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  1. 1. Financial Statements Analysis and Long-Term Planning
  2. 2. Accounting as an Information System
  3. 3. Chapter Outline <ul><li>3.1 Financial Statements Analysis </li></ul><ul><li>3.2 Ratio Analysis </li></ul><ul><li>3.3 The Du Pont Identity </li></ul><ul><li>3.4 Using Financial Statement Information </li></ul>
  4. 4. 3.1 Financial Statements Analysis <ul><li>Common-Size Balance Sheets </li></ul><ul><ul><li>Compute all accounts as a percent of total assets </li></ul></ul><ul><li>Common-Size Income Statements </li></ul><ul><ul><li>Compute all line items as a percent of sales </li></ul></ul><ul><li>Standardized statements make it easier to compare financial information, particularly as the company grows. </li></ul><ul><li>They are also useful for comparing companies of different sizes, particularly within the same industry. </li></ul>
  5. 5. 3.2 Ratio Analysis <ul><li>Ratios also allow for better comparison through time or between companies . </li></ul><ul><li>As we look at each ratio, ask yourself: </li></ul><ul><ul><li>How is the ratio computed? </li></ul></ul><ul><ul><li>What is the ratio trying to measure and why? </li></ul></ul><ul><ul><li>What is the unit of measurement? </li></ul></ul><ul><ul><li>What does the value indicate? </li></ul></ul><ul><ul><li>How can we improve the company’s ratio? </li></ul></ul>
  6. 6. Categories of Financial Ratios <ul><li>Short-term solvency or liquidity ratios </li></ul><ul><li>Long-term solvency, or financial leverage, ratios </li></ul><ul><li>Asset management or turnover ratios </li></ul><ul><li>Profitability ratios </li></ul><ul><li>Market value ratios </li></ul>
  7. 8. Payables Turnover <ul><li>Number of times , on average, that a company pays its accounts payables in an accounting period </li></ul>Payables Turnover = Net Purchases Average Accounts Payable
  8. 9. Days’ Payable <ul><li>How long , on average, a company takes to pay its accounts payables </li></ul>Days’ Payable = Payables Turnover 365 days
  9. 10. <ul><li>進貨 銷貨 收現 </li></ul><ul><li>平均銷售天數 平均收現天數 </li></ul><ul><li>營 業 週 期 </li></ul><ul><li> 進貨 付現 收現 </li></ul><ul><li>平均付款天數 現金週期 </li></ul><ul><li> </li></ul>
  10. 11. <ul><li>Days’ Sales in Receivables = </li></ul><ul><li>Gross Receivables / (Net Sales/365) </li></ul><ul><li>Assess how effectively a company manages its receivables by comparing days’ sales in receivables with its credit terms . </li></ul>
  11. 12. Liquidity of Inventory <ul><li>Days’ sales in Inventory = </li></ul><ul><li>Ending Inventory / (Cost of Goods Sold / </li></ul><ul><li>365) </li></ul><ul><li>An indication of the length of time that it will take to use up the inventory through sales. </li></ul>
  12. 13. 3.3 The Du Pont Identity <ul><li>ROE = NI / TE </li></ul><ul><li>= (NI / Sales) (Sales / TA) (TA / TE) </li></ul><ul><ul><li>= PM * TAT * EM </li></ul></ul>
  13. 14. Using the Du Pont Identity <ul><li>ROE = PM * TAT * EM </li></ul><ul><ul><li>Profit margin is a measure of the firm’s operating efficiency – how well it controls costs. </li></ul></ul><ul><ul><li>Total asset turnover is a measure of the firm’s asset use efficiency – how well it manages its assets. </li></ul></ul><ul><ul><li>Equity multiplier is a measure of the firm’s financial leverage . </li></ul></ul>
  14. 15. 3.4 Using Financial Statements <ul><li>Ratios are not very helpful by themselves: they need to be compared to something </li></ul><ul><li>Time-Trend Analysis </li></ul><ul><ul><li>Used to see how the firm’s performance is changing through time </li></ul></ul><ul><li>Peer Group Analysis </li></ul><ul><ul><li>Compare to similar companies or within industries </li></ul></ul>
  15. 16. Potential Problems <ul><li>There is no underlying theory, so there is no way to know which ratios are most relevant. </li></ul><ul><li>Benchmarking is difficult for diversified firms. </li></ul><ul><li>Globalization and international competition makes comparison more difficult because of differences in accounting regulations. </li></ul><ul><li>Firms use varying accounting procedures. </li></ul><ul><li>Firms have different fiscal years. </li></ul><ul><li>Extraordinary, or one-time, events </li></ul>