Managerial Accounting & Control - Chapter 14: Financial Statement Analysis

Vocabulary and key concepts from Chapter 14 of Managerial Accounting & Control regarding Financial Statement Analysis, including horizontal, vertical, and ratio analysis methods.

Performance Evaluation Methods

Ways to judge a company's performance, including from year to year, compared with a competitor, and compared with industry averages.

Horizontal Analysis

A two-step process to analyze financial statements by computing the dollar amount of change from an earlier period to a later period, then dividing that change by the base period amount.

Base Period

The earlier period amount used as the denominator when computing the percentage of change in horizontal analysis.

Trend Percentages

A form of horizontal analysis that indicates the direction a business is taking over a longer period of time, such as $3$ to $10$ years, where base year amounts are set equal to $100\%$. Formula: $\text{Trend \%} = \frac{\text{Any year \$}}{\text{Base year \$}}$

Vertical Analysis

An analysis showing the relationship of each item to a base amount; for the income statement, the base is net sales, and for the balance sheet, the base is total assets.

Common-Size Statements

Financial reports that only show the percentages derived from vertical analysis, useful for comparing a company against industry averages or competitors.

Ratio Analysis

A means of evaluating relationships between key components of financial statements, often requiring the closing market price and number of shares outstanding.

Current ratio

A ratio that measures the ability to pay current liabilities with current assets.

Acid-test ratio (quick ratio)

A ratio that reveals whether an entity could pay all its current liabilities if they came due immediately, using only quick assets.

Quick assets

Liquid assets consisting of cash, short-term investments, and net current receivables.

Inventory turnover

A ratio indicating how many times a year a company sells its average level of inventory.

Average inventory

Calculated by the formula: $\frac{\text{Beginning inventory} + \text{Ending inventory}}{2}$

Account receivable turnover

A measure of how quickly a company collects cash from credit customers.

Days’ sales in receivable

A ratio measuring how quickly the company collects receivables.

Debt ratio

The proportion of a company’s assets that are financed with debt.

Times-interest-earned (interest coverage)

A measure of how many times operating income covers interest expense.

Rate of return on net sales (profit / sales margin)

The percentage of each sales dollar that is earned as net income.

Rate of return on total assets

A measure of how successful a business is at using its assets to earn a profit.

Rate of return on common stockholders’ equity

A measure of how much income is earned for every $\$1$ invested by the common stockholder.

Earnings per share of common stock

The amount of income generated by one share of stock.

Price/Earnings ratio (P/E)

An investment ratio that indicates the market price of $\$1$ of earnings.