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46 Cards in this Set
- Front
- Back
What is horizontal analysis? |
An analysis of the change from year to year expressed as a percentage. |
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What is trend analysis? |
The earliest period is the base period with all subsequent periods compared with the base. |
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What is vertical analysis? |
It involves restating the dollar amount of each item reported on an individual financial statement as a percentage of a specific item on the same statement. |
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What are the three main categories of ratios? |
Profitability ratios |
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How do you calculate return on assets? |
= Profit (before tax) / Average total assets |
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What does return on assets measure? |
Return on assets measures the return earned through total assets provided by both creditors and owners. |
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How do you calculate return on ordinary equity? |
= Profit - Preference dividends / Average ordinary equity |
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What does return on ordinary equity measure? |
Return on ordinary equity measures the return earned on assets provided by owners. Profitability ratio |
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How do you calculate profit margin? Profitability ratio |
= Profit / Revenue |
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What does profit margin measure? |
Profit margin measures the net profitability of each dollar of sales. |
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How do you calculate earnings per share? |
= Profit (after tax) - Preference dividends / Weighted average number of ordinary shares |
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What does earnings per share measure? |
Earnings per share measures profit earned on each ordinary share. |
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How do you calculate dividend yield? |
= Annual dividend per share / Market price per share |
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What does dividend yield measure? |
Dividend yield measures the return to shareholders based on current market price. |
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How do you calculate current ratio? Liquidity ratio |
= Current assets / Current liabilities |
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What does the current ratio measure? |
The current ratio measures short-term liquidity and indicates the ability of an entity to meet short-term debts from current assets. |
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How do you calculate receivables turnover? |
= Net sales revenue / Average receivables balance |
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What does receivables turnover measure? |
Receivables turnover measures the effectiveness of collections. |
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How do you calculate the average collection period? |
= Average receivables balance x 365 / Net sales revenue |
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What does the average collection period measure? |
The average collection period measures the average number of days taken by an entity to collect its receivables. Liquidity ratio |
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How do you calculate the inventory turnover? Liquidity ratio |
= Cost of sales / Average inventory balance |
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What does inventory turnover measure? |
Inventory turnover measures the number of times inventory was sold on average during a period. |
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How do you calculate the debt ratio? |
= Total liabilities / Total assets |
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What does the debt ratio measure? |
The debt ratio measures the percentage of assets provided by creditors and the extent of using gearing. Financial stability ratio |
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How do you calculate the equity ratio? |
= Total equity / Total assets |
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What does the equity ratio measure? |
The equity ratio measures the percentage of assets provided by shareholders and the extent of using gearing. Financial stability ratio |
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How do you calculate times interest earned? Financial stability ratio |
= Profit (before tax) + Net finance costs / Net finance costs |
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What does times interest earned measure? |
Times interest earned measures the ability of the entity to meet its interest payments on borrowings out of current profits. Financial stability ratio |
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How do you calculate asset turnover ratio? Financial stability ratio |
= Revenue / Average total assets |
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What does the asset turnover ratio measure? |
The asset turnover ratio measures the effectiveness of an entity in using its assets during the period. Financial stability ratio |
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Name four limitations of financial analysis. |
Historical data is used to predict future performance. Year-end data may not be typical of the entity's position during the year. Lack of disclosure may inhibit the extent of analysis. One-off items can bias the information. |
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What are the 2 things that ratios derived from the Statement of Cash Flows help evaluate? |
Cash sufficiency |
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What is cash sufficiency? |
The adequacy of the cash flows to meet the entity's cash needs. |
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What is cash flow efficiency? |
How well the entity generates cash flows relative both to other periods and to other entities. |
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How do you calculate the cash flow adequacy ratio? |
= Cash flow from operating activities / Repayment of long-term borrowing + Assets acquired + Dividends paid |
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What does the cash flow adequacy ratio measure? |
Cash flow adequacy measures the entity's ability to cover its main cash requirements. |
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How do you calculate repayment of long term borrowings ratio? Cash sufficiency ratio |
= Repayment of long term borrowings / cash flows from operating activities |
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What does the repayment of long term borrowings ratio measure? |
The repayment of long term borrowings measures the entity's ability to cover its long term debt out of cash from operating activities. Cash sufficiency ratio |
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How do you calculate the dividend payment ratio? |
= Dividends paid / Cash flows from operating activities |
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What does the dividend payment ratio measure? |
The dividend payment ratio measures the entity's ability to cover its dividend payments. Cash sufficiency ratio |
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How do you calculate the cash flow to revenue ratio? Cash flow efficiency ratio |
= Cash flows from operating activities / Revenue |
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What does the cash flow to revenue ratio measure? |
The cash flow to revenue ratio measures the ability to convert revenue into cash flows. |
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How do you calculate the operations index ratio? |
= Cash flows from operating activities / Profit |
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What does the operations index ratio measure? |
The operations index ratio measures the relationship between profit and operating cash flows. |
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How do you calculate the cash flow return on assets ratio? |
= Cash flows from operating activities / Average total assets |
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What does the cash flow return on assets ratio measure? |
The cash flow return on asset ratio measures the operating cash flow return on assets before interest and tax. Cash flow efficiency ratio |