheet is represented as a ___ of the total account.

Answer 56

``` Vertical assets liabilities equities proportion ```

Question 57

Vertical analysis is also used across other financial statements as a ___ measure.

Answer 57

percentage

Question 58

The main advantage of vertical analysis is the balance sheets, income statements and other financial reports of businesses of all sizes can___ ___ ___. It also makes it easy to see ___ ___changes within one business.

Answer 58

easily be compared. | relative annual

Question 59

These types of financial statements, including detailed vertical analysis, are also known as ___ financial statements and are used by many companies to provide greater detail on a company’s ___ ___. Often, ___financial statements also incorporate ___ financial statements that include columns comparing each line item to a previously measured period.

Answer 59

common-size financial position common-size comparative

Question 60

The method of vertical analysis can also be contrasted with ___ ___, which uses one___worth of entries as a ___ while every other year represents ___ differences in terms of changes to that baseline.

Answer 60

horizontal analysis year's baseline percentage

Question 61

Several techniques are commonly used as part of ___ ___ analysis including ___ analysis, which compares two or more years of financial data in both dollar and percentage form; ___ analysis, where each category of accounts on the balance sheet is shown as a percentage of the total account; and ___ analysis, which calculates statistical relationships between data.

Answer 61

financial statement horizontal vertical ratio

Question 62

Financial statements allow stakeholders to analyze four things:

Answer 62

cash flow efficiency, company-wide liquidity profitablity

Question 63

There are three main types of financial statements:

Answer 63

the balance sheet, income statement and cash flow statement.

Question 64

The balance sheet is a snapshot in time of the company's:

Answer 64

assets, liabilities and shareholders' equity.

Question 65

Analysts use the balance sheet to analyze trends in:

Answer 65

assets and debts.

Question 66

The income statement begins with ___ and ends with ___ ___.

Answer 66

sales | net income

Question 67

It also provides analysts with gross profit, operating profit and net profit.

Answer 67

income statement

Question 68

The cash flow statement provides an overview of the company's cash flows from:

Answer 68

operating activities, investing activities and financing activities.

Question 69

It also provides analysts with gross profit, operating profit and net profit.

Answer 69

income statement

Question 70

horizontal analysis is also called

Answer 70

trend analysis

Question 71

Horizontal analysis allows investors and analysts to determine how a company:

Answer 71

has grown over time

Question 72

For example, when you hear someone saying that revenues increased by 10% this past quarter, that person is using:

Answer 72

horizontal analysis

Question 73

Horizontal analysis typically shows the changes from the base period in dollar and percentage. The percentage change is calculated by first ___ the dollar change between the ___ year and the ___ year by the___ ___ in the base year, then ___ the quotient by 100%.

Answer 73

``` dividing comparison base item value multiplying ```

Question 74

The income statement, also referred to as the profit and loss (P&L) statement, provides an overview of:

Answer 74

sales expenses net income

Question 75

The income statement equation is:

Answer 75

sales minus expenses equals net income.

Question 76

Financial statements for businesses usually include ___ statements, ___ sheets, statements of ___ earnings and ___ flows.

Answer 76

income balance retained cash

Question 77

GAAP

Answer 77

Generally Accepted Accounting Principles

Question 78

An income statement is a financial statement that reports a company's ___ ___ over a specific accounting period.

Answer 78

financial performance

Question 79

Financial performance is assessed by giving a summary of how the business incurs its ___ and ___ through both ___ and ___ activities.

Answer 79

revenues expenses operating non-operating

Question 80

What financial statements go in the annual report and the 10k to the SEC?

Answer 80

income statement balance sheet cash flows

Question 81

What statement provides an overview of the company's sales and net income?

Answer 81

income statement

Question 82

Unlike the balance sheet, which covers ___ ___ in time, the income statement provides performance information about a ___ ___.

Answer 82

one moment | time period

Question 83

It begins with sales and works down to net income and earnings per share (EPS).

Answer 83

income statement

Question 84

The income statement is divided into two parts:

Answer 84

operating and non-operating.

Question 85

The income statement is often presented in a ___ format, which provides each line item on the income statement as a percent of sales.

Answer 85

common-sized

Question 86

Analysts use the income statement for data to calculate financial ratios such as ROE, ROA, gross profit, operating profit, EBIT, and EBITDA.

Answer 86

Return on Equity Return on Assets Earning before interest and taxes Earnings before interest and taxes and amortization

Question 87

___ is the paying off of debt with a fixed repayment schedule in regular installments over a period of time for example with a mortgage or a car loan. It also refers to the spreading out of capital expenses for intangible assets over a specific period of time (usually over the asset's useful life) for accounting and tax purposes.

Answer 87

Amortization

Question 88

How do you measure liquidity?

Answer 88

Current Ratio

Question 89

What can you use to take a rough measurement of the company's financial health?

Answer 89

current ratio

Question 90

How do you judge a company's short-term liquidity?

Answer 90

Quick Ratio

Question 91

What are the 3 assets in a quick ratio?

Answer 91

Cash and cash equivalents Marketable securities Accounts Receivable