1. Financial Statement Analysis MGT-537 Dr. Hafiz Muhammad Ishaq 32
Course Title:
Financial Statement Analysis
Course Code:
MGT-537
Course Instructor:
Dr. Hafiz Muhammad Ishaq
Total Lectures: 32

2. Previous Lecture Summary
Basic Elements of the Balance Sheet
Assets, Current and Fixed Assets
Tangible Assets
Intangible Assets
Different methods for calculation of depreciation
Current liabilities.

3. Today's Lecture Topics Quasi Reorganization
Foreign Currency Translation
Unrealized holding gains and losses
Equity-Oriented
Deferred Compensation
Employee Stock ownership Plans, Treasury Stock
Practical Exercise

4. Long-Term Liabilities
Due in a period beyond one year or operating cycle
Related to
Financing arrangements
Operational obligations

5. Long-Term Liabilities: Financing Arrangements
Notes Payable & Bonds Payable
Secured by property: Mortgage notes
Credit Agreements
Ready lines of credit that may require a compensating balance
Not a liability until funds are drawn

6. Long-Term Liabilities: Financing Arrangements (cont’d)
Bonds Payable
Sold at par, premium, or discount
Premium or discount is amortized into interest expense
Bond carrying value is amortized to par value
Convertible bonds can be converted into common stock
Conversion feature enhances bond selling price

7. Bonds at Par, Premium, or Discount
Market Interest Rate
Bonds Sold at 6%
Premium
Bond Contractual Interest Rate 8% 8%
Par (Face Value)
10%
Discount

8. Long-Term Liabilities: Operational Obligations
Deferred Taxes
Difference between accounting and tax methods
Difference in the timing of recognizing revenue and expense for accounting and tax purposes
Warranty Obligations
Estimated; arise from offering product warranties
Estimated to achieve matching of sales revenue and associated expense of warranty

9. Long-Term Liabilities: Warranty Obligations
Product warranties require the seller to correct any deficiencies in quantity, quality or performance for a specific period of time
Warranty obligations are estimated in order to recognize the obligation at the balance sheet date
Charge the expense to the period of sale

10. Long-Term Liabilities: Operational Obligations (cont’d)
Minority Interest
Reported on consolidated financial statements
Represents the interest in the equity of a partially-held subsidiary by the non majority owners
Not a liability but for purposes of analysis treat as a liability
Other Noncurrent Liabilities
As circumstances warrant
Redeemable Preferred Stock
Excluded from stockholders’ equity
For analysis, treat as a liability

11. Stockholders’ Equity
The residual ownership interest in the assets of an entity that remains after deducting its liabilities
Paid-in Capital
Retained Earnings

12. Stockholders’ Equity: Paid-in Capital
Par value
In some states, referred to as “stated value”
Considered “legal capital” by many states
Established by the articles of incorporation
Usually a minimal value
No-par stock

13. Stockholders’ Equity: Paid-in Capital (cont’d)
Additional paid-in capital
Issue price in excess of par (stated) value
Other sources
Treasury stock transactions
Stock dividend transactions
Donated capital

14. Stockholders’ Equity: Paid-in Capital (cont’d)
Common Stock
Shareholder ownership
Voting rights
Election of board of directors
Major corporate decisions
Liquidation rights secondary to
Creditors
Preferred stock

15. Stockholders’ Equity: Paid-in Capital (cont’d)
Preferred Stock
Does not normally convey voting rights
May carry any or all of these features:
Preference as to dividends
Accumulation of dividends
Participation in dividend beyond stated dividend rate
Convertibility into common stock at holder’s discretion
Preference in liquidation secondary to creditors
Callable at issuer discretion
Redemption at future maturity value
Donated Capital
Donated by outside entities
Shareholder surrender of stock

16. Stockholders’ Equity: Retained Earnings
Undistributed earnings of the corporation
Net income for all prior periods
Less dividends declared to shareholders

17. Stockholders’ Equity: Other
Quasi-Reorganization
Eliminates a deficit balance of retained earnings
Retained earnings are dated for 5-10 years
Equity-Oriented Deferred Compensation
A reduction to stockholders’ equity that is amortized (expensed) to future periods of employee service

18. Stockholders’ Equity: Other (cont’d)
Employee Stock Ownership Plans (ESOPs)
A qualified pension plan
Tax benefits for the employer and employee
Unearned compensation reduces stockholders’ equity
Treasury Stock
Stock purchased and held by the issuing corporation
Recording and disclosure
Record at par value; deduct from paid-in capital
Record at cost; deduct from total stockholders’ equity

19. Statement of Stockholders’ Equity
Reconciles the beginning and ending balances of all components of stockholders’ equity
Account changes indicate
Issuance of stock: paid-in capital increase
Acquisition of treasury stock: treasury stock increase
Net income: retained earnings increase
Dividends: retained earnings decrease

20. Balance Sheet Presentation Issues
Financial analysis is complicated by
Many assets recorded at cost rather than fair (replacement) value
Varying valuation methods
Within a firm from item to item
Within an industry from company to company
Not all items of value are listed as assets
Certain contingent liabilities may be excluded

21. Chapter End Problem
The Aggarwal Company has had 10,000 shares of 10%, $100 par value preferred stock and 80,000 shares of $5 stated-value common stock outstanding for the last three years. During that period, dividends paid totaled $0, $200,000, and $220,000 for each year respectively.
Required: Compute the amount of dividends that must have been paid to preferred stockholders and common stockholders in each of the three years given the following four independent assumptions:
Preferred stock is nonparticipating and cumulative.
Preferred stock participates up to 12% of its par value and is cumulative.
Preferred stock is fully participating and cumulative.
Preferred stock is nonparticipating and noncumulative.

25. Chapter End Problem
The Roswell Company has had 5,000 shares of 9%, $100 par-value preferred stock and 10,000 shares of $10 par-value common stock outstanding for the last two years. During the most recent year, dividends paid totaled $65,000; in the prior year, dividends paid totaled $40,000. Required: Compute the amount of dividends that must have been paid to preferred stockholders and common stockholders in each year, given the following independent assumptions: a. Preferred stock is fully participating and cumulative. b. Preferred stock is nonparticipating and noncumulative. c. Preferred stock participates up to 10% of its par value and is cumulative. d. Preferred stock is nonparticipating and cumulative.

29. Lecture Summary Quasi Reorganization Foreign Currency Translation
Unrealized holding gains and losses
Equity-Oriented Deferred Compensation
Employee Stock ownership Plans
Treasury Stock
Practical Exercise