Definition: Financial statement analysis is the use of analytical or financial tools to examine and compare financial statements in order to make business decisions. Most common types are: Current Ratiomeasures the extent of the number of current assets to current liabilities. There are some useful techniques involving simple math which can help you perform a financial statement analysis for your business. As a result, its financial situation has deteriorated. B. Efficiency 8. Which of the following ratios represents dividends per common share in relation to market price per common share? Created by. It should help report users to summarize and evaluate the financial condition and operating results of enterprises, and to provide a reliable basis for making economic forecasts and decisions. Liquidity and efficiency 2. An acceleration in the collection of receivables will tend to cause the accounts receivable turnover to: Which of the following would best indicate that the firm is carrying excess inventory? Which type of numbers would be most meaningful for statement analysis? Which suppliers of funds bear the greatest risk and should therefore earn the greatest return? Profitability 6. By funds, in this context, we mean investments and debt. A limitation in calculating ratios in financial statement analysis is that. Which of the following would be most detrimental to a firm's current ratio if that ratio is currently 2.0? Flashcards. Each of the following methods gives visibility into trends that your business may have. A financial analysis may also be an assessment of the value and safety of debtors’ claims against the company’s assets. Which of the following is the most of interest to a firm's suppliers? Financial statement analysis is the process of reviewing and analyzing a company's financial statements to make better economic decisions to earn income in future. The following four areas are considered the _____ of financial statement analysis: 1. They use financial statement analysis to determine what to do with their investments in the company. Which of the following best compares the profitability of Denver and Oakland? In order to improve its liquidity ratios, this firm should. Which one of the following ratios would not likely be used by a short-term creditor in evaluating whether to sell on credit to a company? Financial statement analysis is an exceptionally powerful tool for a variety of users of financial statements, each having different objectives in learning about the financial circumstances of the entity. Which of the following ratios would be least helpful in appraising the liquidity of current assets? Vertical 2. Liquidity ratios are financial ratios that measure a company’s ability to repay both short- and long-term obligations. A financial analysis of a company's financial statements—along with the footnotes in the annual report—is essential for any serious investor seeking to understand and value a … Horizontal 3. common size statements, ration anlysis,liquid ratios, asset management ratios,debt ratios, profitability ratios, market value ratios, dupont analysis. Learn. Companies A and B are in the same industry and have similar characteristics except that Company A is more leveraged than Company B. Spell. Statement of Stockholders equity reports if the earnings of this accounting period are distributed as dividends or retained in the business as retained earnings. The ratios that are used to determine a company's short-term debt paying ability are. change in RE = NI - Dividends. Chapter 3 : Financial Statement analysis. Managers use financial statement analysis both to assess current condition and to plan for the future Through operating indicator analysis, managers are better able to identify and implement strategies that ensure a sound financial condition in the future. Learn analysis financial statement with free interactive flashcards. A firm with a total asset turnover lower than the industry standard and a current ratio which meets industry standard might have excessive: Denver Dynamics has net income of P2,000,000. Trend analysis allows a firm to compare its performance to: The present and prospective stockholders are primarily concerned with a firm'. Which of the following reasons should not be considered in order to explain why the receivables appear to be abnormally high? Typically, which of the following would be considered to be the most indicative of a firm's short-term debt paying ability? 4. The tendency of the rate earned on stockholders' equity to vary disproportionately from the rate earned on total assets is sometimes referred to as: Using financial leverage is a good financial strategy from the viewpoint of stockholders of companies having: The ratio that indicates a company's degree of financial leverage is the. Profitability 4. Horizontal analysis is a technique for evaluating a series of financial statement data over a period of time. provides a snapshot of a company's financial position as of a certain date, items of value such as inventory and equipment are financed with liabilities(debt) or stockholders' equity(owners' shares), reports the company's profitability during an accounting period, amounts recieved from customers for products sold or services provided, reports if the earnings of this accounting period are distributed as dividends or retained in the business as retained earnings. These statements include the income statement, balance sheet, statement of cash flows, notes to accounts and a statement of changes in equity. They are: Creditors. Which of the following is a measure of the liquidity position of a corporation? Financial statement analysis is an art; it requires judgment decisions on the part of the analyst. Which of the following statements best compares long-term borrowing capacity ratios? Gravity. Market prospects Recently the M&M Company has been having problems. Vertical analysis is a tool to evaluate individual financial statements items or a group of items in terms of a specific base amount. Variance Which of the following would most likely cause a rise in net profit margin? Certain gains/losses on pension plans, proportional increases in the number of shares outstanding, smaller proportional increases in the number of shares outstanding, Net Income-Preferred Dividends/Common Stockholders equity, Net Income-Preferred dividends/Average number of common shares outstanding, Stock market trading price of the company's common stock, companies divide net income by the actual average number of common shares outstanding, contracts that give their holders the right to buy or sell shares of stock at a certain market price, Annual common stock dividends paid/average number of common shares outstanding. For a more technical financial analysis, ratios can be used to deepen understanding and interpretation. Which of the following ratios usually reflects investors opinions of the future prospects for the firm? The most common types of financial analysis are: 1. A times interest earned ratio of 0.90 to 1 means that, If a firm has substantial capital or financing leases disclosed in the notes but not capitalized in the financial statements, then the, The return on assets ratio is affected by the, Stockholders are most interested in evaluating, The set of ratios that are most useful in evaluating profitability is. There are a number of users of financial statement analysis. Financial statement analysis is a method or process involving specific techniques for … Which of the following comments does not represent a fair statement as to the management perspective? Financial statement analysis emphasizes four areas of inquiry--with varying degrees of importance. The role of financial statement analysis is to use financial report prepared by companies, combined with other information, to evaluate the past, current and potential performance and financial position of a company for the purpose of making investment, credit and other economic decisions. Financial ratios are an established tool for businesses and nonprofits. Considering the different requirements of internal management, the content of financial statement analysis is very extensive. Which of the following ratios provides a solvency measure that shows the margin of safety of noteholders or bondholders and also gives an indication of the potential ability of the business to borrow additional funds on a long-term basis? Which of the following statements best represents an analysis of the long-term debt position of these two firms? Both companies have the same income before interest and taxes and the same total assets. The percentage analysis of increases and decreases in individual items in comparative financial statements is called: In which of the following cases may a percentage change be computed? Based on this information we could conclude that, A firm has a current ratio of 1:1. PLAY. Which of the following is not a limitation of financial statement analysis? Cash Flow 9. It is important, therefore, that we understand the principles governing these statements by looking at four questions: • How valuable are the assets of a firm? Terms in this set (48) common stock = par value * # shares. While there are dozens of ratios that can be calculated, most nonprofits can use a handful of them to learn more about their financial condition. M&M approached the First National Bank for a badly needed loan, but the loan officer insisted that the current ratio (now 0.5) be improved to at least 0.8 before the bank would even consider granting the credit. Which of the following circumstances will cause sales to fixed assets to be abnormally high? All of the following are asset utilization ratios except: Total asset turnover measures the ability of a firm to: A measure of how efficiently a company uses its assets to generate sales is the, Long-term creditors are usually most interested in evaluating, Trading on the equity (leverage) refers to the. Oakland Enterprises has net income of P2,500,000. Valuation 11. Also reports amounts paid by stockholders to purchase common stock and preferred stock, Retained earnings + Net Income - (Dividends), Contributed capital, beginning + issuance of shares - (Repurchase to retire shares), reports cash inflows + cash outflows during an accounting period, amounts to be recieved in the future from customers, amounts that the corporation must pay to suppliers in the future, portion of assets the owners are free and clear of any liabilities, amounts paid by stockholders to purchase common stock and preferred stock, Net income earned by the company since its incorporation and not yet distributed as dividends, largest expense item which reports the wholesale costs of inventory sold during the accounting period, relate to a company's main business: selling products or services to earn net income, relate to the need for investing in property, plant, and equipment or expanding by making investments in other companies, relate to how a company finances its assets with debt or stockholders' equity, rules that management must follow when preparing financial statements available to investors, most accounting reporting standards that formulate GAAP are set by the 7 full time voting members, attest to whether a company's financial statements comply with the GAAP rules, defines ethical behavior code of professional conduct, establish auditing standards and conduct inspections of the public accounting firm that perform audits, legislative authority to set the reporting rules for accounting info of publicly held corporations, states that companies should record assets and services at their acquisition cost, the amount paid for them, because this is the most reliable information, compares all amounts within one year to revenue of that same year, compares all amounts within on year to total assets of that same year, a company's ability to pay liabilities as they come due in the next year, a company's ability to pay liabilities for many years into the future, expected to be converted into cash, sold, or consumed within the next 12 months, actual currency, bank accounts, and investments that can be liquidated immediately, Monies to be recieved by the company from customers, cost of television programs that will be aired during the next year, cost allocated to each year of the assets life, total amount of depreciation expensed since the assets' date of purchase, patents, trademarks, and copyrights that have value but not any physical presence, extra value that is recorded when buying another company, borrowing corporation records bonds payable, entity loaning the money records a bond recievable, entities owning shares of stock are the owners of the corporation, refer to revenues from the sale of merchandise, Indicate that returns or discounts were subtracted from total sales, revenues are recorded in the period earned, not necessarily in the period that the company collects the money, idea that accountants usually record transactions when they occur, not necessarily when cash is recieved or paid, records transactions when cash is recieved or paid, equals the difference between revenues and cost of sales, includes all costs of generating sales besides cost of sales, Subtracting operating expenses from gross profit (Income from Operations), arise from the sale of long-lived assets or investments, accountants deem unusual and infrequent, may appear in the bottom section of the income statement, recored when a company closes down or sells part of its business, highly unusual transactions that are considered unusual in nature and infrequent in occurence, measures how efficiently you can generate desired outputs from given inputs, shares are bought and sold on stock exchanges such as the New york stock exchange, when a company sells stock to the public for the first time as a publicly traded corporation, stock bought back from investors not recorded as an asset because it is impossible for a company to own itself, the total number of shares actually held by investors at a given time, a legal value assigned to each share of stock, carries a dividend rate which must be paid to preferred stockholders before any dividends can be paid to common stockholders, recorded in stockholders equity 1. unrealized gains/losses on certain securities 2. When analyzing income statement accounts, the base is usually _____ and for balance sheet accounts, the base is usually total _____. Financial statements provide the fundamental information that we use to analyze and answer valuation questions. Leverage 4. Which of the following does not represent a problem with financial analysis? The general purpose of the financial statements is to provide information about the results of operations, financial position , and cash flows of an organization. Which one of the following would not be considered a liquidity ratio? Choose from 500 different sets of analysis financial statement flashcards on Quizlet. Foreign currency translation adjustments 3. STUDY. Which of the following ratios is most relevant to evaluating solvency? Generally, the ratio of 1 is considered to be ideal to depict that the company has sufficient current assets in order to repay its current liabilities. Which of the following could cause return on assets to decline when net profit margin is increasing? Scenario & Sensitivity 12. ABC’s Current Ratio is better as compared to XYZ which shows ABC is in a better position to re… One firm is large and the other is small. Tyner Company had P250,000 of current assets and P90,000 of current liabilities before borrowing P60,000 from the bank with a 3-month note payable. Creditors are interested in knowing if a company will be able to honor its payments as they become due. The following groups of ratios primarily measure risk: Ratios are used as tools in financial analysis. A general rule to use in assessing the average collection period is. Match. When Tri-C Corp. compares its ratios to industry averages, it has a higher current ratio, an average quick ratio, and a low inventory turnover. Which of the following does not bear on the quality of receivables? So depending on how the company is doing, they will either hold onto their stock, sell it or buy more. Which of the following will not cause times interest earned to drop? Which of the following ratios is rated to be a primary measure of liquidity and considered of highest significance rating of the liquidity ratios a bank analyst? Growth 5. Though the way financial statements are structured and the […] A. A financial analysis is an assessment of how viable, stable, solvent, and profitable a business or project is. Common liquidity ratios include the following:The current ratioCurrent Ratio FormulaThe Current Ratio formula is = Current Assets / Current Liabilities. This guide will teach you to perform financial statement analysis of the income statement, Forensic Audit Guide Forensic Audit Guide A Forensic Audit is a detailed audit of a company's records to be used in a court of law in a legal proceeding. Financial statement analysis is a significant business activity because a corporation's financial statements provide useful information on its economic standing and profit levels. Management is a user of financial analysis. Assume no other changes than those listed. Statements in which all items are expressed only in relative terms (percentages of a base) are termed: The percent of property, plant and equipment to total assets is an example of: Vertical analysis is a technique that expresses each item in a financial statement, In performing a vertical analysis, the base for prepaid expenses is. Creditors. A firm with a lower net profit margin can improve its return on total assets by. The current ratio, also known as the working capital ratio, measures the capability of measures a company’s ability to pay off short-term liabilities with current a… Liquidity ratiosmeasure the ability of a company to pay off its current obligations. 2. Financial Analysis Present and prospective stakeholders of entity like to obtain information regarding its financial position and financial performance. Which ratio is most helpful in appraising the liquidity of current assets? What effect did the borrowing transaction have on Tyner Company's current ratio? Jones Company has long-term debt of P1,000,000, while Smith Company, Jones' competitor, has long-term debt of P200,000. A measure of a company's immediate short-term liquidity is the. Which of the following ratios appears most frequently in annual reports? For example, in the income statement shown below, we have the total dollar amounts and the percentages, which make up the vertical analysis. Which of the following actions would do the most to improve the ratio in the short run? Accountants, lawyers, and finance professionals are all involved. This information is used by the readers of financial statements to make decisions regarding the allocation of resources. Liquidity 7. Users of Financial Statement Analysis. With our lesson, Financial Statement Analysis: Definition, Purpose, Elements & Examples, you'll be able to answer that question. Ideas of Financial Statement Analysis Rates of Return 10. This need is served by entity’s general public finance statements that are prepared by the management of the entity and are usually audited by the external auditor. Solvency 3. Test. You'll need the three main financial statements for reference—the balance sheet, income statement, and statement of cash flows. In other words, financial statement analysis is a way for investors and creditors to examine financial statements and see if the business is healthy enough to invest in or loan to. The term may refer to an assessment of how effectively funds have been invested. The use of alternative accounting methods: Suppose you are comparing two firms in the steel industry. Also reports amounts paid by stockholders to purchase common stock and preferred stock In the near term, the important ratios that provide the information critical to the short-run operation of the firm are: The ability of a business to pay its debts as they come due and to earn a reasonable amount of income is referred to as: The primary concern of short-term creditors when assessing the strength of a firm is the entity's, Short-term creditors are usually most interested in assessing, The two categories of ratios that should be utilized to asses a firm's true liquidity are the. Financial statement analysis is the process of analyzing a company's financial statements for decision-making purposes. Which of the following actions will increase a firm's current ratio if it is now less than 1.0? At a more r What might you assume about Tri-C? 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