Managerial Accounting

What are the four building blocks of FSA

market prospects liquidity and efficiency solvency profitability

for the accounts receivable turnover, any short-term notes receivables from customers are normally included in the

numerator

One risk factor is the required payment for interest and principal when debt is outstanding. Stockholders cannot require

payment from the company.

A company's operating efficiency and profitability can be expressed by two measures:

profit margin and

profit margin

reflects a company's ability to earn net income from sales

total asset turnover

reflects a company's ability to use its assets to generate sales and is an important measure of operating efficiency

Financial analysis uses general-purpose financial statements that include :

(1) income statement, (2) balance sheet, (3) statement of stockholders' equity (or statement of retained earnings), (4) statement of cash flows, and (5) notes to these statements.

acid-test ratio / quick ratio formula

(Cash+Short-term investments+Current receivables)/Current liabilities

A common-size percent is measured by

A common-size percent is measured by dividing each individual financial statement amount under analysis by its base amount:

Quick assets are

Cash, short-term investments, and current receivables.

Efficiency refers to ... and it is is usually measured relative to

Efficiency refers to how productive a company is in using its assets. Efficiency is usually measured relative to how much revenue is generated from assets.

Each common-size income statement item is shown as a percent of revenue. Why is this?

If we think of the revenue amount as representing one sales dollar, the remaining items show how each revenue dollar is distributed among costs, expenses, and income.

Liquidity refers to

Liquidity refers to the availability of resources to meet short-term cash requirements. It is affected by the timing of cash inflows and outflows along with prospects for future performance

What is the purpose of financial statement analysis for internal users

The purpose of financial statement analysis for internal users is to provide strategic information to improve company efficiency and effectiveness.

trend percent formula

Trend percent (%)=Analysis period amountBase period amount×100

After assigning the base amount a value,

We then compute a common-size percent for each asset, liability, and equity item using total assets as the base amount. When we present a company's successive balance sheets in this way, changes in the mixture of assets, liabilities, and equity are highlighted.

Analysis also involves the use of

a common size income statement

Profitability refers to

a company's ability to earn an adequate return on invested capital. Return is judged by assessing earnings relative to the level and sources of financing.

what is an important component of solvency analysis

a company's capital structure

capital structure

a company's makeup of equity and debt financing

the acid-test ratio / quick ratio reflects

a company's short term liquidity

return on common stockholders' equity measures

a company's success in reaching the goal of earning income for owners

A ratio expresses

a relation between two quantities as a rate, percent, or proportion

Vertical analysis is

a tool to evaluate individual financial statement items or a group of items in terms of a specific base amount. We usually define a key aggregate figure as the base, which for an income statement is usually revenue and for a balance sheet is usually total assets.

days sales in inventory is

a useful measure in evaluating inventory liquidity

solvency

ability to generate future revenues and meet long-term obligations.

market prospects

ability to generate positive market expectations.

liquidity and efficiency

ability to meet short-term obligations and to efficiently generate revenues.

profitability

ability to provide financial rewards to attract and retain financing

We can measure how frequently a company converts its receivables into cash by computing the

accounts receivable turnover

Comparative balance sheets consist of

amounts from two or more dates arranged side by side. This method of analysis is improved by showing each item's dollar change and percent change to highlight large changes.

Comparing financial statements over short time periods—two to three years—is often done by

analyzing changes in line items

The amount of income before deductions for interest expense and income taxes is the amount

available to pay interest expense

Common-size statements show each item as a percent of a

base amount

why is debt described as included with financial leverage

because debt can have the effect of increasing the return to stockholders

We use common-size financial statements to show

changes in the relative importance of each financial statement item.

All individual amounts in common-size statements are redefined in terms of

common size percents

vertical analysis is also known as

common-size analysis

divided yield is used to

compare the dividend-paying performance of different companies.

current ratio =

current assets / current liabilities

example of accounts receivable turnover

days' sales uncollected

A change analysis includes analyzing

dollar amount changes and percent changes

the most important goal in operating a company is to

earn income for its owners

A company is considered less risky if its capital structure (equity plus long-term debt) contains more

equity

how is profit margin measured

expressing net income as a percent of sales (sales and revenues are similar terms).

accounts receivable turnover expresses

how frequently a company collects its accounts

What are the four standards for comparison for ratios for the four building blocks of analysis

intracompany, competitor, industry, and guidelines.

Trend analysis, also called trend percent analysis or index number trend analysis, is

is a form of horizontal analysis that can reveal patterns in data across successive periods. It involves computing trend percents for a series of financial numbers and is a variation on the use of percent changes.

solvency refers to a company's

long-run financial viability and its ability to meet long term obligations

The base for a common size income statement is usually

revenue, which is also assigned a value of 100%

What does a comparative financial statement show

show financial amounts in side-by-side columns on a single statement, called a comparative format

working capital / net working capital

the amount of current assets minus current liabilities

What is financial reporting

the communication of financial information useful for making investment, credit, and other business decisions. Financial reporting includes general-purpose financial statements, information from SEC 10-K and other filings, press releases, shareholders' meetings, forecasts, management letters, and auditors' reports.

times interest earned ratio reflects

the creditors' risk of loan repayments with interest

debt-to-equity ratio

the ratio of total liabilities to equity, another measure of solvency

The comparative statements show the change in each item over time, but they do not show

the relative importance of each item.

The base amount is assigned a value of 100%. (This implies that

the total amount of liabilities plus equity equals 100% since this amount equals total assets.)

What does a company need enough working capital for

to meet current debts, to carry sufficient inventories, and to take advantage of cash discounts.

The base amount for a common-size balance sheet is usually

total assets