Week 6 Flashcards
(46 cards)
What is the analysis of financial statements?
The identification, separation and other manipulation of elements of information in financial statements
What is the interpretation of financial statements?
The translation of analysis information into a form useful for decision making.
What are the goals of interpretation?
- Profitability
- Liquidity
- Solvency - Financial Stability
Interpretation: What is Profitability?
- to evaluate the entity’s performance for the period
* to evaluate future prospects for survival
Interpretation: What is Liquidity?
• to evaluate the entity’s ability to meet its short term liabilities
Interpretation: What is Solvency - Financial Stability?
• to evaluate the entity’s ability to continue operations in the long term
What are the Profitability Ratios?
- Return on Assets
- Return on Ordinary Shareholders’ Equity
- Profit Margin
- Gross Profit Margin
- Expense Ratio
Return on Assets: What is the ratio’s significance?
Measures RATE or RETURN earned through operating total ASSETS provided by both creditors and owners.
Return on Ordinary Shareholders’ Equity: What is the ratio’s significance?
Measures RATE or RETURN earned on ASSETS PROVIDED BY OWNERS.
Profit Margin: What is the ratio’s significance?
Measures PROFITABILITY of each $ of SALES
Gross Profit Margin: What is the ratio’s significance?
Measures GROSS PROFITABILITY of each $ of SALES
Expense Ratio: What is the ratio’s significance?
Attempts to measure the PROPORTION of a specific EXPENSE type as a proportion OF SALES.
Return on Assets: What is the formula?
(Profit from Ordinary Activities BEFORE Income Tax + Borrowing Costs) / Average Total Assets
Return on Ordinary Shareholders’ Equity: What is the formula?
(Profit - Preference Shares) / Average Ordinary Equity
Profit Margin: What is the formula?
Profit from Ordinary Activities AFTER Income Tax / Income
Gross Profit Margin: What is the formula?
Gross Proft / Sales
Expense Ratio: What is the formula?
Selling Expense / Income
What are the Liquidity Ratios?
- Current Ratio
- Quick Ratio
- Receivables Turnover
- Ageing Collection Period
- Inventory Turnover
- Average Days to Sell
- Operating Cycle
Current Ratio: What is the ratio’s significance?
A measure of short-term liquidity.
Indicates the ABILITY of an entity to meet its SHORT-TERM DEBTS from its CURRENT ASSETS.
Quick Ratio: What is the ratio’s significance?
A more rigorous measure of short-term liquidity.
Indicates the ABILITY of the entity to meet UNEXPECTED DEMANDS demands from LIQUID CURRENT ASSETS.
Receivables Turnover: What is the ratio’s significance?
Measures the effectiveness of collections.
Used to evaluate whether receivables balance is Excessive.
Ageing Collection Period: What is the ratio’s significance?
Measures the AVERAGE number of DAYS taken by an entity to COLLECT its receivables.
Inventory Turnover: What is the ratio’s significance?
Indicates the liquidity of inventory.
Measures the number of TIMES INVENTORY was SOLD on the average during the period
Average Days to Sell: What is the ratio’s significance?
Measures the AVERAGE number of DAYS taken by an entity to SELLits inventory.
