Accounting 202 Midterm 1 Formulas
Earnings Per Share
Net Income - Preferred Dividends / Average Number of Common Shares Higher = Better [More income per share]
Income Statement Base Amount
Net Sales
Asset Turnover Ratio
Net Sales / Average Total Assets *How many sales generated for every $1 of asset [higher = better]
Accounts Receivable Turnover Ratio
Net Credit Sales / Average Net Accounts Recievables [lower is better]
Horizontal Analysis Calculation
(1) Compute $ change from earlier period to later period (2) Divide $ of change by earlier period amount
Which of the following is not a way to accurately determine the financial performance of a company? A) carefully examining one year's data B) from year to year C) with a competing company D) with the same industry as a whole
(A)
Which of the following is used to see how a company's operating expenses, as a percentage of net sales, have changed from one year to the next? A) vertical analysis B) horizontal analysis C) ratio analysis D) analysis of internal control system
(A)
Which of the following is used to determine how the sales revenue of a company has changed from one year to the next? A) vertical analysis of the balance sheet B) horizontal analysis of the income statement C) horizontal analysis of the balance sheet D) vertical analysis of the income statement
(B)
When performing vertical analysis of an income statement, the base amount is ________. A) total assets B) total cash and cash equivalents C) net sales D) gross profit
(C)
Number of Day's Sales in Receivables
365 Days / Accounts Receivable Turnover Ratio [higher is better -> more time to get cash]
Inventory Turnover Ratio
COGS / Average Merchandise Inventory
Acid-Test Ratio / Quick Ratio
Case + Short-Term Investment + Receivables / Total Current Liabilities
Working Capital
Current Assets - Current Liabilities
What is Horizontal Analysis?
Horizontal analysis allows you to see how the amount of a special item on income statement, say Operating expense, change from year to year. For example, say we have operating expenses of $2,000 in 2017, and $1,600 in 2016. By using the horizontal analysis, we can determine that the operating expense is increased by 25% in 2017 compared to 2016. In this case, for horizontal analysis, we are comparing operating expense in 2017 to operating expense in 2016.
Price / Equity Ratio
Market Price of Share of Common Stock / Earnings per Share *Tells how much investors are willing to pay per dollar of earnings. Higher P/E ratio suggests investors are expecting a higher earnings growth in the future compared to companies with a lower P/E. A low P/E indicates either that a company may currently be undervalued or that is it performing exceptionally better relative to its past trends. *If is <1, company is undervalued.
Balance Sheet Base Amount
Total Assets
Current Ratio
Total Current Assets / Total Current Liability *The ability to pay of current liabilities with current assets.
Debt Ratio
Total Liabilities / Total Assets *Tells how much of your assets are from debt. *Higher = More Risk
Debt to Equity Ratio
Total Liabilities / Total Ratio *Measures financial leverage and is the amount of debt used to acquire additional assets. *If is >1, use more debt than equity.
What is Vertical Analysis?
Vertical analysis for income statement reports a special item of income statement as a representation of the percentage of net sales revenue. In other words, vertical analysis reports allow us to determine, for example, operating expenses, gross profit or net income, is what percentage of net sales revenue. For example, if the gross profit is $500, net sales revenue is $1000, a vertical analysis would tell us that gross profit represents/is 50% of net sales revenue. Same logic applies to vertical analysis on balance sheet. The only difference is the base amount for balance sheet is total assets. Vertical analysis for balance sheet reports a special item of balance sheet as a representation of the percentage of total assets.
Vertical Analysis Percentage
[Special Item / Base Amount] x 100%
