Chapter 14: Financial Statement Analysis

Vocabulary flashcards covering key financial statement analysis concepts, techniques, and evaluation ratios from Chapter 14.

Financial Statements Analysis

An analytical process that aims to reveal the stories behind each number and account presented on financial reports, detailing past events, current performance, and expectations for the next business season.

Total Equity

The sum of creditors' equity (debt/liabilities) and shareholders' equity.

Financial Leverage

A company's strategy of using creditors' money to finance its investing and operating activities.

Financial Risk

The uncertainty of not meeting long-term obligations as they mature due to an inadequacy of assets or a critical level of assets used to meet debts.

Positive Financial Leverage

A condition in which the return on assets is greater than the return required.

Negative Financial Leverage

A condition in which the return on assets is less than the return required.

Equity Multiplier

Also called the financial leverage multiplier, a metric that represents the creditors' participation in financing business activities.

Current Assets

Assets directly used and managed to impact the operating activities of the business.

Non-Current Assets

Assets representing the long-term commitment of the business to carry on its long-term objectives.

Horizontal Analysis

Also called interperiod, cross-period, or intercompany analysis; a technique that presents differences in absolute amounts and percentages between two periods, two companies, actual and budgeted data, or other bases.

Cross-Sectional Analysis

A form of analysis where an enterprise's data is compared with data from another enterprise operating in a different industry.

Trend Analysis

An analysis extending beyond two years that tracks past occurrences to establish patterns of what may happen in upcoming years.

Vertical Analysis

Also called common-size analysis; a method that determines the proportional component of each variable in financial statements relative to a chosen base.

Profitability

The ability of a business to generate profit.

Profit Margin

A ratio that measures management's ability to produce a return on every peso of net sales.

Return on Assets

A profitability metric measuring management's ability to generate return on every peso of resources employed in operating the business.

Return on Equity

A metric measuring management's effectiveness in generating wealth from normal business operations relative to owner investments.

Earnings Per Share

The top-of-the-line measure evaluating management's effectiveness regarding profitability.

Growth Ratio

Ratios indicative of an organization's potential and attractiveness as an investment option.

Dividend Yield Ratio

A ratio reflecting an organization's ability to return investments to owners in cash or dividends rather than accrual profit.

Dividend Payout Ratio

A measure of how generous management is in distributing business earnings to owners.

Liquidity

The ability of a business to pay obligations in cash as they mature, with cash serving as the focal point.

Inventory-Conversion Cycle

A metric that measures the number of days required for an enterprise to buy and sell its inventory base.

Receivable-Conversion Cycle

A metric that measures the number of days required for an enterprise to collect its base receivables.

Inventory Turnover

An efficiency metric indicating the effectiveness of a business in selling its inventories.

Receivable Turnover

An activity ratio measuring how effectively investment in receivables is used to generate net credit sales.

Payable Turnover

A ratio reflecting how effectively an enterprise utilizes trade credit lines provided by merchandise creditors to finance purchases.

Gearing Ratios

Ratios designed to measure the financial risk associated with an enterprise's financial structure.