Chapter 13 Analysis of Financial Statements

A company's market price is $40.00 per common share, book value is $10.00 per share, and the earnings is $3.00 per share. Compute price-earnings ratio. P. 516 Price-Earnings Ratio

$40 / 3 = $13.3

A company's market price is $60.00 per common share, book value is $10.00 per share, and the earnings is $5.00 per share. Compute price-earnings ratio. P. 516 Price-earnings ratio

$60 / 5 = $12.0

A company has Total Assets of $34,000 including $3,000 in Accounts Receivable, and Net Sales of $40,000. Days' sales uncollected is ____ days. P. 514 Days' sales uncollected

($3,000/$40,000) x 365 = 27.4

A company has Total Assets of $135,000 including $29,000 in Accounts Receivable, and Net Sales of $380,000. Days' sales uncollected is ____ days.

(29,000/380,000)x365=27.9

________ refers to a company's makeup of equity and debt financing. P. 514 Solvency: Capital Structure

Capital structure

financial statements express each item as a percent of a base amount. The base amount is assigned a value of 100%. P. 509 Common-Size financial statements

Common; Size

financial statements show financial amounts in side-by-side columns on a single statement. P. 504 Comparative financial statements

Comparative

____________ is a useful measure in evaluating inventory liquidity. It is computed by taking ending inventory divided by cost of goods sold multiplied by 365. P. 514 Days' sales in inventory

Days' sales in inventory

________ is a measure of how frequently a company collects accounts receivables. It is computed by dividing the current balance of receivables by the annual credit (or net) sales and then multiplying by 365. P. 513 Days' sales uncollected

Days' sales uncollected

______ refers to how productive a company is in using its assets. Multiple choice question. P. 512 Efficiency

Efficiency

(Internal/External) users of accounting information rely on financial statement analysis to make more informed decisions when pursuing their goals. P.503 Purpose of Analysis: External users

External

Three common tools of financial statement analysis include: P. 504 Tools of Analysis

Horizontal analysis. Vertical analysis. Ratio analysis.

Most users rely on general-purpose financial statements, which include which of the following? P. 504 General-purpose financial statements

Income statement Balance sheet Statement of stockholders' equity Statement of cash flows Notes to financial statements

All of the following are standards used in financial statement analysis for comparisons: P.504 Standards of Comparisons

Intracompany Competitor Industry Guidelines (rules of thumb)

_____ refers to the availability of resources to pay short-term cash requirements. Analysis is aimed at a company's funding requirements. P. 512 Liquidity

Liquidity

Building blocks of Analysis

Liquidity and efficiency Solvency Profitability Market prospects

margin measures a company's ability to earn net income from sales. It is measured by expressing net income as a percent of net sales. P. Profit margin

Profit

______ reflects a company's ability to earn net income from sales. It is measured by expressing net income as a percent of net sales. P. 515 Profit Margin

Profit margin

_____ refers to a company's ability to generate an adequate return. P. 515 Profitability

Profitability

refers to a company's ability to generate an adequate return. P. 515 Profitability

Profitability

Identify which of the following specific areas are considered the building blocks of financial statement analysis. P. 503 Building Blocks of Analysis

Profitability Market prospects Liquidity and efficiency Solvency

Which of the following areas are not considered to be one of the building blocks of financial statement analysis? P. 503 Building Blocks of Analysis

Ratio analysis

__________ are widely used tools of financial analysis that can help us uncover conditions and trends difficult to detect by inspecting individual amounts. P. 512 Ratios

Ratios

_____ analysis is a form of horizontal analysis that can reveal patterns in data across periods. It is computed by taking the (analysis period amount/base period amount) x 100. P. 507 Trend Analysis

Trend

________ analysis is a form of horizontal analysis that can reveal patterns in data across periods by comparing period amounts by base period amounts. P. 507 Trend Analysis Trend analysis is computing trend percents that show patterns in data across periods. Trend percent is computed as follows.

Trend

Days' sales uncollected is computed by taking _______, net divided by net sales multiplied by 365. P. 513 Days' Sales Uncollected

accounts receivable

The ratio that measures how frequently a company converts its account receivables into cash by taking net sales divided by average accounts receivable is known as: P. 513 Accounts receivable turnover

accounts receivable turnover

The _______ ratio takes the sum of cash, short-term investments, and current receivables and divides the total by current liabilities. It helps determine immediate short-term debt-paying ability. P. 513 Acid-Test Ratio

acid-test

To prepare common-size financial statements, each line item needs to be calculated to a common-size percent. The formula for common-size percent is (_________) x 100. P. 508 Common-Size Statements

analysis amount/base amount

Working capital can be computed by taking current minus current

assets; liabilities

Vertical analysis is also called analysis. P. 508 Common-Size Statements

common size

The _______ ratio, or current assets divided by current liabilities, is used to evaluate a company's ability to pay its short-term obligations. P. 512 Current Ratio

current

The ratio, or current assets divided by current liabilities, is used to evaluate a company's ability to pay its short-term obligations. P. 512 Current ratio

current

The acid-test ratio takes the sum of cash, short-term investments, and ________ and divides the total by current liabilities. It helps determine immediate short-term debt-paying ability. P. 513 Acid-Test Ratio

current receivables

The ________ ratio is a measure of solvency that takes total liabilities divided by total equity. P. Debt-to-Equity Ratio

debt-to-equity

Trend percent is computed by taking the (analysis period amount ________) x 100. P. 507 Trend Analysis

divided by the base period

An investor in Kora, Inc. is interested in how productive Kora is in using its assets. This is known as a(n) (efficiency/liquidity)measure. P. 512 Efficiency

efficiency

Days' sales uncollected is a measure of how a company collects accounts receivables computed by dividing the current balance of receivables by the annual credit (or net) sales and then multiplying by 365. P. 513 Days' Sales Uncollected

frequently

Most users rely on financial statements, which include the (1) income statement, (2) balance sheet, (3) statement of stockholders' equity, (4) statement of cash flows, and (5) notes to these statements. P. 504 General-purpose financial statements

general purpose

A comparison of a company's financial condition and performance across time is called _______ analysis. P. 504 Tools of Analysis: Horizontal analysis

horizontal

The purpose of financial statement analysis for (internal/external) users is to provide information to improve efficiency and effectiveness. P. 503 Purpose of Analysis: Internal users

internal

The length of time that a company holds inventory prior to selling it is called the P. 513 Inventory turnover

inventory turnover

The measure of how long a company holds inventory before selling it is called the

inventory turnover

Visualizations are used to identify: P. 511 Visualizations also are used to identify

investing activities sources of financing

The debt-to-equity ratio is a measure of solvency that takes total divided by total equity. P. Debit-to-Equity Ratio

liabilities

An investor in Able Inc. would like to understand Able's availability of resources to pay its short-term cash requirements. This type of analysis is known as a(n) (efficiency/liquidity)measure. P. 512 Ratio Analysis: Liquidity

liquidity

Days' sale in inventory is a useful measure in evaluating inventory (efficiency/liquidity). It is computed by taking ending inventory divided by cost of goods sold multiplied by 365. P. 512 Liquidity

liquidity

The ______ ratio measures a company's market expectations for future growth. Multiple choice question. P.

price-earnings

The ratio is computed by taking market price per common share divided by earnings per share. P. 516 Price-Earnings Ratio

price-earnings

A(n) is used to uncover conditions and trends difficult to see by looking at individual amounts. It can be expressed as a percent, rate, or proportion. P. 512 Ratio analysis

ratio

A potential investor in Denzel Co. would like to measure how frequently Denzel converts its account receivables into cash. The investor takes Denzel's net sales divided by average accounts receivable to determine this information, known as the accounts turnover ratio. P. 513 Accounts Receivable Turnover

receivable

Vertical analysis is a tool to evaluate individual financial statement items or a group of items. When analyzing income statement accounts, the base is usually (revenue/expenses/net income) and for balance sheet accounts, the base is usually total (assets/liabilities/equity) P.

revenue ; assets

Vertical analysis is a tool to evaluate individual financial statement items or a group of items. When analyzing income statement accounts, the base is usually (revenue/expenses/net income)and for balance sheet accounts, the base is usually total (assets/liabilities/equity)

revenue; assets

Days' sales uncollected is computed by taking accounts receivable, net divided by net multiplied by 365. P. 514 Days' sales uncollected

sales

Comparative financial statements show financial information in _____ columns. P. 504 Comparative financial statements

side-by-side

(Solvency/efficiency) refers to a company's ability to meet long-term obligations and generate future revenues. P. 514 Solvency

solvency

When interpreting measures from financial statement analysis, we need (or benchmarks) for comparisons. P. 504 Standards for Comparisons

standards

Data visualizations reveal: P. 510 Data Visualizations

trends not easily seen by looking at numbers insights not easily seen by looking at numbers

The amount of current assets minus current liabilities is called

working capital