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Financial Accounting 1 Week 7 Summary
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Financial Accounting 1 Week 7 Summary including readings
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Week 7:Preparation: Chap 15: Financial Analysis: The big
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Analyzing financial statements is based on company’s liquidity, profitability, and
solvency.
Short-term creditor: interested in liquidity.
Long-term creditor: interested in profitability and solvency.
Shareholders: //
Comparation:
° Intracompany basis
° Industry averages
° Intercompany basis
Tools of Analysis to evaluate its significance:
- Horizontal analysis (trend analysis) toward financial data on a time period
Change Since Base Period = (Current Year Amount – Base Year Amount) /
Base Year Amount.
Current Results in Relation to Base Period = Current Year Amount / Base
Year Amount
- Vertical Analysis (common-size analysis) toward financial data expressing
items as a percentage of a base amount. Calculating
SFP % = Each item / Total asset.
Income statement percentage = Each item on I/S / Net sales
- Ratio analysis is the relationship among several items of these data:
Mathematical relationship.
, Liquidity ratio: short-term ability of the company to pay its maturing
obligations and to meet unexpected needs for cash:
. Current ratio = Current Assets / Current Liabilities; Also referred as the
working capital ratio: Working Capital = Current assets – current liabilities.
Used widely for company’s liquidity and short-term debt-paying ability.
. Acid-test Ratio = (Cash + Short-Term Investments + Accounts Receivable
(Net)) / Current Liabilities.
(Quick one) used for immediate short-term liquidity.
. Accounts Receivable Turnover = Net Credit Sales / Average Net Accounts
Receivable.
Measures how quickly assets -> cash.
. Inventory Turnover = COGS / Average Inventory. How many times it is sold
during the period.
Profitability Ratios measure the income or operating success of a company for
a given period of time:
. Profitability Margin = Net Income / Net Sales. Measure of % /€ of sales in NI. =
Rate of return on sales.
. Asset Turnover = Net Sales / Average Total Assets. How efficiently a company
uses its assets to generate sales.
. Return on Assets = Net Income /
Average Total Assets. Overall
measures of profitability.
. Return on Ordinary Shareholder’s
Equity = (Net Income – Preference
Dividends) / Average Ordinary
Shareholders Equity. Measures
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