Financial Management SCDL

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Financial Management SCDL

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  • Financial Management SCDL

    1. 1. Financial management By Prof. Augustin Amaladas M. Com., AICWA., PGDFM., B.Ed. <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    2. 2. <ul><li>Welcome To SCDL </li></ul><ul><li>Financial Management </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    3. 3. <ul><ul><li></li></ul></ul>*11.CAPITAL BUDGETING *9.LEVERAGES *8.CAPITAL STRUCTURE *7.SOURCES OF LONG TERM AND MEDIUM TERM *5.CASH FLOW STATEMENTS 5.FUND FLOW STATEMENT *4.RATIOS *10.CAPITAL mARKET *3.FINANCIAL STATEMENTS *2.FORMS OF BUSS.ORG. 1.FINANCIAL FUNCTION *6.CAPITALISATION *13.CASH MANAGEMENT *14.RECEIVABLE MANAGEMENT *15.INVENTORY MANAGEMENT *16.DIVIDEND POLICY *12.WORKING CAPITAL MANAGEMENT e-mail: aug_bang@yahoo.com www.augustin.co.nr
    4. 4. <ul><ul><li></li></ul></ul>L L L L L L Welcome by SCDL to AZtecsoft e-mail: aug_bang@yahoo.com www.augustin.co.nr
    5. 5. <ul><li>MANAGEMENT PROCESSES, </li></ul><ul><li>DEFICIENCY FINDING </li></ul><ul><li>MANAGEMENT AUDIT </li></ul><ul><li> MANAGEMENT PLANNING </li></ul><ul><li>MANAGEMENT SERVICES </li></ul><ul><li> PLANNING AND CONTROL SYSTEMS </li></ul><ul><li>MANAGEMENT ACCOUNTING </li></ul><ul><li> TAX PLANNING, TAX ADVICING </li></ul><ul><li>TAX ACCOUNTING </li></ul><ul><li> GOVERNMENT ACCOUNTING </li></ul><ul><li>COST STANDARD, COST REVENUE ANALYSIS, </li></ul><ul><li>COST ANALYSIS, COST AND PRODUCTION STATISTICS </li></ul><ul><li> COST ACCOUNTING </li></ul><ul><li>PRINCIPLES OF FINANCIAL REPORTING, </li></ul><ul><li> AUDITING STANDARDS, </li></ul><ul><li>UNIFORM STATEMENTS,AUDITING OF RECORDS AND STATEMENTS </li></ul><ul><li>FINANCIAL AUDITING </li></ul><ul><li>COMPUTERS, PUNCHED CARD RECORDS,TAX RECORDS, </li></ul><ul><li>INCOME STATEMENT ANALYSIS, </li></ul><ul><li>BALANCE SHEET EMPHASIS </li></ul><ul><li>BOOK KEEPING(SINGLE ENTRY AND DOUBLE ENTRY ) </li></ul><ul><li>1775 1800 1825 1850 1875 1900 1925 1950 1975 1985 1990 1995 2005 </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    6. 6. <ul><ul><ul><ul><ul><li> COST MANAGEMENT : </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>ACTIVITY BASED ACCOUNTING, LIFE CYCLE COSTING, </li></ul></ul></ul></ul></ul><ul><li>VALUE CHAIN ANALYSIS, </li></ul><ul><li> TARGET COSTING, </li></ul><ul><li> KAIZEN COSTING </li></ul><ul><li>RESPONSIBILITY ACCOUNTING </li></ul><ul><li>,CURRENT COST ACCOUNTING, </li></ul><ul><li> INFLATIONARY ACCOUNTING </li></ul><ul><li> </li></ul><ul><li>EDP ENVIRONMENTAL AUDIT </li></ul><ul><li>HUMAN BEHAVIOUT, </li></ul><ul><li> MANPOWER VALUES, </li></ul><ul><li> INTER GOVERNMENTAL RELATIONS </li></ul><ul><li> </li></ul><ul><li>SOCIAL ACCOUNTING </li></ul><ul><li>TOTALSYSTEMS PLANNING, </li></ul><ul><li>INTER DECIPLINARY APPLICATIONS </li></ul><ul><li> TOTAL SYSTEM RECVIEW </li></ul><ul><li> EFFECTIVENESS AUDITING </li></ul><ul><li> </li></ul><ul><li> EFFECTIVENESS EVALUATIOn COMPUTERS CYBERNETICS </li></ul><ul><li> INFORMATION SYSTEMS </li></ul><ul><li>ORGANISATIONAL MODEL, ORGANISATIONAL PLANNING, </li></ul><ul><li>DECISION THEORY, </li></ul><ul><li>COST BENEFIT ANALYSIS </li></ul><ul><li> </li></ul><ul><li>MANAGEMENT SCIENCES </li></ul><ul><li>1775 1800 1825 1850 1875 1900 1925 1950 1975 1985 1990 1995 2005 </li></ul><ul><ul><li></li></ul></ul>GROWTH OF ACCOUNTABILITY KNOWLEDGE:FINANCIAL ACCOUNTING Cost accounting, Management Accounting Tax accounting and Management e-mail: aug_bang@yahoo.com www.augustin.co.nr
    7. 7. FLOW OF CASH/SHORT TERM AND LONG TERM <ul><ul><li></li></ul></ul>information Accounts payable RAW mATERIAL ADR Bonds(281) Preference Shares Bad debts Accounts receivable Debtors Work in progress information Overheads Labour Equity shares CASH GDR information Information Rights issue Leasing/Hr.Pur Reserves Public deposits e-mail: aug_bang@yahoo.com www.augustin.co.nr
    8. 8. FLOW OF CASH - LONG TERM <ul><ul><li></li></ul></ul>ADR Long term loans Preference Shares Equity shares CASH Short term GDR land furniture investments goodwill building Patent rights Know how Copy right e-mail: aug_bang@yahoo.com www.augustin.co.nr
    9. 9. FLOW OF CASH-SHORT TERM <ul><ul><li></li></ul></ul>information Accounts payable RAW mATERIAL Bad debts Accounts receivable Debtors Work in progress information Overheads Labour information Information Discounting bills creditors Cash credit Sale of investments Bad debts Bad debts Issue of long term funds Sale of fixed assets Bank overdraft cash cash Commer Cial papers e-mail: aug_bang@yahoo.com www.augustin.co.nr
    10. 10. Working capital finance(361) <ul><ul><li></li></ul></ul>Inter corpo Rate deposits Trade credit Bills discounts Outstanding Expenses Cash credit Packing credit overdraft Letter of credit loan Commercial papers pledge Hypothecation lien mortgage 1.Spontaneous 2.Bank guarantee 3.Fund based 4.Security e-mail: aug_bang@yahoo.com www.augustin.co.nr
    11. 11. Users of information and goals <ul><ul><li></li></ul></ul>organisation shareholders public Benefactors government banks Debenture holders Loan vendor Preference shareholders creditors debtors customers dividend liquidity Dividend/value in the share market Interest/return of capital Interest/return of capital Timely payment Timely supply Good product Less pollution Good name tax e-mail: aug_bang@yahoo.com www.augustin.co.nr
    12. 12. <ul><ul><li></li></ul></ul>Page-3 e-mail: aug_bang@yahoo.com www.augustin.co.nr
    13. 13. Scope of Financial Management <ul><ul><li></li></ul></ul>Capital Budgeting Management of Mergers, reorganisation Financing Financial Analysis Management of Current Assets Method of Raising funds Implementation Determine Financing mix Financial Control Receivables Selection Identification Marketable Securities Cash Financial Forecasting Inventory Management Source identification Profit planning Dividend policy e-mail: aug_bang@yahoo.com www.augustin.co.nr
    14. 14. Role of Finance in a Typical Business Organization-page- 9 <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr Board of Directors President VP: Sales VP: Finance VP: Operations Treasurer Controller Credit Manager Inventory Manager Capital Budgeting Director Cost Accounting Financial Accounting Tax Department
    15. 15. Unit-2 Forms of Business organisation <ul><li>Sole trading </li></ul><ul><li>Partnership </li></ul><ul><li>Companies </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    16. 16. <ul><li>What will happen if this deal does not materialise? </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr My business!! My family?
    17. 17. Partnership <ul><ul><li></li></ul></ul>h Should we build this plant? e-mail: aug_bang@yahoo.com www.augustin.co.nr
    18. 18. Mini computer <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr Ulta pulta Company Ltd.???
    19. 19. Nature of Financial Statements-Page-30 <ul><ul><li></li></ul></ul>Financial accounting 1. Introduction 2. Basic Accounting 3. Process of accounting 4. BRS 5. Rectification of Errors Final accounts e-mail: aug_bang@yahoo.com www.augustin.co.nr
    20. 20. Unit-3 Financial statements <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    21. 21. Chapter-2: Basics of financial accounting <ul><li>1.Concepts </li></ul><ul><li>2.system of accounting </li></ul><ul><li>3.Types of Expenditure </li></ul><ul><li>4.Terms used in financial accounts </li></ul><ul><li>5.Double entry / Single entry </li></ul><ul><li>6. Depreciation methods </li></ul><ul><li>7. Practical consideration relating to depreciation </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    22. 22. 1.concepts& conventions <ul><li>Meaning: Basic assumptions upon which the basic process of accounting based. </li></ul><ul><li>a] Business entity concept- </li></ul><ul><li>b] Dual aspect concept </li></ul><ul><li>c] Going concern concept </li></ul><ul><li>d] Accounting period concept </li></ul><ul><li>e] Cost concept </li></ul><ul><li>f] Money measurement concept </li></ul><ul><li>g] Matching Concept </li></ul><ul><ul><ul><ul><ul><li>Conventions </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Coservativism </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Materiality </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Consistency </li></ul></ul></ul></ul></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    23. 23. a] Business entity concept- <ul><li>Business is different from the owner </li></ul><ul><li>We pass Journal entry when owner contributes towards capital. </li></ul><ul><li>When amount / goods withdrawn for personal use we make an entry in the business </li></ul><ul><li>When Income tax paid by the owner out of business money we make an entry In the books of accounts. </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    24. 24. b] Dual aspect concept <ul><li>Every debit has equal amount of credit </li></ul><ul><li>Asset =Liability </li></ul><ul><li>Liability creates asset </li></ul><ul><li>If asset>Liability= profit </li></ul><ul><li>If Liability> Assets= loss </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    25. 25. c] Going concern concept <ul><li>Business will go for at least for a reasonable period. </li></ul><ul><li>Depreciation is provided based on this assumption. </li></ul><ul><li>If this assumption is not made all Fixed assets will be valued at realised value like current assets. </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    26. 26. d] Accounting period concept <ul><li>Fixing time limit for accounts </li></ul><ul><li>Profit for the period </li></ul><ul><li>It can be one week or two weekor 6 months/one year or 5 years </li></ul><ul><li>But to find profit we normally consider 12 months period </li></ul><ul><li>Financial year for income tax point of view 1 st April-31 st March of the following year </li></ul><ul><li>Calendar year –January to December </li></ul><ul><li>Divali to Divali </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    27. 27. e] Cost concept <ul><li>The cost to the organisation (Actual) is recorded in the books </li></ul><ul><li>Assets are not recorded according to the market price every year. </li></ul><ul><li>Depreciation is calculated on cost not based on market price </li></ul><ul><li>Accounting records may not show the real worth of the business </li></ul><ul><li>Market price may be disclosed with in bracket in the balance sheet </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    28. 28. Exercise <ul><li>Accounting Test Question SV No.1: Company XYZ uses a perpetual inventory system. Append below the following transaction relating to its merchandise inventory during the month of Nov’06 </li></ul><ul><li>Date:Transaction </li></ul><ul><li>Nov 1 inventory on hand - 3,000 units @ $8 each </li></ul><ul><li>Nov 7Bought 5,000 units for $8.40 each </li></ul><ul><li>Nov 13Sold 4,000 units for $14.00 each </li></ul><ul><li>Nov 17Bought 6,000 units for $8.20 each </li></ul><ul><li>Nov 24Sold 7,000 units for $14.00 each </li></ul><ul><li>Nov 30Inventory on hand -3000 units </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    29. 29. <ul><li>Required: Compute the inventory balance Company XYZ would report on its November 30 2006 balance sheet and the cost of goods sold for the period of November 2006 income statement using each of the following inventory methodology: </li></ul><ul><li>(1) First-in, first-out (FIFO) </li></ul><ul><li>2) Last-in, first-out (LIFO) </li></ul><ul><li>(3) Average cost[ Refer Answer ] </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    30. 30. f] Money measurement concept <ul><li>Every thing which can be expressed in terms of Money is recorded in the books </li></ul><ul><li>Beautiful women are working /Handsome boys working in AZTEC /Efficient engineers worth Rs.5000 crores –How do you record?. </li></ul><ul><li>Good working environment? </li></ul><ul><li>Highly motivated employees? </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    31. 31. g] Matching Concept <ul><li>Matching Cost with revenue </li></ul><ul><li>It is used to estimate correct profits </li></ul><ul><li>Accrual/ cash basis of accounting </li></ul><ul><ul><li>Even cash paid /received if it belongs to accounting period we consider them as expenditure /income </li></ul></ul><ul><ul><li>Salary outstanding for the last month? </li></ul></ul><ul><ul><li>Income from Investments yet to be received? </li></ul></ul><ul><ul><li>Rent received in advance for next year? </li></ul></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    32. 32. Conventions <ul><li>Customs and traditions that are followed by the accountants while preparing the financial statements. </li></ul><ul><li>Why do we respect elders? </li></ul><ul><li>Why do we shake hands? </li></ul><ul><li>Why do Young Indians hate receiving dowry? </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    33. 33. Coservativism <ul><li>To be on the safer side </li></ul><ul><li>Expect future losses as current year loss </li></ul><ul><li>not future income is treated as current year income. </li></ul><ul><li>Stock is valued cost price / market price which ever is lower </li></ul><ul><li>Making provision for bad debts is based on this assumptions. </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    34. 34. Materiality <ul><li>Material impact on profitability are considered </li></ul><ul><li>Insignificant transactions ignored from recording </li></ul><ul><li>Pen purchased, pencil purchased? </li></ul><ul><li>Wine purchased regularly? </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    35. 35. Consistency <ul><li>Accounting policies and procedures should be followed consistently </li></ul><ul><li>Method of depreciation should be followed consistently. </li></ul><ul><li>Stock valuation- cost/market price whichever is lower is consistently followed </li></ul><ul><li>If not followed it amount to change in the policy of the company </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    36. 36. 2.system of accounting (26) <ul><li>1.Cash system: </li></ul><ul><li>unless cash received /paid in the accounting year can not be considered as income/expenses respectively </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    37. 37. 2.Mercantile <ul><li>Mercantile/Accrual/due concept: </li></ul><ul><li>Even cash received/paid but due for payment/due for receipt (yet to be received/payable) if they belong to current accounting year are considered. </li></ul><ul><li>If last year expenditure paid this year? </li></ul><ul><li>If you receive/paid in advance ? </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    38. 38. Mercantile love!!!!??? <ul><li>Last year I loved her? Next year I shall love him depends on type of bike model!!!! </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    39. 39. Life Education <ul><li>If I do not get married to him I will not be happy- Girl said </li></ul><ul><li>If I do not get married to her I will not be happy- Boy said </li></ul><ul><li>If both get married what will happen!!!! </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    40. 40. <ul><li>Structure of Financial </li></ul><ul><li>Statement-(Chapter-3)page-34 </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    41. 41. <ul><ul><li></li></ul></ul>1.Production Prime Cost 1.Godown 1.canteen 2 Cost of sales 6.sales 5.profit 1.Factory administration 4.Sales and distribution 3.General administration Total cost Bin card Stores ledger Cost calculations/operating activity + + = + + Danger Facility department Factory cost/ works cost e-mail: aug_bang@yahoo.com www.augustin.co.nr
    42. 42. Financial Statements <ul><li>Balance Sheet </li></ul><ul><li>Income Statement </li></ul><ul><li>Cashflow Statement </li></ul><ul><li>Statement of Retained Earnings </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    43. 43. Review: Major Balance Sheet Items <ul><li>Assets </li></ul><ul><li>Current assets: </li></ul><ul><ul><li>Cash & securities </li></ul></ul><ul><ul><li>Receivables </li></ul></ul><ul><ul><li>Inventories </li></ul></ul><ul><li>Fixed assets: </li></ul><ul><ul><li>Tangible assets </li></ul></ul><ul><ul><li>Intangible assets </li></ul></ul><ul><li>Liabilities and Equity </li></ul><ul><li>Current liabilities: </li></ul><ul><ul><li>Payables </li></ul></ul><ul><ul><li>Short-term debt </li></ul></ul><ul><li>Long-term liabilities </li></ul><ul><li>Shareholders' equity </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    44. 44. An Example: Dell Abbreviated Balance Sheet-34 <ul><li>Assets: </li></ul><ul><ul><li>Current Assets: $7,681.00 </li></ul></ul><ul><ul><li>Non-Current Assets: $3,790.00 </li></ul></ul><ul><ul><li>Total Assets: $11,471.00 </li></ul></ul><ul><li>Liabilities: </li></ul><ul><ul><li>Current Liabilities: $5,192.00 </li></ul></ul><ul><ul><li>LT Debt & Other LT Liab.: $971.00 </li></ul></ul><ul><ul><li>Equity: $5,308.00 </li></ul></ul><ul><ul><li>Total Liab. and Equity: $11,471.00 </li></ul></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    45. 45. An Example: Dell Abbreviated Income Statement-page-47 <ul><li>Sales $25,265.00 </li></ul><ul><li>Costs of Goods Sold -$19,891.00 </li></ul><ul><li>Gross Profit $5,374.00 </li></ul><ul><li>Cash operating expense -$2,761.00 </li></ul><ul><li>EBITDA 2,613.00 </li></ul><ul><li>Depreciation & Amortization -$156.00 </li></ul><ul><li>Other Income (Net) -$6.00 </li></ul><ul><li>EBIT $2,451.00 </li></ul><ul><li>Interest -$0.00 </li></ul><ul><li>EBT $2,451.00 </li></ul><ul><li>Income Taxes -$785.00 </li></ul><ul><li>Special Income/Charges -$194.00 </li></ul><ul><li>Net Income (EAT) $1,666.00 </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    46. 46. Financial Statement Analysis <ul><li>External users rely on publicly-available information to perform financial analysis </li></ul><ul><li>Such information is contained in corporate annual report </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    47. 47. Life education <ul><li>Lady in a seashore </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    48. 48. <ul><li>1. Use the statement of cash flows in decision making </li></ul><ul><li>2. Compute the standard financial ratios used for decision making </li></ul><ul><li>3. Use ratios in decision making </li></ul><ul><li>4. Measure economic value added by a company’s operations </li></ul>Chapter Learning Objectives <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    49. 49. What do you learn?? <ul><li>Here's how you'll benefit from this course:  </li></ul><ul><li>Understand the contents of the balance sheet, cashflow, and income statements </li></ul><ul><li>Contribute to better costing and working capital management </li></ul><ul><li>Review production capacity and investment proposals </li></ul><ul><li>Evaluate long, medium and short term financing </li></ul><ul><li>Review financial statements and analyse them using ratios to determine your business strengths and weaknesses </li></ul><ul><li>Apply techniques to make decisions that create genuine value </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    50. 50. Annual Report Contents <ul><ul><li></li></ul></ul>FOUR BASIC FINANCIAL STATEMENTS e-mail: aug_bang@yahoo.com www.augustin.co.nr
    51. 51. Annual Report Contents <ul><ul><li></li></ul></ul>FOUR BASIC FINANCIAL STATEMENTS e-mail: aug_bang@yahoo.com www.augustin.co.nr 1
    52. 52. Annual Report Contents <ul><ul><li></li></ul></ul>FOUR BASIC FINANCIAL STATEMENTS FOOTNOTES TO THE FINANCIAL STATEMENTS e-mail: aug_bang@yahoo.com www.augustin.co.nr 1 2
    53. 53. Annual Report Contents <ul><ul><li></li></ul></ul>FOUR BASIC FINANCIAL STATEMENTS FOOTNOTES TO THE FINANCIAL STATEMENTS SUMMARY OF ACCOUNTING METHODS e-mail: aug_bang@yahoo.com www.augustin.co.nr 1 2 3
    54. 54. Annual Report Contents <ul><ul><li></li></ul></ul>FOUR BASIC FINANCIAL STATEMENTS FOOTNOTES TO THE FINANCIAL STATEMENTS SUMMARY OF ACCOUNTING METHODS MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS e-mail: aug_bang@yahoo.com www.augustin.co.nr 1 2 3 4
    55. 55. Annual Report Contents <ul><ul><li></li></ul></ul>FOUR BASIC FINANCIAL STATEMENTS FOOTNOTES TO THE FINANCIAL STATEMENTS SUMMARY OF ACCOUNTING METHODS MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS AUDITOR’S REPORT e-mail: aug_bang@yahoo.com www.augustin.co.nr 1 2 3 4 5
    56. 56. Annual Report Contents <ul><ul><li></li></ul></ul>FOUR BASIC FINANCIAL STATEMENTS FOOTNOTES TO THE FINANCIAL STATEMENTS SUMMARY OF ACCOUNTING METHODS MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS AUDITOR’S REPORT COMPARATIVE FINANCIAL DATA FOR A SERIES OF YEARS e-mail: aug_bang@yahoo.com www.augustin.co.nr 1 2 3 4 5 6
    57. 57. Financial Statement Analysis <ul><li>Before you jump to a decision, consider the following: </li></ul><ul><li>1. Financial statements provide data about what happened during the accounting period </li></ul><ul><li>Pick the one annual report component which provides investors and creditors with the most descriptive information about the corporation’s activities and financial condition </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    58. 58. Financial Statement Analysis <ul><li>2. Investors and creditors use information contained in the annual report to: </li></ul><ul><li>Forecast future income and cash flows </li></ul><ul><li>Assess risk of investing in or lending to the corporation </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    59. 59. Financial Statement Analysis <ul><ul><li></li></ul></ul>MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS 4 e-mail: aug_bang@yahoo.com www.augustin.co.nr
    60. 60. Financial Statement Analysis-page-51 <ul><li>Management’s discussion and analysis (MD&A) includes: </li></ul><ul><li>Evaluation of current business operations </li></ul><ul><li>Assessment of future operations </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    61. 61. Tools to Evaluate Financial Information <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    62. 62. Tools to Evaluate Financial Information <ul><li>Horizontal Analysis </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr 1
    63. 63. Tools to Evaluate Financial Information <ul><li>Horizontal Analysis </li></ul><ul><li>Vertical Analysis </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr 2 1
    64. 64. Tools to Evaluate Financial Information <ul><li>Horizontal Analysis </li></ul><ul><li>Vertical Analysis </li></ul><ul><li>Ratio Analysis </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr 3 2 1
    65. 65. Perform a horizontal analysis of comparative financial statements <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    66. 66. Tools to Evaluate Financial Information <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    67. 67. Tools to Evaluate Financial Information <ul><li>Horizontal Analysis </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr 1
    68. 68. Horizontal Analysis <ul><li>Examines percentage change in each item on the financial statements </li></ul><ul><li>Compares current year’s dollar amount with prior year’s dollar amount </li></ul><ul><li>Expresses the change in </li></ul><ul><ul><li>Dollars </li></ul></ul><ul><ul><li>Percentage </li></ul></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    69. 69. Horizontal Analysis <ul><li>First, calculate dollar change from base year (prior year) to current year </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    70. 70. Horizontal Analysis <ul><li>First, calculate Rupee/dollar change from base year (prior year) to current year </li></ul><ul><li>Second, divide Rupee/ dollar change by base-year dollar amount </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    71. 71. Horizontal Analysis <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    72. 72. Horizontal Analysis <ul><li>DOLLAR AMOUNT INCREASE (DECREASE) </li></ul><ul><li>Amounts in thousands </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    73. 73. Horizontal Analysis <ul><li>DOLLAR AMOUNT INCREASE (DECREASE) </li></ul><ul><li>Amounts in thousands </li></ul><ul><li> 1996 1995 Dollars % </li></ul><ul><li>Receivables (net) $325,384 $272,225 </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    74. 74. Horizontal Analysis <ul><li>DOLLAR AMOUNT INCREASE (DECREASE) </li></ul><ul><li>Amounts in thousands </li></ul><ul><li> 2007 2006 Dollars % </li></ul><ul><li>Receivables (net) $325,384 $272,225 </li></ul><ul><li> Difference </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    75. 75. Horizontal Analysis <ul><li>DOLLAR AMOUNT INCREASE (DECREASE) </li></ul><ul><li>Amounts in thousands </li></ul><ul><li> 1996 1995 Dollars % </li></ul><ul><li>Receivables (net) $325,384 $272,225 $53,159 </li></ul><ul><li> Difference </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    76. 76. Horizontal Analysis <ul><li>DOLLAR AMOUNT INCREASE (DECREASE) </li></ul><ul><li>Amounts in thousands </li></ul><ul><li> 2007 2006 Dollars % </li></ul><ul><li>Receivables (net) $325,384 $272,225 $53,159 19.5% </li></ul><ul><li>Leasehold Improv. 314,933 273,015 41,918 15.3 </li></ul><ul><li>Notes Receivable 54,715 32,528 </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    77. 77. Trend Percentages <ul><li>Specialized form of horizontal analysis </li></ul><ul><li>Shows trend of financial statement items over longer time periods such as 5 or 10 years </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    78. 78. Trend Percentages <ul><li>Base year (earliest year in the time series) set at 100% </li></ul><ul><li>All other years expressed as percentage of base year </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    79. 79. Trend Percentages <ul><li>Income statement amounts for Ray’s Seafood Shack are presented in the next slide </li></ul><ul><li>Compute the trend percentages for these items </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    80. 80. Trend Percentages <ul><li>(AMOUNTS IN THOUSANDS ) </li></ul><ul><li>2008 2007 2006 2005 2004 2003 </li></ul><ul><li>Net Sales $714 $553 $502 $474 $451 $346 </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    81. 81. Trend Percentages <ul><li>(AMOUNTS IN THOUSANDS ) </li></ul><ul><li>2008 2007 2006 2005 2004 2003 </li></ul><ul><li>Net Sales $714 $553 $502 $474 $451 $346 </li></ul><ul><li> </li></ul><ul><li> Divide </li></ul><ul><li> x 100 </li></ul><ul><li>Net Sales 206% 160% 145% 137% 130% 100% </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    82. 82. Trend Percentages <ul><li>(AMOUNTS IN THOUSANDS ) </li></ul><ul><li>2008 2007 2006 2005 2004 2003 </li></ul><ul><li>Net Sales $714 $553 $502 $474 $451 $346 </li></ul><ul><li> </li></ul><ul><li> Divide </li></ul><ul><li> x 100 </li></ul><ul><li>Net Sales 206% 160% 145% 137% 130% 100% </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    83. 83. Trend Percentages <ul><li>(AMOUNTS IN THOUSANDS ) </li></ul><ul><li>2008 2007 2006 2005 2004 2003 </li></ul><ul><li>Net Sales $714 $553 $502 $474 $451 $346 </li></ul><ul><li> </li></ul><ul><li> Divide </li></ul><ul><li> x 100 </li></ul><ul><li>Net Sales 206% 160% 145% 137% 130% 100% </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    84. 84. Trend Percentages <ul><li>(AMOUNTS IN THOUSANDS ) </li></ul><ul><li>2008 2007 2006 2005 2004 2003 </li></ul><ul><li>Net Sales $714 $553 $502 $474 $451 $346 </li></ul><ul><li> </li></ul><ul><li> Divide </li></ul><ul><li> x 100 </li></ul><ul><li>Net Sales 206% 160% 145% 137% 130% 100% </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    85. 85. Trend Percentages <ul><li>(AMOUNTS IN THOUSANDS ) </li></ul><ul><li>2008 2007 2006 2005 2004 2003 </li></ul><ul><li>Net Sales $714 $553 $502 $474 $451 $346 </li></ul><ul><li> </li></ul><ul><li> Divide </li></ul><ul><li> x 100 </li></ul><ul><li>Net Sales 206% 160% 145% 137% 130% 100% </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    86. 86. Trend Percentages <ul><li>(AMOUNTS IN THOUSANDS ) </li></ul><ul><li>2008 2007 2006 2005 2004 2003 </li></ul><ul><li>Net Sales $714 $553 $502 $474 $451 $346 </li></ul><ul><li>Cost of Sales 373 265 201 259 280 193 </li></ul><ul><li>Net Sales 206% 160% 145% 137% 130% 100% </li></ul><ul><li>Cost of Sales 193 137 104 134 145 100 </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    87. 87. Trend Percentages <ul><li>(AMOUNTS IN THOUSANDS ) </li></ul><ul><li>2008 2007 2006 2005 2004 2003 </li></ul><ul><li>Net Sales $714 $553 $502 $474 $451 $346 </li></ul><ul><li>Cost of Sales 373 265 201 259 280 193 </li></ul><ul><li>Gross Profit 341 288 301 215 171 153 </li></ul><ul><li>Net Sales 206% 160% 145% 137% 130% 100% </li></ul><ul><li>Cost of Sales 193 137 104 134 145 100 </li></ul><ul><li>Gross Profit 223 188 197 140 112 100 </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    88. 88. Horizontal Analysis and Trend Percentages: A Summary <ul><li>Tools used to compare financial results of companies of different sizes and/or in different industries </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    89. 89. Vertical Analysis <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    90. 90. Vertical Analysis <ul><li>Vertical Analysis </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr 2
    91. 91. Vertical Analysis <ul><li>Compares each item on the financial statement to a key, or base, item </li></ul><ul><li>Base-item dollar amount always set to 100% </li></ul><ul><li>Income statement </li></ul><ul><ul><li>Net sales = 100% </li></ul></ul><ul><li>Balance sheet </li></ul><ul><ul><li>Total assets = 100% </li></ul></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    92. 92. <ul><li>2007 2006 </li></ul><ul><li>AMOUNT % AMOUNT % </li></ul><ul><li>Net sales $430,013 100% $362,386 100% </li></ul><ul><li>Cost of Goods Sold 336,589 78 284,897 79 </li></ul><ul><li>Gross Profit 93,424 22 77,489 21 </li></ul><ul><li>Selling, General & Admin. 72,363 17 65,096 18 </li></ul><ul><li>Income from Operations 21,061 5 12,393 3 </li></ul><ul><li>Income Taxes 7,072 2 4,350 2 </li></ul><ul><li>Net Income $13,989 3% $8,043 2% </li></ul>Vertical Analysis <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    93. 93. Vertical Analysis <ul><li>Once financial statement items are converted into percentages of the base item, users can compare one company’s financials against another’s </li></ul><ul><li>These are called common-size statements </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    94. 94. Prepare common-size financial statements for benchmarking against the industry average and key competitors <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    95. 95. Common-Size Statements <ul><li>Show all items as percentages of the key, or base, amount </li></ul><ul><ul><li>Use no dollar amounts </li></ul></ul><ul><li>Facilitate financial statement comparison among different sized companies </li></ul><ul><li>Improve user’s ability to assess company performance against industry averages </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    96. 96. Common-Size Statements <ul><li>Can also be used to evaluate company performance over time </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    97. 97. Benchmarking Against the Industry Average <ul><li>Benchmarking is a term used to describe the process of comparing a company’s activities to a standard of excellence achieved by industry leaders </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    98. 98. <ul><li>A company also can compare its common-size financials to those of its industry’s leaders </li></ul><ul><li>Determine where it differs </li></ul><ul><li>Design and implement business processes to bring financial results in line with these benchmark entities </li></ul>Benchmarking Against Key Competitors <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    99. 99. Benchmarking Against Key Competitors <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    100. 100. <ul><ul><li></li></ul></ul><ul><li>Chineese tree </li></ul>Life education e-mail: aug_bang@yahoo.com www.augustin.co.nr
    101. 101. Interpretation of Financial Statements-Ratio Analysis-Unit-4 <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    102. 102. Interpretation of Financial Statement Analysis( Ratio Analysis)-page 55- Unit-4 By Prof. Augustin Amaladas <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    103. 103. <ul><li>A leading company in the health-care and consumer products industry </li></ul><ul><li>Sales revenues of $14-billion </li></ul><ul><li>Assets of $13-billion </li></ul>PROCTER & GAMBLE and BRISTOL-MYERS SQUIBB <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    104. 104. <ul><li>How would you compare Bristol-Myers Squibb’s performance against other industry competitors? </li></ul><ul><li>Companies differ in size, so you can’t compare absolute dollar amounts </li></ul><ul><li>Need to use ratios - tools to translate financial data into percentages - which can be compared across companies </li></ul>PROCTER & GAMBLE and BRISTOL-MYERS SQUIBB <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    105. 105. <ul><li>PROCTER & GAMBLE </li></ul><ul><li>Sales revenues $33.4 </li></ul><ul><li>Net income 2.6 </li></ul><ul><li>Assets 28.0 </li></ul>PROCTER & GAMBLE and BRISTOL-MYERS SQUIBB <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    106. 106. <ul><li>BRISTOL-MYERS SQUIBB </li></ul><ul><li>Sales revenues $13.7 </li></ul><ul><li>Net income 1.8 </li></ul><ul><li>Assets 13.0 </li></ul><ul><li>PROCTER & GAMBLE </li></ul><ul><li>Sales revenues $33.4 </li></ul><ul><li>Net income 2.6 </li></ul><ul><li>Assets 28.0 </li></ul>Opening Vignette - Bristol-Myers Squibb <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    107. 107. <ul><li>BRISTOL-MYERS SQUIBB </li></ul><ul><li>Sales revenues $13.7 </li></ul><ul><li>Net income 1.8 </li></ul><ul><li>Assets 13.0 </li></ul><ul><li>PROCTER & GAMBLE </li></ul><ul><li>Sales revenues $33.4 </li></ul><ul><li>Net income 2.6 </li></ul><ul><li>Assets 28.0 </li></ul><ul><li>Which company was better in generating net income from sales revenues earned? </li></ul>Opening Vignette - Bristol-Myers Squibb <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    108. 108. <ul><li>BRISTOL-MYERS SQUIBB </li></ul><ul><li>Sales revenues $13.7 </li></ul><ul><li>Net income 1.8 </li></ul><ul><li>Assets 13.0 </li></ul><ul><li>You can use the return on sales ratio to compare </li></ul><ul><li>PROCTER & GAMBLE </li></ul><ul><li>Sales revenues $33.4 </li></ul><ul><li>Net income 2.6 </li></ul><ul><li>Assets 28.0 </li></ul><ul><li>Which company was better in generating net income from sales revenues earned? </li></ul>Opening Vignette - Bristol-Myers Squibb <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    109. 109. <ul><li>PROCTER & GAMBLE </li></ul><ul><li>Sales revenues $33.4 </li></ul><ul><li>Net income 2.6 </li></ul>Opening Vignette - Bristol-Myers Squibb <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    110. 110. <ul><li>PROCTER & GAMBLE </li></ul><ul><li>Sales revenues $33.4 </li></ul><ul><li>Net income 2.6 </li></ul><ul><li>$2.6 </li></ul><ul><li>$33.4 </li></ul><ul><li>= 7.78% </li></ul>Opening Vignette - Bristol-Myers Squibb <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    111. 111. <ul><li>BRISTOL-MYERS SQUIBB </li></ul><ul><li>Sales revenues $13.7 </li></ul><ul><li>Net income 1.8 </li></ul><ul><li>PROCTER & GAMBLE </li></ul><ul><li>Sales revenues $33.4 </li></ul><ul><li>Net income 2.6 </li></ul><ul><li>$2.6 </li></ul><ul><li>$33.4 </li></ul><ul><li>= 7.78% </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    112. 112. <ul><li>BRISTOL-MYERS SQUIBB </li></ul><ul><li>Sales revenues $13.7 </li></ul><ul><li>Net income 1.8 </li></ul><ul><li>$1.8 </li></ul><ul><li>$13.7 </li></ul><ul><li>= 13.13% </li></ul><ul><li>PROCTER & GAMBLE </li></ul><ul><li>Sales revenues $33.4 </li></ul><ul><li>Net income 2.6 </li></ul><ul><li>$2.6 </li></ul><ul><li>$33.4 </li></ul><ul><li>= 7.78% </li></ul>Opening Vignette -Bristol-Myers Squibb <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    113. 113. <ul><li>BRISTOL-MYERS SQUIBB </li></ul><ul><li>Sales revenues $13.7 </li></ul><ul><li>PROCTER & GAMBLE </li></ul><ul><li>Sales revenues $33.4 </li></ul>Opening Vignette - Bristol-Myers Squibb <ul><ul><li></li></ul></ul>Although P&G’s sales were higher e-mail: aug_bang@yahoo.com www.augustin.co.nr
    114. 114. <ul><li>BRISTOL-MYERS SQUIBB </li></ul><ul><li>Sales revenues $13.7 </li></ul><ul><li>Net income 1.8 </li></ul><ul><li>$1.8 </li></ul><ul><li>$13.7 </li></ul><ul><li>= 13.13% </li></ul><ul><li>PROCTER & GAMBLE </li></ul><ul><li>Sales revenues $33.4 </li></ul><ul><li>Net income 2.6 </li></ul><ul><li>$2.6 </li></ul><ul><li>$33.4 </li></ul><ul><li>= 7.78% </li></ul><ul><ul><li></li></ul></ul>Bristol-Myers’ return on sales was nearly twice that of P&G e-mail: aug_bang@yahoo.com www.augustin.co.nr
    115. 115. Financial Statement Analysis <ul><li>External users rely on publicly-available information to perform financial analysis </li></ul><ul><li>Such information is contained in corporate annual report </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    116. 116. Financial Statement Analysis: Lecture Outline <ul><li>Review of Financial Statements </li></ul><ul><li>Ratios </li></ul><ul><ul><li>Types of Ratios </li></ul></ul><ul><ul><li>Examples </li></ul></ul><ul><li>The DuPont Method </li></ul><ul><li>Ratios and Growth </li></ul><ul><li>Summary </li></ul><ul><ul><li>Strengths </li></ul></ul><ul><ul><li>Weaknesses </li></ul></ul><ul><ul><li>Ratios and Forecasting </li></ul></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    117. 117. Financial Analysis <ul><li>Assessment of the firm’s past, present and future financial conditions </li></ul><ul><li>Done to find firm’s financial strengths and weaknesses </li></ul><ul><li>Primary Tools: </li></ul><ul><ul><li>Financial Statements </li></ul></ul><ul><ul><li>Comparison of financial ratios to past, industry, sector and all firms </li></ul></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    118. 118. The Main Idea <ul><li>Value for the firm comes from cashflows </li></ul><ul><li>Cashflows can be calculated as: </li></ul><ul><ul><li>(Rev t - Cost t - Dep t )x(1-  ) + Dep t —OR— </li></ul></ul><ul><ul><li>(Rev t - Cost t )x(1-  ) +  xDep t —OR— </li></ul></ul><ul><ul><li>Rev t x(1-  ) - Cost t x(1-  ) +  xDep t </li></ul></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    119. 119. Review: Major Balance Sheet Items <ul><li>Assets </li></ul><ul><li>Current assets: </li></ul><ul><ul><li>Cash & securities </li></ul></ul><ul><ul><li>Receivables </li></ul></ul><ul><ul><li>Inventories </li></ul></ul><ul><li>Fixed assets: </li></ul><ul><ul><li>Tangible assets </li></ul></ul><ul><ul><li>Intangible assets </li></ul></ul><ul><li>Liabilities and Equity </li></ul><ul><li>Current liabilities: </li></ul><ul><ul><li>Payables </li></ul></ul><ul><ul><li>Short-term debt </li></ul></ul><ul><li>Long-term liabilities </li></ul><ul><li>Shareholders' equity </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    120. 120. An Example: Dell Abbreviated Balance Sheet <ul><li>Assets: </li></ul><ul><ul><li>Current Assets: $7,681.00 </li></ul></ul><ul><ul><li>Non-Current Assets: $3,790.00 </li></ul></ul><ul><ul><li>Total Assets: $11,471.00 </li></ul></ul><ul><li>Liabilities: </li></ul><ul><ul><li>Current Liabilities: $5,192.00 </li></ul></ul><ul><ul><li>LT Debt & Other LT Liab.: $971.00 </li></ul></ul><ul><ul><li>Equity: $5,308.00 </li></ul></ul><ul><ul><li>Total Liab. and Equity: $11,471.00 </li></ul></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    121. 121. Absorption Costing vs. Variable Costing Income Statements <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    122. 122. Absorption Costing Income Statement <ul><ul><li></li></ul></ul>Sales XXX Cost of Goods Sold: Beginning inventory XXX Cost of goods manufactured XXX Cost of goods available XXX Ending inventory XXX Cost of goods sold XXX Gross Margin XXX Operating Expenses: Selling XXX Administrative XXX XXX Income before Taxes XXX e-mail: aug_bang@yahoo.com www.augustin.co.nr
    123. 123. ABSORPTION COSTING PRO-FORMA <ul><ul><li></li></ul></ul>  ££Sales Revenue xxxxx Less Absorption Cost of Sales     Opening Stock (Valued @ absorption cost) xxxx   Add Production Cost (Valued @ absorption cost) xxxx  Total Production Cost xxxx  Less Closing Stock (Valued @ absorption cost) (xxx)   Absorption Cost of Production xxxx Add Selling, Admin & Distribution Cost xxxx Absorption Cost of Sales  (xxxx) Un-Adjusted Profit  xxxxx Fixed Production O/H absorbed xxxx  Fixed Production O/H incurred (xxxx)  (Under)/Over Absorption  xxxxx Adjusted Profit xxxxx e-mail: aug_bang@yahoo.com www.augustin.co.nr
    124. 124. Variable Costing Income Statement <ul><ul><li></li></ul></ul>Sales XXX Cost of Goods Sold: Beginning inventory XXX Cost of goods manufactured XXX Cost of goods available XXX Ending inventory XXX Variable cost of goods sold XXX Product Contribution Margin XXX Variable Selling Expense XXX Total Contribution Margin XXX Fixed Expenses: Factory XXX Selling XXX Administrative XXX XXX Income before Taxes XXX e-mail: aug_bang@yahoo.com www.augustin.co.nr
    125. 125. Marginal costing cost sheet <ul><li>  ££Sales Revenue  xxxxx </li></ul><ul><li>Less Marginal Cost of Sales   </li></ul><ul><li>Opening Stock (Valued @ marginal cost) xxxx </li></ul><ul><li>Add Production Cost (Valued @ marginal cost) xxxx  </li></ul><ul><li>Total Production Cost xxxx  </li></ul><ul><li>Less Closing Stock (Valued @ marginal cost) xxx)  </li></ul><ul><li>Marginal Cost of Production xxxx </li></ul><ul><li>  Add Selling, Admin & Distribution Cost xxx </li></ul><ul><li>  Marginal Cost of Sales  (xxxx) </li></ul><ul><li>Contribution  xxxxx </li></ul><ul><li>Less Fixed Cost  (xxxx) </li></ul><ul><li>Marginal Costing Profit  xxxxx </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    126. 126. An Example: Dell Abbreviated Income Statement <ul><li>Sales $25,265.00 </li></ul><ul><li>Costs of Goods Sold -$19,891.00 </li></ul><ul><li>Gross Profit $5,374.00 </li></ul><ul><li>Cash operating expense -$2,761.00 </li></ul><ul><li>EBITDA 2,613.00 </li></ul><ul><li>Depreciation & Amortization -$156.00 </li></ul><ul><li>Other Income (Net) -$6.00 </li></ul><ul><li>EBIT $2,451.00 </li></ul><ul><li>Interest -$0.00 </li></ul><ul><li>EBT $2,451.00 </li></ul><ul><li>Income Taxes -$785.00 </li></ul><ul><li>Special Income/Charges -$194.00 </li></ul><ul><li>Net Income (EAT) $1,666.00 </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    127. 127. Objectives of Ratio Analysis <ul><li>Standardize financial information for comparisons </li></ul><ul><li>Evaluate current operations </li></ul><ul><li>Compare performance with past performance </li></ul><ul><li>Compare performance against other firms or industry standards </li></ul><ul><li>Study the efficiency of operations </li></ul><ul><li>Study the risk of operations </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    128. 128. Rationale Behind Ratio Analysis <ul><li>A firm has resources </li></ul><ul><li>It converts resources into profits through </li></ul><ul><ul><li>production of goods and services </li></ul></ul><ul><ul><li>sales of goods and services </li></ul></ul><ul><li>Ratios </li></ul><ul><ul><li>Measure relationships between resources and financial flows </li></ul></ul><ul><ul><li>Show ways in which firm’s situation deviates from </li></ul></ul><ul><ul><ul><li>Its own past </li></ul></ul></ul><ul><ul><ul><li>Other firms </li></ul></ul></ul><ul><ul><ul><li>The industry </li></ul></ul></ul><ul><ul><ul><li>All firms- </li></ul></ul></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    129. 129. <ul><li>financials can be used in benchmarking </li></ul>Benchmarking Against Key Competitors <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    130. 130. Using Ratios to Make Business Decisions <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    131. 131. <ul><li>Ratio Analysis </li></ul>Using Ratios to Make Business Decisions <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr 3
    132. 132. Types of Ratios-59 <ul><li>Financial Ratios: </li></ul><ul><ul><li>Liquidity Ratios </li></ul></ul><ul><ul><ul><li>Assess ability to cover current obligations </li></ul></ul></ul><ul><ul><li>Leverage Ratios </li></ul></ul><ul><ul><ul><li>Assess ability to cover long term debt obligations </li></ul></ul></ul><ul><li>Operational Ratios: </li></ul><ul><ul><li>Activity (Turnover) Ratios </li></ul></ul><ul><ul><ul><li>Assess amount of activity relative to amount of resources used </li></ul></ul></ul><ul><ul><li>Profitability Ratios </li></ul></ul><ul><ul><ul><li>Assess profits relative to amount of resources used </li></ul></ul></ul><ul><li>Valuation Ratios: </li></ul><ul><ul><ul><li>Assess market price relative to assets or earnings </li></ul></ul></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    133. 133. Using Ratios to Make Business Decisions <ul><li>Ratios - the relationship between two items on financial statements - permit users to calculate a variety of financial comparisons </li></ul><ul><li>These ratios can be compared to: </li></ul><ul><li>Prior years’ financial results </li></ul><ul><li>Industry averages </li></ul><ul><li>Benchmark entities’ ratios </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    134. 134. <ul><li>Ratios measure an entity’s ability to: </li></ul><ul><li>Pay current liabilities </li></ul><ul><li>Sell inventory and collect receivables </li></ul><ul><li>Pay long-term debt </li></ul><ul><li>Generate profits from operations </li></ul><ul><li>Sustain shareholder wealth </li></ul>Using Ratios to Make Business Decisions <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    135. 135. Measuring the Company’s Ability to Pay Current Liabilities-Page-59 <ul><li>One measure of entity’s ability to pay its current obligations is to look at working capital </li></ul><ul><li>Current assets - current liabilities </li></ul><ul><li>2 ratios help users assess working capital information </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    136. 136. Measuring the Company’s Ability to Pay Current Liabilities <ul><li>One measure of entity’s ability to pay its current obligations is to look at working capital </li></ul><ul><li>Current assets - current liabilities </li></ul><ul><li>2 ratios help users assess working capital information </li></ul><ul><ul><li>Current ratio </li></ul></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    137. 137. Measuring the Company’s Ability to Pay Current Liabilities <ul><li>One measure of entity’s ability to pay its current obligations is to look at working capital </li></ul><ul><li>Current assets - current liabilities </li></ul><ul><li>2 ratios help users assess working capital information </li></ul><ul><ul><li>Current ratio </li></ul></ul><ul><ul><li>Quick (acid-test) ratio </li></ul></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    138. 138. Using Ratios to Make Business Decisions <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    139. 139. Ability to Pay Current Liabilities <ul><li>Current ratio </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    140. 140. Ability to Pay Current Liabilities <ul><li>Current ratio </li></ul><ul><li>Current assets </li></ul><ul><li>Current liabilities </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    141. 141. Ability to Pay Current Liabilities-page-59 <ul><li>Current ratio </li></ul><ul><li>Current assets </li></ul><ul><li>Current liabilities </li></ul><ul><li>$7,681.00 </li></ul><ul><li>$5,192.00 </li></ul><ul><li>= 1.48 </li></ul><ul><ul><li></li></ul></ul><ul><li>Assets: </li></ul><ul><ul><li>Current Assets: $7,681.00 </li></ul></ul><ul><ul><li>Non-Current Assets: $3,790.00 </li></ul></ul><ul><ul><li>Total Assets: $11,471.00 </li></ul></ul><ul><li>Liabilities: </li></ul><ul><ul><li>Current Liabilities: $5,192.00 </li></ul></ul><ul><ul><li>LT Debt & Other LT Liab.: $971.00 </li></ul></ul><ul><ul><li>Equity: $5,308.00 </li></ul></ul><ul><ul><li>Total Liab. and Equity: $11,471.00 </li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    142. 142. Ability to Pay Current Liabilities-page-60 <ul><li>Quick ratio </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    143. 143. Ability to Pay Current Liabilities <ul><li>Quick ratio </li></ul><ul><li>Current assets - inventory - prepaid items </li></ul><ul><li>Current liabilities </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    144. 144. Ability to Pay Current Liabilities <ul><li>Liquid ratio </li></ul><ul><li>Current assets - inventory - prepaid items </li></ul><ul><li>Current liabilities </li></ul><ul><li>$25,240 </li></ul><ul><li>$114,744 </li></ul><ul><li>= .22 </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    145. 145. Measuring the Company’s Ability to Sell Inventory and Collect Receivables <ul><li>Entity’s operating cycle </li></ul><ul><ul><li>Time to go from cash to inventory to receivables to cash </li></ul></ul><ul><li>is critical to generating cash inflows from operating activities </li></ul><ul><li>3 ratios help users assess management’s skill in selling inventory and collecting receivables </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    146. 146. <ul><li>Inventory turnover </li></ul>Measuring the Company’s Ability to Sell Inventory and Collect Receivables-page-63 <ul><ul><li></li></ul></ul>1 e-mail: aug_bang@yahoo.com www.augustin.co.nr
    147. 147. <ul><li>Inventory turnover </li></ul><ul><li>A/R turnover </li></ul>Measuring the Company’s Ability to Sell Inventory and Collect Receivables <ul><ul><li></li></ul></ul>1 2 e-mail: aug_bang@yahoo.com www.augustin.co.nr
    148. 148. <ul><li>Inventory turnover </li></ul><ul><li>A/R turnover </li></ul><ul><li>Days’ sales in receivables </li></ul>Measuring the Company’s Ability to Sell Inventory and Collect Receivables <ul><ul><li></li></ul></ul>1 2 3 e-mail: aug_bang@yahoo.com www.augustin.co.nr
    149. 149. Inventory Turnover-page-63 <ul><li>Number of times the average level of inventory is sold during the accounting year </li></ul><ul><li>Measures time required to earn return on company’s investment in inventory </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr 2008
    150. 150. Inventory Turnover <ul><li>Cost of goods sold </li></ul><ul><li>Average inventory </li></ul><ul><li>=$19,891/$4000 </li></ul><ul><li>=4.972 times </li></ul><ul><ul><li></li></ul></ul>Sales $25,265.00 Costs of Goods Sold -$19,891.00 Gross Profit $5,374.00 Cash operating expense -$2,761.00 EBITDA 2,613.00 Depreciation & Amortization -$156.00 Other Income (Net) -$6.00 EBIT $2,451.00 Interest -$0.00 EBT $2,451.00 Income Taxes -$785.00 Special Income/Charges -$194.00 Net Income (EAT) $1,666.00 Average inventory $ 4000 Average debtors $5000 e-mail: aug_bang@yahoo.com www.augustin.co.nr
    151. 151. Inventory Turnover <ul><li>High ratio indicates ability to quickly sell inventory </li></ul><ul><li>Too high a ratio may indicate inadequate inventory levels </li></ul><ul><li>Turnover ratio should be compared to historical and industry averages </li></ul><ul><li>Analyze significant variances </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    152. 152. Accounts Receivable Turnover-page-65 <ul><li>Number of times the average level of A/R is collected during the accounting year </li></ul><ul><li>Measures ability to collect cash from credit customers </li></ul><ul><ul><li></li></ul></ul>$ e-mail: aug_bang@yahoo.com www.augustin.co.nr
    153. 153. Accounts Receivable Turnover <ul><li>Net credit sales </li></ul><ul><li>Average net A/R </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    154. 154. <ul><li>Net credit sales* </li></ul><ul><li>Average net A/R </li></ul><ul><li>$25,265.00 </li></ul><ul><li>5000 </li></ul><ul><li>= 5.053 times </li></ul>Accounts Receivable Turnover <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    155. 155. Days’ Sales in Receivables <ul><li>Number of equivalent days’ sales revenue represented by the outstanding A/R balance </li></ul><ul><li>Measures A/R balance in terms of number of days it would take to generate the equivalent dollar amount of sales </li></ul><ul><ul><li></li></ul></ul>$ e-mail: aug_bang@yahoo.com www.augustin.co.nr
    156. 156. <ul><li>Average net A/R </li></ul><ul><li>(Net sales / 365 days) </li></ul><ul><li>$5000 </li></ul><ul><li>($25265 / 365 days) </li></ul><ul><li>= 72.23 days </li></ul>Days’ Sales in Receivables <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    157. 157. Measuring the Company’s Ability to Pay Long-Term Debt-67 <ul><li>Bondholders and long-term lenders are concerned about an entity’s ability to repay debt principal and accumulated interest on long-term notes and loans </li></ul><ul><li>2 ratios help these users assess the entity’s ability to pay its long-term obligations </li></ul><ul><li>Debt ratio </li></ul><ul><li>Times-interest-earned ratio </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    158. 158. Debt Ratio-page-67 <ul><li>Relationship between company’s total liabilities and total assets </li></ul><ul><li>Measures proportion of total assets provided through debt </li></ul><ul><li>1 - debt ratio = proportion of assets provided by equity </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    159. 159. Debt Ratio-page 67 <ul><li>Total Liabilities </li></ul><ul><li>Total Equity </li></ul><ul><ul><li></li></ul></ul><ul><li>Assets: </li></ul><ul><ul><li>Current Assets: $7,681.00 </li></ul></ul><ul><ul><li>Non-Current Assets: $3,790.00 </li></ul></ul><ul><ul><li>Total Assets: $11,471.00 </li></ul></ul><ul><li>Liabilities: </li></ul><ul><ul><li>Current Liabilities: $5,192.00 </li></ul></ul><ul><ul><li>LT Debt & Other LT Liab.: $971.00 </li></ul></ul><ul><ul><li>Equity: $5,308.00 </li></ul></ul><ul><ul><li>Total Liab. and Equity: $11,471.00 </li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    160. 160. Debt Ratio <ul><li>Total Liabilities </li></ul><ul><li>Total Assets </li></ul><ul><ul><li>$971.00 $5,308.00 </li></ul></ul><ul><ul><li>=.1829 </li></ul></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    161. 161. Debt Ratio <ul><li>Total Liabilities </li></ul><ul><li>Total Assets </li></ul><ul><li>2,00000 </li></ul><ul><li>$323,497 </li></ul><ul><li>= .38 </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    162. 162. Debt Ratio <ul><li>If debt ratio = 1.0, company used all debt to finance acquisition of its assets </li></ul><ul><ul><li>A highly unlikely situation </li></ul></ul><ul><li>Thus, debt ratio is generally less than 1.0 </li></ul><ul><ul><li></li></ul></ul>LOANS, NOTES, BONDS, ETC. e-mail: aug_bang@yahoo.com www.augustin.co.nr
    163. 163. Debt Ratio <ul><li>The higher the ratio, the more cash the company must commit toward paying annual interest expense and loan principal </li></ul><ul><li>As a result, company’s cash flow might be negatively affected </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    164. 164. <ul><li>Lenders and creditors might require company to appropriate portion of retained earnings to ensure sufficient assets to repay interest and loan principal </li></ul>Debt Ratio <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    165. 165. Times-Interest-Earned Ratio-page-70 <ul><li>Relationship between company’s net income from operations and interest expense </li></ul><ul><li>Measures ability of company to cover, or pay for, its interest expense out of operating income </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    166. 166. Times-Interest-Earned Ratio <ul><li>Income from operations </li></ul><ul><li>Interest expense </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    167. 167. Times-Interest-Earned Ratio <ul><li>Income from operations </li></ul><ul><li>Interest expense </li></ul><ul><li>2,613.00 </li></ul><ul><li>0 </li></ul><ul><li>= & </li></ul><ul><ul><li></li></ul></ul>Sales $25,265.00 Costs of Goods Sold -$19,891.00 Gross Profit $5,374.00 Cash operating expense -$2,761.00 EBITDA 2,613.00 Depreciation & Amortization -$156.00 Other Income (Net) -$6.00 EBIT $2,451.00 Interest -$0.00 EBT $2,451.00 Income Taxes -$785.00 Special Income/Charges -$194.00 Net Income (EAT) $1,666.00 Average inventory $ 4000 Average debtors $5000 e-mail: aug_bang@yahoo.com www.augustin.co.nr
    168. 168. <ul><li>high ratio indicates ease in meeting debt interest payments </li></ul>Times-Interest-Earned Ratio <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    169. 169. <ul><li>A low ratio would signal possible difficulties in making payments to lenders and bondholders </li></ul>Times-Interest-Earned Ratio <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    170. 170. Measuring a Company’s Profitability <ul><li>Financial analysts pay close attention to ratios which assess a company’s ability to generate profits and operate efficiently </li></ul><ul><li>Creditors and investors rely on forecasts of a company’s potential to generate net income when they make lending and investing choices </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    171. 171. <ul><li>4 profitability ratios are commonly used in financial statement analysis </li></ul>Measuring a Company’s Profitability <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    172. 172. <ul><li>4 profitability ratios are commonly used in financial statement analysis </li></ul><ul><li>Return on sales </li></ul>Measuring a Company’s Profitability <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    173. 173. <ul><li>4 profitability ratios are commonly used in financial statement analysis </li></ul><ul><li>Return on sales </li></ul><ul><li>Return on assets </li></ul>Measuring a Company’s Profitability <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    174. 174. <ul><li>4 profitability ratios are commonly used in financial statement analysis </li></ul><ul><li>Return on sales </li></ul><ul><li>Return on assets </li></ul><ul><li>Return on equity </li></ul>Measuring a Company’s Profitability <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    175. 175. <ul><li>4 profitability ratios are commonly used in financial statement analysis </li></ul><ul><li>Return on sales </li></ul><ul><li>Return on assets </li></ul><ul><li>Return on equity </li></ul><ul><li>Earnings per share </li></ul>Measuring a Company’s Profitability-page-74 <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    176. 176. <ul><li>Relationship between a company’s net income and net sales </li></ul><ul><li>Measures management’s ability to efficiently and effectively manage company operations </li></ul><ul><li>Shows percentage of each net sales dollar earned as net income </li></ul>Return on Sales <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    177. 177. Return on Sales-Net profit ratio-73 <ul><li>Net income </li></ul><ul><li>Net sales revenue </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    178. 178. Return on Sales <ul><li>Net income </li></ul><ul><li>Net sales revenue </li></ul><ul><li>$1,666.00 </li></ul><ul><li>$25,265.00 </li></ul><ul><li>=0 .065 </li></ul><ul><ul><li></li></ul></ul>Sales $25,265.00 Costs of Goods Sold -$19,891.00 Gross Profit $5,374.00 Cash operating expense -$2,761.00 EBITDA 2,613.00 Depreciation & Amortization -$156.00 Other Income (Net) -$6.00 EBIT $2,451.00 Interest -$0.00 EBT $2,451.00 Income Taxes -$785.00 Special Income/Charges -$194.00 Net Income (EAT) $1,666.00 $1,666.00 Average inventory $ 4000 Average debtors $5000 e-mail: aug_bang@yahoo.com www.augustin.co.nr
    179. 179. <ul><li>Higher rate tells users that more net sales dollars add to a company’s profits </li></ul><ul><ul><li>And fewer dollars go to cover company expenses </li></ul></ul><ul><li>Company conducts its business effectively, manages expenses </li></ul>Return on Sales <ul><ul><li></li></ul></ul>Net Income e-mail: aug_bang@yahoo.com www.augustin.co.nr
    180. 180. <ul><li>Ratio of the return to the two groups that provide financing to the company </li></ul><ul><ul><li>Creditors and investors </li></ul></ul><ul><li>and average assets owned during the period </li></ul><ul><li>Measures company’s success in generating income from its available resources </li></ul>Return on Assets-74 <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    181. 181. <ul><li>Net income + interest expense </li></ul><ul><li>Average total assets </li></ul>Return on Assets <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    182. 182. <ul><li>Net income + interest expense </li></ul><ul><li>Average total assets </li></ul><ul><li> $1,666.00 + 0 </li></ul><ul><li> 9000 </li></ul><ul><li>= .185 </li></ul>Return on Assets <ul><ul><li></li></ul></ul>Sales $25,265.00 Costs of Goods Sold -$19,891.00 Gross Profit $5,374.00 Cash operating expense -$2,761.00 EBITDA 2,613.00 Depreciation & Amortization -$156.00 Other Income (Net) -$6.00 EBIT $2,451.00 Interest -$0.00 EBT $2,451.00 Income Taxes -$785.00 Special Income/Charges -$194.00 Net Income (EAT) $1,666.00 Average inventory $ 4000 Average debtors $5000 Average total assets $9000 e-mail: aug_bang@yahoo.com www.augustin.co.nr
    183. 183. Return on Assets <ul><li>Why do we add back interest expense to net income? </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    184. 184. <ul><li>Total assets are financed by 2 sources: </li></ul><ul><ul><li>Investors (equity) </li></ul></ul><ul><ul><li>Creditors (debt) </li></ul></ul><ul><li>Net income is the return attributable to investors in the company’s stock </li></ul><ul><li>Interest expense is the return paid to creditors for using their funds to acquire assets </li></ul>Return on Assets <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    185. 185. <ul><li>Relationship between net income available to common stockholders and the equity they provide </li></ul><ul><li>Measures company’s success in using stockholders’ investments to generate net income </li></ul>Return on Equity-75 <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    186. 186. Return on Equity <ul><li>Net income - preferred dividends </li></ul><ul><li>Common contributed capital + retained earnings </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    187. 187. Return on Equity <ul><li>Net income - preferred dividends </li></ul><ul><li>Common contributed capital + retained earnings </li></ul><ul><li>$30,555* </li></ul><ul><li>($286,676 + $255,773) / 2 </li></ul><ul><li>= .1126 </li></ul><ul><li>* X ltd. does not have preferred stock </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    188. 188. <ul><li>Relationship between net income available to common stockholders and the number of shares of common stock issued </li></ul><ul><li>Expresses net income in terms of one share of the company’s common stock </li></ul>Earnings Per Share-77 <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    189. 189. Earnings Per Share <ul><li>Net income - preferred dividends </li></ul><ul><li># of shares of common stock outstanding </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    190. 190. Earnings Per Share <ul><li>Net income - preferred dividends </li></ul><ul><li># of shares of common stock outstanding </li></ul><ul><li>$30,555,000* </li></ul><ul><li>40,221,000 shares </li></ul><ul><li>= $.76 </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    191. 191. Earnings Per Share <ul><li>In addition to net income, EPS is presented for several other elements on the corporate income statement </li></ul><ul><li>Discontinued operations </li></ul><ul><li>Extraordinary items </li></ul><ul><li>Cumulative effect of accounting change </li></ul><ul><li>Earnings per share (EPS) disclosure on the face of the corporate income statement is mandatory </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    192. 192. Analyzing the Company’s Stock as an Investment <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    193. 193. <ul><li>Investors expect to receive 2 types of returns on their investments in a corporation’s common stock </li></ul><ul><li>Gains earned when they sell the corporation’s stock </li></ul><ul><li>Periodic dividends paid by the corporation to its stockholders </li></ul>Analyzing the Company’s Stock as an Investment <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    194. 194. <ul><li>Financial analysts use several ratios to assess value of stock investments </li></ul><ul><li>Price/earnings ratio </li></ul><ul><li>Dividend yield </li></ul><ul><li>Book value </li></ul>Analyzing the Company’s Stock as an Investment <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    195. 195. Price/Earnings Ratio-77 <ul><li>Relationship between a stock’s market price and its earnings per share </li></ul><ul><li>Measures the number of times one share of stock sells above the current period’s reported earnings </li></ul><ul><li>Assists financial analysts in deciding if a stock is overpriced or underpriced </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    196. 196. <ul><li>Calculating the P/E ratio </li></ul>Price/Earnings Ratio <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    197. 197. <ul><li>Calculating the P/E ratio </li></ul><ul><li>Market value of stock </li></ul><ul><li>Earnings per share </li></ul>Price/Earnings Ratio <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    198. 198. <ul><li>Suppose the market value of Asian Art, Inc., common stock is $15.75 on the last day of its fiscal year </li></ul><ul><li>Calculating the P/E ratio </li></ul><ul><li>Market value of stock </li></ul><ul><li>Earnings per share </li></ul>Price/Earnings Ratio <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    199. 199. <ul><li>Suppose the market value of Asian Art, Inc., common stock is $15.75 on the last day of its fiscal year </li></ul><ul><li>The income statement reports EPS of $.92 </li></ul>Price/Earnings Ratio <ul><li>Calculating the P/E ratio </li></ul><ul><li>Market value of stock </li></ul><ul><li>Earnings per share </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    200. 200. <ul><li>Suppose the market value of Asian Art, Inc., common stock is $15.75 on the last day of its fiscal year </li></ul><ul><li>The income statement reports EPS of $.92 </li></ul><ul><li>What is Asian Art’s price/earnings ratio? </li></ul>Price/Earnings Ratio <ul><ul><li></li></ul></ul>Calculating the P/E ratio Market value of stock Earnings per share e-mail: aug_bang@yahoo.com www.augustin.co.nr
    201. 201. Price/Earnings Ratio <ul><li>Market value of stock </li></ul><ul><li>Earnings per share </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    202. 202. Price/Earnings Ratio <ul><li>Market value of stock </li></ul><ul><li>Earnings per share </li></ul><ul><li>$15.75 </li></ul><ul><li>$.92 </li></ul><ul><li>= 17.12 </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    203. 203. P/E ratio <ul><li>If a stock has low P/E ratio say 3/1 it may be considered as an undervalued stock. </li></ul><ul><li>If the ratio is 80/1 it may be viewed as overvalued. </li></ul><ul><li>This ratio is more popular in the secondary market. </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    204. 204. Dividend Yield <ul><li>Ratio of dividends per share of stock to the stock’s market value </li></ul><ul><li>Indicates the percentage of a stock’s market value “returned” to the stockholder in the form of dividends </li></ul><ul><li>Assists investors who desire a steady flow of dividend revenue in their decisions to invest in a particular stock </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    205. 205. Dividend Yield <ul><li>Annual dividends per share </li></ul><ul><li>Stock’s market value per share </li></ul><ul><li>If Asian Art paid a total of $1.25 in dividends per share, what would be its dividend yield, assuming the same market value for its stock ($15.75)? </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    206. 206. Dividend Yield-78 <ul><li>Annual dividends per share </li></ul><ul><li>Stock’s market value per share </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    207. 207. Dividend Yield <ul><li>Annual dividends per share </li></ul><ul><li>Stock’s market value per share </li></ul><ul><li>$1.25 </li></ul><ul><li>$15.75 </li></ul><ul><li>= .079 </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    208. 208. Book Value <ul><li>Relationship between common stockholders’ equity and number of common shares outstanding </li></ul><ul><li>Measures the accounting value of one share of the corporation’s common stock </li></ul><ul><ul><li></li></ul></ul>DEBIT CREDIT e-mail: aug_bang@yahoo.com www.augustin.co.nr
    209. 209. Book Value <ul><li>Total equity - preferred equity </li></ul><ul><li># of shares of common stock outstanding </li></ul><ul><li>The book value of one share of Lands’ End common stock is: </li></ul><ul><li>$201,192,000 </li></ul><ul><li>4,02,21,000 shares </li></ul><ul><li>= $5.00/share </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    210. 210. Review: Major Income Statement Items <ul><li>Gross Profit = Sales - Costs of Goods Sold </li></ul><ul><li>EBITDA = Gross Profit - Cash Operating Expenses </li></ul><ul><li>EBIT = EBDIT - Depreciation - Amortization </li></ul><ul><li>EBT = EBIT - Interest </li></ul><ul><li>NI or EAT = EBT- Taxes </li></ul><ul><li>Net Income is a primary determinant of the firm’s cashflows and, thus, the value of the firm’s shares </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    211. 211. Life education <ul><ul><li></li></ul></ul>Thomas Cooper –Dictionary e-mail: aug_bang@yahoo.com www.augustin.co.nr
    212. 212. Accounting Test Question No IFS 4: <ul><li>Effect of Management Decisions On Ratios </li></ul><ul><li>Require: </li></ul><ul><li>Put by letter whether each of the actions listed below will immediately </li></ul><ul><li>-increase (I), </li></ul><ul><li>-decrease (D) or </li></ul><ul><li>-have no effect (N) on the ratios shown. </li></ul><ul><li>Current ratio Acid-test ratio Debt to Equity ratio </li></ul><ul><li>1.Company issued ordinary shares for cash </li></ul><ul><li>2.Bought raw material on account </li></ul><ul><li>3.Received money from accounts receivable </li></ul><ul><li>4.Expiration of prepaid rent </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    213. 213. <ul><li>5.Payment of cash dividend </li></ul><ul><li>6.Purchase long term investment with cash </li></ul><ul><li>7.Sale of fixed assets for cash with no gain or loss </li></ul><ul><li>8.Stock write off </li></ul><ul><li>9.Refinance on a long term basis currently matured debt </li></ul><ul><li>10.Bought fixed asset with a 6 month note </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    214. 214. Answer to Accounting Test Question IFS No 4 : <ul><li>Current ratio Acid-test ratio Debt to equity ratio </li></ul><ul><li>1.Company issued ordinary shares for cash I I D </li></ul><ul><li>2.Bought raw material on accountI D I </li></ul><ul><li>3.Received money from accounts receivable N N N </li></ul><ul><li>4.Expiration of prepaid rent D N I </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    215. 215. <ul><li>5.Payment of cash dividendDDI </li></ul><ul><li>6.Purchase long term investment with cash </li></ul><ul><ul><ul><ul><li>D D N </li></ul></ul></ul></ul><ul><li>7.Sale of fixed assets for cash with no gain or loss I I N </li></ul><ul><li>8.Stock write off D N I </li></ul><ul><li>9.Refinance on a long term basis currently matured debt I I N </li></ul><ul><li>10.Bought fixed asset with a 6 month note D D I </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    216. 216. <ul><li>Accounting Test Question No IFS 1: </li></ul><ul><li>Details of financial performance of Company XYZ </li></ul><ul><li>For year 2005 Income Statement : </li></ul><ul><li>Net Sales - $ 7 million, </li></ul><ul><li>Cost of Goods sold - $ 3 million </li></ul><ul><ul><li>Net Income - $1.2 million </li></ul></ul><ul><ul><li>Balance Sheet ($’000):- 2007 </li></ul></ul><ul><li>Assets </li></ul><ul><li>Cash $2,00,240 </li></ul><ul><li>Accounts Receivable $8,10,620 </li></ul><ul><li>Inventory $8,30,710 </li></ul><ul><li>Property, plant and equipment ( net) $2,59,02,420 </li></ul><ul><li>Total Assets $4,43,03,990  </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    217. 217. <ul><li>  Liabilities & Shareholders’ Equity: </li></ul><ul><li>   Current liabilities710640 </li></ul><ul><li>Notes payable550990 </li></ul><ul><li>Paid-in capital1,5001,500 </li></ul><ul><li>Retained earnings1,670860Total Liabilities & Shareholders’ Equity4,4303,990The average industry for </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    218. 218. <ul><li>Company’s line of business are: </li></ul><ul><li>Inventory Turnover  5 times </li></ul><ul><li>Average Collection period  45 days </li></ul><ul><li>Asset Turnover 2 times </li></ul><ul><li>Required: </li></ul><ul><li>Evaluate Company XYZ’s asset management relative to its industry. </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    219. 219. Accounting Test Question No IFS 2: <ul><li>Append below Company TIM s Income Statement and Balance Sheet: </li></ul><ul><li>Income Statement (000) 2006-2007 </li></ul><ul><li>Net Sales Rs.7,05,06,200 </li></ul><ul><li>Net Income Rs.3,40,410 </li></ul><ul><li>Balance Sheet (000):-Assets2006-2007 </li></ul><ul><li>Current Assets Rs.1,84,01,570 </li></ul><ul><li>Property, plant and equipment ( net) Rs.2,59,02,420 </li></ul><ul><li>Total Assets Rs.4,43,03,990 </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    220. 220. <ul><li>Current Liabilities1,15,01,190 </li></ul><ul><li>Long term liabilities RS. 8,10,440 </li></ul><ul><li>Paid-in capital1 RS.50,01,500 </li></ul><ul><li>Retained earnings Rs.9,70,860 </li></ul><ul><li>Required: </li></ul><ul><li>Determine the following ratios for 2006- 2007: </li></ul><ul><li>profit margin on sales </li></ul><ul><li>return on assets (ROA) </li></ul><ul><li>return on shareholders equity </li></ul><ul><li>(2) Determine the amount of dividends paid to the shareholders during2006- 2007 </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    221. 221. Answer to Accounting Test Question IFS No 2 : <ul><li>1(a) Profit margin on sales </li></ul><ul><li>= Net Income/ Net Sales </li></ul><ul><li>= Rs.340,000/Rs.7,050,000 </li></ul><ul><li>= 4.8% </li></ul><ul><li>1(b) Return on Assets (ROA) </li></ul><ul><li>= Net Income/(Average Total Assets)/2 </li></ul><ul><li>=RS.340,000/(Rs.4,430,000+3,990,000)/2 </li></ul><ul><li>= 8.1% </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    222. 222. <ul><li>1(c) Return on Shareholders equity </li></ul><ul><li>= Net Income/ (Average Total Shareholder fund)/2 </li></ul><ul><li>=Rs.340,000/(Rs.3,170,000+2,360,000)/2 </li></ul><ul><li>= 12.3% </li></ul><ul><li>Computation of Dividend paid during Year 2005: </li></ul><ul><li>Retained earnings beginning of year 2005 RS.860,000 </li></ul><ul><li>Add: Net Income Rs.340,000 </li></ul><ul><li>Less: Retained earnings end of year 2005 (Rs.970,000) </li></ul><ul><li>Dividends paid during 2007 Rs.230,000 </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    223. 223. <ul><li>Accounting Test Question No IFS 3: </li></ul><ul><li>Append below Company XYZ’s Income Statement and Balance Sheet: </li></ul><ul><li>Income Statement ($’000)2005 </li></ul><ul><li>Net Sales 7,100 </li></ul><ul><li>Interest expense 40 </li></ul><ul><li>Income tax expense 150 </li></ul><ul><li>Net Income 210 </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    224. 224. <ul><li>Balance Sheet ($’000):- </li></ul><ul><li>Assets2005 </li></ul><ul><li>Cash 200 </li></ul><ul><li>Accounts Receivable 810 </li></ul><ul><li>Inventory 830 </li></ul><ul><li>Property, plant and equipment ( net) 2,590 </li></ul><ul><li>Total Assets 4,430 </li></ul><ul><li>Liabilities & Shareholders’ Equity: </li></ul><ul><li>Current liabilities 710 </li></ul><ul><li>Long-term liabilities 550 </li></ul><ul><li>Paid-in capital 1,500 </li></ul><ul><li>Retained earnings 1,670 </li></ul><ul><li>Total Liabilities & Shareholders’ Equity4,430 </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    225. 225. <ul><li>Required: </li></ul><ul><li>Determine the following ratios for 2005: </li></ul><ul><li>(a) current ratio </li></ul><ul><li>(b) acid-test ratio </li></ul><ul><li>(c) debt to equity ratio </li></ul><ul><li>(d) times interest earned ratio </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    226. 226. Answer:3 <ul><li>(a) current ratio= </li></ul><ul><li>Current asset/current liabilities </li></ul><ul><li>= ($200,000+$810,000+$830,000)/$710,000)= 2.59 </li></ul><ul><li>(b) acid-test ratio= </li></ul><ul><li>(Current assets- inventory)/current liabilities </li></ul><ul><li>=($200,000+$810,000)/$710,000= 1,42 </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    227. 227. <ul><li>(c) debt to equity ratio </li></ul><ul><li>=(Total liabilities)/Shareholders fund </li></ul><ul><li>=($710,000+$550,000)/($1,500,000+ </li></ul><ul><li>$1,670,000) </li></ul><ul><li>= 0.39 </li></ul><ul><li>(d) times interest earned ratio </li></ul><ul><li>=(Net Income+ Interest Expense+ Income Tax)/InterestExpense </li></ul><ul><li>=($210,000+$40,000+$150,000)/$40,000 </li></ul><ul><li>=10 times </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    228. 228. Some difficulty in ratios <ul><li>All profitability and expenses ratios Sales in the denominator </li></ul><ul><li>All turn over ratios, sales in the numerator. </li></ul><ul><li>Propritory ratio=Total assets/owner’s funds </li></ul><ul><li>Shareholders’ funds=Equity shares+Reserves and surplus </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    229. 229. Exercise problems-103 <ul><li>1.1.NC </li></ul><ul><li>1.2 decrease </li></ul><ul><li>1.3 NC </li></ul><ul><li>1.4 NC </li></ul><ul><li>1.5 Increase </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    230. 230. Exercise-2. <ul><li>1.GP ratio=15*100/30=50% </li></ul><ul><li>2.NP ratio=5*100/30=16.67% </li></ul><ul><li>3.STR=COGS/Average stock=15/2.5=6.0 times </li></ul><ul><li>4.CR=8/3=2.67 </li></ul><ul><li>5.LR=6/3=2 </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    231. 231. Exercise-3 <ul><li>GP 33.33% 35% </li></ul><ul><li>NP 20% 25% </li></ul><ul><li>ROCE 15% 20% </li></ul><ul><li>STR 4 5 </li></ul><ul><li>CR 1.5 2 </li></ul><ul><li>D/E 0.17241 0.24 </li></ul><ul><li>Capital employed=3.4-.2=3.2 </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    232. 232. Exercise-4 <ul><li>1. current ratio=550/200=2.75 </li></ul><ul><li>2.Acid test ratio=400/200=2 </li></ul><ul><li>3.Operating ratio=1480*100/1800=82.22% </li></ul><ul><li>4.STR=1150/200=5.75 times </li></ul><ul><li>5. DTR=1800/250=7.2 times </li></ul><ul><li>6.ROPR= </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    233. 233. Prob.13. <ul><li>1.sales=3,20,000 </li></ul><ul><li>2.sundry debtors=80,000 </li></ul><ul><li>3. sundry creditors=80,000 </li></ul><ul><li>4. closing stock=31,000 </li></ul><ul><li>5. Opening stock=29,000 </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    234. 234. Prob.12 <ul><li>Balance sheet: General reserve at the beginning=2,00,000 </li></ul><ul><li>Proposed addition=1,00,000 </li></ul><ul><li>Profits and loss appro.=20,000 </li></ul><ul><li>10% Debentures=1,00,000 </li></ul><ul><li>Current liabilities(Proposed dividend)=2,00,000 </li></ul><ul><li>Fixed assets=7,20,000 </li></ul><ul><li>Stock=2,53,125 </li></ul><ul><li>Sundry debtors=84,375 </li></ul><ul><li>Tranfer to general reserve=1,00,000 </li></ul><ul><li>Balance transferred to balance sheet=20,000 </li></ul><ul><li>Net profit=2,50,000 </li></ul><ul><li>Provision for tax=7500 </li></ul><ul><li>Net profit=2,50,000;gross profit=6,07,500;sales=10,12,500; purchases=1,30,625. </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    235. 235. Prob.9 <ul><li>Balance sheet. </li></ul><ul><li>Liabilities Assets </li></ul><ul><li>Equity shares 2,00,000 Fixed assets 2,25,000 </li></ul><ul><li>R/S 1,00,000 current liabilities 1,75,000 </li></ul><ul><li>Long term liabilities NIL </li></ul><ul><li>Over draft 60,000 </li></ul><ul><li>Sundry creditors 40,000 </li></ul><ul><li>4,00,000 4,00,000 </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    236. 236. <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    237. 237. Chapter Objective 5 Use ratios in decision making <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    238. 238. Limitations of Financial Analysis <ul><li>No one ratio or year’s worth of financial information should be relied upon to provide a complete assessment of a corporation’s financial condition </li></ul><ul><li>Analysts should: </li></ul><ul><li>Examine trends over time </li></ul><ul><li>Benchmark to industry and key competitors </li></ul><ul><li>Seek answers about why ratios are different </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    239. 239. Limitations of Financial Analysis <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    240. 240. Limitations of Financial Analysis <ul><li>Grant’s ratios were reasonably good up until several years before its failure </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    241. 241. Limitations of Financial Analysis <ul><li>But analysts and the investing public continued to believe the company’s strong history would carry it forward </li></ul><ul><li>Grant’s ratios were reasonably good up until several years before its failure </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    242. 242. Limitations of Financial Analysis <ul><li>But analysts and the investing public continued to believe the company’s strong history would carry it forward </li></ul><ul><li>Financial statement users didn’t consider the social and economic changes of the early 1970s and how these affected the retailer! </li></ul><ul><li>Grant’s ratios were reasonably good up until several years before its failure </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    243. 243. The Complexity of Business Decisions <ul><li>Business environment is complicated by numerous local, regional, national, and global issues - all must be considered when evaluating current financial condition or forecasting future potential for income </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    244. 244. An Example: Dell Abbreviated Balance Sheet <ul><li>Assets: </li></ul><ul><ul><li>Current Assets  inventories$391 $7,681.00 </li></ul></ul><ul><ul><li>Non-Current Assets: $3,790.00 </li></ul></ul><ul><ul><li>Total Assets: $11,471.00 </li></ul></ul><ul><li>Liabilities: </li></ul><ul><ul><li>Current Liabilities: $5,192.00 </li></ul></ul><ul><ul><li>LT Debt & Other LT Liab.: $971.00 </li></ul></ul><ul><ul><li>Equity: $5,308.00 </li></ul></ul><ul><ul><li>Total Liab. and Equity: $11,471.00 </li></ul></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    245. 245. <ul><li>Current Ratio: </li></ul><ul><li>Quick (Acid Test) Ratio: </li></ul>Liquidity Ratio Examples: Dell <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    246. 246. Ratio Comparison: Current Ratio <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    247. 247. <ul><li>Debt Ratio: </li></ul>Leverage Ratio Examples: Dell <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    248. 248. Ratio Comparison: Debt Ratio <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    249. 249. <ul><li>Return on Assets (ROA): </li></ul><ul><li>Return on Equity (ROE): </li></ul>Profitability Ratio Examples: Dell <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    250. 250. Profitability Ratio Examples: Dell <ul><li>Net Profit Margin: </li></ul><ul><li>Retention Ratio </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    251. 251. Ratio Comparison: ROE <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    252. 252. Ratio Comparison: ROA <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    253. 253. Ratio Comparison: Profit Margin <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    254. 254. <ul><li>Total Asset Turnover Ratio: </li></ul><ul><li>Inventory Turnover Ratio: </li></ul>Activity (Turnover) Ratio Examples: Dell <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    255. 255. Ratio Comparison: Asset Turnover <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    256. 256. The DuPont System <ul><li>Method to breakdown ROE into: </li></ul><ul><ul><li>ROA and Equity Multiplier </li></ul></ul><ul><li>ROA is further broken down as: </li></ul><ul><ul><li>Profit Margin and Asset Turnover </li></ul></ul><ul><li>Helps to identify sources of strength and weakness in current performance </li></ul><ul><li>Helps to focus attention on value drivers </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    257. 257. The DuPont System <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    258. 258. The DuPont System <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    259. 259. The DuPont System <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    260. 260. The DuPont System <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    261. 261. The DuPont System: Dell <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    262. 262. A Note on Sustainable Growth and Stock Returns <ul><li>In the long run </li></ul><ul><ul><li>Sustainable growth and long run capital gains (g) = ROE x  </li></ul></ul><ul><li>Recall the relationship between stock returns (r), capital gains (g) and forward dividend yields (D 1 /P 0 ): </li></ul><ul><ul><li>r = g + D 1 /P 0 = g + D o (1+g)/P 0 </li></ul></ul><ul><li>Note: r & g must be quarterly if D is quarterly and annual if D is annual </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    263. 263. Example: Predicted Sustainable Growth for Dell <ul><li>Based on the most recent numbers: </li></ul><ul><ul><li>ROE = 31.39% &  = 100% </li></ul></ul><ul><ul><li>g = 0.3139 x 1 = 31.39% </li></ul></ul><ul><ul><li>r = 0.3139 + 0/P = 31.39% </li></ul></ul><ul><li>Based on 5 year averages: </li></ul><ul><ul><li>ROE = 51.94% &  = 100% </li></ul></ul><ul><ul><li>g = 0.5194 x 1 = 51.94% </li></ul></ul><ul><ul><li>r = 0.3139 + 0/P = 51.94% </li></ul></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    264. 264. Summary of Financial Ratios <ul><li>Ratios help to: </li></ul><ul><ul><li>Evaluate performance </li></ul></ul><ul><ul><li>Structure analysis </li></ul></ul><ul><ul><li>Show the connection between activities and performance </li></ul></ul><ul><li>Benchmark with </li></ul><ul><ul><li>Past for the company </li></ul></ul><ul><ul><li>Industry </li></ul></ul><ul><li>Ratios adjust for size differences </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    265. 265. Limitations of Ratio Analysis <ul><li>A firm’s industry category is often difficult to identify </li></ul><ul><li>Published industry averages are only guidelines </li></ul><ul><li>Accounting practices differ across firms </li></ul><ul><li>Sometimes difficult to interpret deviations in ratios </li></ul><ul><li>Industry ratios may not be desirable targets </li></ul><ul><li>Seasonality affects ratios </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    266. 266. Ratios and Forecasting <ul><li>Common stock valuation based on </li></ul><ul><ul><li>Expected cashflows to stockholders </li></ul></ul><ul><ul><li>ROE and  are major determinants of cashflows to stockholders </li></ul></ul><ul><li>Ratios influence expectations by: </li></ul><ul><ul><li>Showing where firm is now </li></ul></ul><ul><ul><li>Providing context for current performance </li></ul></ul><ul><li>Current information influences expectations by: </li></ul><ul><ul><li>Showing developments that will alter future performance </li></ul></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    267. 267. How Might Ratios Help Me on the IEM? <ul><li>Analysis of AAPL, IBM and MSFT, and comparisons to the S&P500 companies can help to: </li></ul><ul><ul><li>Assess the (absolute and relative) financial state of each company </li></ul></ul><ul><ul><li>Show each company’s strengths and weaknesses </li></ul></ul><ul><ul><li>Predict sustainable growth rate </li></ul></ul><ul><li>Combined with current information, this can help to: </li></ul><ul><ul><li>Assess likely future performance </li></ul></ul><ul><ul><li>Predict future valuation and earnings growth </li></ul></ul><ul><ul><li>Predict returns </li></ul></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    268. 268. Financial Statement Analysis: Lecture Outline <ul><li>Review of Financial Statements </li></ul><ul><li>Ratios </li></ul><ul><ul><li>Types of Ratios </li></ul></ul><ul><ul><li>Examples </li></ul></ul><ul><li>The DuPont Method </li></ul><ul><li>Ratios and Growth </li></ul><ul><li>Summary </li></ul><ul><ul><li>Strengths </li></ul></ul><ul><ul><li>Weaknesses </li></ul></ul><ul><ul><li>Ratios and Forecasting </li></ul></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    269. 269. Financial Analysis <ul><li>Assessment of the firm’s past, present and future financial conditions </li></ul><ul><li>Done to find firm’s financial strengths and weaknesses </li></ul><ul><li>Primary Tools: </li></ul><ul><ul><li>Financial Statements </li></ul></ul><ul><ul><li>Comparison of financial ratios to past, industry, sector and all firms </li></ul></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    270. 270. Sources of Data <ul><li>Annual reports </li></ul><ul><ul><li>Via mail, SEC or company websites </li></ul></ul><ul><li>Published collections of data </li></ul><ul><ul><li>e.g., Dun and Bradstreet or Robert Morris </li></ul></ul><ul><li>Investment sites on the web </li></ul><ul><ul><li>Examples </li></ul></ul><ul><ul><ul><li>http://moneycentral.msn.com/investor </li></ul></ul></ul><ul><ul><ul><li>http://www.marketguide.com </li></ul></ul></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    271. 271. The Main Idea <ul><li>Value for the firm comes from cashflows </li></ul><ul><li>Cashflows can be calculated as: </li></ul><ul><ul><li>(Rev t - Cost t - Dep t )x(1-  ) + Dep t —OR— </li></ul></ul><ul><ul><li>(Rev t - Cost t )x(1-  ) +  xDep t —OR— </li></ul></ul><ul><ul><li>Rev t x(1-  ) - Cost t x(1-  ) +  xDep t </li></ul></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    272. 272. An Example: Dell Abbreviated Balance Sheet <ul><li>Assets: </li></ul><ul><ul><li>Current Assets: $7,681.00 </li></ul></ul><ul><ul><li>Non-Current Assets: $3,790.00 </li></ul></ul><ul><ul><li>Total Assets: $11,471.00 </li></ul></ul><ul><li>Liabilities: </li></ul><ul><ul><li>Current Liabilities: $5,192.00 </li></ul></ul><ul><ul><li>LT Debt & Other LT Liab.: $971.00 </li></ul></ul><ul><ul><li>Equity: $5,308.00 </li></ul></ul><ul><ul><li>Total Liab. and Equity: $11,471.00 </li></ul></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    273. 273. Review: Major Income Statement Items <ul><li>Gross Profit = Sales - Costs of Goods Sold </li></ul><ul><li>EBITDA = Gross Profit - Cash Operating Expenses </li></ul><ul><li>EBIT = EBDIT - Depreciation - Amortization </li></ul><ul><li>EBT = EBIT - Interest </li></ul><ul><li>NI or EAT = EBT- Taxes </li></ul><ul><li>Net Income is a primary determinant of the firm’s cashflows and, thus, the value of the firm’s shares </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    274. 274. An Example: Dell Abbreviated Income Statement <ul><li>Sales $25,265.00 </li></ul><ul><li>Costs of Goods Sold -$19,891.00 </li></ul><ul><li>Gross Profit $5,374.00 </li></ul><ul><li>Cash operating expense -$2,761.00 </li></ul><ul><li>EBITDA 2,613.00 </li></ul><ul><li>Depreciation & Amortization -$156.00 </li></ul><ul><li>Other Income (Net) -$6.00 </li></ul><ul><li>EBIT $2,451.00 </li></ul><ul><li>Interest -$0.00 </li></ul><ul><li>EBT $2,451.00 </li></ul><ul><li>Income Taxes -$785.00 </li></ul><ul><li>Special Income/Charges -$194.00 </li></ul><ul><li>Net Income (EAT) $1,666.00 </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    275. 275. Objectives of Ratio Analysis <ul><li>Standardize financial information for comparisons </li></ul><ul><li>Evaluate current operations </li></ul><ul><li>Compare performance with past performance </li></ul><ul><li>Compare performance against other firms or industry standards </li></ul><ul><li>Study the efficiency of operations </li></ul><ul><li>Study the risk of operations </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    276. 276. Rationale Behind Ratio Analysis <ul><li>A firm has resources </li></ul><ul><li>It converts resources into profits through </li></ul><ul><ul><li>production of goods and services </li></ul></ul><ul><ul><li>sales of goods and services </li></ul></ul><ul><li>Ratios </li></ul><ul><ul><li>Measure relationships between resources and financial flows </li></ul></ul><ul><ul><li>Show ways in which firm’s situation deviates from </li></ul></ul><ul><ul><ul><li>Its own past </li></ul></ul></ul><ul><ul><ul><li>Other firms </li></ul></ul></ul><ul><ul><ul><li>The industry </li></ul></ul></ul><ul><ul><ul><li>All firms- </li></ul></ul></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    277. 277. Types of Ratios <ul><li>Financial Ratios: </li></ul><ul><ul><li>Liquidity Ratios </li></ul></ul><ul><ul><ul><li>Assess ability to cover current obligations </li></ul></ul></ul><ul><ul><li>Leverage Ratios </li></ul></ul><ul><ul><ul><li>Assess ability to cover long term debt obligations </li></ul></ul></ul><ul><li>Operational Ratios: </li></ul><ul><ul><li>Activity (Turnover) Ratios </li></ul></ul><ul><ul><ul><li>Assess amount of activity relative to amount of resources used </li></ul></ul></ul><ul><ul><li>Profitability Ratios </li></ul></ul><ul><ul><ul><li>Assess profits relative to amount of resources used </li></ul></ul></ul><ul><li>Valuation Ratios: </li></ul><ul><ul><ul><li>Assess market price relative to assets or earnings </li></ul></ul></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    278. 278. <ul><li>Current Ratio: </li></ul><ul><li>Quick (Acid Test) Ratio: </li></ul>Liquidity Ratio Examples: Dell <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    279. 279. Ratio Comparison: Current Ratio <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    280. 280. <ul><li>Debt Ratio: </li></ul>Leverage Ratio Examples: Dell <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    281. 281. Ratio Comparison: Debt Ratio <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    282. 282. <ul><li>Return on Assets (ROA): </li></ul><ul><li>Return on Equity (ROE): </li></ul>Profitability Ratio Examples: Dell <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    283. 283. Profitability Ratio Examples: Dell <ul><li>Net Profit Margin: </li></ul><ul><li>Retention Ratio </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    284. 284. Ratio Comparison: ROE <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    285. 285. Ratio Comparison: ROA <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    286. 286. Ratio Comparison: Profit Margin <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    287. 287. <ul><li>Total Asset Turnover Ratio: </li></ul><ul><li>Inventory Turnover Ratio: </li></ul>Activity (Turnover) Ratio Examples: Dell <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    288. 288. Ratio Comparison: Asset Turnover <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    289. 289. The DuPont System <ul><li>Method to breakdown ROE into: </li></ul><ul><ul><li>ROA and Equity Multiplier </li></ul></ul><ul><li>ROA is further broken down as: </li></ul><ul><ul><li>Profit Margin and Asset Turnover </li></ul></ul><ul><li>Helps to identify sources of strength and weakness in current performance </li></ul><ul><li>Helps to focus attention on value drivers </li></ul><ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    290. 290. The DuPont System <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    291. 291. The DuPont System <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.nr
    292. 292. The DuPont System <ul><ul><li></li></ul></ul>e-mail: aug_bang@yahoo.com www.augustin.co.

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