1. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Financial Statement Analysis Chapter 14

2. 14-2 Financial Statements Are Designed for Analysis

3. 14-3 Dollar & Percentage Changes Trend Percentages Component Percentages Ratios Tools of Analysis

4. 14-4 Trend Percentages Trend analysis is used to reveal patterns in data covering successive periods. Trend Percentages Analysis Period Amount Base Period Amount 100%=×

5. 14-5 A Classified Balance Sheet

6. 14-6 Working capital is the excess of current assets over current liabilities. Working Capital

7. 14-7 Current Ratio Current Assets Current Liabilities = = 1.80 : 1 This ratio measures the short-term debt-paying ability of the company. Current Ratio Current Ratio $180,000 $100,000 =

8. 14-8 Quick assets are cash, marketable securities, and receivables. This ratio is like the current ratio but excludes current assets such as inventories that may be difficult to quickly convert into cash. Quick Assets Current Liabilities = Quick Ratio Quick Ratio $106,000 $100,000 =1.06 : 1= Quick Ratio

9. 14-9 Uses and Limitations of Financial Ratios

10. 14-10 Proper Heading Gross Profit Operating Expenses Non-operating Items Income Statement (Multiple-Step) Remember to compute EPS.

11. 14-11 Earnings Per Share & Price-Earnings Ratio Net Income Average Shares of Capital Stock Outstanding = EPS Current Market Price of one Share of Stock Earnings Per Share = P/E The PE Ratio shows us the relationship between earnings of the company and the market price of its stock.

12. 14-12 ROI is a good measure of the efficiency of utilization of assets by the business. Return On Investment (ROI) & Return on Assets (ROA) ROA is generally considered the best overall measure of a company’s profitability.

13. 14-13 Dividend Yield and Return on Equity (ROE) Dividend Yield identifies the return, in terms of cash dividends, on the current market price of the stock. Dividend Yield Ratio Dividends Per Share Market Price Per Share = = $2.40_ $96.00 = 2.5% ROE indicates how well the company employed the owners’ investments to earn income.

14. 14-14 Interest Coverage & Debt Ratios Times Interest Earned is the most common measure of the ability of a firm’s operations to provide protection to the long- term creditor. Times Interest Earned Operating income before Interest and Income Taxes Annual Interest Expense = $120,000 12,000 == 10.0 times The Debt Ratio is a measure of creditor’s long-term risk. The smaller the percentage of assets that are financed by debt, the smaller the risk for creditors. The Debt Ratio is a measure of creditor’s long-term risk. The smaller the percentage of assets that are financed by debt, the smaller the risk for creditors.

15. 14-15 Accounts Receivable and Inventory Turnover Rates This ratio measures how many times a company converts its receivables into cash each year. Net Sales Average Accounts Receivable Accounts Receivable Turnover = = 15.25 times $900,000 ($58,000 + $60,000) ÷ 2 = This ratio measures the number of times merchandise inventory is sold and replaced during the year. Cost of Goods Sold Average Inventory Inventory Turnover = = 7.83 times $540,000 ($68,000 + $70,000) ÷ 2 =

16. 14-16 End of Chapter 14