Chapter_3_and_4_Questions_and_Answers[1]

Chapter_3_and_4_Questions_and_Answers[1] - Chapters 3 and 4...

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Chapters 3 and 4 Notes, Questions, and Answers Financial Statement Analysis 1. common-size analysis 2. financial ratio analysis 3. pro forma analysis 1 Common-size 1.1 Vertical common-size analysis The vertical common-size compares items in a given period to a benchmark item. Use revenue as the benchmark for the income statement. Use total assets as the benchmark for the asset side of the balance sheet. Use total liability and equity as the benchmark for the liab-equity side of balance sheet. 1.2 Horizontal common-size For horizontal we use the base year as the benchmark. 2 Financial ratio analysis Use of data to assess performance and financial condition. 1. activity ratios 2. liquidity ratios 3. solvency ratios 1
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4. coverage ratios 5. profitability ratios 6. return on investment ratios 2.1 Activity ratios 1. inventory turnover= costofgoodssold averageinventory 2. receivables turnover= totalrevenue averagereceivables 3. total asset turnover= totalrevenue averagetotalassets 2.2 Liquidity The company’s ability to satisfy short-term obligations using assets that are most readily converted into cash.
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