Textbook Notes (363,234)
United States (204,453)
ACCTG 201 (13)
De Boskey (12)
Chapter 12

ACCTG 201 Chapter 12: acctg textbook notes - ch 12

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San Diego State University
De Boskey

Comparison of Financial Accounting Information Vertical Analysis β€’ vertical analysis – when we express each item in a financial statement as a percentage of sales o aka. common-size analysis Horizontal Analysis β€’ horizontal analysis – used to analyze trends in financial statement data for a single company over time π‘π‘’π‘Ÿπ‘Ÿπ‘’π‘›π‘‘ π‘¦π‘’π‘Žπ‘Ÿ π‘Žπ‘šπ‘œπ‘’π‘›π‘‘ βˆ’ π‘π‘Ÿπ‘–π‘œπ‘Ÿ π‘¦π‘’π‘Žπ‘Ÿ π‘Žπ‘šπ‘œπ‘’π‘›π‘‘ % π‘–π‘›π‘π‘Ÿπ‘’π‘Žπ‘ π‘’ π‘‘π‘’π‘π‘Ÿπ‘’π‘Žπ‘ π‘’ = ) π‘π‘Ÿπ‘–π‘œπ‘Ÿ π‘¦π‘’π‘Žπ‘Ÿ π‘Žπ‘šπ‘œπ‘’π‘›π‘‘ Using Ratios to Assess Risk and Profitability Risk Analysis β€’ liquidity – refers to having sufficient cash to pay its current liabilities β€’ solvency – refers to a company’s ability to pay its long-term liabilities as well β€’ receivables turnover ratio – measure how many times, on average, a company collects its receivables during the year 𝑛𝑒𝑑 π‘π‘Ÿπ‘’π‘‘π‘–π‘‘ π‘ π‘Žπ‘™π‘’π‘  π‘Žπ‘£π‘’π‘Ÿπ‘Žπ‘”π‘’ π‘Žπ‘π‘π‘œπ‘’π‘›π‘‘π‘  π‘Ÿπ‘’π‘π‘’π‘–π‘£π‘Žπ‘π‘™π‘’ o average collection period – conversion of receivables turnover ratio into days 365 π‘‘π‘Žπ‘¦π‘  π‘Ÿπ‘’π‘π‘’π‘–π‘£π‘Žπ‘π‘™π‘’π‘  π‘‘π‘’π‘Ÿπ‘›π‘œπ‘£π‘’π‘Ÿ π‘Ÿπ‘Žπ‘‘π‘–π‘œ β€’ inventory turnover ratio – measures how many times, on average, a company sells its entire inventory during the year π‘π‘œπ‘ π‘‘ π‘œπ‘“ π‘”π‘œπ‘œπ‘‘π‘  π‘ π‘œπ‘™π‘‘ π‘Žπ‘£π‘’π‘Ÿπ‘Žπ‘”π‘’ π‘–π‘›π‘£π‘’π‘›π‘‘π‘œπ‘Ÿπ‘¦ o average days in inventory – conversion of inventory turnover ratio into days 365 π‘‘π‘Žπ‘¦π‘  π‘–π‘›π‘£π‘’π‘›π‘‘π‘œπ‘Ÿπ‘¦ π‘‘π‘’π‘Ÿπ‘›π‘œπ‘£π‘’π‘Ÿ π‘Ÿπ‘Žπ‘‘π‘–π‘œ β€’ current ratio – compares current assets to current liabilities π‘π‘’π‘Ÿπ‘Ÿπ‘’π‘›π‘‘ π‘Žπ‘ π‘ π‘’π‘‘π‘  π‘π‘’π‘Ÿπ‘Ÿπ‘’π‘›π‘‘ π‘™π‘–π‘Žπ‘π‘™π‘–π‘‘π‘–π‘’π‘  β€’ acid-test ratio – more conservative measure of current assets available to pay current liabilities π‘π‘Žπ‘ β„Ž + π‘π‘’π‘Ÿπ‘Ÿπ‘’π‘›π‘‘ π‘–π‘›π‘£π‘’π‘ π‘‘π‘šπ‘’π‘›π‘‘π‘  + π‘Žπ‘π‘π‘œπ‘’π‘›π‘‘π‘  π‘Ÿπ‘’π‘π‘’π‘–π‘£π‘Žπ‘π‘™π‘’ π‘π‘’π‘Ÿπ‘Ÿπ‘’π‘›π‘‘ π‘™π‘–π‘Žπ‘π‘–π‘™π‘–π‘‘π‘–π‘’π‘  β€’ debt to equity ratio – the ability of a company to pay its long-term liabilities π‘‘π‘œπ‘‘π‘Žπ‘™ π‘™π‘–π‘Žπ‘π‘–π‘™π‘–π‘‘π‘–π‘’π‘  π‘ π‘‘π‘œπ‘π‘˜β„Žπ‘œπ‘™π‘‘π‘’π‘Ÿπ‘  π‘’π‘žπ‘’π‘–π‘‘π‘¦ β€’ times interest earned ratio – compares interest payments with a company’s income available to pay those charges 𝑛𝑒𝑑 π‘–π‘›π‘π‘œπ‘šπ‘’ + π‘–π‘›π‘‘π‘’π‘Ÿπ‘’π‘ π‘‘ 𝑒π‘₯𝑝𝑒𝑛𝑠𝑒 + π‘‘π‘Žπ‘₯ 𝑒π‘₯𝑝𝑒𝑛𝑠𝑒 π‘–π‘›π‘‘π‘’π‘Ÿπ‘’π‘ π‘‘ 𝑒π‘₯𝑝𝑒𝑛𝑠𝑒 Profitability Analysis β€’ profitability ratio – measures the earnings or operat
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