# ADMN 2021H Lecture Notes - Lecture 11: Weighted Arithmetic Mean, Free Cash Flow, Accounting

ADMN2021H: Financial Accounting II

Tuesday, March 27th, 2018

Lecture Week 11 – Performance Measurement

Study Objectives:

1. Explain and apply comparative analysis

2. Calculate and interpret ratios that are used to analyze liquidity

3. Calculate and interpret ratios that are used to analyze solvency

4. Calculate and interpret ratios that are used to analyze profitability

5. Understand the limitations of financial analysis

Comparative Analysis: Two Tools

-Horizontal analysis(rent analysis)

oCan be expressed as an amount or percentage

Percentage of base-period

Percentage change for the period

Horizontal Percentage of Base-Period Amount

Horizontal percentage of base-period amount = analysis-period amount = base period amount

Horizontal Percentage Change for the Period

Horizontal percentage change for period = analysis period amount – prior period amount / prior period amount (x100)

Vertical Analysis

-Expresses each item in a financial statement as a percent of a base amount (total assets or net sales)

Vertical percentage of base amount = analysis amount / base amount

Comparative Analysis

-Three types of comparisons:

oIntracompany basis – comparisons within a company

oIntercompany basis – comparisons between one or more competitor companies

oIndustry averages

Ratio Analysis

-Liquidity ratios

-Solvency ratios

-Profitability ratios

Liquidity Ratios

-Working capital

-Current ratio

-Receivables turnover

-Average collection period

-Inventory turnover

-Days in inventory

Working Capital

Working capital = current assets – current liabilities

-Higher is better

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## Document Summary

Horizontal analysis(rent analysis: can be expressed as an amount or percentage. Horizontal percentage of base-period amount = analysis-period amount = base period amount. Horizontal percentage change for period = analysis period amount prior period amount / prior period amount (x100) Expresses each item in a financial statement as a percent of a base amount (total assets or net sales) Vertical percentage of base amount = analysis amount / base amount. Three types of comparisons: intracompany basis comparisons within a company, intercompany basis comparisons between one or more competitor companies, industry averages. Working capital = current assets current liabilities. Current ratio = current assets / current liabilities. Average collection period = 365 days / receivables turnover. Inventory turnover = cost of goods sold / average inventory. Days in inventory = 365 days / inventory turnover. Debt to total assets = total liabilities / total assets. Times interest earned = net income +interest expense + income tax expense (ebit) / interest expense.