Flash Card financial making decision

What is the primary purpose of financial statement analysis?

To assess the financial health of a firm for both internal and external decision-making.

What are the basic financial statements?

Income Statement and Balance Sheet.

What is the formula for the current ratio?

Current Ratio = Current Assets / Current Liabilities.

What does a liquidity ratio measure?

A liquidity ratio measures a firm's ability to cover its current liabilities with its current assets.

How is the debt-to-equity ratio calculated?

Debt-to-Equity Ratio = Total Debt / Shareholders' Equity.

What does the DuPont Analysis break down?

It breaks down Return on Equity into net profit margin, asset turnover, and equity multiplier.

What does a high inventory turnover ratio indicate?

It indicates efficient inventory management and sales efficiency.

What is trend analysis in financial analysis?

Trend analysis examines financial data over a period to identify patterns.

What is common-size analysis?

It expresses all items in financial statements as a percentage of a base item to allow comparison.

What is the significance of return on investment (ROI)?

ROI measures the efficiency of an investment or compares the profitability of investments.

What indicates a company's earnings power?

Return on investment (ROI) and return on equity (ROE) indicate a company's earnings power.

What do profitability ratios reflect?

Profitability ratios reflect the firm's ability to generate earnings relative to its expenses.

How can financial ratios be used to improve a firm's health?

Ratios can identify weaknesses and guide management decisions for improvement.

What financial statement provides a snapshot of a firm's assets, liabilities, and equity at a point in time?

The Balance Sheet.

What is the acid-test ratio formula?

Acid-Test Ratio = (Current Assets - Inventories) / Current Liabilities.

What are the limitations of financial ratio analysis?

Limitations include potential misinterpretation, lack of context, and reliance on historical data.

What does a below-average interest coverage ratio indicate?

It indicates potential difficulty in meeting interest obligations.

What are the components of the ROI formula?

ROI = Net Profit Margin x Asset Turnover.

What factors can affect a firm's cost structure leading to decreased profitability?

High COGS and administrative costs.

How does the profit margin influence return on equity?

Higher profit margins can lead to higher return on equity, assuming efficient asset management.

What is an example of an external user of financial statement analysis?

Bondholders focus on long-term cash flow.

Why is it important to compare financial ratios with industry averages?

To assess a firm's performance relative to peers and the standard in the industry.

What is the formula for calculating the Quick Ratio?

Quick Ratio = (Current Assets - Inventories) / Current Liabilities.

What are activity ratios used to measure?

They measure how efficiently a firm utilizes its assets for generating sales.