l10 - chapter 15 summary pdf
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managerial and accountingTRANSCRIPT
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Chapter 15: Summary Handout for Students
1. Horizontal Analysis
o Percentage changes in comparative financial statements
o Percentage change = (Dollar amount of change/Base period amount) * 100
The base period is the earlier of the two periods
o Performed on the Income Statement and the Balance Sheet
o Trend analysis is a form of horizontal analysis
Trend analysis = (Any period amount/Base period amount) * 100
Base period will equal 100%
Usually calculated over a period of years
2. Vertical Analysis
o Shows the relationship of each statement item to its base amount
o Income statement:
Vertical Analysis Percentage = (Specific item/Base amount) * 100
o Balance sheet:
The base amount for each asset is Total Assets
The base amount for each liability and equity item is Total Liabilities and Equity
3. Comparing Companies
o Common-size statements reports only percentages
o Benchmarking – comparing a company with other leading companies
Benchmarking against a key competitor
Benchmarking against the industry average
4. Use ratio analysis to aid in decision-making
o Evaluating the Ability to Pay Current Liabilities
Working Capital = Current assets – Current liabilities
Current Ratio = Total current assets/Total current liabilities
Cash Ratio = (Cash + Cash equivalents)/Total current liabilities
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Acid-Test (Quick) Ratio = (Cash + Short-term investments + Net current
receivables)/Total Current liabilities
o Evaluating the Ability to Sell Merchandise Inventory and Collect Receivables
Inventory Turnover = Cost of goods sold/Average merchandise inventory
Days in Inventory= 365/Inventory Turnover
Gross Profit Percentage = Gross Profit/Net Sales Revenue
Accounts Receivable Turnover = Net credit sales/Average net accounts receivable
Days’ Sales in Receivables Ratio= 365 days/Accounts receivable turnover ratio
o Evaluating Ability to Pay Long-Term Debt
Debt Ratio = Total liabilities/Total assets
Debt to Equity Ratio = Total liabilities/Total equity
Times-Interest-Earned Ratio = (Net income + Income tax expense + Interest
expense)/Interest expense
o Evaluating Profitability
Profit Margin Ratio = Net income/Net sales
Rate of Return on Total Assets = (Net income + Interest expense)/Average total assets
Asset Turnover Ratio = Net sales/Average total assets
Rate of Return on Common Stockholders’ Equity = (Net income – Preferred
dividends)/Average common stockholders’ equity
Earnings per Share = (Net income – Preferred dividends)/Weighted average number
of common shares outstanding
o Evaluating Stock as an Investment
Price/Earnings Ratio = Market price per share of common stock/Earnings per share
Dividend Yield = Annual Dividend per share/Market price per share
Dividend Payout = Annual dividends per share/Earnings per share
5. Red flags in financial statement analysis
o Movement of Sales, Merchandise Inventory, and Receivables
o Earnings Problems
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o Decreased Cash Flow
o Too Much Debt
o Inability to Collect Receivables
o Buildup of Merchandise Inventories