Chapter 16 Flashcards

Acid-test (quick) ratio a more rigorous test of a company’s ability to meet its short-term debts than the current ratio. Inventories and prepaid expenses are excluded from total current assets, leaving only the more liquid (or “quick”) assets to be divided by current liabilities (p. 733)

Current ratio A company’s current assets divided by its current liabilities (p. 732)

Common-size financial statements A statement showing each account in percentage and dollar form. On the income statement, the percentages are based on total sales; on the balance sheet, they are based on total assets. (p. 729)

Financial leverage A difference between the rate of return on assets and the rate paid to creditors. (p. 736)

Horizontal analysis A side-by-side comparison of two or more years’ financial statements. (p. 727)

Liquidity Refers to how quickly an asset can be converted to cash. Liquid assets can be converted to cash quickly, whereas illiquid assets cannot. (p. 731)

Trend analysis See Horizontal analysis. (p. 727)

Trend percentages Several years of financial data expressed as a percentage of a base year. (p. 728)

Vertical analysis The presentation of a company’s financial statements in common-size form. (p. 729)

Working capital Current assets less current liabilities. (p. 732)