# Analyzing Financial Statements Flashcards

Analyzing Financial Statements Flashcards
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Main types of Inventory Valuation

Last in, first out (LIFO), which may make a company's sales appear higher while their profit appears lower

First in, first out (FIFO)

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Operating Profit Ratio
A profitability ratio that tells you what percentage of profit you earn per each dollar of sales. You find this ratio by dividing profit by sales.
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Current Ratio
This is a type of liquidity ratio that involves taking a business's current assets and dividing them by their current liabilities.
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Liquidity
We use this term when referring to the action of turning assets, such as a savings account, into cash.
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Ratios included in financial statements

Debt

Liquidity

Profitability

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Four Main Financial Statements

Statement of cash flow

Statement of owner's equity

Income statement

Balance sheet

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Vertical Analysis
A type of analysis that can be completed using either a balance sheet or an income statement. It involves dividing a business's liabilities by either assets or revenue.
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Balance Sheet Vertical Analysis
You complete this kind of vertical analysis when you compare assets and liabilities. To complete this calculation you divide a company's liabilities by assets for a given year.
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Income Statement Vertical Analysis
A form of vertical analysis that compares revenue to expenses across multiple years. You calculate this by dividing expenses by sales revenue and expressing the result as a percentage.
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Income Statement Horizontal Analysis
When completing this kind of horizontal analysis you examine sales revenue across two different years.
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Balance Sheet Horizontal Analysis Formula
Assets for year 2 / assets of the base year x 100
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Horizontal Analysis
A process that compares a new year against a base year to identify trends in growth. It can be completed using a balance sheet or an income sheet.
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## Flashcard Content Overview

You can use these flashcards to go over different types of horizontal and vertical analysis. You'll also be able to review financial statements and financial statement ratios, including the current ratio and the operating profit ratio. The ratios involved in assessing a business's credit will also be covered, including the debt ratio, the interest coverage ratio, the leverage ratio, the debt-to-equity ratio and more.

Front
Back
Horizontal Analysis
A process that compares a new year against a base year to identify trends in growth. It can be completed using a balance sheet or an income sheet.
Balance Sheet Horizontal Analysis Formula
Assets for year 2 / assets of the base year x 100
Income Statement Horizontal Analysis
When completing this kind of horizontal analysis you examine sales revenue across two different years.
Income Statement Vertical Analysis
A form of vertical analysis that compares revenue to expenses across multiple years. You calculate this by dividing expenses by sales revenue and expressing the result as a percentage.
Balance Sheet Vertical Analysis
You complete this kind of vertical analysis when you compare assets and liabilities. To complete this calculation you divide a company's liabilities by assets for a given year.
Vertical Analysis
A type of analysis that can be completed using either a balance sheet or an income statement. It involves dividing a business's liabilities by either assets or revenue.
Four Main Financial Statements

Statement of cash flow

Statement of owner's equity

Income statement

Balance sheet

Ratios included in financial statements

Debt

Liquidity

Profitability

Liquidity
We use this term when referring to the action of turning assets, such as a savings account, into cash.
Current Ratio
This is a type of liquidity ratio that involves taking a business's current assets and dividing them by their current liabilities.
Operating Profit Ratio
A profitability ratio that tells you what percentage of profit you earn per each dollar of sales. You find this ratio by dividing profit by sales.
Main types of Inventory Valuation

Last in, first out (LIFO), which may make a company's sales appear higher while their profit appears lower

First in, first out (FIFO)

Seasonality
This represents seasonal factors associated with spring, summer, fall and winter and how they can impact a business's monthly or quarterly ratios.
How businesses can use the current ratio
This ratio can be used to assess a company's readiness to pay short-term debts.
Debt-to-Equity Ratio Formula
Total debt / total equity = debt-to-equity ratio
Quick Ratio Formula
Current assets - inventory / current liabilities = quick ratio
Interest Coverage Ratio Formula
Earnings before interest and taxes (EBIT) / interest expense = interest coverage ratio
Debt Service Coverage Ratio
A ratio that allows companies to show that they can deal with their present debt and the interest associated with their debt.
Creditworthiness
You can examine this factor to determine if a business or organization can repay the money it borrowed easily.
Leverage Ratio
These ratios can be used to assess how much debt a company has.
Debt-to-Equity Ratio
Using this ratio will compare the amounts of debt and equity a company used while purchasing assets.
Interest Coverage Ratio
By looking at this kind of ratio, you can determine the ease a company will have when paying its interest charges.
Leverage
In accounting terms, this occurs when a company uses money it borrowed to maintain operations and fuel growth.
Capitalization
A ratio that assesses how much of a company's capital comes from borrowing or other debts. The formula for this ratio is: (long-term debt / (long-term debt + shareholder's equity)) x 100%.
Debt Ratio
A ratio that tells you how much of a company's assets were financed through borrowing. This ratio's formula is: (total liabilities / total assets) x 100%.

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