Exam 2 Complete Review

Who are the users of financial analysis?

Business leaders, employees, lenders, investors, competitors.

What is the purpose of financial analysis?

To turn financial statements from numbers into a narrative.

Why is context important in financial analysis?

Industry, business stage, and seasonality are crucial elements.

What is horizontal analysis?

Trend analysis across multiple periods.

What is vertical analysis?

Analysis within a reporting period (e.g., Income Statement as a percentage of revenue, Balance Sheet as a percentage of assets or liabilities).

What does profitability measure?

How much money the company is making.

What does liquidity measure?

How well the company can pay its bills.

What is efficiency in asset management?

How well the company uses its assets.

What does leverage measure?

How the company uses debt to grow.

What is the working capital formula?

Current Assets - Current Liabilities.

What does the working capital to sales ratio show?

Whether a company has enough working capital to support its sales.

What is the ideal current ratio for a company?

At least 1:1 for solvency, but 2:1 is better.

What is the quick ratio or acid test ratio?

(Cash + Receivables) / Current Liabilities.

What is gross margin?

Revenue - Cost of Goods Sold (COGS).

What does a higher gross margin indicate?

More money is available to cover operating expenses.

What is income from operations?

Operating Income divided by Sales.

What is return on sales?

Net Income divided by Net Sales.

What is return on assets?

Net Income divided by Total Assets.

What is return on investment (ROI)?

Net Income divided by Equity, also known as Return on Equity (ROE).

What is return on assets (ROA)?

Net Income divided by Total Assets.

What are inventory turns?

COGS divided by Inventory, indicating how efficiently inventory is used.

What are asset turns?

Sales divided by Assets, measuring efficiency of asset use in creating revenue.

What is the formula for days receivable?

(Accounts Receivable x 365) / Annual Revenue.

What does the debt to equity ratio indicate?

Current plus Long-Term Debt divided by Equity.

What is the debt to EBITDA ratio?

Current plus Long-term Debt divided by Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA).

What does the interest coverage ratio measure?

Earnings Before Interest and Taxes (EBIT) divided by Interest Expense.

What is a healthy interest coverage ratio?

A ratio of 1.5x or higher indicates a healthy ability to pay interest expenses.

What are the steps in risk management?

Identify, Analyze, Rank, Mitigate, Review.

What is external risk?

Risk from factors outside the organization, like physical, cyber, strategic, and technological risks.

What is internal risk?

Risk from within the organization, such as fraud, embezzlement, illness, or injury.

What are common indicators of financial distress?

Cash flow issues, falling margins, high-interest payments, longer payable days.

What is the formula for days payable?

(# of Days in Period x Average Accounts Payable) / Purchases Made with Credit.

What are common small business problems relating to liquidity?

Review current and quick ratios.

What does the breakeven formula represent?

Breakeven = Fixed Expenses / (1 - Variable Expenses / Sales).

How should payroll costs be assessed?

Determine if it's cheaper to hire new employees or pay overtime.

What are primary risk management approaches?

Controls, Contracts, and Insurance.

What are internal controls?

Procedures implemented to prevent loss, fraud, or injury.

What are red flags of fraud?

Recklessness, outsized spending, personal difficulties, disgruntled employees.

What does effective risk management require?

A clear understanding of risk tolerance, proportional management, and multiple approaches.

What is the formula for current ratio?

Current Assets divided by Current Liabilities.

What is the formula for quick ratio?

(Cash + Receivables) divided by Current Liabilities.

What is the formula for gross margin?

Revenue - Cost of Goods Sold (COGS).

What is the return on sales formula?

Net Income divided by Net Sales.

What is the return on assets formula?

Net Income divided by Total Assets.

What is the debt to equity ratio formula?

(Current + Long-Term Debt) divided by Equity.

What is the fraud triangle?

A model that explains three key factors that lead to fraud: Opportunity, Pressure, and Rationalization.

What is EBIT?

Earnings Before Interest, Taxes, Depreciation, and Amortization, representing a company's operating performance.

What is the EBITDA formula?

- Net Income + Interest + Taxes + Depreciation + Amortization.