The document discusses financial statement analysis. It covers the three main financial statements: the balance sheet, income statement, and cash flow statement. The balance sheet provides a snapshot of a company's financial position at a point in time, showing assets, liabilities, and shareholders' equity. The income statement indicates profits/losses over a period of time by comparing revenues and expenses. The cash flow statement provides insight into a company's sources and uses of cash. The document also discusses ratio analysis, which is used to analyze a company's performance and financial position by calculating and comparing various financial ratios over time and against industry benchmarks. Common ratios cover areas like debt management, asset utilization, liquidity, profitability, and market

1. Understanding Financial
Statements

2. Also called Profit and Loss Statement
Also called Source- and -use-of-funds Statement
Understanding Financial Statements
3.1 Balance Sheet
3.2 Income Statement
3.4 Financial Ratio Analysis of Companies
3.3 Cash-flow statement
Past Questions
1. Explain the following terms: Profitability ratios, Leverage
ratios,Market ratios,activity ratios. (2074 Chaitra) [8]
2. What ratios would you compute if you are asked to measure how
effectively a firm is managing its liquidity ratio? Explain these ratios
with formulas. (2075 Ashwin Back) [6]/ 2073 Chaitra
3. Why do business firm use ratio analysis? Explain the following
terms: Inventory turnover ratio, Return on common equity, Debt
Ratio, and Quick Ratio. (2074 Ashwin Back) [5]
4. J. C. Olson & Co. had earnings per share of $8 in year 2006, and
it paid a $4 div-
idend. Book value per share at year’s end was $80. During the
same period, the
total retained earnings increased by $24 million. Olson has no
preferred stock, and
no new common stock was issued during the year. If Olson’s year-
end debt (which
equals its total liabilities) was $240 million, what was the company’s
year-end
debt-to-asset ratio? (2071 Chaitra) [6]
Chan S. Park Problem 2.5
5. Why do business firm use ratio analysis? Mention common
comparisions used for ratio analysis. Explain the following terms:
i) Dividen Yield
ii) Asset Turn Over
iii) Debt to Equity Ratio
iv) Quick Ratio (2070 Chaitra) [8]
5. Why do business firm use ratio analysis? Mention common
comparisions used for ratio analysis. Explain the following terms:
i) Return Equity
ii) Asset Turn Over
iii) Debt Ratio
iv) Current Ratio (2069 Chaitra) [8]
The accounting system and flow of information
People make decisions
Business transactions occur
Company prepars reports to show the resuls of operations
Post Audit
Accounting data for future decisions
Summary of major factors affecting stock prices
1. External constraints
2. Strategic Policy decisions by management
3. Accounting Information
4. Expected Financial Performance
Environment Regualtions
Antitrust laws
Product and workplace safety rules
Operating decisions
Investment decisions
Financing decisions
Balance sheet sstatement
Income Statement
Cash flow statement
Expected profitability
Timing of cash flows
Degree of finanical risk
How much money profit did the company made during the fiscal
perod?
How much cash did the company generate and spend during the
fiscal period?
What is the company's financial position at the end of fiscal product
or at a single point in time?
It shows the net worth of the shareholders at a point in time.
Liabilities- what money has been made avaiable to the firm
Assets- how the firm has made use of the money available to it
Current Assets
Long- Term Assets/fixed assests
Current Liabilities
Long-term Liabilities
Equity- money invested by the shareholders and the retained earnings
Owner Contributions
Retained Earnings Assets= :Liabilities+Owner's equity
They are short term debt obligations of the firm with maturities of
less than one year.
acquired for long-term uses in the firm such as plant, building, land,
and equipment, fixtures and fittings, motor vehicles
cash in hand,cash in bank,Marketable securities, accounts
receivables, and inventories of finished goods and raw materials,
deposits,Prepaid expenses, Finished Products, Work in progress
Depreciation
Working Capital
Net working capital
allocation of cost of an asset to different time periods
composed of firm's current assets.
difference between current assets and current liabilities
It shows the record of financial events between two points in time. It
has revenue from sales and expenses incurred during the period.
Net Worth
The value of total assets minus total liabilities or the value of the
owners' claim on the assets
Net Worth= Total assets- Total liabilities
summary of the flow of the financial activity of the firm. It shows
where the firm obtains cash and how it uses it.
Sources of Funds
Uses of funds
Increase in liabilities
Increase net worth through retained earnings or capital contribution
by the shareholders
Reduction in assets through sales of assets
reduction in liabilities
reduction in net worth through payment of dividends or losses
increase in assets
relate various items from the firm's financial statements to each
other with the aim of assessing and analyzing the firm's financial
position
By comparing the financial ratios of the same company over
different periods, or by comparing with that of other companies in
the industry, or the industry average, we can compare the relative
performance of the company
Financial statements provide historical information, but most users
of financial statements are concerned about what will happen in the
future.
Stockholders are concerned with future earnings and dividends.
Creditors are concerned with the company's ability to repay its debts
Managers are concerned with the company's ability to finance
future expanison
Engineers are concerned with planning actions that will influence
the future course of business events.
Five categories of widely used ratios that analysts use in
attempting to predict the future course of events in business
organization
Debt management - Ratios that show how a firm uses debt
financing and its ability to meet debt repayment obligations
Asset management - A set of ratios which measure how effectively
a firm is managing its assets
Liquidity - Ratios that show the relationship of a firm's cash and
other assets to its current liabilities
Profitability - A set of ratios which show the combined effects of
liquidity, asset management, and debt on operating results
Market Value /trend - A set of ratios that relate the firm's stock price
to its earnings and book value per share
Debt ratio
Times-interest-ratio
Current ratio
Quick Ratio
Inventory Turnover ratio
Days sales outstanding ratio
Total assets turnover ratio
Profit margin on sales
Return on total assets
Return on common equity
P/E ratio
Market/book ratio

3. 3.1 Balance Sheet
 What is the company's financial position at the end of
fiscal product or at a single point in time?
 It shows the net worth of the shareholders at a point in
time.
 Liabilities- what money has been made avaiable to the
firm
 Assets- how the firm has made use of the money
available to it
 Assets= :Liabilities+Owner's equity
 Depreciation
 Working Capital
 Net working capital

4. What is the company's financial position at the end of fiscal
product or at a single point in time?

5. It shows the net worth of the shareholders at a
point in time.

6. Liabilities- what money has been made avaiable to
the firm
 Current Liabilities
 Long-term Liabilities
 Equity- money invested by the shareholders and the
retained earnings

7. Current Liabilities
 They are short term debt obligations of the firm with
maturities of less than one year.

8. They are short term debt obligations of the firm with
maturities of less than one year.

9. Long-term Liabilities

10. Equity- money invested by the shareholders and
the retained earnings
 Owner Contributions
 Retained Earnings

11. Owner Contributions

12. Retained Earnings

13. Assets- how the firm has made use of the money
available to it
 Current Assets
 Long- Term Assets/fixed assests

14. Current Assets
 cash in hand,cash in bank,Marketable securities,
accounts receivables, and inventories of finished goods
and raw materials, deposits,Prepaid expenses, Finished
Products, Work in progress

15. cash in hand,cash in bank,Marketable securities, accounts receivables,
and inventories of finished goods and raw materials, deposits,Prepaid
expenses, Finished Products, Work in progress

16. Long- Term Assets/fixed assests
 acquired for long-term uses in the firm such as plant,
building, land, and equipment, fixtures and fittings, motor
vehicles

17. acquired for long-term uses in the firm such as plant,
building, land, and equipment, fixtures and fittings, motor
vehicles

18. Assets= :Liabilities+Owner's equity

19. Depreciation
 allocation of cost of an asset to different time periods

20. allocation of cost of an asset to different time
periods

21. Working Capital
 composed of firm's current assets.

22. composed of firm's current assets.

23. Net working capital
 difference between current assets and current liabilities

24. difference between current assets and
current liabilities

25. 3.2 Income Statement
 Also called Profit and Loss Statement
 How much money profit did the company made during
the fiscal perod?
 It shows the record of financial events between two
points in time. It has revenue from sales and expenses
incurred during the period.
 Net Worth

26. Also called Profit and Loss Statement

27. How much money profit did the company made
during the fiscal perod?

28. It shows the record of financial events between two points in
time. It has revenue from sales and expenses incurred
during the period.

29. Net Worth
 The value of total assets minus total liabilities or the
value of the owners' claim on the assets
 Net Worth= Total assets- Total liabilities

30. The value of total assets minus total liabilities or the value of
the owners' claim on the assets

31. Net Worth= Total assets- Total liabilities

32. 3.3 Cash-flow statement
 Also called Source- and -use-of-funds Statement
 How much cash did the company generate and spend
during the fiscal period?
 summary of the flow of the financial activity of the firm. It
shows where the firm obtains cash and how it uses it.
 Sources of Funds
 Uses of funds

33. Also called Source- and -use-of-funds
Statement

34. How much cash did the company generate and spend
during the fiscal period?

35. summary of the flow of the financial activity of the firm. It
shows where the firm obtains cash and how it uses it.

36. Sources of Funds
 Increase in liabilities
 Increase net worth through retained earnings or capital
contribution by the shareholders
 Reduction in assets through sales of assets

37. Increase in liabilities

38. Increase net worth through retained earnings or capital
contribution by the shareholders

39. Reduction in assets through sales of assets

40. Uses of funds
 reduction in liabilities
 reduction in net worth through payment of dividends or
losses
 increase in assets

41. reduction in liabilities

42. reduction in net worth through payment of
dividends or losses

43. increase in assets

44. 3.4 Financial Ratio Analysis of Companies
 relate various items from the firm's financial statements to each
other with the aim of assessing and analyzing the firm's financial
position
 By comparing the financial ratios of the same company over different
periods, or by comparing with that of other companies in the
industry, or the industry average, we can compare the relative
performance of the company
 Financial statements provide historical information, but most users
of financial statements are concerned about what will happen in the
future.
 Five categories of widely used ratios that analysts use in attempting
to predict the future course of events in business organization

45. relate various items from the firm's financial statements to each other
with the aim of assessing and analyzing the firm's financial position

46. By comparing the financial ratios of the same company over different
periods, or by comparing with that of other companies in the industry, or
the industry average, we can compare the relative performance of the
company

47. Financial statements provide historical information, but most users of
financial statements are concerned about what will happen in the future.
 Stockholders are concerned with future earnings and
dividends.
 Creditors are concerned with the company's ability to
repay its debts
 Managers are concerned with the company's ability to
finance future expanison
 Engineers are concerned with planning actions that will
influence the future course of business events.

48. Stockholders are concerned with future earnings
and dividends.

49. Creditors are concerned with the company's ability
to repay its debts

50. Managers are concerned with the company's ability to
finance future expanison

51. Engineers are concerned with planning actions that will
influence the future course of business events.

52. Five categories of widely used ratios that analysts use in
attempting to predict the future course of events in business
organization
 Debt management - Ratios that show how a firm uses debt
financing and its ability to meet debt repayment obligations
 Asset management - A set of ratios which measure how
effectively a firm is managing its assets
 Liquidity - Ratios that show the relationship of a firm's cash
and other assets to its current liabilities
 Profitability - A set of ratios which show the combined effects
of liquidity, asset management, and debt on operating results
 Market Value /trend - A set of ratios that relate the firm's stock
price to its earnings and book value per share

53. Debt management - Ratios that show how a firm uses debt
financing and its ability to meet debt repayment obligations
 Debt ratio
 Times-interest-ratio

54. Debt ratio

55. Times-interest-ratio

56. Asset management - A set of ratios which measure how
effectively a firm is managing its assets
 Inventory Turnover ratio
 Days sales outstanding ratio
 Total assets turnover ratio

57. Inventory Turnover ratio

58. Days sales outstanding ratio

59. Total assets turnover ratio

60. Liquidity - Ratios that show the relationship of a firm's cash
and other assets to its current liabilities
 Current ratio
 Quick Ratio

61. Current ratio

62. Quick Ratio

63. Profitability - A set of ratios which show the combined effects
of liquidity, asset management, and debt on operating
results
 Profit margin on sales
 Return on total assets
 Return on common equity

64. Profit margin on sales

65. Return on total assets

66. Return on common equity

67. Market Value /trend - A set of ratios that relate the firm's
stock price to its earnings and book value per share
 P/E ratio
 Market/book ratio

68. P/E ratio

69. Market/book ratio

70. Past Questions
 1. Explain the following terms: Profitability ratios, Leverage ratios,Market ratios,activity ratios. (2074 Chaitra) [8]
 2. What ratios would you compute if you are asked to measure how effectively a firm is managing its liquidity ratio?
Explain these ratios with formulas. (2075 Ashwin Back) [6]/ 2073 Chaitra
 3. Why do business firm use ratio analysis? Explain the following terms: Inventory turnover ratio, Return on
common equity, Debt Ratio, and Quick Ratio. (2074 Ashwin Back) [5]
 4. J. C. Olson & Co. had earnings per share of $8 in year 2006, and it paid a $4 div- idend. Book value per share
at year’s end was $80. During the same period, the total retained earnings increased by $24 million. Olson has no
preferred stock, and no new common stock was issued during the year. If Olson’s year-end debt (which equals its
total liabilities) was $240 million, what was the company’s year-end debt-to-asset ratio? (2071 Chaitra) [6]
 5. Why do business firm use ratio analysis? Mention common comparisions used for ratio analysis. Explain the
following terms:i) Dividen Yieldii) Asset Turn Overiii) Debt to Equity Ratioiv) Quick Ratio (2070 Chaitra) [8]
 5. Why do business firm use ratio analysis? Mention common comparisions used for ratio analysis. Explain the
following terms:i) Return Equityii) Asset Turn Overiii) Debt Ratioiv) Current Ratio (2069 Chaitra) [8]
 6. Why do business firm use ratio analysis? Explain the following terms: Return in equity, Asset Turn over, Debt
Ratio, and Current Ratio. (2079 Bhadra) [6]

71. 1. Explain the following terms: Profitability ratios, Leverage
ratios,Market ratios,activity ratios. (2074 Chaitra) [8]

72. 2. What ratios would you compute if you are asked to measure how
effectively a firm is managing its liquidity ratio? Explain these ratios with
formulas. (2075 Ashwin Back) [6]/ 2073 Chaitra

73. 3. Why do business firm use ratio analysis? Explain the following terms:
Inventory turnover ratio, Return on common equity, Debt Ratio, and
Quick Ratio. (2074 Ashwin Back) [5]

74. 4. J. C. Olson & Co. had earnings per share of $8 in year 2006, and it paid a $4 div-
idend. Book value per share at year’s end was $80. During the same period, the
total retained earnings increased by $24 million. Olson has no preferred stock, and
no new common stock was issued during the year. If Olson’s year-end debt (which
equals its total liabilities) was $240 million, what was the company’s year-end
debt-to-asset ratio? (2071 Chaitra) [6]
 Chan S. Park Problem 2.5

75. Chan S. Park Problem 2.5

76. 5. Why do business firm use ratio analysis? Mention common comparisions used for ratio
analysis. Explain the following terms:
i) Dividen Yield
ii) Asset Turn Over
iii) Debt to Equity Ratio
iv) Quick Ratio (2070 Chaitra) [8]

77. 5. Why do business firm use ratio analysis? Mention common comparisions used for ratio
analysis. Explain the following terms:
i) Return Equity
ii) Asset Turn Over
iii) Debt Ratio
iv) Current Ratio (2069 Chaitra) [8]

78. 6. Why do business firm use ratio analysis? Explain the following terms:
Return in equity, Asset Turn over, Debt Ratio, and Current Ratio. (2079
Bhadra) [6]

79. The accounting system and flow of
information
 People make decisions
 Business transactions occur
 Company prepars reports to show the resuls of
operations
 Post Audit

80. People make decisions

81. Business transactions occur

82. Company prepars reports to show the resuls of
operations

83. Post Audit
 Accounting data for future decisions

84. Accounting data for future decisions

85. Summary of major factors affecting stock
prices
 1. External constraints
 2. Strategic Policy decisions by management
 3. Accounting Information
 4. Expected Financial Performance

86. 1. External constraints
 Environment Regualtions
 Antitrust laws
 Product and workplace safety rules

87. Environment Regualtions

88. Antitrust laws

89. Product and workplace safety rules

90. 2. Strategic Policy decisions by management
Role of EngineersEvaluation of capital expenditure related
to projectsSelection of production methods
usedAssessment of engineering safety and environmental
impactSelection of types of product or services produced

91. 2. Strategic Policy decisions by management
 Operating decisions
 Investment decisions
 Financing decisions

92. Operating decisions

93. Investment decisions

94. Financing decisions

95. 3. Accounting Information
 Balance sheet sstatement
 Income Statement
 Cash flow statement

96. Balance sheet sstatement

97. Income Statement

98. Cash flow statement

99. 4. Expected Financial Performance
 Expected profitability
 Timing of cash flows
 Degree of finanical risk

100. Expected profitability

101. Timing of cash flows

102. Degree of finanical risk