VSA IRS CPA Review Financial Management

Financial Statement Analysis Flashcards

The evaluation of an entity's past performance, present condition, and business potentials by analyzing financial statements.

Financial Statement Analysis

Analysis that shows changes of corresponding financial statements items over a period of time, analyzed in terms of amount or percentage.

Horizontal Analysis

Calculated as (Most Recent - Base Period) / Base Period;

cannot be computed if the base period is zero or negative.

Percentage Change Calculation

A subset of horizontal analysis using an index number of 1.00 for the base period to facilitate understanding of performance over multiple periods.

Trend or Index Analysis

Compares figures in the financial statement of a single period by expressing all figures as percentages of a common base.

Vertical Analysis

Financial statements converted to percentages of a common base to allow comparison of multiple years, companies, and industry averages.

Common-Sized Statements
or
Percentage Composition Financial Statement

A detailed study of the net change in cash and cash equivalents resulting from operating, investing, and financing activities.

Cash Flow Analysis

Principal revenue-producing activities of the entity, generally related to changes in current assets and current liabilities.

Operating Activities

Acquisition and disposal of long-term assets and investments not included in cash equivalents, generally related to changes in non-current assets.

Investing Activities

Activities that result in changes in the size and composition of contributed equity and borrowings, generally related to changes in long-term liabilities and equity accounts.

Financing Activities

Relationships among accounts in the financial statements that provide information about a firm's liquidity, solvency, stability, profitability, and potential.

Financial Ratios

Measure an entity's ability to meet short-term obligations and provide insights into present cash solvency (e.g., net working capital, current ratio, quick ratio).

Liquidity Ratios

Measure an entity's long-term financial viability (e.g., debt ratio, debt-equity ratio, times interest earned ratio).

Solvency Ratios
(a.k.a. leverage ratios)

Measure an entity's ability to use its assets and manage liabilities effectively by determining how quickly accounts are converted into sales or cash (e.g., turnover ratios, conversion periods).

Activity Ratios
(a.k.a. asset utilization ratios or efficiency ratios)

Determine how well an entity can generate profits from its operations (e.g., margin ratios, return ratios).

Profitability Ratios
(a.k.a. performance ratios)

Help potential investors make equity investment decisions using trends in earnings, dividends, and stock prices (e.g., dividend payout ratio, dividend yield, price-earnings ratio).

Market Value Ratios
(a.k.a. market prospect ratios)

Current Ratio
or
Working Capital ratio

Formula: Current Assets / Current Liabilities

Purpose: to evaluate company’s liquidity and ability to pay current obligations

Quick Ratio
or
Acid Test Ratio

Formula: Quick Assets / Current Liabilities.
It measures the number of times that the current liabilities could be paid with the available cash and near-cash asset.

Accounts Receivable Turnover

Formula: Net Credit Sales / Average AR

It measures the number of times receivables are recorded and collected during the period.

Age of Accounts Receivables

Formula: 360 / AR Turnover.

It indicates the average number of days during which the company must wait before receivables are collected.

Inventory Turnover

Formula: Cost of Goods Sold / Ave. Inventory.
It measures the number of times that the inventory is replaced during the period.

Age of Inventory

Formula: 360 / Inventory TO

It measures the number of times that the inventory is replaced during the period.

Payables Turnover

Formula: Net Credit Purchases / Ave. Payables.

It measures the number of times payables are recorded and paid during the period.

Age of Payables

Formula: 360 / Pay. TO

It indicates the length of time during which payables remain unpaid

Operating Cycle

Formula: Ave. age of receivables + Ave. age of inventories

Measures the average number of days to convert inventories to cash

Asset Turnover (ATO)

Formula: Net Sales / Ave. Total Assets.

Measures the level of capital investment relative to sales volume.

Debt Ratio

Formula: Total Liabilities / Total Assets

Equity Ratio

Formula: Total Stockholders’ Equity / Total Assets

Debt-Equity Ratio

Formula: Total Liabilities / Total Stockholders’ Equity

Equity Multiplier

Formula: Total Assets / Total Stockholders’ Equity

Times Interest Earned (TIE) Ratio

Formula: EBIT / Interest Expense

Return on Sales (ROS)

Formula: Net Income / Net Sales

Gross Profit Rate (GPR)

Formula: Gross Profit / Net Sales

Return of Investment (ROI)

Formula: Operating Income / Average Total Assets

Return on Assets (ROA)

Formula: Net Income + Interest expense, net of tax / Average Total Assets

Return on Equity (ROE)

Formula: Net Income / Average Stockholders’ Equity

Earnings per Share (EPS)

Formula: Net Income – Preferred Dividends / Average Common Shares Outstanding

Price-Earnings (P/E) Ratio

Formula: Market Price per Share / Earnings per Share

Dividend Yield Ratio

Formula: Dividends per Share / Market Price per Share

Dividend Payout Ratio

Formula: Dividends per Share / Earnings per Share

Book Value per Share

Formula: Stockholders’ Equity / Average Shares Outstanding

Internal Growth Rate

Formula: Amount Retained / Asset Base