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