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Unit 4 · 6 lessons

Financial Analysis and Decision Making

Learn how businesses raise money, how to read an annual report, and how horizontal and vertical analysis, financial ratios and the cash flow statement reveal a company's liquidity, solvency and profitability.

  • 55 practice questions
  • 51 flashcards
  • 2 interactive lessons
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Lessons

  1. 1Financing a Business: Debt versus EquityA business raises long-term money either by borrowing (debt, which must be repaid with tax-deductible interest) or by selling ownership (equity, which is never repaid but dilutes control), and the mix it chooses changes both its risk and its return to shareholders.9 questions
  2. 2Reading an Annual ReportAn annual report packages a corporation's audited financial statements with management's explanation, the auditor's opinion, the notes and governance information, and reading its sections together lets you judge a company's current and future financial strength.8 questions
  3. 3Horizontal and Vertical AnalysisHorizontal analysis measures how each item changed from a base year in dollars and percent, vertical analysis expresses each item as a percent of a base figure in the same year, and together they reveal liquidity, solvency and profitability trends that raw numbers hide.9 questions
  4. 4Liquidity, Efficiency and Solvency RatiosLiquidity ratios test whether a company can pay its bills soon, efficiency (turnover) ratios test how quickly it converts receivables and inventory into cash, and solvency ratios test whether it can carry its debt over the long run, each judged against prior years and the industry.Interactive10 questions
  5. 5Profitability and Market RatiosProfitability ratios measure how well a company turns sales, assets and owners' money into profit, market ratios connect that profit to each share and its price, and every ratio has limitations that must be kept in mind before drawing a conclusion.Interactive9 questions
  6. 6The Cash Flow StatementThe cash flow statement explains why cash changed during the year by sorting every cash receipt and payment into operating, investing and financing activities, with operating cash flow usually found by adjusting net income (the indirect method), and the net change must reconcile to the balance sheet.10 questions