A Practical Approach to Financial Statement Analysis

A Practical Approach to Financial Statement Analysis* presented to CMA Business Credit Services Western Region Credit Conference October 6, 2006 presented by Kathleen Tomlin, CCE Central Concrete Supply Co., Inc. & Central Precast Concrete US Concrete Companies *Pocket protector and eyeshade not included

Where do I start?
Definitions
Accounting Lingo
Concepts
Types of Statements
Balance Sheet
Income Statement
Funds Flow
What do they mean?
Ratios
Analysis

Definitions
What is Accounting?
FASB
GAAP
SEC
10-K
10-Q
Auditor
Balance Sheet
Income Statement
Statement of Cash Flows
Accruals
Depreciation
LIFO/FIFO

Accounting Watchdogs
FASB – Financial Accounting Standards Board
SEC–Securities & Exchange Commission
Auditors
Sarbanes-Oxley
GAAP-Generally Accepted
Accounting Principles

Types of Financial Statements
Annual Statements
Interim Statements
Estimated Statements
Consolidated
Combined
ProForma “Forecast”

Balance Sheet
Assets = Liabilities & Shareholders’ Equity
A snapshot at a
point in time

Assets
Current Assets
Cash
Marketable Securities
Accounts Receivable
Notes Receivable
Inventory
Prepaid Expenses

Other A ss ets
Fixed Assets (Net of Depreciation)
Leases
Investment and Advances to Subsidiaries
Miscellaneous Assets
Intangibles

Liabilities
Current Liabilities
Accounts Payable
Notes Payable
Advance Payments
Wages, Taxes and Accruals
Miscellaneous Obligations
Other Liabilities
Long Term Debt
Deferred Income

Net Worth
Unincorporated: Capital
Corporations
Preferred Stock
Common Stock
Paid-in Capital
Retained Earnings

Accruals
Matching of revenues and expenses to a particular accounting period
Regardless of when revenue is collected or when expenses are paid!!

Depreciation
Allocating the cost of an asset over the estimated life of the asset…
Life of over one year
Accounted for as an expense
No cash outlay!

Income Statement
Sales
- Cost of Goods Sold
= Gross Profit
- Expenses
= Net Operating Income
- Other Income & Expenses
- Extraordinary Items
- Federal Income Taxes
= Net Income
Retained Earnings

Statement of Cash Flows
Cash inflow and outflow
By operating activities
By investing activities
By financing activities
Shows changes over time

Operating Activities
Inflows
Revenue from sales, services
Interest & dividends
Outflows
Payments for inventory
Operating expenses & purchases
Interest payments
Taxes

Investing Activities
Inflows
Sales of long-term assets (PP&E)
Sales of debt or securities
Returns from loans (to others)
Outflows
Acquisition of long-term assets
Purchases of debt or securities
Loans made (to others)

Financing Activities
Inflows
From borrowing
From issuance of equity
Outflows
Payment of debt (principal)
Repurchase of shares
Payment of dividends

Trend Analysis
Helps determine the trend of operations
Compare current financials with prior periods (2 or more)
Compare statements of like dates (year to year, quarter to quarter) to eliminate seasonal variations

Trend Analysis (cont)
Same accounting techniques should be used by firm (LIFO vs FIFO, Accrual vs. Cash, etc.)
Comparisons between changes in percentages from period to period
Comparison between changes in ratios from period to period

What are creditors looking for???
Short-term Creditors
Current Assets
Long-Term Creditors
Profitability & Return on Investment

Types of Ratios
Liquidity
Measures the firm’s ability to meet its short-term obligations
Current Current Assets/Current Liabilities
Quick Or Acid Current Assets-Inventory
Current Liabilities

Types of Ratios-Leverage
Measures the extent to which the firm has been financed by debt.
Debt to Total Assets
Times Interest Earned (Earnings before
Taxes/Interest Charges)
Current Liabilities to Net Worth

Types of Ratios-Activity
Measures how effectively the firm has been using its resources.
Inventory Turnover (Sales/Inventory)
Avg Collection Period (Receivables/Sales per Day)

Types of Ratios-Profitability
Measures management’s overall effectiveness as shown by the returns generated on sales and investment.
Profit Margin on Sales (Net Income/Sales)
Return on Total Assets (Net Income/Total Assets)
Return on Net Worth (Net Income/Net Worth)

You can get the answers!
Your personal network
Anscers.com
Community Bulletin Board
Encyclopedia of Credit

With just a little work…

A Practical Approach to Financial Statement Analysis

by Credit Management Association on Oct 30, 2006

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