Financial Statement Analysis in Accounting Flashcards

Financial Statement Analysis in Accounting Flashcards
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Inventory Turnover Ratio Formula
(Cost of goods sold / Inventory) x 100
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Inventory Turnover Ratio
A ratio that can provide information about how a company buys and sells inventory.
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Financial Ratio
This kind of ratio is formed when a mathematical operation joins at least two items that are found on a financial statement.
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Efficiency Ratios
We use these ratios to see how well a business is applying assets to ensure sales are generated.
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Liquidity
This refers to how quickly a company can transform assets to cash. Some assets are more easily turned to cash than others. For example, shares are much easier to transform than a building.
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Gross Profit Margin
A margin that tells us what portion of every dollar of sales a company has available to handle the payment of administrative or sales expenses.
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Use vertical analysis to compare expenses to revenue for years one and two. Year One expenses: $5,000. Year One revenue: $10,000. Year Two expenses: $10,000. Year Two revenue: $20,000.

(5,000 / 10,000) x 100 = 50

(10,000 / 20,000) x 100 = 50

50 - 50 = 0% increase in expenses

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How to complete vertical analysis by comparing expenses and revenue
Complete the calculation (expenses / revenue) x 100 for both year one and year two. Subtract the year one results from the year two results. This number is the percent increase or decrease.
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Vertical Analysis
Accountants use this method of analysis when they want to compare line items that are all found on one financial statement against one another.
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Use horizontal analysis to determine how much assets increased from Year One to Year Two. Year One's assets were $100,000. Year One's index is 100. Year Two's assets were $200,000.

200,000 / 100,000 = 2

2 x 100 = 200

200 - 100 = 100% growth

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How to complete horizontal analysis for assets with a balance sheet

(Current year assets / Base year assets) x 100


Subtract the base year's index from this number to find how much the business's assets grew. The base year index is always 100.

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Horizontal Analysis
A method of analysis used by accountants to compare one year with a base year. This allows the accountant to look at trends related to business growth.
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25 cards in set

Flashcard Content Overview

Check out this set of flashcards when you're ready to review the processes of horizontal and vertical analysis in accounting. You'll also be able to go over the debt ratio, the debt-to-equity ratio and the efficiency ratio. Interest coverage ratios, the current ratio and the operating profit ratio will also be discussed. While considering the cost of goods sold, you'll also find cards that address the days sales in inventory ratio, the asset turnover ratio and the inventory turnover ratio.

Front
Back
Horizontal Analysis
A method of analysis used by accountants to compare one year with a base year. This allows the accountant to look at trends related to business growth.
How to complete horizontal analysis for assets with a balance sheet

(Current year assets / Base year assets) x 100


Subtract the base year's index from this number to find how much the business's assets grew. The base year index is always 100.

Use horizontal analysis to determine how much assets increased from Year One to Year Two. Year One's assets were $100,000. Year One's index is 100. Year Two's assets were $200,000.

200,000 / 100,000 = 2

2 x 100 = 200

200 - 100 = 100% growth

Vertical Analysis
Accountants use this method of analysis when they want to compare line items that are all found on one financial statement against one another.
How to complete vertical analysis by comparing expenses and revenue
Complete the calculation (expenses / revenue) x 100 for both year one and year two. Subtract the year one results from the year two results. This number is the percent increase or decrease.
Use vertical analysis to compare expenses to revenue for years one and two. Year One expenses: $5,000. Year One revenue: $10,000. Year Two expenses: $10,000. Year Two revenue: $20,000.

(5,000 / 10,000) x 100 = 50

(10,000 / 20,000) x 100 = 50

50 - 50 = 0% increase in expenses

Gross Profit Margin
A margin that tells us what portion of every dollar of sales a company has available to handle the payment of administrative or sales expenses.
Liquidity
This refers to how quickly a company can transform assets to cash. Some assets are more easily turned to cash than others. For example, shares are much easier to transform than a building.
Efficiency Ratios
We use these ratios to see how well a business is applying assets to ensure sales are generated.
Financial Ratio
This kind of ratio is formed when a mathematical operation joins at least two items that are found on a financial statement.
Inventory Turnover Ratio
A ratio that can provide information about how a company buys and sells inventory.
Inventory Turnover Ratio Formula
(Cost of goods sold / Inventory) x 100
Days Sales in Inventory Ratio
Companies can examine this ratio to see how long their inventory will last before it runs out.
Days Sales in Inventory Ratio Formula
(Inventory / Cost of goods sold) x 365
Cost of Goods Sold (COGS)
This refers to how much a company spends to buy what they need to produce their products.
Asset Turnover Ratio
Checking out this ratio will allow us to assess how well assets are being used to generate more sales.
Asset Turnover Ratio Formula
Sales / Total assets
Operating Profit Ratio
You can use this ratio when you want to find out what percentage of profit your company is earning per dollar on every sale.
Debt Ratio
Businesses look at this ratio to see how many of their assets received financing through loans.
Highly Leveraged Companies
Companies in this state have gotten more loans than they should have. They now have more debt than they can handle.
Debt-to-Equity Ratio
Accountants can use this ratio to find out how much financing stockholders or banks provide for a company.
Debt-to-Equity Ratio Formula
Total liabilities / Total equity
Interest Coverage Ratio
Banks look at this ratio to see how a company's earnings are in relation to the interest payments the company has to make. If your ratio is over 1, you will be able to pay your interest.
Interest Coverage Ratio Formula
Earnings / Interest expense
Current Ratio
Businesses look at this ratio to judge their ability to use current assets to pay off current liabilities. This is measured on a baseline.

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