Chapter 2 Pages 54-66

Ratio Analysis- expresses the relationship among selected items of

financial statement data.
Ratio- expresses the mathematical relationship between one quantity
and another.
Intracompany Comparisons- covering two years for the same
company.
Industry-average Comparisons- based on average ratios for
particular industries.
Intercompay Comparisons- based on comparisons with a competitor
in the same industry.
(Profitability Ratios)
Earnings per Share (EPS)- measures the net income earned on each
share of common stock.
Net income preferred dividends
-------------------------------------------average number of common shares outstanding
(during year)
Statement of Stockholders Equity- presents the causes of
changes to stockholders equity during the period, including those that
caused retained earnings to change.
Liquidity- ability to pay obligations expected to become due within
the next year or operating cycle.
Working Capital- a measure of liquidity. The difference between the
amounts of current assets and current liabilities.
Working Capital= Current Assets Current Liabilities
Liquidity Ratio- measure the short-term ability of the company to pay
its maturing obligations and to meet unexpected needs for cash.
Current Ratio- computed as current assets divided by current
liabilities.
Solvency- ability to pay interest as it comes due and to repay the
balance of a debt due at its maturity.
Solvency Ratio- measure the ability of the company to survive over a
long period of time.
Debt to Assets Ratio- one measure of solvency. Calculated by
dividing total liabilities (both current and long-term) by total assets. It

measures the percentage of total financing provided by creditors

rather than stockholders.
Free Cash Flow- describes the net cash provided by operating
activities after adjusting for capital expenditures and dividends.
Comparability- results when two different companies use the same
accounting principles.
Consistency- a company uses the same accounting principles and
methods year after year.
Verifiable- if independent observers, using the same methods, obtain
similar results.^
Timely- it must be available to decision-makers before it loses its
capacity to influence decisions.
Understandability- it is presented in a clear and concise fashion so
that reasonably informed users of that information can interpret it and
comprehend its meaning.
Historical Cost Principle- dictates that companies record assets at
their cost.
Fair Value Principle- indicates that assets and liabilities should be
reported at fair value.
Full Disclosure Principle- requires that companies disclose all
circumstances and events that would make a difference to financial
statement users.
Cost Constraint- weighs the cost that companies will incur to provide
the information against the benefit that financial statement users will
gain from having the information available.