Ch 14 Financial Statement Analysis

Quick Ratio

A financial ratio that measures the ability to pay current liabilities with quick assets (cash, marketable securities, accounts receivable).

Common-sized statement

A financial statement in which all items are expressed only in relative terms as percentages, without dollar amounts.

Rate earned on common stockholders equity

A measure of profitability computed by dividing net income, reduced by preferred dividend requirements, by average common stockholders' equity.

Rate earned on stockholders' equity

A measure of profitability computed dividing net income by average total stock holders equity.

Number of times interest charges are earned

A ratio that measures creditor margin of safety for interest payments, calculated as income before interest and taxes divided by interest expense.

Management's discussion and analysis (MD&A)

An annual report disclosure that provides management's analysis of current operations and its plans for the future.

Number of days' sales in receivable

An estimate of the length of time the accounts receivable have been outstanding, computed by dividing the average accounts receivable by the average daily sales.

Extraordinary item

An event or transaction that is both (1) unusual in nature or (2) infrequent in occurrence.

Quick assets

Cash and other current assets that can be quickly converted to cash, such as marketable securities and receivables.

Dividend per share

Measures the extent to which earnings are being distributed to common shareholders.

Number of days' sales inventory

Measures the length of time it takes to acquire, sell, and replace inventory, computed by dividing the average inventory by the average daily cost of goods sold.

Earning per share (eps) on common stock

The profitability ratio of net income available to common shareholders to the number of common shares outstanding.

Price earning ratio (P/E) ratio

The ratio of the market price per share of common stock, at a specific date, to the annual earnings per share.

Profitability

The ability of a firm to earn income.

Liquidity

The ability to convert assets into cash.

Accounts receivable analysis

A company's ability to collect its account receivable.

Inventory analysis

A company's ability to manage its inventory effectively.

Current position analysis

A company's ability to pay its current liabilities

Current Ratio

A financial ratio that is computed by dividing current assets by current liabilities.

Dividend yield

Dividend yield A ratio, computed by dividing the dividends per share of common stock by the market price per share of common stock, that indicates the rate of return to stockholders in terms of cash dividend distribution.

Horizontal analysis

Financial analysis that compares an item in a current statement with the same item in prior months.

Accounts receivable turnover

The relationship between sales and accounts receivable, computed by dividing the sales by the average accounts receivable; measures how frequently during the year the accounts receivable are being converted to Cash.

Inventory turnover

The relationship between the cost of goods sold and amount of inventory carried during the period, computed by dividing the cost of goods sold by the average inventory.

Leverage

Using debt to increase the return on an investment.