Chapter 12 Managerial Accounting

What is the purpose of financial statement analysis?

To evaluate a company's performance and make better decisions for the future.

What are the three ways a company can evaluate its financial performance?

Year to year, against a competitor, and against industry averages.

What does the income statement include?

Revenues, expenses, gains, and losses; also known as a profit and loss statement.

What is the balance sheet equation?

Assets = Liabilities + Stockholder's Equity.

What does the statement of cash flows provide information about?

Sources and uses of cash for the period, including operating, investing, and financing activities.

What is horizontal analysis?

A year-to-year comparison of a company's financial performance that computes the percentage change in financial statement line items.

What are the steps in performing horizontal analysis?

Compute the dollar amount of change from an earlier period, then divide by the base year to determine the percentage change.

What are trend percentages in financial analysis?

A form of horizontal analysis comparing several years against a base year, with the base year set to 100%.

What is vertical analysis?

An analysis showing the relationship of each line item on a financial statement to a base amount, typically expressed as a percentage.

What are common size financial statements?

Statements that report all items as percentages to facilitate benchmarking against competitors or industry averages.

Who are the interested user groups of financial statements?

Managers, investors, and creditors.

What do liquidity ratios measure?

A company's ability to pay its debts when they become due.

How is working capital calculated?

Current Assets - Current Liabilities.

What does the current ratio indicate?

The relationship between current assets and current liabilities.

What is quick ratio equation ?

(Cash + Short Term Investments + Net Receivables) / Current Liabilities.

What does the inventory turnover ratio measure?

How quickly a company sells its inventory, calculated as Cost of Goods Sold / Average Inventory.

What is the accounts receivable turnover ratio?

Measures the ability to collect cash from credit customers, calculated as Net Credit Sales / Average Net Accounts Receivable.

What does the days' sales in receivables measure?

The average number of days a sale remains in accounts receivable before being collected.

What does the debt ratio measure?

The amount of assets financed with debt, calculated as Total Liabilities / Total Assets.

What is the times interest earned ratio?

Measures how effectively income can cover interest expenses on long-term debt, calculated as Income from Operations / Interest Expense.

What does the return on sales ratio indicate?

The percentage of each sales dollar earned as net income, calculated as Net Income / Net Sales.

How is the return on total assets calculated?

Net Income + Interest Expense / Average Total Assets.

What is return on equity?

A ratio used to calculate earnings in relation to the amount invested by common stockholders. ( net income- preferred dividends)/ average common stock holder equity

What is earnings per share?

The amount of net income earned for each share of outstanding common stock, calculated as (Net Income - Preferred Dividends) / Average Number of Common Shares Outstanding.

What does the price earnings ratio compare?

The market price of a common share to the company's earnings per share.

What is dividend yield?

The ratio of dividends per share to the market price per share.

What is big data strategy in financial analysis?

A plan for how a company will collect and use relevant and valuable data.

What is business intelligence?

The use of data tools and best practices to help managers make data-driven decisions.