FABM 2: Financial Statement Analysis

These flashcards cover essential concepts in financial statement analysis as outlined in the lecture notes, providing a useful study tool for the upcoming exam.

What is the main purpose of financial statement analysis?

To examine performance for decision-making.

Who are considered internal users of financial statements?

Managers.

Who are considered external users of financial statements?

Creditors and investors.

What is horizontal analysis also known as?

Trend analysis.

What is vertical analysis also known as?

Common-size analysis.

What does ratio analysis help to do?

Compare items for performance evaluation.

What do liquidity ratios measure?

A company’s short-term ability to pay obligations.

What do solvency ratios focus on?

A company’s long-term financial stability.

What does horizontal analysis evaluate?

Financial data over time.

What does vertical analysis look at?

Each account’s percentage of a total.

How is the working capital ratio calculated?

Current Assets − Current Liabilities.

Which account does the quick ratio exclude?

Inventory.

What does a current ratio greater than 1 indicate?

The company can cover debts.

What does the debt ratio show?

Proportion of assets financed by debt.

What does the debt-to-equity ratio compare?

Debt to owner’s capital.

What does the Times Interest Earned (TIE) ratio indicate?

Ability to pay interest using EBIT.

What do profitability ratios measure?

Ability to generate income.

What does Return on Equity (ROE) measure?

Profit earned per peso of equity.

What does Earnings per Share (EPS) mean?

Net income per share.

What does a high P/E ratio indicate?

Investors are confident.

What is the current ratio if CA=200,000 and CL=100,000?

2:1.

What is the quick ratio if CA=150,000, Inv=30,000 and CL=100,000?

1.2:1.

What is the debt ratio if TL=600,000 and TA=1,200,000?

50%.

What is the debt-to-equity ratio if TL=500,000 and Eq=250,000?

2.0.

What is the TIE if EBIT=100,000 and Int Exp=20,000?

5x.

What is the Gross Profit Margin if Sales=400,000 and COGS=250,000?

50%.

What is the Net Profit Margin if NI=80,000 and Sales=400,000?

20%.

What is the ROA if NI=100,000 and Avg TA=500,000?

20%.

What is the ROE if NI=120,000 and Avg Eq=600,000?

20%.

What is the EPS if NI=300,000 and Shares=100,000?

3.00.

What is the P/E Ratio if Price=50 and EPS=5?

10x.

What is the Dividend Yield if DPS=4 and PPS=40?

10%.

What does CR=3:1 but QR=1:1 imply?

Too much inventory.

What does a debt ratio of 80% imply?

Heavily financed by debt.

What does a falling gross profit margin indicate?

COGS rising faster than sales.

What does a high cash ratio indicate?

Not investing cash effectively.

What does ROE > ROA suggest?

Debt used to increase returns.

What does a high current ratio but low cash ratio mean?

Assets mostly inventory or receivables.

What does more leverage do in the DuPont Model?

Increases ROE if ROA is positive.

What does high operating leverage cause?

Larger profit swings with sales changes.