Accountancy 200 Fundamentals of Accounting ANALYZING FINANCIAL STATEMENTS Part I
Financial Statement Analysis <ul><li>Relationships within a set of financial statements at a  point in time , also known a...
Financial Ratios <ul><li>Liquidity </li></ul><ul><li>Solvency and equity position </li></ul><ul><li>Profitability </li></u...
Liquidity Financial Ratios Current ratio  - a measure of working capital adequacy. Current Assets  .   Current Liabilities
Liquidity Financial Ratios Inventory turnover  - reflects how many times during the period inventory is acquired and sold....
Solvency and Equity Position Ratios Times interest earned ratio  - reflects the margin of protection for creditor interest...
Solvency and Equity Position Ratios Debt-to-Equity ratio  - reflects the proportion between debt and owners’ equity, which...
Profitability Ratios Profit margin  - represents the percentage of each revenue dollar, on average, that is profit. Net In...
Profitability Ratios Earnings per share  - income related to the number of outstanding owners’ shares. Income  . Average N...
Profitability Ratios Return on owners’ investment  - relates income for a period to the investment made by owners. Income*...
Profitability Ratios Return on total investment  - relates income for a period to the assets used to earn that income. Inc...
Capital Market Performance Ratios Price/Earnings ratio  - measures the relation between the end-of-year market price of th...
Capital Market Performance Ratios Dividend yield ratio  - measures the relation between the dividends paid per share and t...
Capital Market Performance Ratios Stock price yield  - measures the relative growth in the market price of the stock betwe...
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  1. 1. Accountancy 200 Fundamentals of Accounting ANALYZING FINANCIAL STATEMENTS Part I
  2. 2. Financial Statement Analysis <ul><li>Relationships within a set of financial statements at a point in time , also known as cross-sectional analysis. </li></ul><ul><li>Trends in these relationships over time , also known as time-series analysis. </li></ul>
  3. 3. Financial Ratios <ul><li>Liquidity </li></ul><ul><li>Solvency and equity position </li></ul><ul><li>Profitability </li></ul><ul><li>Market performance </li></ul>
  4. 4. Liquidity Financial Ratios Current ratio - a measure of working capital adequacy. Current Assets . Current Liabilities
  5. 5. Liquidity Financial Ratios Inventory turnover - reflects how many times during the period inventory is acquired and sold. Cost of Goods Sold Average Inventory* *(Beginning Inventory + Ending Inventory) / 2
  6. 6. Solvency and Equity Position Ratios Times interest earned ratio - reflects the margin of protection for creditor interest payments. Net Income + Interest Expense + Income Tax Expense Interest Expense
  7. 7. Solvency and Equity Position Ratios Debt-to-Equity ratio - reflects the proportion between debt and owners’ equity, which is a capital structure measure. Total Liabilities . Total Owners’ Equity
  8. 8. Profitability Ratios Profit margin - represents the percentage of each revenue dollar, on average, that is profit. Net Income* Net Revenues *Typically before extraordinary items, if any.
  9. 9. Profitability Ratios Earnings per share - income related to the number of outstanding owners’ shares. Income . Average Number of Shares of Common Stock Outstanding EPS is reported toward the bottom of the income statement.
  10. 10. Profitability Ratios Return on owners’ investment - relates income for a period to the investment made by owners. Income* . Average Owners’ Equity** *Typically before extraordinary items, if any. **(Beginning OE + Ending OE) / 2
  11. 11. Profitability Ratios Return on total investment - relates income for a period to the assets used to earn that income. Income* + Interest Expense (net of tax) Average Total Assets** *Typically before extraordinary items, if any. **(Beginning total assets + Ending total assets) / 2
  12. 12. Capital Market Performance Ratios Price/Earnings ratio - measures the relation between the end-of-year market price of the stock and its earnings per share. End-of-Year Market Price per Share Earnings per Share
  13. 13. Capital Market Performance Ratios Dividend yield ratio - measures the relation between the dividends paid per share and the end-of-year market price of the stock. Dividends per Share . End-of-Year Market Price per Share
  14. 14. Capital Market Performance Ratios Stock price yield - measures the relative growth in the market price of the stock between the beginning and end of the period. End-of-Year Market Price/Share – Beginning Market Price/Share Beginning Market Price/Share

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