D366 Financial Statement Analysis - Set 5 - Part 3

Correct Answer: Price-to-earnings ratio

The price-to-earnings ratio is a valuation multiple useful for comparing how the market prices similar companies relative to their earnings, helping identify relative over- or undervaluation.

Correct Answer: Actual cash receipts and cash payments

The direct method lists actual operating cash receipts (such as cash from customers) and cash payments (to suppliers and employees). It contrasts with the indirect method, which reconciles from net income.

Correct Answer: LIFO reserve

The LIFO reserve is the disclosed difference between LIFO and FIFO inventory values. Analysts add it to LIFO inventory to approximate FIFO, enabling comparison with firms that use FIFO.

Correct Answer: Differences in accounting policies and estimates

Differences in accounting policies and estimates, such as depreciation methods or inventory costing, reduce comparability across companies. Analysts must adjust for these differences to make valid comparisons.

Correct Answer: Capital expenditures, debt repayments, and dividends

Cash flow adequacy examines whether operating cash flow is sufficient to cover a company's major cash needs, such as capital expenditures, debt repayments, and dividends, indicating financial self-sufficiency.

Correct Answer: Reconciles net income to operating cash flow, showing the sources of difference

The indirect method reconciles net income to operating cash flow, highlighting the non-cash items and working capital changes that explain the difference. This linkage is why most companies favor it.

Correct Answer: Incorporate the current stock price set by investors

Market-value ratios incorporate the current share price, reflecting investors' expectations and sentiment. This makes them forward-looking compared with ratios based solely on historical accounting figures.

Correct Answer: Net income and net profit margin for that period

A one-time gain inflates net income and profit margin for the period, but it is not part of ongoing operations. Analysts often exclude such nonrecurring items to assess sustainable, core profitability.

Correct Answer: Evaluate a company's past performance and assess its future prospects

Financial statement analysis uses ratios, trends, and comparisons to evaluate a company's historical performance, current condition, and future prospects, supporting decisions by investors, creditors, and managers.

Correct Answer: Cash received from selling equipment

Cash from selling equipment or other long-term assets is an investing inflow. Cash from customers is operating, while cash from issuing stock or borrowing is a financing inflow.