Internal and external users analyze financial statements to assess a company's performance and financial position. Internal users use it for planning, evaluating, and controlling operations, while external users assess past performance, current financial position, and future profitability and solvency. Methods for analyzing financial statements include horizontal analysis, vertical analysis, common-size statements, trend percentages, and ratio analysis. Ratio analysis specifically uses liquidity, equity, profitability, and market ratios to evaluate a company's financial health.
Introduction to Financial statements - AccountingFaHaD .H. NooR
Financial statement introduction and its elements.
There are three fundamental financial statements used in accounting.
The income statement shows revenues and expenses.
The balance sheet is a listing of all asset, liability, and equity account balances that do not appear on the income statement.
The statement of cash flows shows how the company receives and spends its cash.
Introduction to Financial statements - AccountingFaHaD .H. NooR
Financial statement introduction and its elements.
There are three fundamental financial statements used in accounting.
The income statement shows revenues and expenses.
The balance sheet is a listing of all asset, liability, and equity account balances that do not appear on the income statement.
The statement of cash flows shows how the company receives and spends its cash.
The presentation slide is on stock valuation. We have tried to present the various techniques to stock valuation under which different methods are discussed with illustrations. Key concepts:
Zero Growth Model
Balance sheet Technique
Constant Growth Model
Two-stage growth Model
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F ull list test bank and solution manual 2020 2021 ( student saver team ) -pa...JoneMakine
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The Cash Flow Statement translates earnings in the Income Statement into cash inflows. Explained in detail above as a part of the topic “Financial accounting”, is brought to you by Welingkar’s Distance Learning Division.
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The presentation slide is on stock valuation. We have tried to present the various techniques to stock valuation under which different methods are discussed with illustrations. Key concepts:
Zero Growth Model
Balance sheet Technique
Constant Growth Model
Two-stage growth Model
Feel Free to comment.
F ull list test bank and solution manual 2020 2021 ( student saver team ) -pa...JoneMakine
Hi all ,
We are StudenT SaveR TeaM,
Find the test bank and Solution Manual you need for your classes from us ,
Test Bank is collection of questions and answers for a particular textbook. This material is very useful to prepare for quizzes and exams. Most professor will generally adopt the exam/quizzes from the test bank.
Having a test bank clearly helps you to understand the subject matter better.
We have comprehensive TEST BANK and SOLUTION MANUAL for your textbooks in electronic format (PDF/Word). The test bank contains practice exam and quiz questions and answers.
Are you having problem doing test/exams for your classes?
If so, then you have come at the right place. for any questions , orders just try to contact :
student-saver@hotmail.com
student-saver(at)Hotmail(dot)com
and u can check our Big list here
http://www.testbanks-solutionmanual.com/
StudenT SaveR TeaM,
The Cash Flow Statement translates earnings in the Income Statement into cash inflows. Explained in detail above as a part of the topic “Financial accounting”, is brought to you by Welingkar’s Distance Learning Division.
For more such innovative content on management studies, join WeSchool PGDM-DLP Program: http://bit.ly/SlideshareFaccounting
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Financial statement analysis (or financial analysis) is the process of reviewing and analyzing a company's financial statements. These statements include the Income Statement, Balance Sheet, and Statement of Cash Flows. Financial statement analysis is a method or process involving specific techniques for evaluating risks, financial health, and future prospects of an organization. It is used by investors, stakeholders, the public, and decisionmakers within the organization. Popular methods of financial statement analysis include horizontal and vertical analysis and the use of financial ratios.
C3 Took KitTool Kit for Analysis of Financial Statements Financial.docxhumphrieskalyn
C3 Took KitTool Kit for Analysis of Financial Statements Financial statements are analyzed by calculating certain key ratios and then comparing them with the ratios of other firms and by examining the trends in ratios over time. We can also combine ratios to make the analysis more revealing, those indicated below are exceptionally useful for this type of analysis. RATIO ANALYSIS (Section 3.1)Input Data:20102009Year-end common stock price$23.00$26.00Year-end shares outstanding (in millions)5050Tax rate40%40%After-tax cost of capital11.0%10.8%Lease payments$28$28Required sinking fund payments$20$20Balance Sheets(in millions of dollars)Assets20102009Cash and equivalents$10$15Short-term investments$0$65Accounts receivable$375$315Inventories$615$415 Total current assets$1,000$810Net plant and equipment$1,000$870Total assets$2,000$1,680Liabilities and equityAccounts payable$60$30Notes payable$110$60Accruals$140$130 Total current liabilities$310$220Long-term bonds$754$580 Total liabilities$1,064$800Preferred stock (400,000 shares)$40$40Common stock (50,000,000 shares)$130$130Retained earnings$766$710Total common equity$896$840Total liabilities and equity$2,000$1,680Income Statements(in millions of dollars)20102009Net sales$3,000.0$2,850.0 Operating costs$2,616.2$2,497.0Earnings before interest, taxes, depr. & amort. (EBITDA)$383.8$353.0 Depreciation$100.0$90.0 Amortization$0.0$0.0 Depreciation and amortization$100.0$90.0Earnings before interest and taxes (EBIT)$283.8$263.0 Less interest $88.0$60.0Earnings before taxes (EBT)$195.8$203.0 Taxes (40%)$78.3$81.2Net income before preferred dividends$117.5$121.8 Preferred dividends$4.0$4.0Net income available to common stockholders$113.5$117.8Common dividends$57.5$53.0Addition to retained earnings$56.0$64.8Calculated Data: Operating Performance and Cash Flows20102009Net operating working capital (NOWC)$800.0$585.0Total operating capital$1,800.0$1,455.0Net Operating Profit After Taxes (NOPAT)$170.3$157.8Net Cash Flow (Net income + Depreciation)$213.5$207.8Operating Cash Flow (OCF)$270.3$247.8Free Cash Flow (FCF)($174.7)N/ACalculated Data: Per-share Information20102009Earnings per share (EPS)$2.27$2.36Dividends per share (DPS)$1.15$1.06Book value per share (BVPS)$17.92$16.80Cash flow per share (CFPS)$4.27$4.16Free cash flow per share (FCFPS)($3.49)N/ALIQUIDITY RATIOS (Section 3.2)Industry20102009AverageLiquidity ratios Current Ratio3.233.684.2 Quick Ratio1.241.802.1ASSET MANAGEMENT RATIOS (Section 3.3)Industry20102009AverageAsset Management ratios Inventory Turnover4.886.879 Days Sales Outstanding45.640.34
Christopher Buzzard: To calculate the DSO ratio, a 365-day accounting year was used.36 Fixed Asset Turnover3.003.283 Total Asset Turnover1.501.701.8DEBT MANAGEMENT RATIOS (Section 3.4)Industry20102009AverageDebt Management ratios Debt Ratio53.20%47.62%40.00% Debt-to-Equity Ratio1.140.910.67 Market Debt Ratio48.06%38.10%N/A Times Interest Earned3.234.386 EBITDA Coverage Ra ...
1
CHAPTER 3
Analysis of Financial Statements
2
Topics in Chapter
Ratio analysis
Du Pont system
Effects of improving ratios
Limitations of ratio analysis
Qualitative factors
3
Value = + + +
FCF1
FCF2
FCF∞
(1 + WACC)1
(1 + WACC)∞
(1 + WACC)2
Free cash flow
(FCF)
Market interest rates
Firm’s business risk
Market risk aversion
Firm’s debt/equity mix
Cost of debt
Cost of equity
Weighted average
cost of capital
(WACC)
Net operating
profit after taxes
Required investments
in operating capital
−
=
Determinants of Intrinsic Value:
Using Ratio Analysis
...
For value box in Ch 3 ratios FM13.
4
Overview
Ratios facilitate comparison of:
One company over time
One company versus other companies
Ratios are used by:
Lenders to determine creditworthiness
Stockholders to estimate future cash flows and risk
Managers to identify areas of weakness and strength
5
Income Statement20102011ESales$5,834,400 $7,035,600COGS4,980,000 5,800,000Other expenses720,000 612,960Deprec.116,960 120,000 Tot. op. costs5,816,960 6,532,960 EBIT17,440 502,640Int. expense176,000 80,000 EBT(158,560)422,640Taxes (40%)(63,424)169,056Net income($ 95,136)$ 253,584
6
Balance Sheets: Assets20102011ECash$ 7,282 $ 14,000S-T invest.20,000 71,632AR632,160 878,000Inventories1,287,360 1,716,480 Total CA1,946,802 2,680,112 Net FA939,790 836,840Total assets$2,886,592 $3,516,952
7
Balance Sheets: Liabilities & Equity20102011EAccts. payable$ 324,000 $ 359,800Notes payable720,000 300,000Accruals284,960 380,000 Total CL1,328,960 1,039,800Long-term debt1,000,000 500,000Common stock460,000 1,680,936Ret. earnings97,632 296,216 Total equity557,632 1,977,152Total L&E$2,886,592 $3,516,952
8
Other Data20102011EStock price$6.00$12.17# of shares100,000 250,000EPS-$0.95$1.01DPS$0.11$0.22Book val. per sh.$5.58$7.91Lease payments$40,000$40,000Tax rate0.40.4
9
Liquidity Ratios
Can the company meet its short-term obligations using the resources it currently has on hand?
10
Forecasted Current and Quick Ratios for 2011.
CR10 = = = 2.58.
QR10 =
= = 0.93.
CA
CL
$2,680
$1,040
$2,680 - $1,716
$1,040
CA - Inv.
CL
11
Comments on CR and QR2011E20102009Ind.CR2.581.462.32.7QR0.930.50.81.0
Expected to improve but still below the industry average.
Liquidity position is weak.
12
Asset Management Ratios
How efficiently does the firm use its assets?
How much does the firm have tied up in assets for each dollar of sales?
13
Inventory Turnover Ratio vs. Industry Average
Inv. turnover =
= = 4.10.
Sales
Inventories
$7,036
$1,716
2011E 2010 2009 Ind.
Inv. T. 4.1 4.5 4.8 6.1
14
Comments on Inventory Turnover
Inventory turnover is below industry average.
Firm might have old inventory, or its control might be poor.
No improvement is currently forecasted.
.
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2. yzing Financial Statements
Who analyzes financial statements?
Internal users (i.e., management)
External users
Examples?
Investors, creditors, regulatory agencies & …
stock market analysts and
auditors
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
4. ds of Analyzing Financial Statements
Horizontal Analysis
Using comparative financial statements to calculate dollar or percentage changes
in a financial statement item from one period to the next
Vertical 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
Common-Size Statements
Financial statements that show only percentages and no absolute dollar amounts
Trend Percentages
Show changes over time in given financial statement items (can help evaluate
financial information of several years)
Ratio Analysis
Expression of logical relationships between items in a financial statement of a
single period (e.g., percentage relationship between revenue and net income)
5. Horizontal Analysis
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 analysis on the
information.
6. Horizontal Analysis
Calculating Change in Dollar Amounts
Dollar Current Year Base Year
Change Figure Figure
Since we are measuring the amount of the change
between 1998 and 1999, the dollar amounts for 1998
become the “base” year figures'
–
Calculating Change as a Percentage
Percentage
Change = Dollar Change
Base Year Figure × 100%
10. Horizontal Analysis Let’s apply the same procedures to the
liability and stockholders’ equity sections of the
balance sheet.
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
11. Horizontal Analysis
Now, let’s apply the procedures to the
income statement.
CLOVER CORPORATION Sales increased by 8.3%
Comparative Income Statements while net income decreased
For the Years Ended December 31, 1999 and 1998 by 21.9%.
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.
12. Vertical analysis
The management of Sample Company asks you to prepare a vertical
analysis for the comparative balance sheets of the company.
$82,000 ÷ $483,000 = 17% rounded
$30,000 ÷ $387,000 = 8% rounded
14. Trend Percentage
Wheeler, Inc. provides you with the following operating data and
asks that you prepare a trend analysis.
$1,991 - $1,820 = $171
Using 1995 as the base year, we develop the following percentage
relationships.
$171 ÷ $1,820 = 9% rounded
16. Ratio Analysis
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. $ (e.g., EPS of $2.25)
CAUTION!
“Using ratios and percentages without considering the underlying
causes may be hazardous to your health!”
lead to incorrect conclusions.”
17. Major Ratio Analysis Tools
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
18. 1.Liquidity Ratios 4.Market Tests
Current (working capital) ratio Earnings yield on common stock
Acid-test (quick) ratio
Price-earnings ratio
Cash flow liquidity ratio
Payout ratio on common stock
Accounts receivable turnover
Dividend yield on common stock
Number of days’ sales in account receivable
Inventory turnover
Dividend yield on preferred stock
Total assets turnover Cash flow per share of common stock
2.Equity (Long-Term Solvency) Ratios
Equity (stockholders’ equity) ratio
Equity to debt
3.Profitability Tests
Return on operating assets
Net income to net sales (return on sales or “profit margin”)
Return on average common stockholders’ equity (ROE)
Cash flow margin
Earnings per share
Times interest earned
Times preferred dividends earned
19. Implementation of Ten main Ratio Analysis Tools
Now, let’s look at Norton Corporation’s 1999 and 1998 financial statements.
20. Calculating the liquidity ratios for Norton.
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
21. 1.Working Capital
The excess of current assets over current liabilities.
12/31/99
Current assets $ 65,000
Current liabilities (42,000)
Working capital $ 23,000
* While this is not a ratio, it does give an indication of a company’s liquidity.
Working capital ratio
Current Current Assets
Ratio = Current Liabilities
Current $65,000
Ratio = = 1.55 : 1
$42,000
Measures the ability of the company to pay current debts as they become due.
22. 2.Acid –Test (Quick) Ratio
Acid-Test Quick Assets
Ratio = Current Liabilities
Quick assets are Cash, Marketable Securities, Accounts
Receivable (net) and current Notes Receivable.
Norton Corporation’s quick assets consist of cash of
$30,000 and accounts receivable of $20,000.
Acid-Test $50,000 = 1.19 : 1
Ratio = $42,000
3.Account Receivable Turnover
Accounts Sales on Account
Receivable =
Average Accounts Receivable
Turnover
Accounts $494,000 = 26.70 times
Receivable = ($17,000 + $20,000) ÷ 2
Turnover
This ratio measures how many times a company
converts its receivables into cash each year.
23. 4.Number of Day’s sales in account receivable
Days’ Sales 365 Days
in Accounts = Accounts Receivable Turnover
Receivables
Days’ Sales 365 Days
in Accounts = = 13.67 days
26.70 Times
Receivables
Measures, on average, how many days it takes to
collect an account receivable.
5.Inventory Turnover
Inventory Cost of Goods Sold
Turnover = Average Inventory
Inventory $140,000
Turnover = ($10,000 + $12,000) ÷ 2 = 12.73 times
Measures the number of times inventory is sold and
replaced during the year.
24. Equity or Long Term Solvency ratios
Calculating the equity, or long-term solvency ratios of Norton Corporation.
NORTON CORPORATION NORTON CORPORATION
1999
1999
Common shares outstanding
Net operating income $ 84,000 Beginning of year 17,000
Net sales 494,000 End of year 27,400
Interest expense 7,300 Net income $ 53,690
Total stockholders' equity 234,390 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
25. 6.Equity Ratio
Equity Stockholders’ Equity
Ratio = Total Assets
Equity $234,390 = 67.7%
Ratio = $346,390
Measures the proportion of total assets provided by stockholders.
7.Net income to Sales Ratio
Net Income Net Income
to = Net Sales
Net Sales
Net Income
to $53,690
= = 10.9%
Net Sales $494,000
Measures the proportion of the sales dollar which is retained as profit.
26. 8.Return on Equity (ROE)
Return on Net Income
Stockholders’ = Average Common
Equity Stockholders’ Equity
Return on $53,690
Stockholders’ = ($180,000 + $234,390) ÷ 2 = 25.9%
Equity
Important measure of the income-producing ability of a company.
9.Earning per share(EPS)
Earnings Earnings Available to Common Stockholders
per Share = Weighted-Average Number of Shares Outstanding
Earnings $53,690
per Share = (17,000 + 27,400) ÷ 2 = $2.42
The financial press regularly publishes actual and forecasted EPS amounts.
27. 10.Price-Earning ratio
Price-Earnings = Market Price Per Share
Ratio EPS
Price-Earnings $20.00
Ratio = $ 2.42 = 8.3 : 1
Provides some measure of whether the stock is under or overpriced.
28. Important Consideration
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
Thanks for reading