Week 7 - Lecture 7 Flashcards
What is the purpose of financial statement analysis?
Evaluate the entity’s financial past to predict future health.
What are the two main types of comparative analysis in financial statement analysis?
Horizontal analysis and vertical analysis.
What does horizontal analysis compare?
Financial data over time (e.g., year-on-year performance).
What is the formula for horizontal analysis?
((Current period’s value - Previous period’s value) / Previous period’s value) × 100.
What does vertical analysis evaluate?
Items in relation to a base (e.g., % of total assets or sales).
What is the formula for calculating Return on Equity (ROE)?
(Profit available to owners / Average equity) × 100.
What is the formula for calculating Return on Assets (ROA)?
(Profit / Average total assets) × 100.
What is the formula for calculating Profit Margin?
(Profit or loss / Sales revenue) × 100.
What does the Gross Profit Margin measure?
Profitability from sales after covering costs.
What does the Asset Turnover Ratio measure?
Sales revenue relative to average total assets.
What is the Days Inventory formula?
(Average inventory / Cost of sales) × 365 days.
What are the limitations of ratio analysis?
- Only provides insights into quantitative data
- Depends on the accuracy of reported figures
- Comparisons may be limited by differences in accounting policies between companies.
True or False: Ratio analysis can provide insights into qualitative factors like market conditions.
False.
What are the key ratios involved in ratio analysis?
- Profitability
- Efficiency
- Liquidity
- Capital structure.
Fill in the blank: Horizontal and Vertical Analysis help track ________.
trends.
What is the significance of analyzing financial statements?
Provides insight into business health, aiding investors and decision-makers.
What is the primary focus of profitability ratios?
Assessing a company’s ability to generate profit.
What is the relationship between asset efficiency ratios and operational efficiency?
Asset efficiency ratios measure how effectively a company uses its assets to generate sales.
