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# Chapter 15: Summary Handout for Students

1. Horizontal Analysis
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## Usually calculated over a period of years

2. Vertical Analysis
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## Shows the relationship of each statement item to its base amount

Income statement:
Vertical Analysis Percentage = (Specific item/Base amount) * 100

Balance sheet:

## The base amount for each asset is Total Assets

The base amount for each liability and equity item is Total Liabilities and Equity

3. Comparing Companies
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## Acid-Test (Quick) Ratio = (Cash + Short-term investments + Net current

receivables)/Total Current liabilities

## Times-Interest-Earned Ratio = (Net income + Income tax expense + Interest

expense)/Interest expense

Evaluating Profitability

## Profit Margin Ratio = Net income/Net sales

Rate of Return on Total Assets = (Net income + Interest expense)/Average total assets

## Rate of Return on Common Stockholders Equity = (Net income Preferred

dividends)/Average common stockholders equity

## Earnings per Share = (Net income Preferred dividends)/Weighted average number

of common shares outstanding

## Evaluating Stock as an Investment

Price/Earnings Ratio = Market price per share of common stock/Earnings per share

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## Movement of Sales, Merchandise Inventory, and Receivables

Earnings Problems