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Chapter II Tutorial

Chapter II Tutorial. Financial Statements Ratio Analysis. Financial Statements. The Income Statement ( financial summary of the firm ‘s operating result during a specified period)

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Chapter II Tutorial

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  1. Chapter IITutorial Financial Statements Ratio Analysis

  2. FinancialStatements • The IncomeStatement (financialsummaryof the firm‘s operatingresultduring a specified period) • The Balance Sheet (summarystatementof the firm‘s financialpositionat a given point in time) • The Statementof Cash Flows (summaryof the cash flowsover a specified period) • The StatementofRetainedEarnings (reconciles the netincomeduring a year, and anydividendspaid, with the change in retainedearningsbetween the start and the endofthatyear)

  3. The IncomeStatement • Provides a financialsummaryof the firm‘s operatingresultduring a specified period. • Most common are incomestatementscovering a 1-year period endingDecember 31. Monthlystatements are preparedfor use by management. Quaterlystatementsmustbemadeavailable to the stockholdersofpubliclyownedcorporations.

  4. The IncomeStatement Generalform: Revenue -Costofgoods sold = Gross profit -Operatingexpenses = Operating profit (EBIT) -Financialcost = EarningBeforeTaxes (EBT) -Taxes = EarningAfterTaxes (EAT)

  5. The Balance Sheet • Balances the firm‘s assetsagainstitsfinancing (debtorequity) • Short-term x Long-term assets and liabilities Shotr-term (currentassets and liabilities) – they are expected to beconvertedinto cash orpaidwithin 1 yearorless. Long-term (fixedassets, equity, long term debt) – they are expected to remain on the firm‘s books far more than 1 year.

  6. The Balance Sheet As iscustomary, the assets are listedfrom the most liquid (cash) downto the leastliquid. Assets Currentassets Fixedassets Liabilities and Equity Currentliabilities Long term debt / liabilities Equity

  7. The Statementof Cash Flows Analyses the firm’s ability to generate cash and cash equivalents Statementof CF shows: – Where did the cash come from? – What was it used for? – What was the change in the cash balance? Operating, Investing and Financing activities Sources vs. Usage of funds

  8. FinancialAnalysis • Evaluationoffirm’sperformance • Users: investors, stockholders, management, creditors, business partners • Typesof Ratio Comparisons • Cross-SectionalAnalysis (benchmarking) • Time-SeriesAnalysis • CombinedAnalysis

  9. CategoriesofFinancialRatios: • Liquidityratios • Activityratios • Debtratios • Profitabilityratios • Marketratios

  10. LiquidityRatios Measure the abilityof a firm to satisfyitsshort-term obligations. Current Ratio = CurrentAssets/CurrentLiabilities (acceptable = 2, depends on industry) Quick Ratio = (CurrentAssets – Inventory) / CurrentLiabilities (acceptable = 1, depends on industry)

  11. ActivityRatios Measure the speed withwhichvariousaccounts are convertedintosalesor cash. InventoryTurnover = CostofGoods Sold / Inventory AverageCollection Period = Accountsreceivable / (Annualsales/365) AveragePayment Period = Accountspayable / (Annualpurchases/365) TotalAssetsTurnover = Sales / TotalAssets

  12. DebtRatios measure how much of the firmisfinancedwithotherpeople’s money and the firm’sabilityto meetfixedcharges. DebtRatio = TotalLiabilities / TotalAssets InterestCoverageRatio orTimesInterestEarned= EBIT / Interest

  13. Profitability Ratios measure a firm’sreturnwithrespect to sales, assets, orequity. Common-sizeIncomeStatement – eachitemisexpressed as % ofsales. Gross Profit Margin = Gross Profit / Sales Operating Profit Margin = EBIT / Sales EPS = Earningsavailableforcomm. Stockh. / numberofshares ROA = Earningsavailableforcomm. Stockh. / TotalAssets ROE = Earningsavailableforcomm. Stockh. / CommonstockEquity

  14. Market Ratios insightinto how wellinvestors in the marketplacefeel the firmisdoing in termsofreturn and risk. PE = Market price per share / EPS Market/Book Ratio = Market price per share / Bookvalue per share Bookvalue per share = Equity / Numberofshares

  15. Questions?ThankYouforYourattention.

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