Chapter 23 - Financial Statement Analysis

Question 1

VERTICAL ANALYSIS

vertical analysis

Answer 1

• computing the relationship between each item on a financial statement to some base amount on the statement
• on the income statement :
  
  • each item is expressed as a percentage of net sales
• on the balance sheet :
  
  • each item is expressed as a percentage of total assets or total liabilities and stockholders’ equity

Question 2

VERTICAL ANALYSIS

horizontal analysis

Answer 2

• computing the percentage change for the individual items in the financial statements from year to year

Question 3

VERTICAL ANALYSIS

ratio analysis

Answer 3

• computing the relationship between various items in the financial statements

Question 4

VERTICAL ANALYSIS

comparative statements

Answer 4

• financial statements presented side by side for two or more years

Question 5

VERTICAL ANALYSIS

common size statements

Answer 5

• financial statements with items expressed as percentages of a base amount

Question 6

HORIZONTAL ANALYSIS

trend analysis

Answer 6

• comparing selected ratios and percentages over a period of time

Question 7

HORIZONTAL ANALYSIS

industry averages

Answer 7

• financial ratios and percentages reflecting averages for similar companies

Question 8

RATIOS

return on common stockholders’ equity

Answer 8

• a measure of how well the corporation is making a profit for its shareholders; the ratio of net income available for common stockholders to common stockholders’ equity

Question 9

RATIOS

price earnings ratio

Answer 9

• the ratio of the current market value of common stock to earnings per share of that stock

Question 10

RATIOS

asset turnover

Answer 10

• a measure of the effective use of assets in making sales; the ratio of net sales to total assets

Question 11

RATIOS

total equities

Answer 11

• the sum of a corporation’s liabilities and stockholders’ equity

Question 12

RATIOS

leveraged buyout

Answer 12

• purchasing a business by acquiring the stock and obligating the business to pay the debt incurred

Question 13

RATIOS

liquidity

Answer 13

• the ability of a business to pay its debts when due

Question 14

RATIOS

working capital

Answer 14

• the measure of the ability of a company to meet its current obligations; the excess of current assets over current liabilities

Question 15

RATIOS

current ratio

Answer 15

• a measure of the ability of a business to pay its current debts using current assets; the ratio of current assets to current liabilities

Question 16

RATIOS

acid test ratio

Answer 16

• a measure of immediate liquidity; the ratio of quick assets to current liabilities

Question 17

RATIOS

quick assets

Answer 17

• cash, receivables, and marketable securities

Question 18

RATIOS

accounts receivable turnover

Answer 18

• a measure of the speed with which sales on account are collected; the ratio of net credit sales to average receivables

Question 19

RATIOS

average collection period

Answer 19

• the ratio of 365 days to the accounts receivable turnover; also called the number of days’ sales in receivables