What three things are needed to compare a companies performance?
year to year (horizontal), with a competing company (vertical), with the same industry as a whole (ratio).
what are the three main ways to analyze financial statements?
horizontal analysisvertical analysisratio alaysis
annual report
provides information about company's financial condition
management's discussion and analysis of financial condition and results of operations (MD&A)
the section of the annual report that is inteded to help investors understand the result of operations and the financial condition of the company.
what is a report of an independed registered public accounting firm often referred to as?
the auditor's report
what is an unqualified opinons when it comes to audit reports?
its when the financial statements are presented fairly in all marterial respects.
what are qualified opinions in reference to audit reports?
its something that might be issued if the financial statements include a departure from GAAP.
what do you need to get an adverse opinion?
an auditor needs to find that the financial statements are not represented fairly.
what do the notes to the financial statements include?
a summary of significant accounting policies and explanations of specific items on the financial statements.
horizontal analysis
the study of percentage changes in comparaitive financial statements. (dollar amount of change/ base period amount) x 100
trend analysis
a form of horizontal analysis in which percentages are computed by selecting a bse period as 100% and expressing amounts for following periods as a percentage of the base period amount.
(any period amount/ basea perios amount) x 100
what is the difference between horizontal analysis and trend analysis?
horizontal analysis allows a company to see the percentage change from one year to the next. trand analysis shows the percentage change from a base year forward to determine whether the trend in net sales, for example, is positive or negative over a longer period of time.
vertical analysis
an analysis of a financial statement that reveals the relationship of each statment item to its base amount which is the 100% figure. (specific item/ base amount) x100
common-size statement
a finacial statement that reports only percentages (no dollar amounts).
dollar value bias
the bias one sees from comparing number in absolute (dollars) rather than relative (percentage) terms.
benchmarking
the practice of comparing company with other leading companies
what are the two main types of benchmarks in financial statement analysis?
bench marking against a key competitor and benchmarking againt the industry average.
working capital
a measure of a business's ability to meet its short-term obligations with its current assets. current assets- current liabilities
what are the three aditional decidsion tools based on working capital?
current ratio, cash ratio, adn acid-test ratio
curretn ratio
measures teh company's ability to pay currnet liabilities from currnet assets. total current assets/ total current liabilities
cash ratio
a measure of a company's ability to pay current liabilites from cash and cash equivalents: (cash + cash equivalents)/ total current liabilities
acit-test ratio (quick ratio)
the ratio of the sum of cash, cash equivalents, short-term investments, adn new curretn receivables to total current liabilities.
the ratio tells whether the entity can pay all its current liabilities if they came due immediately. (cash including cash equivalents + short-term investments + net current receivables)/ total current liabilities
inventory turnover
measures the number of times a company sells its average level of merchandise inventory during a period. cost of goods sold/ average merchandise inventory.
