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Financial Statement Analysis

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Financial Statement Analysis

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  1. Financial Statement Analysis CHAPTER 13

  2. Why? Financial Ratios • Never answers questions by themselves • They do however • Raise questions to answer • Point to opportunities for further analysis • Also include: • Industry trends • Technological changes • Changes in consumer tastes • Changes in broad economic factors • Changes within company

  3. Horizontal (Trend) Analysis • Examines changes in accounts over time • Select a year as the “BASE YEAR” = 100% • Every year is a % of that year. New #/Base Year • Usually over 5 or 10 years • Can compare any account to see how it has changed over the years • Page 586 McDonalds(#s), Graph • When“Super size Me”? • Change over two years in $ and % page 606 13-1 • Exercise 13-10 Trend % pg 610

  4. Common Size (Vertical) Statements • Relationship between accounts • Balance Sheet - % of Total Assets pg 585Income Statement - % of Sales pg 586 • Change over two years in $ and % page 606 13-1

  5. Financial Ratios • Accounting 101 - • Liquidity, Profitability, Long Term Solvency, Market Strength • Accounting 102 – Users • Common Stockholders, Short-Term Creditors, Long Term Creditors • Summary of Ratios Exhibit 13-6 page 600

  6. Numerator • Denomiator • Num goes up ratio goes up • Dem goes up ratio goes down • Num goes down ratio goes down • Dem goes down ratio goes up

  7. Common Stockholders • Gross Margin % • Gross Margin/Sales • Earnings Per share (EPS) • Net Income-Preferred Div/Avg Common Stock O/S • Price Earning Ratio • Market Price/ EPS • Dividend Payout • Dividends per share/ EPS • Dividend Yield • Dividend per share/Market Price per share

  8. Common Stockholders con’t • Return on Assets (simple version) • Net Income / Average Total Assets • Return On Equity (simple version) • Net Income/ Average Total SE • Book Value Per Share • Stockholder’s Equity/ Shares Outstanding EXERCISE 13-2 Page 608

  9. Financial Leverage • Basically--- ability to borrow money at a lower rate 7% (pay your creditors)than your net income percentage 10% (rate of return)

  10. Short Term Creditor- Vendors, Creditors, Suppliers • Working Capital • Current Assets – Current Liabilities • Current Ratio • Current Assets/Current Liabilities • Acid-Test (Quick) Ratio • Cash+Market Sec+A/R+ Short Term Invest/CL • A/R Turnover • Credit Sales/Avg A/R • Avg Collection Period • 365/ A/R Turnover

  11. Short Term Creditors Con’t • Inventory Turnover • Cost of Goods Sold (COGS)/ Avg Inventory • Average Sales Period • 365/ inventory Turnover • Payables Turnover • COGS + or – Change in Inventory/Average A/P • Average days Payables • 365/Payables Turnover • Operating Cycle in days • Average collection period(Days uncollectible) + Average Sales Period (Inventory on hand) • Financing Requirement • Operating Cycle – Average Days Payable • EXERCISE 13-3 PG 608

  12. Long Term Creditors • Times Interest Earned • EBIT/ Interest Expense • Debt to Equity • Total Liabilities/ Stockholder’s Equity • EXERCISE 13-4 PG 608 • SUMMARY OF RATIOS Pg 600