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Chapter 12,Financial Statement Analysis,东莞电工培训 /training-215.html,Part A,Comparison of Financial Accounting Information,Comparison of Financial Accounting Information,LO1 Vertical Analysis,We express each item in a financial statement as a percentage of the same base amount,Vertical Analysis,LO2 Horizontal Analysis,Analyze trends in financial statement data for a single company over time,Horizontal Analysis,Part B,Using Ratios to assess Risk and Profitability,LO3 Risk Analysis,A companys ability to pay its current liabilities,A companys ability to pay its long-term liabilities,Common Mistake,In comparing an income statement account with a balance sheet account, some students use the balance sheet accounts ending balance, rather than the average of its beginning and ending balances. Since income statement accounts are measured over a period of time, comparisons to related balance sheet accounts also need to be over time by taking the average of the beginning and ending points in time.,Receivable Turnover Ratio,Measures how many times, on average, a company collects its receivables during the year,HIGH RATIO,A company can quickly turn its receivables into cash,Average Collection Period,Converts the receivable turnover ratio into days,LOW RATIO,The shorter the average collection period, the better.,Inventory Turnover Ratio,Measures how many times, on average, a company sells its entire inventory during the year,HIGH RATIO,Inventory is selling more quickly, less cash is tied up in inventory, and the risk of outdated inventory is lower,Average Days in Inventory,Converts the inventory turnover ratio into days,LOW RATIO,Companies try to minimize the number of days they hold inventory,Current Ratio,Compares current assets to current liabilities,HIGH RATIO,A company has sufficient current assets to pay current liabilities as they become due,Acid-Test Ratio,Based on a more conservative measure of current assets available to pay current liabilities, the acid-test ratio provides a better indication of a companys liquidity than does the current ratio,HIGH RATIO,A company has sufficient current assets (excluding inventories and prepaid expenses) to pay current liabilities as they become due,Debt-to-Equity Ratio,Compares liabilities to stockholders equity,LOW RATIO,Lower debt compared to equity, results in lower risk of bankruptcy,Times Interest Earned Ratio,Compares interest payments with a companys income available to pay those charges,HIGH RATIO,Company generates enough income to cover its interest payments,LO4 Profitability Analysis,Gross Profit Ratio,Indicates the portion of each dollar of sales above its cost of goods sold,HIGH RATIO,Higher the gross profit, the better it is,Return on Assets,Measures the income the company earns on each dollar invested in assets,HIGH RATIO,Higher the return on assets, the better it is,Profit Margin,Measures the income earned on each dollar of sales,HIGH RATIO,Higher the margin, the better it is,Asset Turnover,Measures sales volume in relation to the investment in assets,HIGH RATIO,Higher the sales for every dollar it invests in assets, the better it is,Return on Equity,Measures the income earned for each dollar in stockholders equity,HIGH RATIO,Higher the income earned for each dollar in stockholders equity, the better it is,Price-Earnings Ratio,Compares a companys share price with its earnings per share,HIGH RATIO,Investors have high expectations of future earnings for the company,Part C,Earnings Persistence and Earnings Quality,LO5 Earnings Persistence and One-Time Income Items,Current earnings that will continue or persist into future years.,Earnings Persistence,Certain items are part of net income in the current year but are not expected to persist,One-Time Income Items,Discontinued operations,Extraordinary items,Discontinued Operations,The sale or disposal of a significant component of a companys operations,Extraordinary Items,An event that produces a gain or loss; and is (1) unusual in nature and (2) infrequent in occurrence.,Other Revenues and Expenses,LO6 Quality of Earnings,The ability of reported earnings to reflect the companys true earnings, as well as the usefulness of reported earnings to predict future earnings.,Conservative Accounting Practices,Aggressive Accounting Practices,Result in reporting lower income, lower assets, and higher liabilities,Result in reporting higher income, higher assets, and lower liabilities,Financial Statements by Mr. Sampras,Financial Statements by