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A Practical Approach to Financial Statement Analysis

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  • 1. 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
  • 2. Where do I start?
    • Definitions
      • Accounting Lingo
      • Concepts
    • Types of Statements
      • Balance Sheet
      • Income Statement
      • Funds Flow
    • What do they mean?
      • Ratios
      • Analysis
  • 3. Definitions
    • What is Accounting?
    • FASB
    • GAAP
    • SEC
    • 10-K
    • 10-Q
    • Auditor
    • Balance Sheet
    • Income Statement
    • Statement of Cash Flows
    • Accruals
    • Depreciation
    • LIFO/FIFO
  • 4. Accounting Watchdogs
    • FASB – Financial Accounting Standards Board
    • SEC–Securities & Exchange Commission
    • Auditors
    • Sarbanes-Oxley
    • GAAP-Generally Accepted
    • Accounting Principles
  • 5. Types of Financial Statements
    • Annual Statements
    • Interim Statements
    • Estimated Statements
    • Consolidated
    • Combined
    • ProForma “Forecast”
  • 6. Balance Sheet
    • Assets = Liabilities & Shareholders’ Equity
    • A snapshot at a
    • point in time
  • 7. Assets
    • Current Assets
      • Cash
      • Marketable Securities
      • Accounts Receivable
      • Notes Receivable
      • Inventory
      • Prepaid Expenses
  • 8. Other A ss ets
    • Fixed Assets (Net of Depreciation)
    • Leases
    • Investment and Advances to Subsidiaries
    • Miscellaneous Assets
    • Intangibles
  • 9. Liabilities
    • Current Liabilities
      • Accounts Payable
      • Notes Payable
      • Advance Payments
      • Wages, Taxes and Accruals
      • Miscellaneous Obligations
    • Other Liabilities
      • Long Term Debt
      • Deferred Income
  • 10. Net Worth
    • Unincorporated: Capital
    • Corporations
      • Preferred Stock
      • Common Stock
      • Paid-in Capital
      • Retained Earnings
  • 11. Accruals
    • Matching of revenues and expenses to a particular accounting period
      • Regardless of when revenue is collected or when expenses are paid!!
  • 12. 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!
  • 13. 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
  • 14. Statement of Cash Flows
    • Cash inflow and outflow
      • By operating activities
      • By investing activities
      • By financing activities
    • Shows changes over time
  • 15. Operating Activities
    • Inflows
      • Revenue from sales, services
      • Interest & dividends
    • Outflows
      • Payments for inventory
      • Operating expenses & purchases
      • Interest payments
      • Taxes
  • 16. 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)
  • 17. Financing Activities
    • Inflows
      • From borrowing
      • From issuance of equity
    • Outflows
      • Payment of debt (principal)
      • Repurchase of shares
      • Payment of dividends
  • 18. 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
  • 19. 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
  • 20. What are creditors looking for???
    • Short-term Creditors
      • Current Assets
      • Long-Term Creditors
      • Profitability & Return on Investment
  • 21. 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
  • 22. 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
  • 23. 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)
  • 24. 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)
  • 25. You can get the answers!
    • Your personal network
    • Anscers.com
    • Community Bulletin Board
    • Encyclopedia of Credit
  • 26. With just a little work…

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