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(Shail) analysis
 

(Shail) analysis

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    (Shail) analysis (Shail) analysis Presentation Transcript

    • 17-1 ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTS
    • 17-2 It looks at accounting information from users’ perspective What is financial statement analysis? ”Tearing apart” the financial statements and looking at the relationships Financial Statement AnalysisFinancial Statement Analysis
    • 17-3 Who need results of financial statement Analysis? Internal users (i.e., management) External users (emphasis of chapter) Examples? Investors, creditors, regulatory agencies & … stock market analysts and auditors Financial Statement AnalysisFinancial Statement Analysis
    • 17-4 What do internal users use it for? Planning, evaluating and controlling company operations What do external users use it for? Assessing past performance and current financial position and making predictions about the future profitability and solvency of the company as well as evaluating the effectiveness of management Financial Statement AnalysisFinancial Statement Analysis
    • 17-5 Information is available from Published annual reports (1) Financial statements (2) Notes to financial statements (3) Letters to stockholders (4) Auditor’s report (Independent accountants) (5) Management’s discussion and analysis Reports filed with the government 627 628 Financial Statement AnalysisFinancial Statement Analysis
    • 17-6 Information is available from Other sources (1) Newspapers (2) Periodicals (3) Financial information organizations such as: AIFI (4) Other business publications 627 628 Financial Statement AnalysisFinancial Statement Analysis
    • 17-7 Horizontal Analysis Vertical Analysis Common-Size Statements Trend Percentages Ratio Analysis Methods ofMethods of Financial Statement AnalysisFinancial Statement Analysis
    • 17-8 Horizontal AnalysisHorizontal Analysis Using comparative financial statements to calculate rupee or percentage changes in a financial statement item from one period to the next Using comparative financial statements to calculate rupee or percentage changes in a financial statement item from one period to the next
    • 17-9 Vertical AnalysisVertical Analysis For a single financial statement, each item is expressed as a percentage of a significant total, e.g., all income statement items are expressed as a percentage of sales For a single financial statement, each item is expressed as a percentage of a significant total, e.g., all income statement items are expressed as a percentage of sales
    • 17-10 Trend PercentagesTrend Percentages Show changes over time in given financial statement items (can help evaluate financial information of several years) Show changes over time in given financial statement items (can help evaluate financial information of several years)
    • 17-11 Ratio AnalysisRatio Analysis Expression of logical relationships between items in a financial statement of a single period (e.g., percentage relationship between revenue and net income) Expression of logical relationships between items in a financial statement of a single period (e.g., percentage relationship between revenue and net income)
    • 17-12 Horizontal Analysis ExampleHorizontal Analysis Example The management of Clover Company provides you with comparative balance sheets of the years ended December 31, 1999 and 1998. Management asks you to prepare a horizontal analysishorizontal analysis on the information.
    • 17-13 Calculating Change as a Percentage Percentage Change Dollar Change Base Year Figure 100%= × Horizontal Analysis ExampleHorizontal Analysis Example
    • 17-14
    • 17-15 Calculating Change in Dollar Amounts Dollar Change Current Year Figure Base Year Figure = – Horizontal Analysis ExampleHorizontal Analysis Example
    • 17-16 $12,000 – $23,500 = $(11,500) Horizontal Analysis ExampleHorizontal Analysis Example
    • 17-17 ($11,500 ÷ $23,500) × 100% = 48.9% Horizontal Analysis ExampleHorizontal Analysis Example
    • 17-18 Horizontal Analysis ExampleHorizontal Analysis Example
    • 17-19 Let’s apply the same procedures to the liability and stockholders’ equity sections of the balance sheet. Horizontal Analysis ExampleHorizontal Analysis Example
    • 17-20 CLOVER CORPORATION Comparative Balance Sheets December 31, 1999 and 1998 Increase (Decrease) 1999 1998 Amount % Liabilities and Stockholders' Equity Current liabilities: Accounts payable 67,000$ 44,000$ 23,000$ 52.3 Notes payable 3,000 6,000 (3,000) (50.0) Total current liabilities 70,000 50,000 20,000 40.0 Long-term liabilities: Bonds payable, 8% 75,000 80,000 (5,000) (6.3) Total liabilities 145,000 130,000 15,000 11.5 Stockholders' equity: Preferred stock 20,000 20,000 - 0.0 Common stock 60,000 60,000 - 0.0 Additional paid-in capital 10,000 10,000 - 0.0 Total paid-in capital 90,000 90,000 - 0.0 Retained earnings 80,000 69,700 10,300 14.8 Total stockholders' equity 170,000 159,700 10,300 6.4 Total liabilities and stockholders' equity 315,000$ 289,700$ 25,300$ 8.7
    • 17-21 Now, let’s apply the procedures to the income statement. Horizontal Analysis ExampleHorizontal Analysis Example
    • 17-22 CLOVER CORPORATION Comparative Income Statements For the Years Ended December 31, 1999 and 1998 Increase (Decrease) 1999 1998 Amount % Net sales 520,000$ 480,000$ 40,000$ 8.3 Cost of goods sold 360,000 315,000 45,000 14.3 Gross margin 160,000 165,000 (5,000) (3.0) Operating expenses 128,600 126,000 2,600 2.1 Net operating income 31,400 39,000 (7,600) (19.5) Interest expense 6,400 7,000 (600) (8.6) Net income before taxes 25,000 32,000 (7,000) (21.9) Less income taxes (30%) 7,500 9,600 (2,100) (21.9) Net income 17,500$ 22,400$ (4,900)$ (21.9)
    • 17-23 CLOVER CORPORATION Comparative Income Statements For the Years Ended December 31, 1999 and 1998 Increase (Decrease) 1999 1998 Amount % Net sales 520,000$ 480,000$ 40,000$ 8.3 Cost of goods sold 360,000 315,000 45,000 14.3 Gross margin 160,000 165,000 (5,000) (3.0) Operating expenses 128,600 126,000 2,600 2.1 Net operating income 31,400 39,000 (7,600) (19.5) Interest expense 6,400 7,000 (600) (8.6) Net income before taxes 25,000 32,000 (7,000) (21.9) Less income taxes (30%) 7,500 9,600 (2,100) (21.9) Net income 17,500$ 22,400$ (4,900)$ (21.9) Sales increased by 8.3% while net income decreased by 21.9%.
    • 17-24 CLOVER CORPORATION Comparative Income Statements For the Years Ended December 31, 1999 and 1998 Increase (Decrease) 1999 1998 Amount % Net sales 520,000$ 480,000$ 40,000$ 8.3 Cost of goods sold 360,000 315,000 45,000 14.3 Gross margin 160,000 165,000 (5,000) (3.0) Operating expenses 128,600 126,000 2,600 2.1 Net operating income 31,400 39,000 (7,600) (19.5) Interest expense 6,400 7,000 (600) (8.6) Net income before taxes 25,000 32,000 (7,000) (21.9) Less income taxes (30%) 7,500 9,600 (2,100) (21.9) Net income 17,500$ 22,400$ (4,900)$ (21.9) There were increases in both cost of goods sold (14.3%) and operating expenses (2.1%). These increased costs more than offset the increase in sales, yielding an overall decrease in net income.
    • 17-25 Vertical Analysis ExampleVertical Analysis Example The management of Sample Company asks you to prepare a vertical analysisvertical analysis for the comparative balance sheets of the company.
    • 17-26 Vertical Analysis ExampleVertical Analysis Example
    • 17-27 Vertical Analysis ExampleVertical Analysis Example $82,000 ÷ $483,000 = 17% rounded $30,000 ÷ $387,000 = 8% rounded
    • 17-28 Vertical Analysis ExampleVertical Analysis Example $76,000 ÷ $483,000 = 16% rounded
    • 17-29 Trend Percentages ExampleTrend Percentages Example Wheeler, Inc. provides you with the following operating data and asks that you prepare a trend analysis.
    • 17-30 Trend Percentages ExampleTrend Percentages Example Wheeler, Inc. provides you with the following operating data and asks that you prepare a trend analysis. $1,991 - $1,820 = $171$1,991 - $1,820 = $171
    • 17-31 Trend Percentages ExampleTrend Percentages Example Using 1995 as the base year, we develop the following percentage relationships. $1,991 - $1,820 = $171$1,991 - $1,820 = $171 $171 ÷ $1,820 = 9% rounded$171 ÷ $1,820 = 9% rounded
    • 17-32 Trend line for Sales
    • 17-33 Ratios can be expressed in three different ways: 1. Ratio (e.g., current ratio of 2:1) 2. % (e.g., profit margin of 2%) 3. Rs. (e.g., EPS of Rs.2.25) CAUTION! “Using ratios and percentages without considering the underlying causes may lead to incorrect conclusions.” RatiosRatios
    • 17-34 Categories of RatiosCategories of Ratios Liquidity Ratios Indicate a company’s short-term debt-paying ability Equity (Long-Term Solvency) Ratios Show relationship between debt and equity financing in a company Profitability Tests Relate income to other variables Market Tests Help assess relative merits of stocks in the marketplace
    • 17-35 Liquidity Ratios Current (working capital) ratio Acid-test (quick) ratio Cash flow liquidity ratio Accounts receivable turnover Number of days’ sales in accounts receivable Inventory turnover Total assets turnover 651 10 Ratios You Must Know10 Ratios You Must Know
    • 17-36 Equity (Long-Term Solvency) Ratios Equity (stockholders’ equity) ratio Equity to debt 10 Ratios You Must Know10 Ratios You Must Know
    • 17-37 Profitability Tests Return on operating assets Net income to net sales (return on sales or “profit margin”“profit margin”) Return on average common stockholders’ equity (ROEROE) Cash flow margin Earnings per share Times interest earned Times preferred dividends earned $ 10 Ratios You Must Know10 Ratios You Must Know
    • 17-38 Market Tests Earnings yield on common stock Price-earnings ratio Payout ratio on common stock Dividend yield on common stock Dividend yield on preferred stock Cash flow per share of common stock 10 Ratios You Must Know10 Ratios You Must Know
    • 17-39 Now, let’s look at Norton Corporation’s 1999 and 1998 financial statements.
    • 17-40
    • 17-41
    • 17-42
    • 17-43 Now, let’s calculate the 10 ratios based on Norton’s financial statements.
    • 17-44 NORTON CORPORATION 1999 Cash 30,000$ Accounts receivable, net Beginning of year 17,000 End of year 20,000 Inventory Beginning of year 10,000 End of year 12,000 Total current assets 65,000 Total current liabilities 42,000 Sales on account 494,000 Cost of goods sold 140,000 We will use this information to calculate the liquidity ratios for Norton.
    • 17-45 Working Capital*Working Capital* 12/31/99 Current assets 65,000$ Current liabilities (42,000) Working capital 23,000$ The excess of current assets over current liabilities. * While this is not a ratio, it does give an indication of a company’s liquidity.
    • 17-46 Current (Working Capital) RatioCurrent (Working Capital) Ratio Current Ratio $65,000 $42,000 = = 1.55 : 1 Measures the ability of the company to pay current debts as they become due. Current Ratio Current Assets Current Liabilities = #1#1
    • 17-47 Acid-Test (Quick) RatioAcid-Test (Quick) Ratio Quick Assets Current Liabilities = Acid-Test Ratio Quick assets are Cash, Marketable Securities, Accounts Receivable (net) and current Notes Receivable. #2#2
    • 17-48 Quick Assets Current Liabilities = Acid-Test Ratio Norton Corporation’s quick assets consist of cash of $30,000 and accounts receivable of $20,000. Acid-Test (Quick) RatioAcid-Test (Quick) Ratio #2#2
    • 17-49 Quick Assets Current Liabilities = Acid-Test Ratio $50,000 $42,000 = 1.19 : 1= Acid-Test Ratio Acid-Test (Quick) RatioAcid-Test (Quick) Ratio #2#2
    • 17-50 Sales on Account Average Accounts Receivable Accounts Receivable Turnover = Accounts Receivable TurnoverAccounts Receivable Turnover = 26.70 times $494,000 ($17,000 + $20,000) ÷ 2 Accounts Receivable Turnover = This ratio measures how many times a company converts its receivables into cash each year. #3#3 Average, net accounts receivable Net, credit sales
    • 17-51 Number of Days’ SalesNumber of Days’ Sales in Accounts Receivablein Accounts Receivable Measures, on average, how many days it takes to collect an account receivable. Days’ Sales in Accounts Receivables = 365 Days Accounts Receivable Turnover = 13.67 days= 365 Days 26.70 Times Days’ Sales in Accounts Receivables #4#4
    • 17-52 Number of Days’ SalesNumber of Days’ Sales in Accounts Receivablein Accounts Receivable In practice, would 45 days be a desirable number of days in receivables? #4#4 Days’ Sales in Accounts Receivables = 365 Days Accounts Receivable Turnover = 13.67 days= 365 Days 26.70 Times Days’ Sales in Accounts Receivables
    • 17-53 Inventory TurnoverInventory Turnover Cost of Goods Sold Average Inventory Inventory Turnover = Measures the number of times inventory is sold and replaced during the year. = 12.73 times $140,000 ($10,000 + $12,000) ÷ 2 Inventory Turnover = #5#5
    • 17-54 Inventory TurnoverInventory Turnover Cost of Goods Sold Average Inventory Inventory Turnover = Would 5 be a desirable number of times for inventory to turnover? = 12.73 times $140,000 ($10,000 + $12,000) ÷ 2 Inventory Turnover = #5#5
    • 17-55 Equity, or Long–TermEquity, or Long–Term Solvency RatiosSolvency Ratios This is part of the information to calculate the equity, or long-term solvency ratios of Norton Corporation. NORTON CORPORATION 1999 Net operating income 84,000$ Net sales 494,000 Interest expense 7,300 Total stockholders' equity 234,390
    • 17-56 NORTON CORPORATION 1999 Common shares outstanding Beginning of year 17,000 End of year 27,400 Net income 53,690$ Stockholders' equity Beginning of year 180,000 End of year 234,390 Dividends per share 2 Dec. 31 market price/share 20 Interest expense 7,300 Total assets Beginning of year 300,000 End of year 346,390 Here is the rest of the information we will use.
    • 17-57 Equity RatioEquity Ratio Equity Ratio = Stockholders’ Equity Total Assets Equity Ratio = $234,390 $346,390 67.7%= Measures the proportion of total assets provided by stockholders. #6#6
    • 17-58 Net Income to Net SalesNet Income to Net Sales A/K/A Return on Sales or Profit MarginA/K/A Return on Sales or Profit Margin Net Income to Net Sales = Net Income Net Sales Net Income to Net Sales = $53,690 $494,000 = 10.9% Measures the proportion of the sales dollar which is retained as profit. #7#7
    • 17-59 Net Income to Net SalesNet Income to Net Sales A/K/A Return on Sales or Profit MarginA/K/A Return on Sales or Profit Margin Net Income to Net Sales = Net Income Net Sales Net Income to Net Sales = $53,690 $494,000 = 10.9% Would a 1% return on sales be good? #7#7
    • 17-60 Return on Average CommonReturn on Average Common Stockholders’ Equity (ROE)Stockholders’ Equity (ROE) Return on Stockholders’ Equity = Net Income Average Common Stockholders’ Equity = $53,690 ($180,000 + $234,390) ÷ 2 = 25.9% Return on Stockholders’ Equity Important measure of the income-producing ability of a company. #8#8
    • 17-61 Earnings per Share Earnings Available to Common Stockholders Weighted-Average Number of Common Shares Outstanding = Earnings per Share $53,690 (17,000 + 27,400) ÷ 2 = = $2.42 The financial press regularly publishes actual and forecasted EPS amounts. #9#9 Earnings Per ShareEarnings Per Share
    • 17-62 What’s new from Chap. 15? Weighted-average calculation EPS of common stock = _______________________ Earnings available to common stockholders Weighted-average number of common shares outstanding 644 Three alternatives for calculating weighted-average number of shares Earnings Per ShareEarnings Per Share
    • 17-63 EPS of common stock = _______________________ Earnings available to common stockholders Weighted-average number of common shares outstanding 645 Alternate #1 Earnings Per ShareEarnings Per Share What’s new from Chap. 15? Weighted-average calculation
    • 17-64 Alternate #3 Alternate #2 645 Earnings Per ShareEarnings Per Share
    • 17-65 ¶ EPS and Stock Dividends or Splits Why restate all prior calculations of EPS? Comparability - i.e., no additional capital was generated by the dividend or split 646 Earnings Per ShareEarnings Per Share ¶ Primary EPS and Fully Diluted EPS APB Opinion No. 15 I mentioned this 17-page pronouncement that required a 100-page explanation in the lecture for chapter 13.
    • 17-66 Price-Earnings RatioPrice-Earnings Ratio A/K/A P/E MultipleA/K/A P/E Multiple Price-Earnings Ratio Market Price Per Share EPS = Price-Earnings Ratio = $20.00 $ 2.42 = 8.3 : 1 #10#10 Provides some measure of whether the stock is under or overpriced.
    • 17-67 Important ConsiderationsImportant Considerations Need for comparable data Data is provided by Dun & Bradstreet, Standard & Poor’s etc. Must compare by industry Is EPS comparable? Influence of external factors General business conditions Seasonal nature of business operations Impact of inflation
    • 17-68 QuestionQuestion The current ratio is a measure of liquidity that is computed by dividing total assets by total liabilities. a. True b. False The current ratio is a measure of liquidity that is computed by dividing total assets by total liabilities. a. True b. False
    • 17-69 The current ratio is a measure of liquidity that is computed by dividing total assets by total liabilities. a. True b. False The current ratio is a measure of liquidity that is computed by dividing total assets by total liabilities. a. True b. False QuestionQuestion The current ratio is a measure of liquidity, but is computed by dividing currentcurrent assets by currentcurrent liabilities The current ratio is a measure of liquidity, but is computed by dividing currentcurrent assets by currentcurrent liabilities
    • 17-70 QuestionQuestion Quick assets are defined as Cash, Marketable Securities and net receivables. a. True b. False Quick assets are defined as Cash, Marketable Securities and net receivables. a. True b. False
    • 17-71 Quick assets are defined as Cash, Marketable Securities and net receivables. a. True b. False Quick assets are defined as Cash, Marketable Securities and net receivables. a. True b. False QuestionQuestion
    • 17-72 No more ratios, please!
    • 17-73 About Test #1About Test #1 Will be challenging because the material covered is challenging All questions are T/F or M/C Questions are 5-pt., 3-pt. & 1-pt. No tricks such as patterns in answers Order of answers is random Coverage is even over the 4 chapters Time allowed: 75 minutes
    • 17-74 About Test #1About Test #1 Best way to study Notes first Study guide and/or Hermanson tutorials Calculators will be provided Must wait outside classroom Have your questions ready for next actual class See course home page for office hours