Financial Statement Analysis Flashcards

Common-size financial statements are most useful for:

Answer: Comparing companies of different sizes

Common-size statements express items as percentages, enabling comparison across companies of different sizes.

The price-to-earnings (P/E) ratio relates a company's stock price to its:

Answer: Earnings per share

The P/E ratio divides market price per share by earnings per share.

A declining gross margin over several years most likely indicates:

Answer: Rising production costs or pricing pressure

Falling gross margin often reflects increasing input costs or declining selling prices.

Asset turnover measures how efficiently a company uses assets to generate:

Answer: Sales revenue

Asset turnover equals revenue divided by total assets, measuring revenue generated per dollar of assets.

Which limitation applies when comparing ratios across different companies?

Answer: Differing accounting policies can distort comparisons

Different accounting methods and estimates can make cross-company ratio comparisons misleading.

The operating margin is calculated as operating income divided by:

Answer: Revenue

Operating margin equals operating income divided by revenue.

Trend analysis of multiple ratios over time is primarily used to:

Answer: Identify improving or deteriorating performance

Trend analysis tracks ratios over time to reveal whether performance is improving or worsening.