©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Financial Statement Analysis Chapter 9

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Learning Objectives After studying this chapter, you should be able to: Describe basic financial statement analytical methods Use financial statement analysis to assess the liquidity and solvency of a business Use financial statement analysis to assess the profitability of a business Describe the contents of corporate annual reports

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Describe basic financial statement analytical methods Learning Objective 1

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Horizontal Analysis The percentage analysis of increases and decreases in related items in _______ financial statements Each item on the most recent statement is compared with the related item on one or more earlier statements in terms of the following: 1. Amount of increase or decrease 2. Percent of increase or decrease

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Horizontal Analysis

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Vertical Analysis A percentage analysis used to show the relationship of each component to a total within _______ statement

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Benefits of Analysis Horizontal and vertical analysis are useful in assessing _______ and ______ in financial conditions and operations of a business ____________ is useful for comparing one company with another or with industry averages ____________ is made easier with common- sized financial statements

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Common-Sized Income Statement All items are expressed as ________ with no dollar amounts shown:

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Use financial statement analysis to assess the liquidity and solvency of a business Learning Objective 2

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Liquidity and Solvency _______ – the ability of a business to convert assets into cash _______ – the ability of a business to pay its debts Liquidity, solvency, and _______ are interrelated! Liquidity, solvency, and _______ are interrelated!

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Solvency Analysis Normally assessed by examining __________ relationships, using the following major analyses: Current position analysis Accounts receivable analysis Inventory analysis Ratio of fixed assets to long-term liabilities Ratio of liabilities to stockholders’ equity Number of times interest charges are earned

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Current Position Analysis Using measures to assess a business’s ability to pay its current liabilities _____________ _____________ Current Assets - Current Liabilities = _____________ Current Assets Current Liabilities = _____________ Quick Assets Current Liabilities =

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Working Capital _____________ - ______________ = Working Capital To illustrate, the working capital for Mooney Company for 20Y6 and 20Y5 is computed below:

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Current Ratio To illustrate, the working capital for Mooney Company for 20Y6 and 20Y5 is computed below: Current Ratio ____________________________ =

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. $280,500 ÷ $210,000 = Quick Assets $280,500 Quick Assets $280,500 Quick Assets $160,000 Quick Assets $160,000 Quick Ratio: $160,000 ÷ $210,000 = Mooney Wendt Quick Ratio ______________ =

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Accounts Receivable Analysis Measures efficiency of ________ Reflects ________ Accounts Receivable Turnover Number of Days’ Sales in Receivables ____________ _____________________ ________/____= =

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Accounts Receivable Turnover

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Number of Days’ Sales in Receivables= ______________ ________________ ________________ Average Daily Sales __________ / ___ =

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Inventory Analysis Measures inventory efficiency Avoid tying up funds in _______ Avoid obsolescence Reflects liquidity Inventory Turnover ________________ Number of Days’ Sales in Inventory ________________ __________/___ = =

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Inventory Turnover ______________ =

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Number of Days’ Sales in Inventory ____________________ _____________________ = Average Daily Cost of Goods Sold _________________ _______________=

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Ratio of Fixed Assets to Long-Term Liabilities Indicates the margin of safety for note-holders or bondholders Indicates the ability to _____ additional funds on a long-term basis Fixed Assets to Long- Term Liabilities _____________ _________________ =

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Ratio of Liabilities to Stockholders’ Equity Indicates the margin of safety for ______ Indicates the ability to withstand adverse business conditions Liabilities to Stockholders’ Equity _________________ __________________ =

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Number of Times Interest Charges Earned Indicates the general financial strength of the business Indicates the ability to withstand adverse business conditions Times Interest Charges Earned ______________ + ______________ __________________ =

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Use financial statement analysis to assess the profitability of a business Learning Objective 3

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Profitability Analysis Normally assessed by examining the income statement and balance sheet resources, using the following major analyses: Ratio of net sales to assets Rate earned on total assets Rate earned on stockholders’ equity Rate earned on common stockholders’ equity Earnings per share on common stock Price-earnings ratio Dividends per share Dividend yield

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Ratio of Net Sales to Assets Shows how effectively a firm utilizes its ______ _________________ ______________ (excluding LT Investments) Ratio of Net Sales to Assets =

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Rate Earned on Total Assets Measures the profitability of ________ without considering how the assets are financed ________ + __________ _________________ Rate Earned on Total Assets =

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Rate Earned on Stockholders’ Equity Emphasizes the rate of income earned on the amount invested by the __________ ________________ _____________________ Rate Earned on Stockholders’ Equity =

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Leverage The effect of leverage for 20Y6 is 3.1% which compares favorably with the 2.7% leverage for 20Y5

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Rate Earned on Common Stockholders’ Equity Measures the rate of profits earned on the amounts invested by the ________________ ____________ − __________ ____________________________ Rate Earned on Common Stockholders’ Equity =

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Earnings Per Share on Common Stock The income earned for each share of _________ ____________ − __________ ____________________________ Earnings per Share on Common Stock =

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Price-Earnings Ratio Price-earnings (P/E) ratio on common stock measures a firm’s future _________ prospects ________________________________ P/E Ratio =

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Dividends per Share _________________ ___________________________ =

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Dividend Yield Dividend yield shows the rate of return to common stockholders in terms of cash dividends Dividend Yield_____________________________________ =

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Describe the contents of corporate annual reports Learning Objective 4

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Corporate Annual Reports Summarize operating activities for the past year and plans for the future Many variations in the order and form, but all include: Management’s _______ and ________ Report on __________ Report on ______ of the financial statements

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Management Discussion and Analysis (MD&A) Provides critical information in interpreting the ____________ and assessing the future of the company Includes an analysis about __________ and financial condition Discusses management’s _______ about future performance Discusses significant _____ exposure Management’s assessment of the company’s _________ and the availability of capital to the company Any “___________” arrangements such as leases not included directly in the financial statements

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Independent Auditors’ Report Publicly traded companies must get an independent opinion on the fairness of the ________________ The ______________________ (CPA) firm that conducts the audit renders an opinion, called the Report of Independent Registered Public Accounting Firm, on the fairness of the statements This opinion must be included in the ____________ along with an opinion on the accuracy of management’s internal control assertion

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. End of Chapter 9