Chapter 16 Flashcards

Acid-test (quick) ratio

A more rigorous test of a company's ability to meet its short-term debts, excluding inventories and prepaid expenses.

Current ratio

A company’s current assets divided by its current liabilities.

Common-size financial statements

Statements showing each account in percentage and dollar form, with percentages based on total sales for the income statement and total assets for the balance sheet.

Financial leverage

The difference between the rate of return on assets and the rate paid to creditors.

Horizontal analysis

A side-by-side comparison of two or more years’ financial statements.

Liquidity

How quickly an asset can be converted to cash; liquid assets convert quickly while illiquid assets do not.

Trend analysis

A method of analyzing financial data by comparing several years' worth of data.

Trend percentages

Several years of financial data expressed as a percentage of a base year.

Vertical analysis

The presentation of financial statements in common-size form.

Working capital

Current assets less current liabilities.